In 2017 my Website was migrated to
the clouds and reduced in size.
Hence some links below are broken.
One thing to try if a “www” link is broken is to substitute “faculty” for “www”
For example a broken link
http://faculty.trinity.edu/rjensen/Pictures.htm
can be changed to corrected link
http://faculty.trinity.edu/rjensen/Pictures.htm
However in some cases files had to be removed to reduce the size of my Website
Contact me atrjensen@trinity.eduif
you really need to file that is missing
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
Jensen Comment
When I was a doctoral student UC Berkeley's Richard Mattessich occasionally
visited Stanford to discuss his current research and writings. I always thought
Mattessich was incapable of writing a working paper with less than 150
pages. He spent much of his life studying history and philosophy, and when
reading one of his papers it was easy to get bogged down in the verbiage and
hundreds of references and endless quotations. I kept thinking "get to the
point."
I never in my life, until now, associated Professor Mattessich with anything
practical. But today I read where he's given credit for a practical idea in the
"invention" of a spreadsheet.
Jensen Comment
A lot depends upon what we mean by "invent?" Companies are often very good at
development and improvements that take a lot of "invention" for progress along
this path. For example, Microsoft did not invent the spreadsheet but there are
hundreds of subsequent Microsoft inventions that allowed Excel to become a
dominant force in spreadsheet software.
Actually until I went to the
following Wikipedia module this morning I was not even aware
that an acquaintance of mine (Richard Mattessich) years ago is given some credit
in the spreadsheet "invention."_
https://en.wikipedia.org/wiki/Spreadsheet#Paper_spreadsheets
There were many "inventions" regarding spreadsheets in the years that followed,
including all the inventions Microsoft kept adding to Excel. I'm absolutely
certain that Richard Mattesich was incapable of developing Excel software even
though he made a seminal contribution to the concept of a "spreadsheet."
The above article overlooks some major inventions and developments that were
corporate-based. For example, note the inventions credited to Xerox Parc:
Xerox PARC has been the inventor and incubator of many elements
of modern computing in the contemporary office work place:
Laser printers,
Computer-generated bitmap graphics
The graphical user interface, featuring windows and
icons, operated with a mouse
The WYSIWYG text editor
Interpress, a resolution-independent graphical
page-description language and the precursor to PostScript
Ethernet as a local-area computer network
Fully formed object-oriented programming in the
Smalltalk programming language and integrated development
environment.
The developments of a spreadsheet and a computer mouse illustrate how
difficult it is to pinpoint where invention takes place. Most inventions are
rooted in other inventions that are rooted in other inventions. There may be
something innovative about each "invention" but there's usually something
borrowed as well.
Nobel prizes and patents are awarded for "seminal discoveries" that almost
always had roots in earlier research and invention. For example, Watson and
Crick got the Nobel Prize for the seminal discovery of DNA structure, but their
discovery depended a lot on the earlier findings of such researchers as Pauling,
Franklin, etc.
My point is that big companies often are not the source of primitive ideas
and findings that led to corporate research projects. These companies do not
usually focus on the most primitive findings upon which funded projects are
later built. Universities are best suited for primitive research. This is mainly
due to the freedom afforded by universities for faculty just to think and work
on things that interest them (the faculty) rather than the university not
motivated by a profit bottom line. Often the university is not even aware of
what faculty are spending a lot of time thinking about and tinkering with in
labs and in their wanderings through libraries and the Internet.
Companies are not as good at primitive level research because their employees
are usually more directed in terms of what to think about.
Primitive discovery is usually the result of freedom and lack of employer
control on how time is spent by workers. Companies do not usually allow the same
freedoms afforded college faculty and the unemployed of the world.
Conclusion
Back in the 1960s professors were not held accountable for publication counts
like they are today. They were expected to write and speak about what they were
thinking, but Richard Mattessich could build a reputation on working papers
without an annual journal hit list. In important ways professors were more
"free to be" in those days than today where the hit list of refereed journal
articles makes or breaks scholarly reputations. In some
ways it's sad that universities are no longer willing to give tenure for
primitive thinking instead of research journal hit lists.
Jensen Comment
In the case of accounting research the software tends to be statistical packages
like SAS or SPSS. Where errors arise is that most of the data comes from
purchased databases like CRSP, Compustat, and AuditAnalytics. The sad news is
that academic accounting research is almost never replicated. Even more sad news
is that when replicated errors in the data are rarely discovered because both
researchers and the replicators use the same databases. Checking for errors in
purchased databases is almost unheard of among accounting researchers. This is
why accounting research is almost always considered truth the instant it's
published. We really don't want to find errors in academic accounting research
because nobody cares if there are errors --- certainly not practitioners who
have no interest in the fun and games of academic accounting research.
Jensen Comment
This can also be a threat to customers of tax professional by putting their
privacy information stored in tax professional firm databases at risk. For
example, if your tax professional is attacked worry about your IRS Pin number
and credit card information. If you are an employer using your tax professional
for accounting services such as payrolls you my be putting your employees at
risk. Not long ago, an enormous number of physician's in New England (including
my doctor) had their privacy information stolen by what we think was a hack into
hospital databases in New England.
If It Were Only True and Not Just Wishful Thinking on the Part of the
Pathways Commission
Jensen Comment
If it were only true. In my opinion the most important criteria for admission
into the very top doctoral programs as students or faculty is still exceptional
demonstration of accountics skills in mathematics, statistics, and econometrics.
Times may be changing in the lower-ranked programs.
Evidence is partly in the admission of foreign applicants to our top doctoral
programs who have exceptional accountics backgrounds and virtually no
professional accountancy credentials. And yes when they graduate from our most
prestigious university accountancy doctoral programs there's very little that
they can teach other than doctoral seminars.
In 2013, the bottom
50 percent of taxpayers (those with AGIs below $36,841) earned 11.49
percent of total AGI. This group of taxpayers paid approximately $34
billion in taxes, or 2.78 percent of all income taxes in 2013.
What is really misleading is all of this is that an estimated $2 trillion
(USA Today very rough estimate) unreported on tax returns from the
underground economy, and much of that income goes to the low-end of income
spectrum for house cleaners, child care workers, prostitutes, construction
workers, landscapers, yard workers, farm hands, etc. Of course some high
earners also share in the underground economy
At a cost of $56
billion in 2013, the EITC is the third-largest social welfare program in the
United States after Medicaid ($275 billion federal and $127 billion state
expenditures) and food stamps ($78 billion).[31] Almost 27 million American
households received more than $56 billion in payments through the EITC in
2010. These EITC dollars had a significant impact on the lives and
communities of the nation's lowest-paid working people largely repaying any
payroll taxes they may have paid. The Census Bureau, using an alternative
calculation of poverty, found that EITC lifted 5.4 million
PS
Some public sector frauds were bigger than these private sector frauds
And some bigger frauds are joint public and private sector frauds (think
Pentagon spending)
Bob Jensen's threads on Fastow and Enron ---
http://faculty.trinity.edu/rjensen/FraudEnron.htm
By the way Andy Fastow was only one of the many fraudsters among Enron's
executives and not the only one to go to prison
Jensen Comment
I don't think I oversold careers in accounting. I did repeatedly caution many of
my advisees early on that they may not get those sought-after offers from the
multinational accounting firms.
However, I probably did oversell ultimate career alternatives for becoming an
accounting professor. It was easy to show my masters students statistics on the
excess of demand for tenure-track accounting professors versus supply. It was
easy to point out the starting salary differences between an accounting Ph.D.
versus a humanities Ph.D.
However, what I did not perhaps stress hard enough was the shortage of
capacity in North American accounting Ph.D. programs accredited by the AACSB
(which is the only route for a career in North American accounting academia).
Whereas there are
27,000+ accounting masters degree graduates in the USA each year, there are
fewer than 200 accounting Ph.D. graduates each year, significantly down from the
1980s. The reason is that the large accounting Ph.D. mills of the 1980s (e.g.,
Illinois, Texas, and some of the Big 10 universities) cut back greatly on the
number of admissions to their Ph.D. programs. For example, Illinois and Texas
graduating over 15 accounting Ph.Ds per year in the 1980s sometimes now graduate
zero or one per year.
Promising our masters students in accounting wonderful careers in academe is
misleading with such low odds of getting into a program, especially amidst the
increasing highest quality global competition (mathematics geniuses) from Asia
trying to get into USA accounting doctoral programs.
Jensen Comment
College costs 10-20 years from now are a great unknown. Even today much varies
with race, level of family income, and admission qualifications of an applicant.
Although there is greater value and inflation risks, you may want to consider a
tax-exempt bond fund as opposed to a 529 plan having greater tax uncertainties
(such as when it will not be used for college expenses) ---
https://en.wikipedia.org/wiki/529_plan#Disadvantages .
The great unknown is what inflation will be over the next 10-20 years. An
advantage of a tax-exempt bond fund is that as inflation risks increase you can
bail out of the tax-exempt fund at any time (usually) and invest the proceeds
where they are more hedged for inflation.
Earnings Quality and IFRS Research in Africa: Recent Evidence, Issues and
Future Direction
SSRN
August 31, 2016
Author
P. K. Ozili
Essex Business School (University of Essex)
Abstract
This paper review the recent empirical research on IFRS and earnings quality
among African studies and show mixed conclusions regarding the impact of
IFRS on earnings quality and financial reporting quality in the region.
Also, some discussions on factors that led to the growth in the earnings
quality African literature over the last decade as well as some challenges
in the recent literature, are provided. Also, the study makes several
observations regarding IFRS and earnings quality research in Africa and
suggests potential directions for future research. The need to (i)
understand the recent direction of earnings quality research in Africa, (ii)
understand the interaction between policy and earnings quality research, if
any, in the African region, and (iii) the need to maintain high-level rigour
in earnings quality research while ensuring greater interaction between
policy and research, makes this study important. Given the paucity of
research on earnings quality in developing countries, this study contributes
to the broader earnings quality literature by providing a review of the
African earnings quality literature; hence, conclusions based on empirical
studies in this review are not intended to be generalised to developed
countries but only to developing countries. Finally, while insights in this
paper may be informative to the reader, the intended objective is to
stimulate debates that would improve the outputs of earnings quality
research and the overall quality of
accounting disclosure among firms in Africa.
Jensen Comment
I would rather this research focused on financial reporting quality than earning
quality. I think earnings quality was pretty well destroyed when the IASB teamed
up with the FASB to combine realized and unrelized revenues (from financial
instrument value changes) ---
http://faculty.trinity.edu/rjensen/Theory02.htm#FairValueFails
Criticizing the IASB’s Conceptual Framework project
based on the balance sheet approach, Barker and Penman (2016) have been
advocating a mixed balance sheet and income statement approach. Although
they do not seem to have noticed, their approach is quite similar to that of
the Japanese accounting standard setter promulgated in ASBJ (2006). We will
explicate the basic similarity as well as some differences between these two
approaches.
Edward P. Swanson Texas A&M University - Mays Business School; Mays
Business School, Texas A&M University
Glen Young Texas A&M University
Abstract
We provide new evidence on the important and
contentious question of whether interventions by activist investors add
value to the targeted companies. Our large sample covers two decades and
includes interventions in which the five-percent-ownership threshold for
filing SEC Schedule 13D requires too much capital. We find that short-window
returns around the public announcement are significantly positive and do not
reverse in the post-intervention period; analyst recommendations decline
prior to the intervention but increase significantly afterward; and short
interest declines significantly in the post-intervention period. These
favorable reactions are supported by significant improvements in target
firms’ accounting fundamentals. Finally, ownership by long-term
(“dedicated”) institutional investors increases after the intervention, and
ownership by short-term (“transient”) investors decreases. Taken together,
actions by informed market participants and accounting fundamentals provide
consistent, strong evidence that investor activism strengthens the prospects
of target firms.
Jensen Comment
It's probably best to download this one before it gets accepted by a journal.
This paper explores the historical development of
international accounting standards (IAS) and the initiatives of the
prominent organizations involved in international standard setting. It also
explains why countries differ in national standards, why the process of
harmonization of standards among countries has been slow, and why countries
should now converge their accounting standards.
Many papers on IAS generally deal with the contents
of the individual standards. This writer, however, believes that
accountants, as social scientists, are also interested in tracing the
development of social forms over time and comparing those developmental
processes across cultures. Thus, this paper addresses the interest of
accountants to learn how some contemporary events or institutions—like the
IAS—came into being. In like manner, accountants are interested in finding
out the varied reasons why the issue of coming up with a global set of
accounting standards has taken a long while. Indeed, these are perspectives
that substantially differ from those commonly presented in professional
forum and scholarly exercises
Jensen Comment
This author is part of a growing trend of re-publishing older published
abstracts to SSRN that are not current and may not be even updated. It seems to
be a publicity stunt. Makes me wonder if this a way of getting old research onto
current performance reports. However, in fairness I did not compare the older
version of the paper with the new SSRN posting. In this case there may have been
some updating since the current SSRN posting can be downloaded.
Readings And Notes On Financial Accounting: Issues and Controversies,
1996
by Stephen A Zeff and Bala G Dharan
Jensen Comment
I just bought a copy of this book for a penny from Amazon (plus shipping).
Perhaps you might like to grab up one of these before it goes out of print.
Ranking Accounting-Education Authors from Four Countries: A 20-Year Study
from 1993 Through 2012 SSRN, December 31, 2014
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832979 Global Perspectives on Accounting Education, Volume 11, p. 65-76, 2014
Taylor L. Delande Roger Williams University
Richard A. Bernardi Roger Williams University - Gabelli School of
Business
Kimberly M. Zamojcin Roger Williams University - Gabelli School of
Business
Abstract
This paper ranks accounting education authors from
Australia, New Zealand, the Republic of Ireland, and the United Kingdom. We
include eight journals whose mission was to publish accounting-education
papers. While prior studies provide rankings of authors in
accounting-education, these rankings are limited to authors located in the
United States and Canada. This research ranks the top-10 authors by country
and ranks the top 50 authors for two periods – 1993 through 2012 and 2003
through 2012. For those authors who were not included in the top-50
rankings, we also provide a distribution of authors by the number of
publications for benchmarking purposes.
Jensen Comment
These authors are part of a growing trend of re-publishing older published
abstracts to SSRN that are not current and not updated since the papers
themselves cannot be downloaded from SSRN. It seems to be a publicity stunt.
Makes me wonder if this a way of getting old research onto current performance
reports.
Richard A. Bernardi Roger Williams University - Gabelli School of
Business
Kimberly M. Zamojcin Roger Williams University - Gabelli School of
Business
Abstract
The purpose of this study is to chronicle the
increased level of accounting research published in 14 accounting-education
journals authored by accounting doctoral classes from 1966 through 2012. The
data indicate that the increase in the number of graduates from our
accounting doctoral programs positively associated with the growth in the
number of accounting-education journals, the number of coauthor-adjusted
accounting publications, the average number of coauthor-adjusted articles
for each year group, and the level of coauthoring. We found that the
increase in the number of AACSB accredited institutions positively
associated with the increase in the number of authors who had an accounting
education publication within 10 years after graduating. However, the
increase in the number of AACSB accredited institutions negatively
associated with the number of coauthor-adjusted articles over time and the
average number of coauthor-adjusted articles for each year group. From a
research perspective, these results challenge Fogarty and Markarian’s
finding about the accounting-education profession being in a state of
decline
Jensen Comment
These authors are part of a growing trend of re-publishing older published
abstracts to SSRN that are not current and not updated since the papers
themselves cannot be downloaded from SSRN. It seems to be a publicity stunt.
Makes me wonder if this a way of getting old research onto current performance
reports.
Enterprise Resource Planning (ERP software and systems) ---
Jensen Comment
One of the biggest deficiencies in Accounting Information Systems (AIS)
curricula is often the lack of available experts to teach the complexities of
ERP systems that is designed to integrate older information systems smokestacks
(marketing, finance, accounting, production, etc.) into integrated
information systems across an entire enterprise ---
http://faculty.trinity.edu/rjensen/245glosap.htm
Implementing Enterprise Resource Planning Education in a Postgraduate
Accounting Information Systems Course
SSRN, September 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2796792
Business Education & Accreditation, v. 8 (1) p. 27-37 (2016)
Author
Kishore Singh
Griffith University - Griffith Business School
Abstract
The importance of Enterprise Resource Planning (ERP)
systems education, its inclusion and evaluation in a university teaching
context are the subjects of this article. As the importance of ERP systems
has increased in the corporate world, so too has its importance increased in
education. Many universities have recognized this need and the potential for
using ERP systems software to teach business concepts. In this paper, the
approach adopted is to develop a course that integrates theoretical
accounting and business concepts together with a hands-on practical
component. The course aims to empower postgraduate accounting students with
knowledge regarding the process of adopting and exploiting ERP systems
software to develop and maintain competitive advantage for organizations in
a global marketplace
Susumu Ueno Management and Accounting Research Institute, Japan; Konan
University-Graduate School of Business and Accounting, Japan
D. Paul Scarbrough Goodman School of Business - Accounting
Abstract
This paper provides scholars and practicing
accountants a comprehensive and objective picture of current Japanese
management accounting methods and practices. The picture is comprised of
discussions of three fields related to specific aspects of organizations
(corporate-level management methods and practices, front-line management
accounting methods and practices and management accounting methods and
practices at small and medium-sized enterprises), as well as the pervasive
changes to all organizations due to information and communication technology
(ICT) and disclosure rule changes.
Firstly, we discuss the development and status of
corporate-level management methods and practices used by large Japanese
companies. Corporate-level management accounting methods and practices
discussed include planning and budgeting, hoshin kanri, the balanced
scorecard, performance management, and compensation management. Second, we
move to topics of front-line management accounting methods and practices
often observed in Japan. The topics include the relationship between
management accounting and Cost Accounting Standards, JIT production and
business continuity management (BCM) and quality control. Third, since a
majority of companies in Japan are small and medium-sized enterprises (SMEs),
we discuss current use of management accounting methods and practices at
SMEs.
In the past decades, management accounting
practices in Japan have changed markedly by adapting to innovations in
information and communication technology (ICT). More recently, revised
disclosure rules also caused significant changes to Japanese management
accounting practices. Thus, throughout this paper, we examine the impacts of
ICT and new disclosure rules to Japanese management accounting practices.
The knowledge and analysis in this study provide an
insightful basis for the improvement and development of managerial
accounting methods and practices.
Rajaram Gana Georgetown University - School of Medicine
Abstract
The lessons I (Gana 2014) have learned from the
vivid contrast between the mean and median fair values (Hayden and Platt
2009) of the game (Bernoulli 1738) underlying the St. Petersburg Paradox (SPP)
are applied, by implicating the median, to modify two unidimensional poverty
indices: the Sen (1976, 1979) index and the Palma (2011) ratio. By
implicating the median in economic analysis when necessary, the SPP urges us
to consider the economic and ethical consequences of our interpretation of
the complex idea called “probability” (Ergodos 2014) in the pursuit of the
political end which Aristotle (circa 350 BC), at the very beginning of his
Nicomachean Ethics, defined as the “good for man”.
The seminal Sen index, as modified by Shorrocks
(1995) and decomposed by Osberg and Xu (2000), is S_P = H_poor × |P| × (1
plus G_poor), where H_poor is the proportion of the population (the “poor”)
with incomes below a poverty line, P is the average income gap ratio (< 0)
of the poor relative to the poverty line, and G_poor is the Gini (1912,
1921) coefficient of the censored poverty gap ratios for the population.
Analogously, S_R = H_rich × R × (1 plus G_rich), where H_rich is the
proportion of the population (the “rich”) with incomes above a wealth line,
R is the average income gap ratio (> 0) of the rich relative to the wealth
line, and G_rich is the Gini coefficient of the censored wealth gap ratios
for the population. S_P and S_R are modified, to S_P* and S_R*,
respectively, by replacing |P| and R by P* ≡ |min {P, P_med}| and R* ≡ min
{R, R_med}, respectively; where P_med and R_med are the median poverty and
wealth gap ratios, respectively. The modified indices are used to modify the
Palma ratio to S_R* / S_P*. Economic policies targeting these modified
indices may benefit the “missing poor” living in the shadows of society
incompletely touched by indices that only take mean values as inputs. That
is, only accounting for mean poverty gaps may well benefit the “richer”
among the poor at the expense of the “poorer” among the poor. Furthermore,
because it is better to be rich than poor (S_R* / S_P* > 1), alleviation of
poverty may well dependent on also targeting the contrast between the rich
and the poor. Using the modified indices to alleviate poverty will be a bit
more in line with the critically important moral heuristics, and demands, of
Rawls (1971, 2001) and Sen (1992), because the modifications give greater
weight to the poorest of the poor.
• The
FASB proposed a number of targeted amendments to its hedge accounting
guidance aimed at more clearly portraying the economics of an entity’s risk
management activities in its financial statements.
• The
proposal would eliminate the need to separately measure and report hedge
ineffectiveness and generally require the entire change in fair value of a
hedging instrument to be presented in the same income statement line as the
hedged item.
• The
proposal would permit entities to hedge contractually specified risk
components in cash flow hedges of variable-rate financial instruments and
forecasted transactions involving nonfinancial items.
•
Certain documentation and assessment requirements would be relaxed and
aspects of the long-haul method for fair value hedges of interest rate risk
would be simplified.
The purpose of this paper is to study the impact of hedging on corporate
capital expenditures by utilizing the changes in hedge effectiveness
following the disclosure requirements of the Statement of Financial
Accounting Standards 133 (SFAS
133). The standard requires firms to recognize and report the use of
derivatives in their financial statements, including the purpose of use and
the extent of hedge effectiveness. The greater transparency that comes with
the standard is expected to incentivize firms toward demonstrating greater
effectiveness in their hedging activities. Since effective hedging, by
reducing risk exposure, can lower the costs of financial distress, it can
raise the level of capital investment. The literature on the real
consequences of hedging is limited despite the prevalence of corporate use
of derivatives for hedging. The research in this paper contributes to this
literature by examining the impact of hedging on capital investment. It also
provides evidence on the relation between risk exposure and capital
investment when a link can be established between hedge effectiveness and
risk exposure, as it is the case under required disclosures.
•
Homebuilders will apply the new revenue recognition standard to revenue from
sales of completed homes and residential units to customers. The standard
will supersede today’s guidance in ASC 360-20, Real Estate Sales.
•
Homebuilders will need to consider a number of changes in the new standard,
including how they identify the customer in an arrangement, evaluate
collectability of the transaction price, determine how and when revenue
should be recognized, recognize costs incurred to obtain a contract and
provide certain new disclosures.
• We
don’t anticipate further significant changes to the recognition and
measurement principles in the new standard, so homebuilders should focus on
implementation. Many entities are finding that implementation requires
significantly more effort than they expected.
Ivan Diaz-Rainey University of Otago - School of Business
Helen Roberts University of Otago
David H. Lont University of Otago - Department of Accountancy and Finance
Abstract
This paper uses inventory data from financial
accounts to explore whether companies involved in the physical oil market
were speculating in the run-up to 2008. Using quarterly inventory data over
the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil
companies in the world, we derive an Index of Scaled Physical Inventories (ISPI).
We find declining ISPI up to the early 2000s is consistent with firms
minimizing inventory for efficiency sake; then ISPI starts to increase,
suggesting physical inventories could have contributed to the run-up in oil
prices between 2003 and 2008. Highlighting heterogeneity in inventory
behaviors amongst the large oil companies, the structural break test on the
ratio of inventory to sales and the days to sales for individual companies
shows that five companies had positive structural breaks during the
speculation period, while the other companies had no or negative structural
breaks. Contrary to declining inventory expectations due to a tightening oil
market, the positive structural breaks suggest speculative behavior. We also
examine the relationship between changes in profitability and changes in oil
inventory over the pre-speculation and speculation period. Though some
coefficients for inventory do switch from negative to positive over the two
periods as hypothesized, they are only significant in a few cases. However,
aggregate measures of inventory do switch and are significant, suggesting
that, on average, inventory holdings negatively affected profitability in
the pre-speculation period and positively affected profitability in the
speculation
Jeffrey Jay Jewell and Jeffrey A. Mankin
Lipscomb University and Lipscomb University - Department of Accounting,
Finance & Economics
Abstract
This paper examines several problematic issues in
the presentation of information related to earnings per share (EPS) that are
common to college textbooks and popular investment websites. U.S. generally
accepted accounting principles (GAAP) require disclosure of EPS for all
publicly listed firms. In fact, EPS is the only financial ratio required by
GAAP and it is the only financial ratio with a formula specified by GAAP.
Despite these facts, many college textbooks and investment websites present
incorrect formulas for the computation of EPS. Furthermore, many textbooks
and investment websites either explicitly or implicitly encourage students
and investors to interpret EPS incorrectly. This paper discusses these
issues and contrasts proper EPS computation and interpretation with the most
common errors in computation and interpretation.
Jensen Comment
EPS is usually computed so it can be compared with itself over time and/or with
other companies. An enormous problem is that neither the IASB nor the FASB can
define earnings. A second huge problem when compairing it with itself over time
is that the rules of accounting often change regarding its underlying
components. For example in the USA under the FASB and internationally under the
IASB the rules have changed significantly on how to book revenues.
Do you think financial analysts and investors are going to make measurement
adjustments for pre-2016 revenue recognition rules versus post 2015 revenue
recongnition rules? Dream on. Mostly they will just compare apples with oranges
when examining EPS trend lines by assuming they are all peaches and cream.
Vic Anand Emory University - Goizueta Business School
Ramji Balakrishnan University of Iowa - Department of Accounting
Eva Labro University of North Carolina Kenan-Flagler Business School
Abstract
We demonstrate the need to view in a dynamic
context any decision based on limited information. We focus on the use of
product costs in selecting the product portfolio. We show how ex post data
regarding the actual costs from implementing the decision leads to updating
of product cost estimates and potentially trigger a revision of the initial
decision. We model this updating process as a discrete dynamical system
(DDS). We define a decision as informationally consistent if it is a
fixed-point solution to the DDS. We employ numerical analysis to
characterize the existence and properties of such solutions. We find that
fixed points are rare, but that simple heuristics find them often and
quickly. We demonstrate the usefulness and robustness of our methodology by
examining the interaction of limited information with multiple decision
rules (heuristics) and problem features (size of product portfolio,
profitability of product markets). We discuss implications for research on
cost systems.
Jensen Comment
Given the inevitable arbitrariness of estimating product costs questions are
often raised about why accountants are so obsessed with measuring product costs.
Actually it's their bosses (all the way to the CEO level) who are obsessed with
needing product costs to set or justify pricing. The controversy is in the media
a lot lately regarding pricing by the pharmaceutical industry.
Jensen Comment
Business executives seem to be less and less interested in ABC Costing after its
rise to fame in the 1990s. Cost/Managerial accounting teachers seeking more
current examples may find the following study useful in forthcoming classes.
Most textbooks seem to have at least one chapter left on ABC costing.
E. Ann Gabriel Ohio University - School of Accountancy
Heather Jane Lawrence Ohio University - College of Business, Department
of Sports Administration
Elizabeth A Wanless Ball State University
Abstract
Data on financial challenges in intercollegiate
athletics consistently show that expenses are outpacing new revenues. Since
2004, National Collegiate Athletic Association (NCAA) Football Bowl
Subdivision (FBS) institutions’ median revenues increased 94 percent while
expenses increased 120 percent during the same time period (Fulks, 2015). As
such, institutions face tough decisions about the possible elimination of
sport teams to control costs. Current accounting methods in intercollegiate
athletics, however, make it difficult for leaders to deliver informed
decisions concerning sport sponsorship, Title IX compliance, and overall
program operations. Institutional leaders, the NCAA, reform groups such as
the Knight Commission, and the federal government, are calling for athletic
departments to report more consistent and accurate financial data. The
purpose of this paper is to respond to the call for accounting reform in
intercollegiate athletics; specifically, to create a better representation
of the costs associated with each sport and to show how accurate costing
provides insight for Title IX compliance. By applying activity-based costing
(ABC) to a budget from one NCAA FBS university, this research revealed the
accurate cost of sport sponsorship varied greatly in comparison with
institutional reporting. ABC application eliminated the expense category of
unallocated (i.e., marketing, compliance, general administration, etc.) and
distributed expenses back to each sport. Results showed women’s sports
increased from 24 percent of total costs to 32 percent of total costs within
the activity-based costing application (data relevant to prong three of
Title IX). Institutional leaders should be encouraged to use ABC to better
understand department operational costs.
September 5, 2016 reply from Steve Markoff
Bob: Good that you point out the increasing
irrelevance of ABC. Despite that, instructors continue to follow along
chapter by chapter from the books, which make it seem as though ABC is some
kind of mega-critical study topic that is commonly used in practice. Fact is
- it's not.
The textbooks mostly want to make you believe that
companies are using activity-based costing as their primary manner for
applying overhead and various other product-costing related areas. Page
after page of problems and exercises follow in the books that all start with
something like this: "Jensen Corporation is considering converting to
Activity-Based Costing for their manufacturing operations" and then the
student goes on and on with determining activity cost pools, drivers,
activity rates, etc etc. Sorry - but this aint happening. Many reasons for
this, not the least of which is that companies have found that numerous
other multi-pool costing methods can give them similar results.
In fact, the biggest benefit of ABC is not from the
costing itself, but rather, the activity study that is undertaken to
determine drivers... but seriously, you don't need to be doing
activity-based costing to get this. Any company that is seriously trying to
value engineer will find itself determining costs and their causes anyway,
but I digress.
I teach only Managerial and Cost. Last research I
saw - and it could be different now - was I think like 2009 -- and it
confirmed that only about 15% of companies use ABC for anything related to
product costing period. The most significant applications are 1)allocation
of shared costs and, 2) customer costing. Also, supplier costing is an area
too, but I think that would be part of the 15% of product costing. That's
it.
Do I cover it? Yes ...in Cost. But we DON'T sit
there running through all kinds of problems on manufacturing overhead. We
look at the more common applications that they might face -- Allocation of
Shared or Common Costs, and Customer Profitability Analysis.
Steve
September 6, 2016 reply from David Johnstone
I used to teach ABC and did many exec programs in
Asia when it was at its zenith in about 1990. I remember being astonished
with how the ABC zealots wanted to treat fixed costs as variable, even for
decision making purposes, thus contradicting all the emphasis that there had
long been in Management Acctg on “relevant” or incremental costs.
It struck me that this was a fad driven by
consultants who were making lots of money out of pretence. I seem to
remember phrases like “broken cost systems are sending America broke”. I
also remember how in teaching people from corporations about ABC, but in
being less than a believer (for reasons well put in Steve’s message), the
corporate types in the exec classes were very hostile (I suspected at the
time they wanted ABC “skills” and language to give them a big say and a lot
of importance back in their companies).
Jensen Comment
Medicare does not cover all the bills even with supplemental Medicare insurance.
The big worry is devastating cost of extended care outside the hospital.
Hospitals are required to dump patients rather quickly to medical facilities not
covered by Medicare. Don't just think that you or a loved one will pull the
plug. For one thing after a stroke you may be to gaga to help end your own
helpless life.
All too often Medicaid ends up with your enormous tab.
Jensen Comment
I'll resist commenting further on a tattoo of one's cat (mentioned in the
article)
I guess that beats making a tattoo of one's significant other who could become
insignificant most any time.
Accountants might consider a forehead tattoo of a green eyeshade.
But that might lead to lonely times in singles bars.
I think I'll get a tattoo that reads "Test Checker for Your Inventory"
Simplice A. Asongu African Governance and Development Institute
Jacinta C Nwachukwu Coventry University
Abstract
This article presents a case for transfer
mispricing as an argument for Corporate Social Responsibility (CSR). The
argument builds on the position that in order to compensate for potential
loss of brand image and reputation, Multinational Companies (MNCs) would be
more socially responsible when they are operating in countries where the
legislation and laws in place are not effective at identifying and
sanctioning transfer mispricing. We first discuss the dark side of transfer
pricing (TP), next we present the nexus between TP and poverty and finally
we advance arguments for CSR in transfer mispricing. While acknowledging
that TP is a legal accounting practice, we argue that in view of its poverty
and underdevelopment externalities, the practice per se should be a solid
justification for CSR because it is also associated with schemes that
deprive developing countries of capital essential for investments in health,
education and development programmes. Therefore CSR owing to TP cannot be
limited to a strategic management approach, but should also be considered as
some kind of social justice because of associated transfer mispricing
practices. We further argue that, CSR by multinational corporations could
incite domestic companies to comply more willingly with their tax
obligations and/or engage in similar activities. Whereas, traditional
advocates of CSR have employed concepts such as reputation, licence-to-operate,
sustainability, moral obligation and innovation to make the case for CSR,
the present inquiry extends this stream of literature by arguing that TP and
its externalities are genuine justifications for CSR. We consolidate our
arguments with a case study of Glencore and the mining industry in the
Democratic Republic of Congo.
AACSB emphasizes that the definitions are
institution-specific, so different institutions will have different
definitions that fit its mission.
I doubt that size of CPA firm would be a factor.
Instead the emphasis is on the degree of responsibility in the professional
practice. Thus a smaller firm could easily provide deeper, more strategic
planning experience than a larger firm.
Generally, the responsibility would need to be
full-time or equivalent to count for PA at my institution, which is hard for
a full-time academic to meet. However, one could imagine another institution
designating a partnership or equivalent position that is more than half-time
as meeting the practice requirements for a PA.
The idea is that "SA" is more to be desired, so
that someone who begins working at a school upon retirement and holds a PhD
will be PA for the 5 years that his or her prior experience counts. During
that time the faculty member is expected to begin producing research and his
or her category will switch to SA and stay at SA due to continued research
productivity.
Moving in the opposite direction is not really
expected. An academic who produces no research because he or she is involved
in practice is probably not working at a high enough level for long enough
while he or she is teaching. So when the faculty member's qualifications as
SA runs out due to lack of research productivity, it is unusual for the
person to qualify as PA.
Jensen Comment
Given all the racial turmoil in and around St Louis this is both surprising and
good news.
This proves that it takes more than no sales tax and no income tax to attract
startups.
It could be that real estate (renting and purchasing) is just too high priced
in competing cities like San Francisco, NYC, Boston, Seattle, Miami, Atlanta,
and LA.
But it takes more than cheap real estate --- New England has half empty former
mill towns that are going nowhere.
I doubt that St. Louis is competing on the basis of quality public schools.
Here San Francisco would have an edge.
Jensen Comment
External auditors are not very good at detecting frauds. Typically insiders
expose frauds, although whistle blowing is controversial and often more damaging
to the whistleblower than rewarding ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
The Securities and Exchange
Commission is probing whether companies are muzzling
corporate whistleblowers.
In recent weeks the agency has
sent letters to a number of companies asking for years
of nondisclosure agreements, employment contracts and
other documents, according to people familiar with the
matter and an agency letter viewed by The Wall Street
Journal. The inquiries come as SEC officials have
expressed concern about a possible corporate backlash
against whistleblowers.
Some of these types of
documents sometimes include clauses that impede
employees from telling the government about wrongdoing
at the company or other potential securities-law
violations, according to lawyers who handle
whistleblower cases and some members of Congress. In
some cases, the firms require employees to agree to
forgo any benefits from government probes, effectively
removing the financial incentive for participating in
the SEC program.
In a separate January letter to
Rep.
Maxine Waters
(D., Calif.)
that was reviewed by the Journal, SEC Chairman
Mary Jo White
said she was
concerned about the agreements.
The SEC has made a push to
bring more whistleblower cases since the 2010 passage of
the Dodd-Frank financial-reform bill, which created the
agency’s whistleblower program.
Whistleblowers have flocked to
the SEC program, with the number of tips increasing each
year. The agency fielded 3,620 tips on potential
securities-law violations in the 2014 fiscal year, up
21% from two years before.
As part of the program,
tipsters can get between 10% and 30% of the sum of
penalties collected if their information leads to an SEC
enforcement action with sanctions of more than $1
million. The program handed out an
award for more than $30 million
last year to an undisclosed
foreign tipster, which was its largest ever.
Dodd-Frank regulations prohibit
companies from interfering with employees reporting
potential securities-law violations to the agency.
An SEC spokesman declined to
comment.
Continued in article
From the CFO Journal's Morning Ledger on February 20, 2015
A
whistleblower’s horror story Recent exposés of less than proprietary behavior in government and
in business has led
Rolling Stone Magazine to
call this era the age of the whistleblower. As Matt Taibbi writes,
“whistleblowers are becoming to this decade what rock stars were to the
Sixties — pop culture icons, global countercultural heroes.” But today’s
whistleblowers tend to partake in little of the spoils and almost none of
the glamour. In fact their lives are very often almost destroyed in the
process.
A massive
pay-to-play scheme involving alleged bid rigging of state contracts involving
hundreds of millions of dollars in taxpayer money was outlined by federal
prosecutors Thursday in a case that targets longtime advisers and major donors
of Gov. Andrew M. Cuomo ---
http://politicsnow.buffalonews.com/2016/09/22/nine-charged-bombshell-state-corruption-case/
September 23, 2016
Sen. Elizabeth Warren is still angry that
more financiers weren’t thrown in prison after the 2008 financial crisis.
Last Thursday—the eighth anniversary of the collapse of Lehman Brothers—the
Massachusetts Democrat wrote to FBI Director James Comey and Justice
Department Inspector General Michael Horowitz to demand an accounting. But
instead of urging Justice to revisit its cold-case files on banksters,
perhaps she should focus on the disturbing news on financial fraud in
municipal government.
Last Wednesday a federal jury found that the city
of
Miami defrauded bond investors by
misleading them about the city’s declining financial condition.
Specifically, Miami moved funds earmarked for specific purposes into its
General Fund to hide fiscal deficits and pretend the city was maintaining
robust reserves. The scheme allowed the city to gain favorable grades from
credit-ratings firms, which later downgraded Miami after an auditor forced
the city to reverse the illegal fund transfers.
Wednesday’s loss in a civil case brought by the
Securities and Exchange Commission wasn’t the first time Miami has been
caught cooking the books. In 2003 the SEC instituted a cease-and-desist
order against the sunny paradise for violating anti-fraud provisions of
federal law in a 1995 bond issuance. And it’s more than a Miami problem. The
Journal reports that last month the SEC settled civil cases with no fewer
than 71 municipal issuers. Yet we haven’t heard a peep from the progressive
left about jailing government officials who mislead investors.
As for Ms. Warren, we have to give her credit for
including abuses by government-backed Fannie Mae and Freddie Mac in her list
of crisis-era outrages she sent to the Justice IG on Thursday. And if she’s
looking for potential areas of investigation, we suggest she spend even more
time examining government disclosures.
Jensen Comment
This will almost certainly cause delays in refunds for taxpayers who do not file
electronically. For those who shift from paper to electronic filing the risk of
ID theft is much greater. I will never file electronically again as long as
paper filing is an alternative.
Jensen Comment
I remember the that Andersen's audits became more and more disreputable as they
replaced detailed test checking with what was then called "analytical review."
For example, after the collapse of WorldCom (which was when Andersen perhaps
conducted the worst audit in the history of the world) the Purchasing Department
purportedly had not seen an Andersen auditor in years. Every respectable audit
firm knows the that detailed test checking is extremely important in inventory
auditing and purchasing department auditing (where kickbacks from suppliers are
the juiciest).
Perhaps the most common complaint in PCAOB inspections of audit firms is the
cutting back of detailed test checking in favor of lower cost analytical
reviews.
There is a debate as to
where should be the focus of analytics in accounting curriculum. While some
emphasize mastery of certain tools and propriety data set, others suggest
focusing on statistical tools and data crunching. We believe in accounting
we have a vast resource of company data to use to improve analytical
thinking of students in various accounting courses by encouraging students
to ask “interesting” questions now that we have all the data and tools. As
there is limited history of applying accounting big data analytics in the
accounting curriculum, this paper reports on some experiences of authors
using analytics in accounting courses. We utilized publicly available
accounting data products/services in the classroom and developed a series of
questions for students that require accounting big data analytics. These
questions are carefully designed to relate to the course subject matter, and
require quick responses, given data services/tools available in class.
Overall such products/services seem to help students to apply classroom
learning to the real world, and therefore make learning more effective. Too
often the entire focus on textbook materials could get boring without any
“action” or live data analytics demonstration regarding the topic of
interest. We have not collected objective data on incremental benefits of
the use of accounting big data and analytics; as such there has not been a
formal survey of students on this topic and tools utilized. However, the
anecdotal evidence suggests that accounting could be more interesting if
students in the classroom can quickly analyze a scenario and come up with
potential answers. We have developed and explained in this paper various
scenarios for different accounting courses that use data services/tools
freely available to academics.
What is the relative priority of auditing services to Deloitte?
That's
not to say that there isn't telling information about the firm's priorities.
Here's a good selection:
Deloitte's ability to deliver value for clients across all geographies
and service areas led to growth in each of its five core
businesses—Audit, Consulting, Financial Advisory, Risk Advisory and Tax
& Legal. All advisory businesses posted double-digit growth globally.
Highlights include:
Risk Advisory grew the most at 22.5 percent, driven by high demand for
cyber and regulatory services.
Consulting grew at 10.8 percent, fueled by increasing demand for
integrated services supporting large-scale digital transformation,
systems implementation, human resources and strategy projects.
Deloitte Tax & Legal grew at 10.0 percent in FY2016, the highest growth
since FY2008. Growth was boosted in part by the sixth consecutive year
of double-digit growth in Deloitte Legal.
I love that legal services got a shoutout. Meanwhile, audit, the service
that Punit Renjen says
is "central to who were are and will remain central to who we are, period,"
is mentioned a grand total of two times.
Jensen Comment
This may be one of those ways to mislead with statistics.
For example, I think an orthopedics surgeon corporation down the road in our
Alpine Clinic has a much higher percentage of return to owners than any
accounting firm in the State of New Hampshire. This is probably true for most
every MD specialty corporation in the State.
Much depends upon what you call an "industry."
One thing that helps accounting firms have high returns is relatively cheap
labor. For example, we have a granddaughter who graduated in pharmacy and then
interned with the Veterans Administration in Boston. She's now returning to
Maine (Portland) for her first real job at a starting salary of $125,000 plus
fringe benefits. Are there any accounting firms in New England with starting
salaries of entry level graduates of $125,000? There might be some who
specialize in computer and IT services, but I doubt that this salary is offered
to accounting graduates.
Having said this, I still recommend in many instances going to work for an
accounting firm at less than half this starting pharmacist salary. The reason is
that accountancy offers so many alternative tracks for advancement into much
higher paying careers. And believe it or not I think an auditor traveling from
client to client has more interesting and varied work. I watch those high paid
pharmacists in our Wal-Mart pharmacy working intently day-to-day and
year-to-year and thank my lucky stars that I never became a Wal-Mart pharmacist.
Jensen Comment
Aside from my six TIAA lifetime annuities, all my savings are invested through
Vanguard. I have a checkbook and can write a check anytime I need liquidity for
such things as buying a car or paying property taxes. My returns are
automatically invested. However, I also have a checking account with a local
bank.
Updates on the
Journal of Accounting and Economics
From MAAW's Blog Compiled by Jim Martin
Updates on the
journal Contemporary Accounting Research (a Canadian Academic Accounting
Association journal and is the Canadian equivalent to the AAA's TAR)
From MAAW's Blog Compiled by Jim Martin
I do
have a PwC Direct password, but I really doubt that the Switzerland link
is using a cookie.
In any
case the home page of PwC does not require any login ---
http://www.pwc.com/
The video is now on this home page.
This
takes me back to the days when Bob Eliott, eventually as President of
the AICPA, was proposing great changes in the profession, including
SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s
AICPA/KPMG videos as starting points for discussion in my accounting
theory course. Bob relied heavily on the analogy of why the railroads
that did not adapt to innovations in transportation such as Interstate
Highways and Jet Airliners went downhill and not uphill. The railroads
simply gave up new opportunities to startup professions rather than
adapt from railroading to transportation.
Bob’s
underlying assumption was that CPA firms could extend assurance services
to non-traditional areas (where they were not experts but could hire new
kinds of experts) by leveraging the public image of accountants as
having high integrity and professional responsibility. That public image
was destroyed by the many auditing scandals, notably Enron and the
implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
The
AICPA commenced initiatives on such things as Systrust. To my knowledge
most of these initiatives bit the dust, although some CPA firms might be
making money by assuring Eldercare services.
The
counter argument to Bob Elliot’s initiatives is that CPA firms had no
comparative advantages in expertise in their new ventures just as
railroads had few comparative advantages in trucking and airline
transportation industries, although the concept of piggy backing of
truck trailers eventually caught on.
I still
have copies of Bob’s great VCR tapes, but I doubt that these have ever
been digitized. Bob could sell refrigerators to Eskimos.
Isn't interesting that the pwc video has
nothing at all to say about protection of the investor or maintenance of
the public interest. It is all about value for the client. The client
gets mentioned at least a dozen times -- investors and the public, zero
times.
If these are truly the internalized values of
the firm, we're sure to have more audit failures in coming years.
Sarbox
(Sarbanes, SOX) revived the profitability of financial audits but
possibly not for long as worldwide lawsuits commence to take their toll
on the auditing firms.
http://faculty.trinity.edu/rjensen/Fraud001.htm
A key point
made by Bob Elliott is that expansion of assurance services (e.g.,
SysTrust and Eldercare) is levered on the public image of CPA firms’
high integrity and professional responsibility. After this shining
public image of CPA firms’ integrity and professional responsibility was
tarnished since the turn of the Century, the question becomes what
comparative advantages do CPA firms have that gives them comparative
advantage. If you believe Francine, there’s not much left for the
largest auditing firms aside from an existing global network of offices,
infrastructures, vast teams of lawyers, and whatever is left of a
once-shining public image
Bob, it's all about branding. If you look at
what Deloitte now says on their new boilerplate legal language- they
recently converted from Swiss Verein to UK private firm structure -
you'll see that brand is king. "Deloitte is a brand..." It begins.
Deloitte has a consulting firm they never shed,
PwC wants one bad and is counting on it to grow to pull the rest if the
firm up. KPMG is trying to get back in. They were advertising their
presence at Oracle Open World user conf. EY seems the only one laying
low, but then again I predicted that. Time and money is being spent on
lots of litigation and they have the whopper of the day-Lehman. Yes, we
are back pre-2000 and no one is doing anything to stop it. In the UK the
regulators and media are rattling sabers but in the US nada but me and a
few others like Jim Peterson. The PCAOB has no powers to stop
acquisitions like BearingPoint and Diamond by PwC that distract them and
waste resources that should be spent on training and quality assurance.
Jensen Comment
The settlement amount is confidential, but given the timing of the settlement I
would guess that PwC is quite happy.
The good news is that PwC is still in business, contrary to one of the scenarios
laid out by Jim Peterson to sell his new (overpriced) book.
From Scott
Bonacker on March 31, 2016
Every once in a while, a dog catches a car. Then what to do (other than
call the lawyer in) – these articles discuss tax reporting after catching an
embezzler:
http://web.nacva.com/JFIA/Issues/JFIA-2013-1_4.pdf
Insulin prices are rising — increases that mean
some people are spending as much on monthly diabetes-related expenses as
their mortgage payment.
But what makes the rise in insulin prices different
than many other old drugs that have drawn scrutiny over prices, is that
there is competition for insulin.
In most industries, competition drives down prices.
In this case, the competitors appear to increase prices side-by-side —
something that's been referred to as "shadow pricing."
At least three companies — Eli Lilly & Co., Novo
Nordisk, and Sanofi Aventis — make and sell insulin.
Despite this competition, prices have steadily
climbed over the past decade, taking single or double-digit list price
increases in a year. A 10 milliliter vial of Sanofi's long-acting insulin,
Lantus, first hit the US market at $34.81 a vial in 2001, according to data
from Truven Health Analytics.
Since 2014, the last time Sanofi raised the price,
it has been $248.51.
During the period in which Lantus's price rose
600%, a rival product from Novo Nordisk appeared. In 2006, the new drug,
called Levemir, hit the market at $66.96 (close to what Sanofi's drug cost
at the time). These days Levemir costs about $269.
In other words, the competition seems to have done
nothing to push prices down. In fact, when charted side by side, the price
increases seem to be in synch.
When the Obama administration announced its plan to
give up U.S. protection of the internet, it promised the United Nations
would never take control. But because of the administration’s naiveté or
arrogance, U.N. control is the likely result if the U.S. gives up internet
stewardship as planned at midnight on Sept. 30.
On Friday Americans for Limited Government received
a response to its Freedom of Information Act request for “all records
relating to legal and policy analysis . . . concerning antitrust issues for
the Internet Corporation for Assigned Names and Numbers” if the U.S. gives
up oversight. The administration replied it had “conducted a thorough search
for responsive records within its possession and control and found no
records responsive to your request.”
It’s shocking the administration admits it has no
plan for how Icann retains its antitrust exemption. The reason Icann can
operate the entire World Wide Web root zone is that it has the status of a
legal monopolist, stemming from its contract with the Commerce Department
that makes Icann an “instrumentality” of government.
Antitrust rules don’t apply to governments or
organizations operating under government control. In a 1999 case, the Second
U.S. Circuit Court of Appeals upheld the monopoly on internet domains
because the Commerce Department had set “explicit terms” of the contract
relating to the “government’s policies regarding the proper administration”
of the domain system.
Without the U.S. contract, Icann would seek to be
overseen by another governmental group so as to keep its antitrust
exemption. Authoritarian regimes have already proposed Icann become part of
the U.N. to make it easier for them to censor the internet globally. So much
for the Obama pledge that the U.S. would never be replaced by a
“government-led or an inter-governmental organization solution.”
Rick Manning, president of Americans for Limited
Government, called it “simply stunning” that the “politically blinded Obama
administration missed the obvious point that Icann loses its antitrust
shield should the government relinquish control.”
The administration might not have considered the
antitrust issue, which would have been naive. Or perhaps in its arrogance
the administration knew all along Icann would lose its antitrust immunity
and look to the U.N. as an alternative. Congress could have voted to give
Icann an antitrust exemption, but the internet giveaway plan is too flawed
for legislative approval.
As the administration spent the past two years
preparing to give up the contract with Icann, it also stopped actively
overseeing the group. That allowed Icann to abuse its monopoly over internet
domains, which earns it hundreds of millions of dollars a year.
Earlier this month, an independent review within
Icann called the organization “simply not credible” in how it handled the
application for the .inc, .llc and .llp domains. The independent review
found Icann staffers were “intimately involved” in evaluating their own
work. A company called Dot Registry had worked with officials of U.S. states
to create a system ensuring anyone using these Web addresses was a
legitimate registered company. Icann rejected Dot Registry’s application as
a community, which would have resulted in lowered fees to Icann.
Delaware’s secretary of state objected: “Legitimate
policy concerns have been systematically brushed to the curb by Icann
staffers well-skilled at manufacturing bureaucratic processes to disguise
pre-determined decisions.” Dot Registry’s lawyer, Arif Ali of the Dechert
firm, told me last week his experience made clear “Icann is not ready to
govern itself.”
Icann also refuses to award the .gay domain to
community groups representing gay people around the world. Icann’s ombudsman
recently urged his group to “put an end to this long and difficult issue” by
granting the domain. Icann prefers to earn larger fees by putting the .gay
domain up for auction among for-profit domain companies.
And Icann rejects the community application for the
.cpa domain made by the American Institute of CPAs, which along with other
accounting groups argues consumers should expect the .cpa address only to be
used by legitimate accountants, not by the highest bidder. An AICPA
spokesman told me he has a pile of paperwork three feet high on the
five-year quest for the .cpa domain. The professional group objected in a
recent appeal: “The process seems skewed toward a financial outcome that
benefits Icann itself.”
From the CFO Journal's Morning Ledger on September 29, 2016
UBS to pay $15 million
over sales practices UBS Group AG has agreed to pay more than
$15 million to settle SEC charges that its
failure to properly train
brokers led to
customers buying hundreds of millions of dollars of unsuitable securities.
According to Reuters, the SEC said
on Wednesday that
UBS from 2011 to 2014 sold about $548 million of derivatives tied to
individual stocks to relatively inexperienced retail customers.
Jensen Comment
If you believe that improper training of brokers in selling derivatives was the
cause of these frauds then Tom Selling will negotiate a price with you for his
ocean front home in Phoenix. The problem is that UBS brokers were overly trained
in screwing derivatives customers. Sometimes I've got to agree with Senator
Elizabeth Warren.
From the CFO Journal's Morning Ledger on September 29, 2016
Why the $600 EpiPen costs
$69 in Britain
The EpiPen allergy shot
costs less than its leather case in Britain, Bloomberg reports. The price of
an EpiPen two-pack has surged to more than $600 in the U.S., sparking a
political outcry. While the manufacturer,
Mylan NV, says it takes home about $274, in the U.K. a similar pair of
injectors costs the state-funded National Health Service $69. The numbers
highlight the stark differences in the way drugs are priced in the U.S. and
Britain, where the government negotiates with pharmaceutical companies to
limit costs.
Jensen Comment
Such pricing would never work worldwide because somebody has to pay for Mylan's
corporate jets and conferences in Ritz hotels around the world. "Cost Plus"
pricing all depends upon what outlays are included in what you call "cost."
Accountants are notoriously creative when it comes to "measuring" cost.
From The Wall Street Journal on September 27, 2016
"Mylan Clarifies EpiPen's Profit"
. . .
Testifying before a
congressional committee last week, CEO Heather Bresch said Mylan's profit
was $100 for a two-pack of injectors, despite a $608 price in the USA
(versus $69 in the U.K.)
Continued in article
Jensen Comment
As usual USA prices include all the allocations of corporate jets, conferences
in luxury hotels, factory depreciation, equipment depreciation, R&D, etc.
Screwing USA customers and third parties (think Blue Cross, Medicare, and
Medicaid) is the name of the game in the USA.
From the CFO Journal's Morning Ledger on September 23, 2016
Sustainability disclosures
unstustainable
Investors are asking
companies to beef up the information that appears in company filings
regarding sustainability efforts, Tatyana Shumsky writes. Many companies
issue corporate-social-responsibility
reports, but both the standardization of reported metrics and third-party
oversight are lacking, an investment officer for the California State
Teachers’ Retirement System said
on Monday.
From the CFO Journal's Morning Ledger on September 23, 2016
PBGC feels your pain
The Pension Benefit Guaranty Corp. wants companies
struggling with overburdened pension deficits to know it understands the
struggle. That’s why,
on
Thursday, it eased late-payment fees, Vipal
Monga reports. The director of the PBGC, Tom Reeder, said employers are
ditching defined benefit plans “at an alarming rate.” Premium-payment
penalties will be halved, and for those with a good payment history the
penalty could be cut by another 80% of that amount.
Jensen Comment
Relax. It's not really taxpayer money at stake here. One day the PRGC
obligation for pensions will be so huge that the Federal Government will
make it simple by printing enough money to pay all the public and private
pension obligations in the USA. Why is everybody so concerned about
entitlements since the simple answer is in the money printing processes?
Economists on edge about entitlements make it seem overly complicated when
Zimbabwe had the answers all along.
Yahoo revealed that upwards of half a billion user’s data was compromised
From the CFO Journal's Morning Ledger on September 23, 2016
If you think your personal data is safe online,
you may be a yahoo.
That’s the message from Yahoo Inc., which revealed
that upwards of half a billion user’s data was compromised – in 2014, by the
way – by what it called “state-sponsored” hackers. While anybody with a
Yahoo email or fantasy sports account is rightfully worried, the massive
breach throws into question the Marissa Mayer-led company’s oversight and
disclosure, especially amid the sale of its core businesses to
Verizon
Communications Inc.
The hack, and the timing of the disclosure,
could affect the Verizon merger,
Vipal Monga and Ryan Knutson report. The question is
whether potentially the biggest hack on record, and the lag-time in noticing
it, could constitute a material adverse change to Yahoo’s business. Courts
haven’t been kind to takeover parties’ attempts to use such deal clauses to
wriggle out of a soured merger, but the legalese might allow Verizon some
leverage if it wants to rework the pact. As Tatyana Shumsky notes,
determining tthe impact is a
sticky wicket
and most companies are reticent to disclose any breaches if materiality
isn’t a foregone conclusion
From the CFO Journal's Morning Ledger on September 22, 2016
U.S. drug company hiked price of acne cream
by 3,900%
Another U.S. drug company has increased the price of
an acne cream by more than 3,900% in less than 18 months in the latest
example of what some label price gouging, which has enraged the American
public and become a central topic of debate in the presidential election
campaign, the Guardian reports. Novum Pharma LLC, a recently formed
privately held Chicago-based company, bought the rights to drug Aloquin in
May 2015. Novum almost immediately increased the price by 1,100%, and hiked
the price higher still in January 2016.
From the CFO Journal's Morning Ledger on September 22, 2016
AICPA steps up cyberfraud fight
The American Institute of CPAs this week unveiled
three measures aimed at advancing the battle for cybersecurity, Tatyana
Shumsky reports. The accounting industry group
on
Wednesday published a fraud report designed to
better equip accountants fight off “executive impersonation” cyberattacks.
The scam involves an email sent from an executive imposter to a subordinate
asking for a wire transfer or payment to a new bank. Finance chiefs and
their staff are particularly popular targets for this type of attack,
because of their access to company accounts.
From the CFO Journal's Morning Ledger on September 21, 2016
Microsoft plans $40 billion stock buyback and
raises dividend Microsoft Corp. announced plans to buy back up
to $40 billion in stock and boost its dividend by 8%, the latest in a series
of moves by the software giant to share a steady flood of cash with
shareholders. The latest repurchase target is the same size as a buyback
plan announced in 2013, which the company said
Tuesday
it expects to complete by the end of this year.
Jensen Comment
When teaching elementary accounting students how to journalize the above
transactions these may good examples of why companies pay dividends and why they
buyback shares. Of course there are various possible reasons in each instance.
From the CFO Journal's Morning Ledger on September 20, 2016
E&Y fined $9 million for improper auditor relationships
Big companies and their outside auditors often have
close professional relationships. But now, for the first time, U.S.
regulators have taken enforcement action over relationships that became a
little too close: it has fined professional services firm Ernst &
Young LLP $9.3 million for failures including an auditor’s romantic
involvement with a client, the Financial Times reports.
From the CFO Journal's Morning Ledger on September 20, 2016
Wells Fargo CEO ‘deeply sorry.’
Wells Fargo & Co.
Chief Executive John Stumpf will tell U.S. senators
on
Tuesday that he is “deeply sorry” for selling
customers unauthorized bank accounts and credit cards and that he would take
“full responsibility” for the unethical activity, the New York Times
reports. Mr. Stumpf will strike a contrite tone in a testimony over the fake
accounts at a Senate Banking Committee hearing
on
Tuesday morning, the New York Times said,
citing a copy of his prepared remarks.
Jensen Question
Where have we heard this before in front of the US Senate?
Bankers, the IRS,
and on and on and on.
From the CFO Journal's Morning Ledger on September 19, 2016
PCAOB levies sanctions, gets first ever
admissions (of guilt) The Public
Company Accounting Oversight Board imposed sanctions on three, smaller audit
firms, along with engagement partners at two of the firms, for violating
independence requirements while auditing broker-dealer clients. Two of the
firms and two engagement partners admitted to the violations, a first for
the PCAOB, Accounting Today reports.
Paperless Office? Yeah Right!
From the CFO Journal's Morning Ledger on September 19, 2016
The future is finally now?
Every year, America’s office workers print out or
photocopy about one trillion pieces of paper, Christopher Mims writes. If
you add in all the other paper businesses produce, the utility bills and
invoices and bank statements and the like, the figure
rises to 1.6 trillion.
This is why HP Inc.’s acquisition of
Samsung Electronics Co.’s
printing and copying business last week makes sense.
If you teach a module on "Rent vs. Buy" you may want to make the following
point
From the CFO Journal's Morning Ledger on September 19, 2016
Renting machines to weather slump Used
machinery is flooding the secondhand market, piling more pain on equipment
makers battling slack demand from any customer that mines, moves or refines
commodities amid a global slump in the value of everything from coal to
corn. Many construction firms and other equipment users are renting or
entering longer-term leases for machines to expand their fleets or replace
worn out equipment, dealers and analysts say.
Low Interest Rates Driving Investors to Real Estate Investment Trusts
From the CFO Journal's Morning Ledger on September 19, 2016
In a sign of shifting trading and tax strategies,
along with ever-changing market conditions, real-estate-investment trusts
will become the new,
11th stock grouping
among S&P 500 companies. It is the first time in roughly two decades, since
the technology boom, that the index is gaining a new sector.
Real-estate investment trusts own real estate and pay
steady dividends, which have been attractive to investors with interest
rates so low. More than a net $62 billion had flowed into U.S. real-estate
funds since 2001 through the end of 2015, according to Morningstar data.
Since 2001, 129 real-estate investment trusts have gone public in the U.S.,
raising more than $38 billion. After it breaks away from banks, insurers and
other financial companies, the real-estate sector will make up roughly 3% of
the market capitalization of the S&P 500.
From the CFO Journal's Morning Ledger on September 16, 2016
Exxon gets New York accounting probe New York
Attorney General Eric Schneiderman is investigating why Exxon Mobil Corp. hasn’t
written down the value of its assets, two years into a pronounced crash in
oil prices. Mr. Schneiderman’s office, which has been probing Exxon’s past
knowledge of the impact of climate change and how it could affect its future
business, is also examining the company’s accounting practices, according to
people familiar with the matter.
A U.S. investigation into the lack of write-downs
at Exxon Mobil Corp. despite the slump in oil-prices has brought to light
the challenge of assessing impairments under U.S. Generally Accepted
Accounting Principles (GAAP).
But, for international companies and U.S. firms
with foreign operations, figuring out GAAP is not the only contest, as there
is second set of rules.
International Financial Reporting Standards (IFRS)
are a single set of accounting standards that are now mandated for use by
more than 100 countries, including the EU and more than ⅔ of the G20.
U.S. companies with overseas operations keep two
sets of books, as they have to convert their IFRS results into GAAP.
International firms that are stocklisted in the U.S. are exempt from this
rule, they file in IFRS.
According to its latest earnings report, Exxon
consolidates in GAAP.
Both in GAAP and in IFRS, the goal is to ensure
that assets are not reported above their so-called fair value, or the amount
that can be recovered from liquidating the asset, said Emmanuel De George,
assistant professor of accounting at London Business School.
Once it is determined that an asset requires a
write-down, reporting entries and disclosure are similar between IFRS and
GAAP, the professor said.
However, there are substantial distinctions between
IFRS and GAAP. “The key difference arises in the determination of whether or
not an asset requires a write-down,” Mr. De George said.
Exxon said it hasn’t needed to record a write-down
since oil-prices came falling 2014. Last year, a trade publication quoted
Exxon Chief Executive Rex Tillerson with saying “we don’t do write-downs.”
It is much harder to write down assets under GAAP
than under IFRS, Mr. De George said.
This is because under IFRS impairment losses can be
reversed if economic conditions change and value is restored, whereas under
GAAP reversals are prohibited, once a write-down has taken place, even if
economic conditions improve.
“Under GAAP, a write-down is triggered if the sum
of the undiscounted expected future cash flows from the asset fall below the
net book value,” said Mr. De George.
This means that over time changes to the value of
the asset, for example due to currency fluctuations, are not taken into
consideration when calculating the expected future cash flow that is
generated by the asset.
For the write-down itself, however, companies don’t
reference undiscounted expected future cash flows, but the discounted
expected future cash flow.
This is also described as “fair value,” the “price
that would be expected upon sale of the asset,” said Mr. De George.
Under IFRS, there’s a difference in testing whether
there needs to be a write-down. IFRS starts with the discounted future
expected cash flows, thus directly accounting for over time changes to the
value of the asset.
The second step, the write-down, follows the same
route as GAAP.
In addition there is another major difference
between GAAP and IFRS. IFRS does not permit a method called
last-in-first-out (LIFO) which shows a lower cost of sales and higher gains
during periods of declining oil prices, said Karthik Balakrishnan, assistant
professor of accounting at London Business School.
“This is what Exxon and most U.S. oil companies
use,” said Mr. Balakrishnan.
Because of the difference in assessing write-downs
and LIFO, IFRS will produce more conservative numbers for earnings during
periods of declining prices, said Mr. Balakrishnan.
In the case of Exxon, the experts warn against
simply accrediting the lack of write-downs to the differences in accounting
standards between the U.S. and other parts of the world.
“That would be an unfair comparison, given that the
threshold for impairment testing is higher under GAAP,” said Mr. De George.
Exxon tends to be more conservative when
capitalizing the costs of their fields which lead to lower book values to
begin with, Mr. George said. “That further reduces the probability that they
will trigger an impairment event,” he said.
This is
mostly because economists are close to insufferable when they opine about
the other. Indeed, in “Economics
Rules,” an otherwise critical book of
his discipline, Dani Rodrik offers up numerous asides about how economics is
more rigorous than the rest of the social sciences, such as, “economics is
by and large the only social science that remains almost entirely
impenetrable to those who have not undertaken the requisite apprenticeship
in graduate school,” which allows him to conclude that, “because economists
share a language and a method, they are prone to disregard, or deprecate,
noneconomists’ point of view.” And this is empirically true: Other academic
disciplines cite economists frequently, but they do not return the favor
nearly as often.
This
has mostly worked out gangbusters for economists. In a 2015 paper that
examined how well economists have thrived in the world compared with the
other social sciences,
sociologist Marion Fourcade
and two colleagues
conclude:
Most
economists feel quite secure about their value-added. They are comforted in
this feeling by the fairly unified disciplinary framework behind them,
higher salaries that many of them believe reflect some true fundamental
value, and a whole institutional structure — from newspapers to
congressional committees to international policy circles — looking up to
them for answers, especially in hard times.
Most
economists are perfectly content with this status quo, believing it to be
fair and just. And I’d just like to take this
opportunity to tell economists that this is a complete and total crock.
One
could argue that the two subfields of economics that have had the largest
real-world policy influence have been in finance and macroeconomics. The
problem is that this influence has mostly been catastrophic. In the arena of
finance, University of Chicago economist
Luigi Zingales has lambasted his own subfield,
acknowledging that “our view of the benefits of finance is inflated.”
Stanford University professor
Paul Pfleiderer accuses finance scholars of using models as chameleons,
engaging in “theoretical cherry-picking” to advance
ideas that are not necessarily grounded in reality. Other
economists acknowledge that a narrow focus on
financial variables caused them to miss political sources of the crisis and
its aftermath.
If you
think that’s bad, though, let’s talk about macroeconomics for a minute. One
could argue that the most high-profile contribution by macroeconomists to
the post-2008 global economy has been an emphasis on fiscal austerity as a
solution to stagnation. That prescription has been, well,
pretty much
disastrous.
I bring
all of this up because Paul Romer has a lulu of a paper entitled “The
Trouble with Macroeconomics” that
rocketed around the social media of the social sciences. If you think
the title implies criticism, read the abstract:
For more than three decades, macroeconomics has gone backward. The
treatment of identification now is no more credible than in the early
1970s but escapes challenge because it is so much more opaque.
Macroeconomic theorists dismiss mere facts by feigning an obtuse
ignorance about such simple assertions as “tight monetary policy can
cause a recession.” Their models attribute fluctuations in aggregate
variables to imaginary causal forces that are not influenced by the
action that any person takes. A parallel with string theory from physics
hints at a general failure mode of science that is triggered when
respect for highly regarded leaders evolves into a deference to
authority that displaces objective fact from its position as the
ultimate determinant of scientific truth.
It gets
more brutal from there, as Romer mocks the logic of real business cycles
(a core component behind much of modern macro) and relabels its key
explanatory variable as “phlogiston.”
In history of science circles, that is a sick burn.
Continued in article
The U.S. Justice Department proposed that Deutsche Bank pay $14 billion to
settle a set of high-profile mortgage-securities probes
From the CFO Journal's Morning Ledger on September 16, 2016
Deutsche Bank AG
will not
go gently into that goodnight. The U.S.
Justice Department proposed that Deutsche Bank pay $14 billion to settle a
set of high-profile mortgage-securities probes stemming from the financial
crisis, according to people familiar with the matter, a number that would
rank among the largest payments by banks to resolve similar claims and is
well above what investors have been expecting. The figure is described by
people close to the negotiations between Deutsche Bank and the government as
preliminary, and they said it came up in discussions between the bank and
government lawyers in recent days.
For its part, Deutsche Bank says it “has no intent to settle these potential
civil claims anywhere near the number cited.” It said the outcome should
reflect those that have settled before and expects a settlement at
“materially lower amounts.” Privately, Deutsche Bank lawyers have suggested
that the bank views between $2 billion and $3 billion as a reasonable cost
to close out the Justice Department’s mortgage-related probe quickly,
according to people familiar with internal bank discussions and signals
communicated to investors
From the CFO Journal's Morning Ledger on September 15, 2016
Health-care costs no joke The average
cost of health coverage offered by employers pushed above $18,000 for a
family plan this year, though the growth was slowed by the accelerating
shift into high-deductible plans, according to a major survey. Annual
premium cost rose 3% to $18,142 for an employer family plan in 2016,
according to the annual poll of employers performed by the nonprofit Kaiser
Family Foundation along with the Health Research & Educational Trust.
From the CFO Journal's Morning Ledger on August 17, 2016
Health care a sticky
wicket
Many companies are cutting
jobs in response to rising health-care costs spurred by the Affordable Care
Act, according to a new survey by the Federal Reserve Bank of New York.
Roughly one-fifth of service sector and manufacturing company executives
said they are reducing the number of workers in response to provisions in
the health-care law, Vipal Monga reports. The results add to a bevy of bad
news related to the Obama administration’s signature health-care law.
Obamacare: More and more limited access to doctors and hospitals From the CFO Journal's Morning Ledger on September 1, 2016
Why put off until January what you can do today? Under
intense pressure to curb costs that have led to losses on the Affordable
Care Act exchanges, insurers
are accelerating their move
toward
plans that offer limited choices of doctors and hospitals. A new McKinsey &
Co. analysis of regulatory filings for 18 states and the District of
Columbia found that 75% of the offerings on their exchanges in 2017 will
likely be health-maintenance organizations or a similar plan design known as
an exclusive provider organization, or EPO. Both typically require consumers
to use an often-narrow network of health-care providers – in some cases,
just one large hospital system and its affiliated facilities and doctors.
Only a quarter of the exchange plans next year would still be broader
designs such as preferred-provider organizations, or PPOs, which generally
offer larger selections of doctors and hospitals and include out-of-network
coverage, the McKinsey analysis found. Across the states McKinsey examined,
about 15% of exchange-eligible consumers are expected to have no PPOs to
choose from. A spokesman for the Department of Health and Human Services
said that many surveys have shown that exchange enrollees are satisfied with
the array of health-care providers in their plans, and insurers are
adjusting their offerings based on consumer demand. Offering a smaller
selection of health-care providers holds down costs, in part because
hospitals and specialists with the highest reimbursement rates can be cut
out.
Regulation: The intent is no longer to regulate. The intent is to
raise government revenues.
From the CFO Journal's Morning Ledger on September 15, 2016
A cross-border merger, one of the larger deals in
history, a ton of debt financing, genetically modified crops, German law,
regulatory oversight and a the future of a 115-year old brand name: What’s
not to love? After months of haggling
Monsanto Co. agreed to sell itself to Bayer AG in
a $57 billion deal
that would create an agricultural powerhouse and end the independence of one
of the most successful and controversial companies in the U.S. Because of
the two companies’ far-flung operations and markets, the pact would require
approval from about 30 regulatory agencies
around the world, including antitrust
enforcers already examining deals between some of the companies’ main rivals
in the roughly $100 billion global market for crop seeds and pesticides.
The two businesses don’t overlap much, though seeds
could be an issue, but perhaps more importantly
there may not be much appetite
for further consolidation among farm suppliers as the
global farming industry struggles and fertilizer companies are also racing
into one another’ arms. The venerable Monsanto brand
could also disappear,
and the resulting company will face a world that,
scientifically justified or not, is increasingly skeptical of GMO crops, and
its farmers
question the higher prices
for such seeds. Bayer will finance the deal chiefly with debt, which under
German law will allow it to circumvent a shareholder vote,
CFO Journal reports.
In a deal with a greater equity component, Bayer would have needed to get
three out of four investors to say yes.
Jensen Comment
Many are predicting that there are so many regulating agencies that this deal
will never materialize. I think it will fly due to those regulatory agencies
catching on the the EU strategy of allowing something (tax deals, merger, etc.)
and then suing later for billions.
The intent is no
longer to regulate. The intent is to raise government revenues.
From the CFO Journal's Morning Ledger on September 14, 2016
Former AIG boss set to go on trial
Former
AIG Inc. boss Hank Greenberg went to
trial in New York
on
Tuesday over a decade after civil charges were
filed, the FT reports. He is accused of engineering bogus transactions to
hide the insurance giant's financial difficulties. The charges were filed in
2005, but Mr. Greenberg has said they have no merit.
From the CFO Journal's Morning Ledger on September 13, 2016
U.K. pension deficits mount
The gap between reserves set aside by U.K. companies
and their obligations to retirees continues to grow, Nina Trentmann reports
in today’s Big Number. The combined deficit of defined-benefit pension plans
at U.K. public companies rose by £50 billion to £189 billion ($250.8
billion) at the end of August, according to Mercer, a benefits consulting
firm. Although the deficit has been building up for over a decade, more
recent developments such as the U.K.’s vote to leave the European Union and
low interest rates have accelerated the downward trend.
This $19 Billion Claim Could Be the Largest in UK History
From the CFO Journal's Morning Ledger on September 9, 2016
MasterCard charged
In 2014, the European Court of Justice ruled that
regulators were right to condemn the cost of its interchange fees - the fees
retailers pay banks to process card payments, the BBC reports. MasterCard
lowered its fees but now faces a claim for damages for 16 years of charging
from 1992 to 2008.
As
the Journal reports,
the claim is nearly $19 billion, and could be the
biggest in U.K. history
From the CFO Journal's Morning Ledger on September 8, 2016
Apache strikes black gold Apache Corp. said it has discovered the
equivalent of at least two billion barrels of oil in a new West Texas field
that has the promise to become one of the biggest energy finds of the past
decade. The discovery, which Apache is calling “Alpine High,” is in an area
near the Davis Mountains that had been overlooked by geologists and
engineers, who believed it would be a poor fit for hydraulic fracturing.
Jensen Comment
That should keep high school football going in West Texas for a few more
decades.
The SEC Racket of Defending Companies You Previously Investigated
From the CFO Journal's Morning Ledger on September 6, 2016
Government parachute
The former
head of the Securities and Exchange Commission’s whistleblower program is
joining a law firm that represents those same tipsters—an unusual turn of
the revolving door that highlights the potential profitability of legal work
that didn’t even exist a few years ago. Government officials typically go
into private practice to
defend the
companies they previously might have investigated. Sean
McKessy, who left his post as the first chief of the SEC’s Office of the
Whistleblower in July, is taking the riskier path of the plaintiffs’ bar by
joining Washington-based Phillips & Cohen LLP.
Jensen Comment
The Regulator to Regulated racket is not confined to the SEC. Is there a
government agency where the top regulators don't become employees of the
companies they regulated?
Exhibits A, B, and C are attorney generals, military generals, and health
regulators in the FDA, NIH, etc.
From the CFO Journal's Morning Ledger on September 6, 2016
Junk is called junk for a reason
High-yield corporate bonds have been a hot investment in 2016. Now, some
investors are fretting that the debt may have gotten too popular. Drawn by
higher yields than on safer bonds and lower valuations than on stocks,
portfolio managers and individuals alike have poured money into junk bonds
this year.
From the CFO Journal's Morning Ledger on September 2, 2016
Whistleblowing, career safety at odds In a perfect
world, whistleblowing would be celebrated universally, but this ain’t a
perfect world. That’s the message David Mayer, a professor of management and
organizations at the University of Michigan business school. Those who speak
out about wrongdoing in organizations often suffer retaliation, he writes
for Harvard Business Review, both at their current organization and in their
attempt to find future employment
From the CFO Journal's Morning Ledger on August 31, 2016
Apple faces EU
peeler
The
European Union’s antitrust regulator announced
Tuesday a ruling that Apple Inc.’s tax
arrangements with Ireland have breached the bloc’s state-aid rules, saying
Ireland must recoup about €13 billion ($14.5 billion) in unpaid taxes from
the tech giant. The EU’s decision is likely to aggravate trans-Atlantic
tensions over the investigations into tax deals brokered between U.S.
multinational corporations and individual European countries.
From the CFO Journal's Morning Ledger on August 31, 2016
The European Union’s ruling against
Apple Inc.’s
tax situation in Ireland
could have global implications.
It might affect everything from our domestic tax code to our relationship
with foreign countries. The size of the tax demand, which came in a formal
decision issued Tuesday,
risks further unsettling multinational companies, which face a broader
international effort to curb aggressive tax avoidance. But the commission’s
decision shows companies could be on the hook for past behavior and
potentially be handed big bills for allegedly unpaid back taxes. The sum is
the highest ever demanded under the EU’s longstanding rules that forbid
companies from gaining advantages over competitors because of government
help.
To the Treasury and members of Congress, EU regulators
represent a threat partly because companies could get U.S. tax credits if
they pay more abroad, reducing future U.S. tax collections. The U.S. is
trying to protect its claim to the foreign income even though it hasn’t
figured out how to tax it,
Richard Rubin writes.
The EU move underscores the difficulty American
regulators have had to deal with as they try to appropriately tax U.S.
multinationals..
A bright side?
The $14.5 billion Apple is being asked to pay to
Ireland in back taxes could potentially help offset its tab with the
Internal R brigevenue Service, Kimberly S. Johnson and Tatyana Shumsky
report. When an American company pays taxes on profits in foreign countries,
it owes Uncle Sam only the difference between the taxes paid and the U.S.
tax rate. So in the case of Apple, recording a large foreign tax charge
could “set the stage for a foreign tax credit,” said tax consultant Robert
Willens.
A silver lining?
But the EU’s move could force the hand of Congress,
which has been arguing and dithering over an overhaul to the U.S.
corporate-tax code. The U.S. levies nearly the highest corporate rates in
the world. Ray Wiacek, senior tax partner at international law firm Jones
Day in Washington, told Richard Teitelbaum that the ruling “may be the straw
that broke the camel’s back.” With the rest of the developed world moving
toward lower corporate rates, the EU ruling may provide the impetus for the
U.S. Congress to address the chasm between the U.S. tax code and that of
other nations. We’ll likely need to wait until November to know more.
New Audit Deficiencies Disclosed in PCAOB Inspection Reports: Do the
big auditing firms simply ignore deficiencies uncovered by the PCAOB?
From the CFO Journal's Morning Ledger on August 31, 2016
It’s that time of
year again
The government’s audit regulator found deficiencies in
13 audits conducted by Deloitte & Touche LLP and 12 audits conducted
by PricewaterhouseCoopers LLP in its latest annual inspections of the
Big Four accounting firms. The 13 deficient audits found by the Public
Company Accounting Oversight Board represent 24% of the 55 audits and
partial audits reviewed by the board in its 2015 inspection of Deloitte,
issued
Tuesday.
That is up slightly from the previous year’s report.
Jensen Comment
Someday law firms will discover how to use these deficiencies to milk the
auditing firms
Maybe they do already and I just don't know about it.
From the CFO Journal's Morning Ledger on August 30, 2016
Public companies are minding the GAAP again, now that
the Securities and Exchange Commission is having a close look,
Tatyana Shumsky reports
in today’s Business & Tech. section. After March
quarterly earnings reports in which nearly half of S&P 500 companies led
with adjusted numbers that didn’t adhere to generally accepted accounting
principles, the SEC in May told businesses to play non-GAAP numbers down.
When second-quarter numbers were released, more than 80% of companies gave
GAAP results top billing, according to an Audit Analytics study for The Wall
Street Journal.
Companies that have made the transition include Halliburton Co.,
Walgreens Boots Alliance Inc. and videogame maker
Electronic Arts Inc.
The guidance leaves little room for flexibility, and most companies aren’t
taking any chances. If a paragraph or table contains standard and adjusted
figures, companies must make sure sentences or columns with the standard, or
GAAP, information precede everything else. Numbers must be also be presented
in the same style, meaning customized metrics can’t be bolded or printed in
a larger-size font, nor can they be described as “record” or “exceptional”
unless GAAP results are characterized in a similar way.
From the CFO Journal's Morning Ledger on August 29, 2016
FASB issues cash-flows standard
The Financial Accounting Standards Board
on
Friday issued a new standard for reporting
cash-flow statements, in an effort to streamline reporting and clarify
aspects of generally accepted accounting principles that are unclear or
absent, the Journal of Accountancy reports.
From the CFO Journal's Morning Ledger on August 29, 2016
Exxon bailing on Alaska project
Exxon Mobil Corp. has
decided not to invest in the next stage of a proposed natural gas export
terminal in Alaska and said it would work with its partners to sell its
interest in the project to the state government. The company’s decision
comes amid a global glut of natural gas that has depressed prices and
follows the release of a Wood McKenzie report last week concluding the
Alaskan project “is one of the least competitive” of proposed liquefied
natural gas plants worldwide
Alaska has the
nation's worst prospects for solar energy due to so many days of darkness. Also
batteries for renewable energy storage don't work well in cold climates.
From the CFO Journal's Morning Ledger on August 29, 2016
Strapped IRS ends program
The Internal Revenue Service, lacking sufficient
budget, is halting a program that lets large companies resolve tax issues
before filing returns, Accounting Today reports. No new taxpayers will be
accepted into the Compliance Assurance Process program for the 2017
application season, which starts next month.
"Credit Derivatives and Analyst Behavior," by George Eli Batta,
Jiaping Qiu, and Fan Yu, The Accounting Review,
September 2016, Vol. 91, No. 5, pp. 1315-1343
http://aaajournals.org/doi/full/10.2308/accr-51381
This is not a free download
This paper presents a comprehensive analysis of the
role of credit default swaps (CDS) in information production surrounding
earnings announcements. First, we demonstrate that the strength of CDS price
discovery prior to earnings announcements is related to the presence of
private information and the illiquidity of the underlying corporate bonds,
consistent with the CDS market being a preferred venue for informed trading.
Next, we ask how the information revealed through CDS trading influences the
output of equity and credit rating analysts. We find that post-CDS trading,
the dispersion and error of earnings per share forecasts are generally
reduced, and downgrades by both types of analysts become more frequent and
more timely before large negative earnings surprises, suggesting that the
CDS market conveys information valuable to financial analysts.
Jensen Comment
Collateralized debt obligations (CDOs) used with credit default swaps led to
the demise of Bear Sterns and the need to bail out Goldman Sachs following the
2007 economic collapse ---
https://en.wikipedia.org/wiki/Credit_default_swap#Regulatory_concerns_over_CDS
Much of the problem was with the poisoned CDOs sold to large investors who had
protected themselves with credit derivatives.
Steve Kroft examines the complicated financial instruments known as credit
default swaps and the central role they are playing in the unfolding economic
crisis. The interview features my hero Frank Partnoy. I don't know of
anybody who knows derivative securities contracts and frauds better than Frank
Partnoy, who once sold these derivatives in bucket shops. You can find links to
Partnoy's books and many, many quotations at
http://faculty.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
From
The
Wall Street Journal Accounting Educators' Review on April 3,
2003
TITLE: Lending Less,
"Protecting" More: Desperate for Better Returns, Banks Turn to
Credit-Default Swaps
REPORTER: Henny Sender and Marcus Walker
DATE: Apr 01, 2003
PAGE: C13
LINK:
http://online.wsj.com/article/0,,SB104924410648100900,00.html
TOPICS: Advanced Financial Accounting, Banking, Fair Value
Accounting, Financial Analysis, Insurance Industry
SUMMARY: This article
describes the implications of banks selling credit-default swap
derivatives. Firtch Ratings has concluded in a recent report that
banks are adding to their own risk as they use these derivatives to
sell insurance agains default by their borrower clients.
QUESTIONS: 1.) Define the
term "derivative security" and describe the particular derivative,
credit-default swaps, that are discussed in this article.
2.) Why are banks entering
into derivatives known as credit-default swaps? Who is buying these
derivatives that the bank is selling?
3.) In general, how should
these derivative securities be accounted for in the banks' financial
statements? What finanicial statement disclosures are required? How
have these disclosures provided evidence about the general trends in
the banking industry that are discussed in this article?
4.) Explain the following
quote from Frank Accetta, an executive director at Morgan Stanley:
"Banks are realizing that you can take on the same risk [as the risk
associated with making a loan] at more attractive prices by selling
protection."
5.) Why do you think the
article equates the sale of credit-default swaps with the business
of selling insurance? What do you think are the likely pitfalls of a
bank undertaking such a transaction as opposed to an insurance
company doing so?
6.) What impact have these
derivatives had on loan pricing at Deutsche Bank AG? What is a term
that is used to describe the types of costs Deutsche Bank is now
considering when it decides on a lending rate for a particular
borrower?
When
companies default on their debt, banks in the U.S. and
Europe increasingly will have to pick up the tab.
That
is the conclusion of Fitch Ratings, the credit-rating
concern. Desperate for better returns, more banks are
turning to the "credit default" markets, a sphere once
dominated by insurers. In a recent report, Fitch says the
banks -- as they use these derivatives to sell insurance
against default by their borrowers -- are adding to their
credit risk.
The
trend toward selling protection, rather than lending, could
well raise borrowing costs for many companies. It also may
mean greater risk for banks that increasingly are attracted
to the business of selling protection, potentially weakening
the financial system as a whole if credit quality remains
troubled. One Canadian bank, for example, lent a large sum
to WorldCom Inc., which filed for Chapter 11 bankruptcy
protection last year. Rather than hedging its loan to the
distressed telecom company by buying protection, it
increased its exposure by selling protection. The premium it
earned by selling insurance, though, fell far short of what
it both lost on the loan and had to pay out to the bank on
the other side of the credit default swap.
"The
whole DNA of banks is changing. The act of lending used to
be part of the organic face of the bank," says Frank Accetta,
an executive director at Morgan Stanley who works in the
loan-portfolio management department. "Nobody used to sit
down and calculate the cost of lending. Now banks are
realizing that you can take on the same risk at more
attractive prices by selling protection."
Despite its youth, the unregulated, informal credit-default
swap market has grown sharply to total almost $2 trillion in
face value of outstanding contracts, according to estimates
from the British Bankers Association, which does the most
comprehensive global study of the market. That is up from
less than $900 billion just two years ago. (The BBA says the
estimate contains a good amount of double counting, but it
uses the same method over time and thus its estimates are
considered a good measuring stick of relative change in the
credit-default swap market.) Usually, banks have primarily
bought protection to hedge their lending exposure, while
insurers have sold protection. But Fitch's study, as well as
banks' own financial statements and anecdotal evidence,
shows that banks are becoming more active sellers of
protection, thereby altering their risk profiles.
The
shift toward selling more protection comes as European and
American banks trumpet their reduced credit risk. And it is
true that such banks have cut the size of their loan
exposures, either by taking smaller slices of loans or
selling such loans to other banks. They also have
diversified their sources of profit by trying to snare more
lucrative investment-banking business and other fee-based
activity.
Whether banks lend money or sell insurance protection, the
downside is generally similar: The bank takes a hit if a
company defaults, cushioned by whatever amount can
eventually be recovered. (Though lenders are first in line
in bankruptcy court; sellers of such protection are further
back in the queue.)
But
the upside differs substantially between lenders and sellers
of protection. Banks don't generally charge their corporate
borrowers much when they make a loan because they hope to
get other, more lucrative assignments from the relationship.
So if a bank extends $100 million to an industrial client,
the bank may pocket $100,000 annually over the life of the
loan. By contrast, the credit-default swap market prices
corporate risk far more systematically, devoid of
relationship issues. So if banks sell $100 million of
insurance to protect another party against a default by that
same company, the bank can receive, say, $3 million annually
in the equivalent of insurance premiums (depending on the
company's creditworthiness).
All
this comes as the traditional lending business is becoming
less lucrative. The credit-derivatives market highlights the
degree to which bankers underprice corporate loans, and, as
a result, bankers expect the price of such loans to rise.
"We
see a change over time in the way loans are priced and
structured," says Michael Pohly, head of credit derivatives
at Morgan Stanley. "The lending market is becoming more
aligned with the rest of the capital markets." In one
possible sign of the trend away from traditional lending,
the average bank syndicate has dropped from 30 lenders in
1995 to about 17 now, according to data from Loan Pricing
Corp.
Some
of the biggest players in the market, such as
J.P. Morgan Chase & Co., are net sellers of such
insurance, according to J.P. Morgan's financial statements.
In its annual report, J.P. Morgan notes that the mismatch
between its bought and sold positions can be explained by
the fact that, while it doesn't always hedge, "the risk
positions are largely matched." A spokesman declined to
comment.
But
smaller German banks, some of them backed by regional
governments, are also active sellers, according to Fitch.
"Low margins in the domestic market have compelled many
German state-guaranteed banks to search for alternative
sources of higher yielding assets, such as credit
derivatives," the report notes. These include the regional
banks Westdeutsche Landesbank, Bayerische Landesbank,
Bankgesellschaft Berlin and Landesbank Hessen-Thueringen,
according to market participants. The state-owned
Landesbanken in particular have been searching for ways to
improve their meager profits in time for 2005, when they are
due to lose their government support under pressure from the
European Union.
Deutsche Bank AG is one of biggest players in the
market. It is also among the furthest along in introducing
more-rational pricing to reflect the implicit subsidy in
making loans. At Deutsche Bank, "loan approvals now are
scrutinized for economic shortfall" between what the bank
could earn selling protection and what it makes on the loan,
says Rajeev Misra, the London-based head of global credit
trading.
A credit
default swap is a form of insurance against default by means of
a swap. See Paragraphs 190 and 411d of FAS 133. See
Risks.
Somewhat confusing is Paragraph 29e on Page 20 of FAS 133 that
requires any cash flow hedge to be on prices or interest rates
rather than credit worthiness. For example, a forecasted sale
of a specific asset at a specific price can be hedged for spot
price changes under Paragraph 29e. The forecasted sale's cash
flows may not be hedged for the credit worthiness of the
intended buyer or buyers. Example 24 in Paragraph 190 on
Page 99 of FAS 133 discusses a credit-sensitive bond. Because
the bond's coupon payments were indexed to credit rating rather
than interest rates, the embedded derivative could not be
isolated and accounted for as a cash flow hedge.
One of my
students wrote the following case just prior to the issuance of
FAS 133:.
John D. Payne's case and case solution entitled
A Case
Study of Accounting for an Interest Rate Swap and a Credit
Derivative appear at
http://www.resnet.trinity.edu/users/jpayne/coverpag.htm .
He states the following:
The
objective of this case is to provide students with an
in-depth examination of a vanilla swap and to introduce
students to the accounting for a unique hedging device--a
credit derivative. The case is designed to induce students
to become familiar with FASB Exposure Draft 162-B and to
prepare students to account for a given derivative
transaction from the perspective of all parties involved. In
1991, Vandalay Industries borrowed $500,000 from Putty
Chemical Bank and simultaneously engaged in an interest rate
swap with a counterparty. The goal of the swap was to hedge
away the risk that variable rates would increase by agreeing
to a fixed-payable, variable-receivable swap, thus hopefully
obtaining a lower borrowing cost than if variable rates were
used through the life of the loan. In 1992, Putty Chemical
Bank entered into a credit derivative with Mr. Pitt Co. in
order to eliminate the credit risk that Vandalay would
default on repayment of its loan principal to Putty.
Example 24 in
Paragraph 190 on Page 99 of FAS 133 discusses a credit-sensitive
bond.
Misuses of Credit Derivatives
JP Morgan – whose lawyers
must be working overtime – is refuting any
wrongdoing over credit default swaps it sold on
Argentine sovereign debt to three hedge funds. But
the bank failed to win immediate payment of $965
million from the 11 insurers it is suing for
outstanding surety bonds.
Christopher Jeffery Editor, March 2, 2002, RiskNews
http://www.risknews.net Note from Bob
Jensen: The
above quotation seems to be Year 2002 Déjà Vu in
terms of all the bad ways investment bankers cheated
investors in the 1980s and 1990s. Read passage from
Partnoy's book quoted at
http://faculty.trinity.edu/rjensen/book02q1.htm#022502
Selected
quotations from "Why Enron Went Bust: Start with
arrogance. Add greed, deceit, and financial
chicanery. What do you get? A company that wasn't
what it was cracked up to be." by Benthany McLean,
Fortune Magazine, December 24, 2001, pp.
58-68.
Why Enron
Went Bust: Start with arrogance. Add greed, deceit,
and financial chicanery. What do you get? A company
that wasn't what it was cracked up to be."
In fact , it's next to impossible to find
someone outside Enron who agrees with Fasto's
contention (that Enron was an energy provider
rather than an energy trading company). "They
were not an energy company that used trading as
part of their strategy, but a company that
traded for trading's sake," says Austin Ramzy,
research director of Principal Capital Income
Investors. "Enron is dominated by pure trading,"
says one competitor. Indeed, Enron had a
reputation for taking more risk than other
companies, especially in longer-term contracts,
in which there is far less liquidity. "Enron
swung for the fences," says another trader. And
it's not secret that among non-investment banks,
Enron was an active and extremely aggressive
player in complex financial instruments such as
credi8t derivatives. Because Enron didn't have
as strong a balance sheet as the investment
banks that dominate that world, it had to offer
better prices to get business. "Funky" is a word
that is used to describe its trades.
I was
particularly impressed, as were all people who
phoned in, by the testimony of Scott Cleland (see
Tuesday, January 15) and then click on the following
link to read his opening remarks to a Senate
Committee on December 18. If you think the public
accounting profession has an "independence problem,"
that problem is miniscule relative to an enormous
independence problem among financial analysts and
investment bankers --- two professions that are
literally rotten to the core. Go to
http://www.c-span.org/enron/scomm_1218.asp#open
A portion
of Mr. Cleland's testimony is quoted below:
Four, it's common for analysts to have a
financial stake in the companies they're
covering. That's just like, essentially,
allowing athletes to bet on the outcome of the
game that they're playing in.
Five, most payments for investment research
is routinely commingled in the process with more
profitable investment banking and proprietary
trading. The problem with this is it effectively
means that most research analysts work for the
companies and don't work for investors.
Six, credit agencies may have conflicts of
interest.
Seven, analysts seeking investment banking
tend to be more tolerant of pro-forma accounting
and the conflict there is, essentially, the
system is allowing companies to tell -- you
know, to make up their own accounting. To
describe their own financial performance, that
no one then can compare objectively with other
companies.
Eight, surprise, surprise, companies
routinely beat the expectations of a consensus
of research analysts that are seeking their
investment banking business.
See how banks
use/misuse credit derivatives with
tranches.
Credit derivatives have three basic structures:
credit default swaps, total return swaps and
credit spread options. In a credit default swap,
a buyer pays a seller a fixed fee in return for
indemnification against losses should a credit
event occur. Credit default swaps are used for
risk management, capital management and
investment management. Buyers of protection
reduce credit concentrations or open up credit
lines. Buyers may also obtain capital relief,
redeploying the capital in more profitable
business lines or buying back stock.
Kicking off what
analysts are calling a small trend, New
York-based Primus Financial Products recently
became the first company structured solely to be
a swap counterparty, selling protection via
credit default swaps. "We're not a dealer, we're
not a CDO, and we're not an insurance company,"
said Chief Executive Officer Tom Jasper. "What
we are is a credit derivatives company."
As derivatives are
becoming a more and more widely accepted method
of transferring risk, it is not surprising that
at least two additional companies - both at
different stages of development - are following
suit. The two are said to be familiar names in
the asset-backed market, and the first will
likely launch in mid-summer, according to
Moody's Investors Service, which, along with
Standard & Poor's, has awarded Primus a triple-A
counterparty rating. Primus will begin trading
in the next few weeks, Jasper said. In the first
year of trading, Primus is planning to build a
portfolio of about $5.5 billion in single name
investment-grade corporate and sovereign
credits.
"The plan is to take
advantage of what we believe is a pretty
efficient capital model and cost model, and to
become a very efficient investor in
investment-grade risk, using, as the transfer
vehicle, the credit default swap," Jasper said.
"So we're transferring risk synthetically versus
a cash instrument."
Though many of its
clients, which could include CDOs, insurance
company portfolio managers, hedge funds, banks
and other cash investors, might be using PFP to
establish hedges, Primus is not incorporating a
hedging strategy for its own portfolio, and,
only in special situations, will buy credit
protection for its exposures. Its triple-A
counterparty rating is based primarily on its
capital levels, or other resources, being sized
to match the expected loss (Moody's) of its
referenced obligations.
Also, contrary to some
players' initial impressions of the company,
Primus doesn't plan to launch any CDOs from its
portfolio.
"It's not contemplated
that we would securitize the risk that we will
take on," Jasper said. "We're very happy to hold
the risk to maturity."
March 2002 - Former dealers from Salomon Smith
Barney and Bank of America yesterday set up what they claimed to
be the first boutique focusing purely on default swap credit
derivatives.
Question:
When does a hedge become a speculation?
Answer: There
are essentially two answers. Answer 1 is that a speculation arises
when the hedge is not perfectly effective in covering that which is
hedged such as the current value (fair alue hedge) of the hedged
item or the hedged cash flow (cash flow hedge). Testing for
hedge ineffectiveness under FAS 133 and IAS 39 rules is very
difficult for auditors. Answer 2 is that a speculation arises when
unsuspected credit risk arises from the settlements themselves such
as when dealers who brokered hedge derivatives cannot back the
defaults all parties contracted under the derivatives themselves.
Hedges may no longer be hedges! Answer 2 is even more problematic
in this particular down economy.
There is a lot of
complaining around the world about need for and technicalities of
the U.S. FAS 133 and the international IAS 39 standards on
Accounting for Financial Instruments Derivatives and Hedging
Activities. But recent scandals adding to the pile of enormous
scandals in derivatives over the past two decades suggest an
increased need for more stringent rather than weakened standards
for accounting for derivatives. The main problem lies in valuation
of these derivatives coupled with the possibility that what is a
safe hedge is really a risky speculation. A case in point is
Newmont Mining Corporation's Yandal Project in Australia as reported
by Steve Maich in "Newmont's Hedge Book Bites Back," on Page IN1 of
the March 4, 2003 edition of Canada's
Financial Post ---
http://www.financialpost.com/
Even by
the gold industry's relatively aggressive standards, Yandal's
derivatives exposure is stunning. The unit has 3.4 million
ounces of gold committed through hedging contracts that had a
market value of negative US$288-million at the end of 2002.
That would
be a problem for any major producer, but the situation is
particularly dire for Yandal because the development's total
proven and provable gold reserves are just 2.1 million ounces.
In other words, the project has, through its hedging contracts,
committed to sell 60% more gold than it actually has in the
ground.
Making
matters worse, the mine's counterparties can require Yandal to
settle the contracts in cash, before they come due. In all,
about 2.8 million ounces are subject to these cash termination
agreements by 2005, which could cost the company
US$223.7-million at current market prices.
With
insufficient gold to meet its obligations, and just
US$58-million in cash to make up the difference, bankruptcy may
be the only option available to Yandal, analysts said.
Comparing
Yandal's reserves to its hedging liabilities "suggests that the
Yandal assets may be worth more dead than alive," CIBC World
Markets analyst Barry Cooper said in a report to clients.
All this
is raising even bigger questions about the impact that the
Yandal situation might have on the industry's other major
hedgers. Companies such as Canada's
Barrick Gold Corp.
and Placer Dome Ltd. have lagged the sector's strong
rally of the past year, largely because many investors and
analysts distrust the companies' derivative portfolios.
One thing that is not
stressed hard enough in FAS 133 is the credit risk of the dealers
themselves. The FAS 133 standard and its international IAS 39
counterpart implicitly assume that when speculating or hedging with
derivatives, the dealers who broker these contracts are highly
credit worthy. For example, in the case of interest rate swaps it
is assumed that the dealer that brokers the swap will stand behind
the swapping party and counterparty default risks. There are now
some doubts about this in the present weak economy.
Billionaire investor Warren Buffett calls derivative contracts
"financial weapons of mass destruction, carrying dangers that
while now latent are potentially lethal," according to excerpts
from his forthcoming annual letter to Berkshire Hathaway Inc.
shareholders.
Mr.
Buffett, whose company is now seeking to divest of derivatives
business tied to its General Re purchase, also worries that
substantial credit risk has become concentrated "in the hands of
relatively few derivatives dealers."
The use
of derivatives has grown exponentially in recent years. The
total value of all unregulated derivatives is estimated to be
$127 trillion -- up from $3 trillion 1990. J.P. Morgan Chase &
Co. is the world's largest derivatives trader, with contracts on
its books totaling more than $27 trillion. Most of those
contracts are designed to offset each other, so the actual
amount of bank capital at risk is supposed to be a small
fraction of that amount.
Previous efforts to increase federal oversight of the
derivatives market have failed, including one during the Clinton
administration when the industry, with support from Greenspan
and other regulators, beat back an effort by Brooksley Born, the
chief futures contracts' regulator. Sen. Dianne Feinstein
(D-Calif.) has introduced a bill to regulate energy derivatives
because of her belief that Enron used them to manipulate prices
during the California energy crisis, but no immediate
congressional action is expected.
Randall Dodd, director of the Derivatives Study Center, a
Washington think tank, said both Buffett and Greenspan are right
-- unregulated derivatives are essential tools, but also
potentially very risky. Dodd believes more oversight is needed
to reduce that inherent risk.
"It's a double-edged sword," he said. "Derivatives are extremely
useful for risk management, but they also create a host of new
risks that expose the entire economy to potential financial
market disruptions."
Buffett has no problem with simpler derivatives, such as futures
contracts in commodities that are traded on organized exchanges,
which are regulated. For instance, a farmer growing corn can
protect himself against a drop in prices before he sells his
crop by buying a futures contract that would pay off if the
price fell. In essence, derivatives are used to spread the risk
of loss to someone else who is willing to take it on -- at a
price.
Buffett's concern about more complex derivatives has increased
since Berkshire Hathaway purchased General Re Corp., a
reinsurance company, with a subsidiary that is a derivatives
dealer. Buffett and his partner, Charles T. Munger, judged that
business "to be too dangerous."
Because many of the subsidiary's derivatives involve long-term
commitments, "it will be a great many years before we are
totally out of this operation," Buffett wrote in the letter,
which was excerpted on the Fortune magazine Web site. The full
text of the letter will be available on Berkshire Hathaway's Web
site on Saturday. "In fact, the reinsurance and derivatives
businesses are similar: Like Hell, both are easy to enter and
almost impossible to exit."
One derivatives expert said several of General Re's contracts
probably involved credit risk swaps with lenders in which
General Re had agreed to pay off a loan if a borrower -- perhaps
a telecommunications company -- were to default. In testimony
last year, Greenspan singled out the case of telecom companies,
which had defaulted on a significant portion of about $1
trillion in loans. The defaults, the Fed chairman said, had
strained financial markets, but because much of the risk had
been "swapped" to others -- such as insurance companies, hedge
funds and pension funds -- the defaults did not cause a wave of
financial-institution bankruptcies.
"Many people argue that derivatives reduce systemic problems, in
that participants who can't bear certain risks are able to
transfer them to stronger hands," Buffett acknowledged. "These
people believe that derivatives act to stabilize the economy,
facilitate trade and eliminate bumps for individual
participants. And, on a micro level, what they say is often
true. Indeed, at Berkshire, I sometimes engage in large-scale
derivatives transactions in order to facilitate certain
investment strategies."
But then Buffett added: "The macro picture is dangerous and
getting more so. Large amounts of risk, particularly credit
risk, have become concentrated in the hands of relatively few
derivatives dealers, who in addition trade extensively with one
another. The troubles of one could quickly infect the others. On
top of that, these dealers are owed huge amounts by nondealer
counterparties," some of whom are linked in such a way that many
of them could run into problems simultaneously and set off a
cascade of defaults.
Alan
Greenspan, chairman of the US Federal Reserve, today once again
defended the use of derivatives as hedging tools, especially
credit derivatives. His comments come in the wake of Warren
Buffett's criticism of derivatives as "time bombs" and Peter
Carr - recipient of Risk's 2003 quant of the year award this
week - saying that in a [hypothetical] argument between quants
convinced of the infallibility of their models and derivatives
sceptics such as Buffett, he would probably side with Buffett.
But Greenspan, speaking at the Banque de France's symposium on
monetary policy, economic cycle and financial dynamics in Paris,
said derivatives have become indispensable risk management tools
for many of the largest corporations. He said the marriage of
derivatives and securitisation techniques in the form of
synthetic collateralised debt obligations has broadened the
range of investors willing to provide credit protection by
pooling and unbundling credit risk through the creation of
securities that best fit their preferences for risk and return.
This
probably explains why credit derivatives employees reap the
highest salaries, with an Asian-based managing director in
synthetic structuring at a bulge-bracket firm earning an average
basic plus bonus of £1.35 million last year. These were the
findings of a first-of-its-kind survey conducted by City of
London executive search company Napier Scott. The survey found
that most managing directors working in credit derivatives at
the top investment banks earn more than £1 million, with
synthetic structurers commanding the highest salary levels.
Asia-based staff earn 12-15% more than their US counterparts,
with UK-based staff not far behind their Asia-based
counterparts. Even credit derivatives associates with one or two
years' experience earn in excess of £150,000 a year on average
at a tier-1 bank.
In more
people news, Merrill Lynch has hired four ex-Goldman Sachs
bankers for its corporate risk management group focused on
Europe, the Middle East and Africa. Roberto Centeno was hired as
a director with responsibility for Iberia. Andrea Anselmetti and
Luca Pietrangeli, both directors, and Ernesto Mercadente, an
associate, will focus on expanding the corporate risk management
and foreign exchange business in the Italian region. The
corporate risk management group focuses on providing advice and
execution for corporate clients, covering all risk management
issues, including foreign exchange, interest rate risk and
credit risk. All four will report to Patrick Bauné, co-head of
Merrill Lynch's global foreign exchange issuer client group, and
Damian Chunilal, head of the EMEA issuer client group, and are
expected to join within the next two weeks. Merrill also hired
Scott Giardina as a director in credit derivatives trading,
based in London. He will report to Jon Pliner, managing director
of credit trading EMEA, and Neil Walker, managing director of
structured credit trading, EMEA. Giardina also joins from
Goldman Sachs.
Jensen Comment
The real challenge in financial auditing is often discoveries of falsehoods that
lie outside the scope of the audit and what the auditors assert in the audit
report to financial statements. What is their professional and ethical
obligation to not ignore falsehoods that legally are "none of their business?"
This also seems to have been the dilemma of the FBI's investigation of the
Clinton emails.
Jensen Comment
In some ways FBI pursuit of false statements is unjust if there is not also FBI
pursuit of Trump false statements.
My point here is that questioning falsehoods is not as simple as what we read
in ethics cases and textbooks and learn in law schools and accounting schools
and journalism schools.
TOPICS: Asset
Valuation, Business Valuation, Discounting, Estate Tax, Gift Tax, Valuation
Discount
SUMMARY: Regulations
proposed by the Treasury Department and Internal Revenue Service apply to
tax-saving moves known as "valuation discounts." They allow people with
assets greater than the current exemption of $5.45 million per person ($10.9
million for a couple) to lower the value of their assets that are subject to
gift and estate taxes. To get the lower valuations, the owner of assets
typically puts them into a holding company or other entity that isn't traded
and gives pieces of the company to family members and perhaps a charity. As
a result, the assets' value drops because control of the entity is dispersed
and the assets would be harder to sell. The combined discounts generally
range from 30% to 50% of the assets' value, and can be even higher. These
moves are controversial because the courts have allowed taxpayers to use
them to get sizable tax breaks on traded securities and even cash. Thus a
wealthy taxpayer could reduce the taxable value of $10 million of blue-chip
stocks to $6 million and cut his estate tax by $1.6 million.
CLASSROOM APPLICATION: This
article is a useful update for an estate and gift tax class and for any
classes covering business valuations.
QUESTIONS:
1. (Advanced) What is a valuation discount? What are the current tax
rules regarding valuation discounts? Why has this been effective? What
benefits does it offer? Who benefits?
2. (Introductory) What has the Treasury Department and Internal
Revenue Service proposed regarding valuation discounts?
3. (Advanced) Why did the government make this proposal? How will the
change affect taxpayers?
4. (Advanced) What are the liquidity issues associated with a partial
interest in a closely held business? Are there control issues? Are there
situations with legitimate reasons for a discount in fair market value? Why
or why not?
5. (Advanced) What actions do some taxpayers take that shows the
purpose of the holding company is for tax avoidance only?
Reviewed By: Linda Christiansen, Indiana University Southeast
Proposed new rules apply to moves known as
‘valuation discounts’
New rules are coming that will likely limit
techniques used by the wealthy to lower their estate and gift taxes.
The proposed regulations, issued by the Treasury
Department and Internal Revenue Service in early August, apply to moves
known as “valuation discounts.” They allow people with assets greater than
the current exemption of $5.45 million per person ($10.9 million for a
couple) to lower the value of their assets that are subject to gift and
estate taxes. The top tax rate on amounts above the exemption is currently
40%, so the savings can be substantial.
To get the lower valuations, the owner of assets
typically puts them into a holding company or other entity that isn’t traded
and gives pieces of the company to family members and perhaps a charity. As
a result, the assets’ value drops because control of the entity is dispersed
and the assets would be harder to sell. The combined discounts generally
range from 30% to 50% of the assets’ value, and can be even higher.
These moves are controversial because the courts
have allowed taxpayers to use them to get sizable tax breaks on traded
securities and even cash. Thus a wealthy taxpayer could reduce the taxable
value of $10 million of blue-chip stocks to $6 million and cut his estate
tax by $1.6 million.
Ronald Aucutt, an estate-tax lawyer with
McGuireWoods LLP in Washington, says that in some cases families simply wait
until three years after the original owner’s estate-tax return is filed and
the statute of limitations for an audit expires. Then they dissolve the
holding company and divide up the assets, having bypassed tax on a large
chunk of market value. “This drives the IRS crazy,” he says.
The proposed changes in the rules would allow the
IRS to ignore many discounts in entities where they currently apply and
collect far more estate or gift tax. In addition, the IRS could disallow
even more discounts if a taxpayer dies within three years after making
certain gifts. Mr. Aucutt thinks the Treasury Department and IRS have the
authority to make such changes.
Critics of the changes call them far too broad.
“This is an example of Treasury overstepping its bounds,” says John Porter,
an attorney with Baker Botts in Houston, who has won landmark court cases
involving discounts.
Mr. Porter points out that the proposed changes
apply to nearly all family-controlled entities, even those holding operating
businesses. “If these rules go through in current form, business owners are
going to be taxed on value they may not have, or have access to,” he says.
He expects a court challenge unless there are substantial revisions to the
rules.
SUMMARY: The
Financial Accounting Standards Board's updated rules aim to make it simpler
for nonprofits to classify and report their assets. The new rules also make
it easier for donors, creditors and other interested parties to see how a
nonprofit's funds are being used. Non-profits will now report two classes of
assets, instead of three, which should reduce some of the burden of deciding
which charitable assets can be used, and when. The simplification will also
come with more stringent standards to more fully explain in footnotes any
restrictions on when and how donations and assets can be used.
CLASSROOM APPLICATION: This
article offers a good update for nonprofit accounting classes.
QUESTIONS:
1. (Introductory) What is the FASB? What is its purpose? What is its
area of authority?
2. (Advanced) What are the updates to nonprofit accounting rules?
What areas are affected?
3. (Advanced) Why did the FASB make these changes? How is financial
reporting improved for users of the financial statements as a result of
these changes?
4. (Advanced) How will nonprofit entities be affected by these
changes? Are the changes substantial?
Reviewed By: Linda Christiansen, Indiana University Southeast
The Financial Accounting Standards Board’s updated
rules aim to make it simpler for nonprofits to classify and report their
assets. The new rules also make it easier for donors, creditors and other
interested parties to see how a nonprofit’s funds are being used.
“More transparent information about an
organization’s available resources and financial performance” was the goal,
FASB member Lawrence Smith said in a statement to CFO Journal.
Non-profits will now report two classes of assets,
instead of three, which should reduce some of the burden of deciding which
charitable assets can be used, and when. The amendments in the standard are
effective for annual financial statements issued for fiscal years after
December 15, 2017.
The new reporting will separate cash that is
available now from cash that may have time contingencies or other strings
attached. Currently these companies must classify cash that isn’t
immediately available into two categories, in addition to a third category
for cash they’re able to use now.
That simplification will also come with more
stringent standards to more fully explain in footnotes any restrictions on
when and how donations and assets can be used. FASB said the changes will
make financial reports easier to complete and understand.
“Stakeholders expressed concerns about the
complexity, insufficient transparency, and limited usefulness of certain
aspects of the model,” FASB Chairman Russell Golden said in a press release
announcing the changes. Not-for-profits will benefit from reduced costs and
complexities in reporting their financial position, while contributors will
receive enhanced disclosures in footnotes, the standards setter said.
SUMMARY: As
globalization accelerates, tax issues often become more complex and relevant
to an organization's business strategies. Increasingly, executives face
demands by tax authorities for more information faster-sometimes in real
time. They also face a growing number of IT challenges as commercial tax
applications evolve to satisfy regulatory mandates. In response, some
leading companies have made a fundamental shift in the way they operate tax
departments, transforming the tax function into a strategic business partner
across the enterprise.
CLASSROOM APPLICATION: This
article would be appropriate for tax classes. It helps us show students the
importance of tax knowledge and the tax issues facing businesses. Tax
implications should be considered in most strategic decisions.
QUESTIONS:
1. (Introductory) What does the tax function of a business include?
2. (Advanced) What does that article say about why the tax function
should be a part of a business's strategy process? What parts could it play?
3. (Advanced) How can a tax function be integrated into a business's
strategic process? In what areas would it be integrated? What steps does
that article offer?
4. (Advanced) What are some reasons why some companies have not
considered the tax function to be an important part of business strategy?
Have conditions changed over time?
Reviewed By: Linda Christiansen, Indiana University Southeast
As globalization accelerates, tax issues often
become more complex and relevant to an organization’s business strategies.
Increasingly, executives face demands by tax authorities for more
information faster—sometimes in real time. They also face a growing number
of IT challenges as commercial tax applications evolve to satisfy regulatory
mandates.
In response, some leading companies have made a
fundamental shift in the way they operate tax departments, transforming the
tax function into a strategic business partner across the enterprise.
“Because the implications of tax affect the
financial and strategic decisions of many organizations, tax issues are
capturing the attention of C-suite executives and boards,” said Carl
Allegretti, chairman and CEO, Deloitte Tax LLP, during a Deloitte webcast.
“Tax transformation activities should be closely aligned with the business
strategy,” he added.
When webcast participants were asked “What is the
biggest advantage to transforming the corporate tax department,” 26% of the
2,182 respondents indicated “having an enhanced ability to reach strategic
and financial goals.” Another 24% reported “enhanced business partnering
across the organization,” such as greater alignment between the tax and
finance functions, and 22% cited “sustainability and efficiency of the tax
function through cost savings.”
“Tax departments should be prepared to transform or
be transformed,” noted Emily VanVleet, partner, Deloitte Tax LLP, during the
webcast. She explained that in many cases, finance executives have gone
through a finance function transformation and currently are experiencing the
benefits of that strategic change. As a result, tax departments may begin to
feel pressure from CFOs to, for example, complete the tax close faster.
“CFOs know what they have accomplished through
finance transformation, and so increasingly expect the tax department to
undertake a similar process,” added Ms. VanVleet.
Expanding Tax Responsibilities
“There is a growing recognition of the tax
department’s ability to contribute to the enterprise,” noted Nathan Andrews,
partner, Deloitte Tax LLP, during the webcast. “As a result, the tax
department is being included in strategic business discussions and
participating in the processes that address marketplace shifts,” he added.
SUMMARY: The
Public Company Accounting Oversight Board found deficiencies in 77% of the
broker-dealer audits it inspected in 2015, compared with 87% in 2014, the
board said in its annual report on its broker-dealer audit inspection
program. Nearly all of the audit firms that conducted the broker-dealer
audits - 72 of 75 - had deficiencies in one or more of their audits. Auditor
independence in broker-dealer audits improved, however.
CLASSROOM APPLICATION: This
article is useful for auditing and financial accounting discussions of the
PCAOB and inspection of audits.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its purpose and area of
authority?
2. (Advanced) What is an audit inspection? Why does the PCAOB conduct
them?
3. (Advanced) What is a deficiency? What are the implications of a
deficiency? If a deficiency is found, should the financial statements be
restated? Why or why not? What problems could deficient audits cause?
4. (Introductory) What are broker-dealers? What are the statistics
regarding deficiencies in audits of broker-dealers in recent years? What
were the most common deficiencies?
5. (Advanced) What is auditor independence? What are the statistical
trends regarding auditor independence in the audits of broker-dealers? Are
these levels acceptable? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Inspectors found deficiencies in more than
three-quarters of broker-dealer audits
Federal inspectors found deficiencies in more than
three-quarters of the audits of broker-dealers they reviewed last year, down
from the previous year but still at a high level, the government’s
audit-industry regulator said Thursday.
The Public Company Accounting Oversight Board found
deficiencies in 77% of the broker-dealer audits it inspected in 2015,
compared with 87% in 2014, the board said in its annual report on its
broker-dealer audit inspection program. Nearly all of the audit firms that
conducted the broker-dealer audits—72 of 75—had deficiencies in one or more
of their audits, the PCAOB said.
The PCAOB’s findings don’t mean that it has
determined the broker-dealers themselves have operational deficiencies, just
that the board believes the audits that assessed whether they might have a
problem were flawed or insufficient.
Auditor independence in broker-dealer audits
improved, however. The PCAOB found auditor independence—an auditor’s need to
keep an arm’s length relationship from its client so as to preserve its
impartiality—was impaired in 7% of the audits it inspected, down from 25%
the previous year.
Among the most common deficiencies the PCAOB’s
inspectors found were problems in auditing revenue, which the PCAOB
identified in 70% of the audits it reviewed, and deficiencies in auditing
fair value measures, in 44% of the audits where that area was inspected.
The PCAOB has consistently found high levels of
deficiencies in its inspections of audits of broker-dealers, which the board
has reviewed since 2011 under powers it was granted by the Dodd-Frank
financial overhaul law. The board’s reports don’t identify the individual
audit firms or the broker-dealers involved in the audits it inspects.
SUMMARY: The
problem with attacking "loopholes" in the tax code is just how popular they
are. That's the challenge facing lawmakers who favor lowering rates and
broadening the tax base. It's easy to talk about closing unjust loopholes -
and depending on your definition of justice, there are a few of them out
there. Taxpayers can itemize deductions if their total exceeds the standard
deduction. Some itemized deductions, such as the break for tax-preparation
fees, are already subject to strict limits, but the big three are largely
uncapped: state and local taxes, home-mortgage interest and charitable
contributions.
CLASSROOM APPLICATION: This
article and topic is appropriate for use in an individual tax class.
QUESTIONS:
1. (Introductory) What are itemized deductions? What are some
examples of itemized deductions? Which are most common?
2. (Advanced) How many households itemize deductions? What do other
households choose to do instead? Why do so few taxpayers itemize? What types
of taxpayers are more likely to itemize?
3. (Advanced) What is a loophole? To what is the writer of this
article referring when using the term tax loophole? Why does the writer call
these loopholes?
4. (Advanced) What does the article say is the reason why it is
challenging to eliminate tax loopholes? What could be done to remedy that?
Should they be eliminated? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southea
Many of the biggest—and most popular—tax breaks
benefit the upper-middle class
The problem with attacking “loopholes” in the tax
code is just how popular they are.
That’s the challenge facing lawmakers who favor
lowering rates and broadening the tax base. It’s easy to talk about closing
unjust loopholes—and depending on your definition of justice, there are a
few of them out there.
But the reality is that many of the biggest breaks
are the ones that benefit the upper-middle class: itemized deductions.
That’s why President Barack Obama and Democratic presidential candidate
Hillary Clinton have proposed limits on high earners’ deductions. Republican
presidential candidates Jeb Bush and Mitt Romney talked about deduction caps
and Donald Trump is considering one, too.
Taxpayers can itemize deductions if their total
exceeds the standard deduction—$6,300 for individuals and twice that for
married couples. Some itemized deductions, such as the break for
tax-preparation fees, are already subject to strict limits, but the big
three are largely uncapped: state and local taxes, home-mortgage interest
and charitable contributions.
Only about 30% of households itemize their
deductions, and they tend to be higher-income households who have mortgages,
significant state taxes and available cash to donate to charities.
To see exactly how much money is at stake and what
happens if you repeal the breaks, here’s a tool from the Open Source Policy
Center at the free-market-oriented American Enterprise Institute, which
draws on ideas from technical contributors.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 2, 2016
TOPICS: Accounting
Change, Accounting for Income Taxes, Income Tax
SUMMARY: The
EU says Apple's tax deal with Ireland allowed the company to pay almost zero
tax on European profits between 2003 and 2014.
CLASSROOM APPLICATION: Questions
in this article relate primarily to accounting for income taxes and
international tax strategy.
QUESTIONS:
1. (Introductory) What entity made the order that Apple should pay
$14.5 billion in taxes?
2. (Introductory) Why are both Apple and Ireland appealing this
ruling?
3. (Advanced) Watch the related video. What is Apple's effective tax
rate in Ireland? What does the EU leadership say about that tax rate? In
your answer, include the definition of effective tax rate.
4. (Advanced) Refer to the graphic entitled "Cash Flow" and the two
related articles. Briefly (no more than 3 sentences) summarize Apple's tax
strategies which lead to its low effective tax rate.
5. (Advanced) If Apple must pay these taxes, do you think they must
re-issue financial statements for the years in question, 2003 to 2014?
Explain your answer and describe what you think are the appropriate areas of
accounting standards addressing this issue.
6. (Advanced) The decision is reported as a payment "well above most
analysts' expectations." What is the significance of that statement? In your
answer, comment on the role of analysts in the U.S. market for Apple's stock
and the market reaction described in the article.
Reviewed By: Judy Beckman, University of Rhode Island
The European Union’s antitrust regulator has
demanded that Ireland recoup roughly €13 billion ($14.5 billion) of unpaid
taxes accumulated over more than a decade by Apple Inc., a move that
intensifies a feud between the EU and the U.S. over the bloc’s tax probes
into American companies.
The size of the tax demand, which came in a formal
decision issued Tuesday, risks further unsettling multinational companies,
which face a broader international effort to curb aggressive tax avoidance.
But the commission’s decision shows companies could be on the hook for past
behavior and potentially be handed big bills for allegedly unpaid back
taxes.
The sum is the highest ever demanded under the EU’s
longstanding rules that forbid companies from gaining advantages over
competitors because of government help.
The decision—which ordered a payment well above
most analysts’ expectations— is likely to be the subject of years of appeals
up to the EU’s top court. It could also set off a broader scramble by the
U.S. and individual EU governments over the right to tax billions of dollars
of offshore profits made by Apple and other large companies.
Apple disputed the reasoning of the decision and
said it would appeal. Chief Executive Tim Cook, in an open letter, added:
“Apple follows the law and we pay all the taxes we owe.”
Irish Finance Minister Michael Noonan said he
disagreed “profoundly” with the European Commission’s decision and said
Ireland would appeal the decision in order “to defend the integrity of our
tax system.”
The European Commission said tax arrangements that
Ireland offered Apple in 1991 and 2007 allowed the company to pay annual tax
rates of between 0.005% and 1% on its European profits for over a decade to
2014, by designating only a tiny portion of its profit as taxable in
Ireland.
“The commission’s investigation concluded that
Ireland granted illegal tax benefits to Apple, which enabled it to pay
substantially less tax than other businesses over many years,” said European
antitrust commissioner Margrethe Vestager.
Mr. Cook described the decision as “an effort to
rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the
international tax system in the process.”
Under EU rules, Ireland has four months to
calculate the exact amount the commission says Apple owes and collect the
cash. Apple, whose shares fell by 0.8% Tuesday in New York, said it would
put the money in an escrow account pending appeals.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 2, 2016
SUMMARY: The
EU says Apple's tax deal with Ireland allowed the company to pay almost zero
tax on European profits between 2003 and 2014.
CLASSROOM APPLICATION: Questions
on this article include international taxation and accounting for income
taxes.
QUESTIONS:
1. (Introductory) Why do the amounts Apple pays in Irish taxes affect
the company's U.S. tax bill? In your answer, define the term tax credit.
2. (Introductory) What are unrepatriated earnings? Describe the tax
implications of unrepatriated earnings.
3. (Advanced) The article states that "many see Apple as finite
amount of taxes to pay"-the more that Apple pays to other worldwide tax
authorities, the less company will owe in the U.S. Why would this be the
case for any multinational corporation? You may tie your answer to questions
#1 and 2.
4. (Advanced) Regarding Apple's accounting for income taxes, why does
tax consultant Robert Willens say that the $14.5 billion amount is "not
damaging from a P&L point of view"? In your answer, state what is meant by
"P&L" and comment on income tax expense calculation.
Reviewed By: Judy Beckman, University of Rhode Island
The $14.5 billion Apple Inc. is being asked to pay
to Ireland in back taxes could potentially help offset its tab with the
Internal Revenue Service.
When an American company pays taxes on profits in
foreign countries, they only owe Uncle Sam the difference between the taxes
paid and the U.S. tax rate.
So in the case of Apple, recording a large foreign
tax charge could “set the stage for a foreign tax credit,” said tax
consultant Robert Willens.
“The tax detriment would be balanced out by a tax
benefit,” he said. “It’s not damaging from a P&L point of view.”
Apple would have to accrue a tax bill in the U.S.
in order to reflect such an assessment, most likely through a repatriation
of foreign earnings. Many multinationals – Apple included – state that their
foreign profits are indefinitely reinvested abroad.
Apple’s foreign subsidiaries held $186.9 billion of
cash and marketable securities when its fiscal year ended last Sept. 26, Of
that sum, Apple had set aside $91.5 billion as indefinitely reinvested, as
previously reported.
The U.S. Treasury Department has criticized the
EU’s tax investigations, and on Tuesday a spokeswoman said the EU’s decision
was disappointing, reiterating that “retroactive tax assessments by the
commission are unfair.”
But based on how multinationals book revenue and
taxes, such a move puts the U.S. government at a disadvantage. “The taxes
they pay in Ireland will reduce the taxes they pay in the U.S.,” Mr. Willens
said. “Many see Apple as having a finite amount of taxes to pay. The more
they pay to others, the less they get.”
Still, the U.S. could challenge whether Apple’s
$14.5 billion payment is correctly classified as back taxes or whether it
is, in fact a fine. The latter wouldn’t generate a foreign tax credit, said
Stephen Brecher, senior advisor at accounting firm WeiserMazars LLP.
Ireland already arguing that it properly applied
its tax law presents another wrinkle. It is unclear whether U.S. authorities
will recognize the payment as an income tax payment even if Ireland changes
its position and collects the payment, Mr. Brecher said.
“The U.S. might say that Apple has paid the correct
amount of tax and that Ireland is wrong to collect this,” Mr. Brecher said.
“Apple could get caught in the middle here,” he added.
For now, the U.S. tech giant has vowed to appeal
the European Commission’s decision, a process that some say will take
several years to play out.
“There’s little question that this story is closer
to its beginning than its end,” said Manal Corwin, national leader KPMG
LLP’s International Tax practice and former Deputy Assistant Secretary for
International Tax Affairs in the Office of Tax Policy at the U.S. Department
of the Treasury.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 2, 2016
SUMMARY: More
companies are responding to regulatory scrutiny of financial reporting by
giving greater prominence to standard, or GAAP, accounting figures, rather
than emphasizing non-GAAP, typically more-flattering metrics.
CLASSROOM APPLICATION: The
article may be used in a financial reporting class above the introductory
level.
QUESTIONS:
1. (Introductory) What are non-GAAP items?
2. (Introductory) What are recent trends and events in U.S.
companies' use of non-GAAP reporting?
3. (Advanced) Why does the opening line of the article describe the
changes in reporting by S&P 500 companies as "giving investors the bad news
first"? Is financial reporting according to generally accepted accounting
principles (GAAP) always bad news?
More companies are giving investors the bad news
first, in response to heavier regulatory scrutiny of their financial
reporting.
More than a quarter of the companies in the S&P 500
index have shifted results that conform with Generally Accepted Accounting
Principles to the top of news releases outlining their most recent financial
performance.
Among the S&P 500 companies reporting results since
the start of July, 81% have given prominence to GAAP figures, an increase
from the 52% that did so when reporting first-quarter results, according to
an Audit Analytics analysis conducted for The Wall Street Journal.
Companies that have made the transition include
Halliburton Co. , Walgreens Boots Alliance Inc. and videogame maker
Electronic Arts Inc.
The uptick comes in response to new guidance issued
by the Securities and Exchange Commission in May that requires companies to
give GAAP figures greater weight. It reflects concerns that adjusted or non-GAAP
figures make companies look healthier.
The SEC’s timing offered some breathing room,
giving companies a chance to comply with the guidance for subsequent
reporting periods, officials said.
The guidance, however, leaves little room for
flexibility. If a paragraph or table contains standard and adjusted figures,
companies must make sure sentences or columns with the standard, or GAAP,
information precedes everything else.
Numbers must be also be presented in the same
style, meaning customized metrics can’t be bolded or printed in a
larger-size font, nor can they be described as “record” or “exceptional”
unless GAAP results are characterized in a similar way.
“There’s little appetite at the SEC for companies
who don’t assess the guidance and self-correct,” said Paula Hamric, a
partner in accounting firm BDO USA’s national SEC practice.
Halliburton highlighted $64 million in “income from
continuing operations excluding special items” in its first-quarter press
release. But when reconciled to standard accounting principles, the company
had a loss of $2.4 billion.
By contrast, the Houston oil-field services company
led its second-quarter earnings release with a standard-accounting loss of
$3.73 per share, or $3.2 billion.
A Halliburton spokeswoman confirmed that the change
was made to comply with the SEC’s new instructions.
Over the past two quarters, drugstore operator
Walgreens has switched around the sentences atop its earnings press release.
The company led its fiscal second-quarter earnings release with an 11%
increase in “adjusted net earnings,” adding that standard per-share results
had plunged 56%. The following quarter, Walgreens put standard results
first, reporting a 14% drop in per-share earnings.
“We did make some small changes to our most recent
quarterly earnings announcement based on the new SEC guidance and to further
enhance our disclosure to investors,” said a spokesman for Walgreens.
Some companies haven’t yet made the shift. Software
provider Ellie Mae Inc. said in its second-quarter earnings release in July
that it hadn’t yet modified “adjusted net income” to reflect certain tax
impacts—a change now required by the SEC.
In a statement recently, Ellie Mae said it plans to
comply with SEC guidelines and modify the “adjusted” benchmark, but is
currently considering timing of the change. “Our measured approach to
transitioning the reporting of this financial metric will balance our
investors’ expectations with the concerns of the SEC staff,” the company
said.
Companies that don’t make the necessary changes run
the risk of additional regulatory scrutiny in the form of letters and forced
revisions. in letters made public through Aug. 5, the SEC questioned 166
companies this year regarding their use of non-GAAP figures, up 13% from a
year earlier, according to Audit Analytics.
The SEC makes such written exchanges public 20 days
after the matter is resolved. The letters that have become public so far
concern financial reports from before the new guidance was announced.
Accountants expect such correspondence to surge as
the SEC evaluates how companies handle the new requirement.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 2, 2016
SUMMARY: This
article and a recent video highlight the skills students must develop in
today's workforce: both "soft skills" and, for accountants, good technology
skills such as spreadsheets (e.g., Excel) and database management (e.g.,
Access).
CLASSROOM APPLICATION: The
article may be used in any level of accounting class, particularly good at
the start of the semester to discuss students' expectations about hiring
practices.
QUESTIONS:
1. (Introductory) What are 'soft skills'?
2. (Introductory) Why are soft skills becoming increasingly important
in today's economy?
3. (Introductory) Do you feel that accountants in particular might be
called upon to develop a broad mix of skills or do you think that is common
across all professionals? Specifically compare the skills discussed in the
article and those listed for accountants in particular by the speaker in the
related video.
4. (Advanced) Refer to the related video. By what average percentage
are accounting salaries expected to increase next year?
5. (Advanced) Accounting and finance associated technology skills
include proficiency with Excel and Access. Are you developing those skills
sufficiently at this point in your educational career? Discuss.
Reviewed By: Judy Beckman, University of Rhode Islan
Companies put more time and money into teasing out
job applicants’ personality traits
The job market’s most sought-after skills can be
tough to spot on a résumé.
Companies across the U.S. say it is becoming
increasingly difficult to find applicants who can communicate clearly, take
initiative, problem-solve and get along with co-workers.
Those traits, often called soft skills, can make
the difference between a standout employee and one who just gets by.
While such skills have always appealed to
employers, decades-long shifts in the economy have made them especially
crucial now. Companies have automated or outsourced many routine tasks, and
the jobs that remain often require workers to take on broader
responsibilities that demand critical thinking, empathy or other abilities
that computers can’t easily simulate.
As the labor market tightens, competition has
heated up for workers with the right mix of soft skills, which vary by
industry and across the pay spectrum—from making small talk with a customer
at the checkout counter, to coordinating a project across several
departments on a tight deadline.
In pursuit of the ideal employee, companies are
investing more time and capital in teasing out job applicants’ personality
quirks, sometimes hiring consultants to develop tests or other screening
methods, and beefing up training programs to develop a pipeline of
candidates.
“We’ve never spent more money in the history of our
firm than we are now on recruiting,” said Keith Albritton, chief executive
of Allen Investments, an 84-year-old wealth-management company in Lakeland,
Fla.
In 2014, the firm hired an industrial psychologist
who helped it identify the traits of its top-performing employees, and then
developed a test for job candidates to determine how closely they fit the
bill.
In the increasingly complex financial-services
world, advisers often collaborate with accountants, attorneys and other
planning professionals, Mr. Albritton said. That means the firm’s associates
must be able to work in teams. “You can’t just be the general of your own
army,” he said.
A recent LinkedIn survey of 291 hiring managers
found 58% say the lack of soft skills among job candidates is limiting their
company’s productivity.
In a Wall Street Journal survey of nearly 900
executives last year, 92% said soft skills were equally important or more
important than technical skills. But 89% said they have a very or somewhat
difficult time finding people with the requisite attributes. Many say it’s a
problem spanning age groups and experience levels.
A LinkedIn analysis of its member profiles found
soft skills are most prevalent among workers in the service sector,
including restaurant, consumer-services, professional-training and retail
industries.
To determine the most sought-after soft skills,
LinkedIn analyzed those listed on the profiles of members who applied for
two or more jobs and changed jobs between June 2014 and June 2015. The
ability to communicate trumped all else, followed by organization, capacity
for teamwork, punctuality, critical thinking, social savvy, creativity and
adaptability.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 2, 2016
SUMMARY: Companies
are offering interns benefits such as health insurance and retirement
savings plans-and offering jobs at record levels-72% as opposed to 59% in
2015.
CLASSROOM APPLICATION: The
article is useful in any level of accounting class, but particularly near
when students will apply for internships.
QUESTIONS:
1. (Advanced) Are you planning to obtain an internship position in
your college career? If so, in what area?
2. (Introductory) What benefits are companies offering to interns?
3. (Advanced) How could employment benefits help some students to
have an internship experience, even if most do not take advantage of them?
4. (Introductory) Why does offering health insurance pose little cost
to employers offering internship experience?
Reviewed By: Judy Beckman, University of Rhode Island
Companies offer health insurance, retirement
savings plans to attract permanent workers
More companies are offering interns benefits such
as health insurance and access to retirement savings plans this year,
according to a recent survey from the National Association of Colleges and
Employers.
Interns are also getting job offers at record
levels this year. Some 72% of them—a postrecession high—received offer
letters at the end of their internships up from 58.9% in 2015, according to
the survey, which looked at internship programs at 271 large companies
including International Business Machines Corp. IBM offers its interns
health insurance and 401(k) plans.
In 2015, 16.7% of companies offered health
insurance. This year, some 46.5% offer medical coverage.
At the same time, companies are offering fewer
internships and being more selective with regard to the interns they
recruit. Companies are providing interns with better benefits in hopes of
attracting them as permanent workers, said Edwin Koc, director of research
at NACE.
Offering health insurance to interns “doesn’t come
at much of a cost to the employer,” said Mr. Koc. Many paid interns who are
offered insurance plans don’t take them. Since most interns are in their
early 20s, they often have coverage through their parents, he said. The
Affordable Care Act allows individuals to stay on their parents’
health-insurance plans until they are 26.
ACA rules may be part of the reason some companies
are now offering insurance to interns. Under the health law, paid interns
who work full-time (more than 30 hours a week) and are employed at a company
with 50 or more employees are entitled to health-insurance benefits. Interns
also have to be working full time for about 17 weeks, or 120 days, to be
legally entitled. But even companies with internship programs that don’t fit
these requirements are offering medical insurance.
Offering insurance could be a gesture of goodwill
to future employees, and a response to demand for generous employee
benefits. In a NACE survey of nearly 10,000 students graduating from college
in 2015, 79% of those surveyed marked “a good benefits package” as important
in an employer—above a “high starting salary” and “diversity.”
Demand could also explain the upward trend in the
portion of companies offering 401(k) plans in recent years, which grew from
8.8% to more than half of employers in the past nine years, said Mr. Koc. In
the student survey, a company-matched 401(k) plan ranked fourth in the list
of preferred employer benefits, behind tuition reimbursement, the promise of
a salary raise and more than two weeks of vacation.
Wages for interns have been stagnant for a number
of years, Mr. Koc notes, reflecting the broader economy. The average hourly
pay for interns, $17.69, is at a seven-year standstill, according to the
employer survey. After calculating for inflation, interns in 2016 make less
money than interns from six years ago.
Geni Harclerode, the director of employer
recruitment at Northwestern University, said she hasn’t noticed any big
firms touting hefty benefits packages. “I haven’t seen companies advertising
it in their promotional material in big bold letters,” she said. Companies
such as Goldman Sachs and Bank of America recruit from the school, Ms.
Harclerode said.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: Independent
film producers face difficulties in assessing the financial performance of
their films that are known as "indies." "The vast majority of indie-movie
viewing takes place via video-on-demand retailers who typically provide
statements to filmmakers quarterly." Orchard, an independent distributor, is
attempting to stand out from competitors and thereby garner business by
providing more frequent and transparent reporting of films' financial
performance.
CLASSROOM
APPLICATION: Questions
ask students to discuss qualitative characteristics of financial information
and interpret financial information presented graphically.
QUESTIONS:
1. (Introductory) What makes finding information about an independent
film's profitability difficult? How often do filmmakers typically receive
financial information about their films' profitability?
2. (Introductory) What financial reporting improvement does
independent film distributor Orchard provide? How important is that
innovation for them in obtaining business?
3. (Advanced) Review the related graphiic enitled "Hollywood
Accounting." Has the movie "Cartel Land" been profitable during the period
July 2015 to August 2016? Explain your answer.
4. (Advanced) Consider the statement that "The Orchard's expenses...totalled
nearly $1.5 million, including a $500,000 advance it paid for rights to
release the movie..." Is it possible that this amount should not entirely be
considered an expense in the period July 2015 through August 2016? Support
your answer with references to accounting literature.
5. (Advanced) List the qualitative characteristics of financial
reporting as identified in FASB Concept Statement 8. Which of these
characteristics is Orchard is attempting to improve in its reporting to
independent filmmakers?
Reviewed By: Judy Beckman, University of Rhode Island
For bigger-budget movies that play nationwide in
theaters, Hollywood can be one of America’s more transparent industries.
Box-office receipts usually are a fraction of a movie’s revenue, but they
are a good predictor of what the sum total will be, making it relatively
straightforward to determine within weeks of a film’s release whether it
will be a financial hit or flop.
Outside the major studio system, though, that is
increasingly not the case. Low-budget films rarely get a theatrical release
these days, and if they do, it typically is in just a handful of theaters
meant to generate reviews, awards consideration and the perception that it
is a “real” movie.
The vast majority of indie-movie viewing today
takes place via video-on-demand retailers such as cable boxes and Apple
Inc.’s iTunes, making them the primary source of revenue for such films.
Box-office grosses, typically in the hundreds or even tens of thousands of
dollars, essentially are meaningless.
Whereas reliable box-office tallies are made public
on a daily basis by websites such as Box Office Mojo, no such mechanism
exists for video-on-demand, for which retailers retain their own data.
Independent filmmakers rarely know how many times
their movie has been rented on Amazon.com, streamed on Netflix, or purchased
on DVD. Typically, they rely on quarterly statements from a distributor to
learn how much revenue their movie has earned and how much that company has
spent on expenses such as advertising. In between quarterly statements,
filmmakers and agents typically pepper distributors with questions.
“It can be like pulling teeth to get any
information, and some filmmakers get frustrated by how long they have to
wait,” said Rena Ronson, head of independent film for the United Talent
Agency.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: Wal-Mart
Stores has removed products from Welspun India, Ltd., because the supplier
had not used Egyptian cotton in its sheets in approximately two years though
the product was labeled as such.
CLASSROOM
APPLICATION: Questions
relate to supply chain management and also could be used in an auditing
class to cover audit procedures.
QUESTIONS:
1. (Introductory) What is a supply chain? What part of Wal-Mart's
supply chain failed?
2. (Advanced) Is Wal-Mart incurring costs because of this failure at
its supplier? Explain.
3. (Introductory) Who has hired an accounting firm to investigate the
cause of these materials sourcing problems?
4. (Advanced) What type of an accountant do you think will do the
work to investigate the cause of the problem with products not containing
the Egyptian cotton materials as labeled?
5. (Introductory) What other steps is the supplier taking to resolve
this materials sourcing problem?
Reviewed By: Judy Beckman, University of Rhode Island
Retailer offering refunds for bed linen, the
authenticity of which its says can’t be confirmed by manufacturer.
Wal-Mart Stores Inc. said it would stop selling
Egyptian cotton sheets made by Welspun India Ltd. , after its investigation
found the Indian textile giant couldn’t guarantee the products were
legitimate.
“Welspun has not been able to assure us the
products are 100% Egyptian cotton, which is unacceptable,” Wal-Mart
spokeswoman Marilee McInnis said.
The world’s biggest retailer is removing the
Welspun products from U.S. store shelves and Walmart.com. Wal-Mart said it
would offer customers who purchased the products a full refund. It will
donate the sheets currently on shelves.
The move is the latest blow to the Indian textile
company after Target Corp. last month said it was pulling thousands of
Welspun’s “Egyptian cotton” sheets from its shelves and cutting ties with
the company after it found Welspun had not used actual Egyptian cotton in
the products for about two years.
Target’s move spurred other Welspun customers,
including Wal-Mart, J.C. Penney Co. and Bed Bath & Beyond Inc. also to
investigate the products.
Penney and Bed Bath & Beyond on Friday didn’t
immediately respond to requests for comment.
A spokesman for Welspun acknowledged the Wal-Mart
action and said the company is working with retailers to resolve the issue.
“We take the current traceability concerns around some of our product lines
very seriously,” he said.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: Ford
Motor Co.'s reduced is guidance for expected operating profit this year
because of a $640 million charge in the third quarter. The charge relates to
doubling Ford's recall of vehicles with faulty latches from 1.5 to 2.4
million vehicles. The faulty latches lead to doors opening while vehicles
are being driven.
CLASSROOM
APPLICATION: Questions
relate to quarterly reporting, warranty liability accounting, measuring
operating profits, management guidance, and non-GAAP reporting.
QUESTIONS:
1. (Introductory) Ford is doubling the number of automobiles it is
recalling due to a faulty latch and will record the impact in its 3rd
quarter reporting. If all of the latches on newly recalled vehicles will not
be serviced in that quarter, why will the company record the entire cost in
that time period? Include in your explanation an example entry to record the
cost of the recall.
2. (Advanced) What is operating profit? What does it mean to say that
a company issues guidance about revenues, operating profits, or earnings?
Ford Motor Co. ’s outlook hit another speed bump
Thursday, with the company saying hefty charges for an expanded safety
recall will reduce this year’s operating profit guidance by 6%.
The Dearborn, Mich., auto maker in July flagged
Brexit headwinds and an expected slowdown in its core U.S. market as reasons
for concerns about 2016’s second half. Although benefiting from strong U.S.
sales for pickups and sport utilities, recovery in Europe and momentum in
Asia, Ford has been less bullish than rival General Motors Co. on near-term
prospects for the industry.
Ford cut its profit outlook after announcing it
would take a $640 million charge in the third quarter to double its recall
of vehicles with faulty door latches. The No. 2 U.S. auto maker said it now
expects adjusted pretax profit of about $10.2 billion, according to a
regulatory filing, down from its previous guidance of at least $10.8
billion.
The company said Thursday it would recall an
additional 1.5 million vehicles at the request of the National Highway
Traffic Safety Administration, bringing the total to 2.4 million vehicles.
Ford said there had been one reported accident and three reported injuries
that may be related.
The recall will fix a spring in the side-door latch
that could fracture and prevent the door from closing properly, causing it
to open while driving. The campaign mostly covers newer models, including
the 2013-2015 Escape, 2012-2015 Ford Focus and 2015 Ford Mustang.
Shares of Ford were flat in afternoon trading.
The $640 million safety-recall charge comes as Ford
is scrambling to keep pace with rivals investing heavily in autonomous-car
and electric-vehicle development.
Ford reported a 9% drop in profits in the second
quarter and Chief Financial Officer Bob Shanks has warned the company will
face a tougher second half.
Slowing U.S. retail sales, a weaker Chinese auto
market and higher costs related to the roll out of a new heavy-duty pickup
truck this fall will hurt the company’s prospects for meeting its 2016
guidance, Mr. Shanks said in July.
Auto makers are also facing greater scrutiny by
U.S. regulators of their safety-recall practices, resulting in the industry
recalling a record 51.26 million vehicles in the U.S. last year. The volume
of safety campaigns has weighed on auto makers’ profitability in recent
years.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: According
to Institutional Shareholder Services, so far this year at least 10 publicly
traded companies have exchanged employees' worthless stock options for new
options or restricted stock.
CLASSROOM
APPLICATION: Questions
related to accounting for employee stock options and accounting for
restricted stock.
QUESTIONS:
1. (Introductory) What are stock option exchanges?
2. (Introductory) What is the main reason companies undertake stock
option exchanges?
3. (Introductory) What type of companies undertake exchanges? How is
the need for exchanges related to a company's need to ccompete for employee
talent?
4. (Advanced) Why could a stock option exchange generate "shareholder
pushback"?
5. (Advanced) "Restricted stock has become much more popular partly
because it is easier to account for." Compare the accounting for employee
stock options and the accounting for restricted stock granted to employees.
Reviewed By: Judy Beckman, University of Rhode Island
Stock-option exchanges surged in popularity during
market busts, when many options became underwater
Stock-option exchanges are making a bit of a
comeback, despite a strong stock market and worries about the shareholder
pushback they can generate.
Such exchanges, which let employees trade nearly
worthless options for new options or restricted stock, have been proposed or
implemented by at least 10 publicly traded companies so far this year,
according to proxy-advisory firm Institutional Shareholder Services—up from
seven last year, and three in 2014.
Options repricing surged in popularity after the
dot-com bust in the early 2000s, then again following the financial crisis
in 2009, when many employee stock options became underwater: The company’s
stock had fallen way below the price at which they had the right to buy
shares.
Eighty companies including Apple Inc., Starbucks
Corp. and Google—now Alphabet Inc. —allowed employees to trade in underwater
options in 2009. Back then, about 25% of companies swapped the options
without consulting shareholders, according to ISS data.
For the most part, the trend these days is confined
to younger firms that have recently gone public, said Brett Harsen, partner
for Radford, a part of Aon Hewitt, a consulting company.
“Companies that have lower values are competing for
employees with companies with stronger equity,” said Robert Finkel, a
partner with the Boston-based law firm of Morse, Barnes-Brown & Pendleton
PC. “And equity is still a very important part of compensation, particularly
for technology companies.”
Shares of Jive Software Inc., a maker of business
software, slid below $4 in March from a high of $27.16 in 2012. That left
more than 25% of the options held by the company’s employees out of the
money, with their strike prices far above Jive’s then current trading price.
The Palo Alto, Calif., company pitched the idea of
an option exchange to shareholders and a majority approved. Nearly 80% of
eligible options were exchanged over the past two months for restricted
stock units that vest over two years.
“We were looking for ways wherever we could to help
the people who were staying with Jive be as incented and motivated as
possible,” said Bryan LeBlanc, Jive’s finance chief.
In the exchange process, Jive and other companies
are offering employees restricted stock units that automatically convert to
shares in place of the options to eliminate future uncertainty.
Companies typically take great pains to ensure that
exchange terms are acceptable to shareholders as well as employees. That
means executives and directors don’t participate and employees receive a
value equivalent to their initial grant. While shareholders approve most
exchanges, companies only float them when they know such approval is
forthcoming, said Mr. Harsen.
Since 2012, Jive has used restricted stock
exclusively for nonexecutive employee equity awards, said Mr. LeBlanc.
Restricted stock has become much more popular
partly because it is easier to account for. It also lowers the risk to
employees.
Such options exchanges can benefit companies by
reducing compensation expenses, since companies are required to expense the
value of outstanding stock options even when they are underwater.
And for employees who receive new options, there is
no guarantee their prospects will improve. Electronics retailer hhgregg Inc.
repriced options with a three-year vesting schedule for 58 employees on May
1, 2013 to the then-current trading price of $13.56, according to a filing.
Since 2014, the stock hasn’t returned to that level, and is currently
trading around $2 per share.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: The
article discusses shipping costs for everyday consumer products by beginning
with a vignette about Vince Bledsoe, a UPS delivery man in tiny Mangum, OK.
"Until five years ago, Mr. Bledsoe was the bearer of special orders, tractor
parts and business deliveries to this area. Now, he delivers dog food, fruit
snacks and Kleenex, among other things. His business has increased 30%
during the past couple of years, he estimates." Shipping these products to
this remote location is estimated to turn sales unprofitable for retailers
and is costlier for delivery services.
CLASSROOM
APPLICATION: The
article may be used to discuss inventory and shipping costs, along with
marketing strategy, in a managerial accounting class.
QUESTIONS:
1. (Introductory) When did Oklahoma-based UPS delivery driver Vince
Bledsoe realize that a significant shift had occurred in what is sold
online?
2. (Introductory) How has the change in online shopping 'transformed
rural America"?
3. (Advanced) Review the graphic entitled "Diminishing Returns" and
focus on the information related to the product Diorshow lash mascara. What
is the cost (estimated) of shipping this product to Oklahoma City? To
Mangum, OK?
4. (Advanced) Define the gross profit method of estimating inventory.
How is that technique used to estimate the impact of shipping to rural
locations on the profitability of product sales shown in the graphic
'Diminishing Returns'?
5. (Introductory) According to the article, why do retailers continue
to make these unprofitable online sales by shipping to remote locations?
Reviewed By: Judy Beckman, University of Rhode Island
MANGUM, Okla.— Vince Bledsoe, a United Parcel
Service Inc. delivery man in this remote tiny town, remembers the exact
moment he knew that e-commerce had changed the way rural America shops.
He was taping up a package a few months ago to one
of the town’s 3,000 residents and noticed it contained a bottle of bleach.
“It wasn’t lavender [scented] or anything,” he recalls. “It was just a
bottle of plain Clorox. ”
Until five years ago, Mr. Bledsoe was the bearer of
special orders, tractor parts and business deliveries to this area. Now, he
delivers dog food, fruit snacks and Kleenex, among other things. His
business has increased 30% during the past couple of years, he estimates.
“It is getting out of hand,” he said, recently
while driving his truck along a highway bordered by cotton fields. “They can
find anything online. Literally anything.”
E-commerce hasn’t just reached rural America, it is
transforming it by giving small-town residents an opportunity to buy staples
online at a cheaper price than the local supermarket. It also provides
remote areas with big-city conveniences and the latest products.
Contemporary fashion, such as Victoria Secret bathing suits or Tory Burch
ballet flats—items that can’t be found at Dollar General —are easily
shipped.
Consumers increasingly are shopping online instead
of driving, often long distances, to stores. Online shopping also brings
with it deals and new entrepreneurial opportunities. These consumers,
however, are the most expensive to serve for both retailers and delivery
companies.
According to Kantar Retail, about 73% of rural
consumers—defined as those who drive at least 10 miles for everyday
shopping—are now buying online versus 68% two years ago. Last year, 30% were
members of Amazon Prime, up from 22% in 2014.
Flowers Unlimited and Bratton Drug are about all
that is left of a red-brick town square that just a couple of decades ago
buzzed with three florists, restaurants and a furniture store. A Wal-Mart
built in 1982 in Altus, Okla., about 20 miles away, brought residents
choice, convenience and low prices. Now, online shopping is creating another
retail revolution here that doesn’t require a half-hour drive to Wal-Mart or
roughly 2½-hour drive to Oklahoma City.
April Geralds, a security-firm support manager,
recently bought her two teenage daughters designer Miss Me jeans for half
price on Macys.com. Her family now has access to things “I didn’t ever think
we would have,” said the Mangum resident.
Residents here are even starting to buy groceries
online because frequently it is cheaper than at the town’s United
Supermarkets.
A can of Bush’s Best Bold and Spicy Baked Beans
cost $2.07 on Walmart.com recently, 22% less than at the United in Mangum,
where it’s more expensive to transport goods.
E-commerce has provided new opportunities for area
residents to earn money. In Willow, Okla., Anneliese Rogers, a mother of
three, raised $1,500 in one sitting by selling items from her closet on
Facebook. Nearby, Kassandra Bruton mails up to 100 packages a week from her
clothing store Trailer Trash.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: The
Senate Finance Committee and the House Ways and Means Committe sent letters
to seven foreign and domestic companies in the solar industry, expanding a
more limited probe started earlier this year. Recipients were SolarCity
Corp., Sunrun Inc. , Sungevity Inc., SunEdison Inc., Abengoa SA, NextEra
Energy Inc. and NRG energy Inc. They are investigating valuation of solar
energy installations for tax credits and/or government cash grants.
CLASSROOM
APPLICATION: Both
tax incentives (e.g., tax credits) and financial reporting disclosures are
covered.
QUESTIONS:
1. (Introductory) Define the two types of incentives offered by the
U.S Federal government for investments in solar energy systems: tax credits
and cash grants.
2. (Introductory) A solar energy developer company could choose
between these two incentive options. When would each of the types of
incentives described above likely be used?
3. (Advanced) When will companies enter into contracts to transfer
these solar energy tax benefits to others?
4. (Advanced) Access SolarEnergy's financial filing on Form 10-Q for
the quarter ended June 30, 2016 on the SEC web site at the link below
https://www.sec.gov/Archives/edgar/data/1408356/000156459016023725/scty-10q_20160630.htm
Search for the disclosure described in the article as adverse effects if the
"Internal Revenue Service or the U.S. Treasury Department were to object to
amounts...claimed [by the company] as too high of a fair market value on
such systems...." Where is this disclosure made? Why is this disclosure
important in this filing?
5. (Advanced) "Solar-energy developers...routinely enlist big
investors and transfer the tax benefits. Some also lease systems to
homeowners and businesses. So there is debate over the fair market value of
the solar energy systems...." Why do these transactions lead to the need to
appraise the fair market value of these solar-energy systems? Offer at least
one explanation for either the scenario of a developer attracting other
investors to a project or the case of a developer leasing systems to
homeowners and businesses.
Reviewed By: Judy Beckman, University of Rhode Island
Under investigation is how companies determine the
value of the credits
Congressional lawmakers have launched a formal
investigation into whether solar-energy companies improperly received
billions of dollars in tax incentives from the Obama administration. The
Senate Finance Committee and the House Ways and Means Committee on
Wednesday sent letters to seven foreign and domestic companies in the solar
industry, expanding a more limited probe started earlier this year. The
recipients included three firms in the residential solar industry, SolarCity
Corp. , Sunrun Inc. and Sungevity Inc., and four solar utility companies—SunEdison
Inc., Abengoa SA, NextEra Energy Inc. and NRG Energy Inc.
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: The
SEC sought information and documents in August from Exxon and the company's
auditor, PricewaterhouseCoopers LLP, over how Exxon values its assets. The
SEC's probe is homing in on how Exxon calculates the impact to its business
from the world's mounting response to climate change, including what figures
the company uses to account for the future costs of complying with
regulations to curb greenhouse gases as it evaluates the economic viability
of its projects....As part of its probe, the SEC is also examining Exxon's
longstanding practice of not writing down the value of its oil and gas
reserves when prices fall, people familiar with the matter said.
CLASSROOM
APPLICATION: Questions
cover impairment testing, carbon tax and cap-and-trad cost, and audit
documentation
QUESTIONS:
1. (Introductory) What two asset valuation issues is the SEC
investigating at Exxon?
2. (Introductory) What is impairment testing?
3. (Advanced) The SEC is investigating how Exxon considers the impact
of climate-related regulation compliance costs "as it evaluates the economic
viability of its projects." When do companies base their accounting on the
economic viability of their projects?
4. (Advanced) According to the article, how should cost of
regulations impact evaluations of future oil and gas prospects? In your
answer, define the terms "carbon tax" and "cap-and-trade systems."
5. (Advanced) The SEC has asked for documents from Exxon's auditor,
PricewaterhouseCoopers, as well as the company. Name one type of
documentation that PwC would have as audit evidence for its Exxon
engagement. Describe the purpose of this audit evidence and then explain how
it might be useful to the SEC in making its assessment of these issues.
Reviewed By: Judy Beckman, University of Rhode Island
Probe also examines company’s practice of not
writing down the value of oil and gas reserves
The U.S. Securities and Exchange Commission is
investigating how Exxon Mobil Corp. values its assets in a world of
increasing climate-change regulations, a probe that could have far-reaching
consequences for the oil and gas industry. The SEC sought information and
documents in August from Exxon and the company’s auditor,
PricewaterhouseCoopers LLP, according to people familiar with the matter.
The federal agency has been receiving documents the company submitted as
part of a continuing probe into similar issues begun last year by New York
Attorney General Eric Schneiderman, the people said. The SEC’s probe is
homing in on how Exxon calculates the impact to its business from the
world’s mounting response to climate change, including what figures the
company uses to account for the future costs of complying with regulations
to curb greenhouse gases as it evaluates the economic viability of its
projects.
The decision to step into an Exxon investigation
and seek climate-related information represents a moment in the effort to
take climate change more seriously in the financial community, said Andrew
Logan, director of the oil and gas program at Ceres, a Boston-based advocacy
organization that has pushed for more carbon-related disclosure from
companies.
“It’s a potential tipping point not just for Exxon,
but for the industry as a whole,” he said. As part of its probe, the SEC is
also examining Exxon’s longstanding practice of not writing down the value
of its oil and gas reserves when prices fall, people familiar with the
matter said. Exxon is the only major U.S. producer that hasn’t taken a write
down or impairment since oil prices plunged two years ago. Peers including
Chevron Corp. have lowered valuations by a collective $50 billion. “The SEC
is the appropriate entity to examine issues related to impairment, reserves
and other communications important to investors,” said Exxon spokesman Alan
Jeffers. “We are fully complying with the SEC request for information and
are confident our financial reporting meets all legal and accounting
requirements.” A spokeswoman for PwC declined to comment. An SEC spokeswoman
declined to comment. A spokesman for Mr. Schneiderman said the attorney
general wouldn’t comment on the matter. The SEC probe isn’t believed to
involve other energy companies, according to a person familiar with the
matter.
Activists, members of Congress and former
government officials have ratcheted up pressure on the SEC in the past year
to do more to assess climate risks. Four congressional Democrats including
U.S. Rep. Ted Lieu last year asked the SEC to investigate Exxon over its
climate-related science and advocacy. Three former U.S. treasury secretaries
wrote the SEC in July urging the agency to adopt industry-specific standards
for disclosure in company filings.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
TOPICS: Generally
accepted accounting principles, IFRS
SUMMARY: The
article discusses the differences between U.S. GAAP and IFRS in the areas of
inventory write-downs and long-lived asset impairments. It is driven by the
related article on the SEC inquiry of Exxon and its auditor, PwC, on
accounting for oil & gas related assets.
CLASSROOM
APPLICATION: The
article may be used when covering impairment analysis or in an IFRS course.
QUESTIONS:
1. (Introductory) According to the article, how does Exxon's
financial reporting for long-lived assets (oil fields) under U.S. GAAP
compare to competitors Royal Dutch Shell PLC, Total SA, and BP PLC (which
report under IFRS) and even Chevron Corp. (which reports under U.S. GAAP)?
2. (Advanced) What is the goal of accounting practices related to
impairment testing under both U.S. GAAP and IFRS? Reference the description
in the article but then support the statement with reference to
authoritative accounting literature.
3. (Advanced) What is the difference in requirements between IFRS and
U.S. GAAP leading to the statement in the article that it is "much harder to
write down assets under [U.S.] GAAP than under IFRS? Again, cite your
sources in authoritative accounting literature.
4. (Advanced) What is the difference in treatment of impairment loss
allowances in U.S. GAAP and IFRS? Again, support the statement in the
article with reference to authoritative guidance.
5. (Introductory) Do you think that the differences in reporting
practices between U.S. GAAP and IFRS described in this article might
influence judgments in difficult areas of accounting such as estimating
values of oil & gas? Explain
Reviewed By: Judy Beckman, University of Rhode Island
A U.S. investigation
into the lack of write-downs at Exxon Mobil Corp. despite the slump in
oil-prices has brought to light the challenge of assessing impairments under
U.S. Generally Accepted Accounting Principles (GAAP).
But, for international
companies and U.S. firms with foreign operations, figuring out GAAP is not
the only contest, as there is second set of rules.
International Financial
Reporting Standards (IFRS) are a single set of accounting standards that are
now mandated for use by more than 100 countries, including the EU and more
than ⅔ of the G20.
U.S. companies with
overseas operations keep two sets of books, as they have to convert their
IFRS results into GAAP. International firms that are stocklisted in the U.S.
are exempt from this rule, they file in IFRS.
According to its latest
earnings report, Exxon consolidates in GAAP.
Both in GAAP and in IFRS,
the goal is to ensure that assets are not reported above their so-called
fair value, or the amount that can be recovered from liquidating the asset,
said Emmanuel De George, assistant professor of accounting at London
Business School.
Once it is determined
that an asset requires a write-down, reporting entries and disclosure are
similar between IFRS and GAAP, the professor said.
However, there are
substantial distinctions between IFRS and GAAP. “The key difference arises
in the determination of whether or not an asset requires a write-down,” Mr.
De George said.
Exxon said it
hasn’t needed to record a write-down since oil-prices came falling 2014.
Last year, a trade publication quoted Exxon Chief Executive Rex Tillerson
with saying
“we don’t do write-downs.”
It is much harder to
write down assets under GAAP than under IFRS, Mr. De George said.
This is because under
IFRS impairment losses can be reversed if economic conditions change and
value is restored, whereas under GAAP reversals are prohibited, once a
write-down has taken place, even if economic conditions improve.
“Under GAAP, a
write-down is triggered if the sum of the undiscounted expected future cash
flows from the asset fall below the net book value,” said Mr. De George.
This means that over
time changes to the value of the asset, for example due to currency
fluctuations, are not taken into consideration when calculating the expected
future cash flow that is generated by the asset.
For the write-down
itself, however, companies don’t reference undiscounted expected future cash
flows, but the discounted expected future cash flow.
This is also described
as “fair value,” the “price that would be expected upon sale of the asset,”
said Mr. De George.
Under IFRS, there’s a
difference in testing whether there needs to be a write-down. IFRS starts
with the discounted future expected cash flows, thus directly accounting for
over time changes to the value of the asset.
The second step, the
write-down, follows the same route as GAAP.
In addition there is
another major difference between GAAP and IFRS. IFRS does not permit a
method called last-in-first-out (LIFO) which shows a lower cost of sales and
higher gains during periods of declining oil prices, said Karthik
Balakrishnan, assistant professor of accounting at London Business School.
“This is what Exxon and
most U.S. oil companies use,” said Mr. Balakrishnan.
Because of the
difference in assessing write-downs and LIFO, IFRS will produce more
conservative numbers for earnings during periods of declining prices, said
Mr. Balakrishnan.
In the case of Exxon,
the experts warn against simply accrediting the lack of write-downs to the
differences in accounting standards between the U.S. and other parts of the
world.
“That would be an unfair
comparison, given that the threshold for impairment testing is higher under
GAAP,” said Mr. De George.
Exxon tends to be more
conservative when capitalizing the costs of their fields which lead to lower
book values to begin with, Mr. George said. “That further reduces the
probability that they will trigger an impairment event,” he said.
Exxon’s competitors
Chevron Corp., Royal Dutch Shell PLC, Total SA and BP PLC have written down
more than $50 billion since 2014. Shell, Total and BP use IFRS, Chevron
consolidates in GAAP.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: Microsoft
announced a stock buyback amounting to approximately 9% of the company's
$442.7 billion market value and increased the dividend rate to 39 cents from
36 cents.
CLASSROOM
APPLICATION: Questions
cover accounting for dividends, treasury stock (stock buybacks) and dividend
yield calculations.
QUESTIONS:
1. (Introductory) Define the terms declaration date, date of record,
and date of payment in relation to dividends. Identify those three dates for
Microsoft's declared dividend reported in the article.
2. (Advanced) What is dividend yield?
3. (Advanced) Show the calculation from the information in the
article which determines that Microsoft's dividend yield is 2.7%.
Reviewed By: Judy Beckman, University of Rhode Island
Rise in Tech giant’s quarterly payout to 39 cents
from 36 cents represents an increased dividend yield to 2.7%
Microsoft Corp. announced plans to buy back up to
$40 billion in stock and boost its dividend by 8%, the latest in a series of
moves by the software giant to share a steady flood of cash with
shareholders. The latest repurchase target is the same size as a buyback
plan announced in 2013, which the company said Tuesday it expects to
complete by the end of this year. Microsoft didn't set an expiration date
for the new buyback, which represents about 9% of Microsoft’s market value
of $442.7 billion. The company has been among most active in buying back
shares, having spent nearly $140 billion on the tactic over the years.
Microsoft tends to announce dividend increases in
September. The 8% increase announced Tuesday is a smaller rate of increase
than those of recent years. Last year, the company raised its quarterly
payout by 16% to 36 cents from 31 cents, after an 11% increase in 2014. This
year’s increase, to 39 cents per quarter, from 36 cents, raises Microsoft’s
dividend yield to 2.7% from 2.3%. The dividend is payable Dec. 8 to
shareholders of record Nov. 17. Microsoft, based in Redmond, Wash., enjoyed
torrid revenue growth in the 1990s fueled by the spread of personal
computers. After its growth slowed, the company began offering increasingly
generous dividends as well as buybacks. The latter tactic tends to prop up a
company’s stock price by reducing total shares outstanding, thereby
increasing earnings per share. Though a slowdown in unit sales of PCs has
tended to hurt sales of Microsoft’s Windows operating system, the company
sells other software and services that generate a steady flow of cash.
Microsoft reported $113 billion in cash and investments at the end of June.
Meanwhile, investors have become more optimistic about the company’s plans
to build a big business in cloud services since Satya Nadella took over as
chief executive in February 2014. Underscoring his bet on services,
Microsoft agreed in June to buy professional social network LinkedIn Corp.
for $26.2 billion. The company’s shares are up 31% over the past year. They
rose 1%, or 54 cents, in after-hours trading. In 4 p.m. trading, Microsoft
shares fell 12 cents, to $56.81. Strength in Microsoft’s cloud business
helped the company beat sales and profit expectations in its fiscal fourth
quarter, which ended June 30, although revenue fell 7% to $20.61 billion.
Continued in article
Teaching Case from The Wall Street Journal Accounting Weekly Review on
September 16, 2016
SUMMARY: This
Letter to the Editor from Representatives John K. Delaney (D., MD) and
Richard Hanna (R., nY) proposes a combination of international tax "reform"
and infrastructure investment.
CLASSROOM
APPLICATION: The
article may be used in tax class to address the political impretus behind
tax law in relation to the recent EU finding against Apple.
QUESTIONS:
1. (Introductory) Describe the features of this proposal to
repatriate U.S. multinationals' foreign held earnings and invest in U.S.
infrastructure. Greater detail is available in the related letter to the
editor by Treasury Secretary Jacob Lew.
2. (Advanced) Refer to the related article: what is Treasury
Secretary's concern about U.S. federal tax revenues because of the European
Union decision on Apple tax payments to Ireland?
3. (Advanced) Explain the argument that U.S. business leave for
foreign countries because of our aging infrastructure. What is the evidence
against this argument?
Reviewed By: Judy Beckman, University of Rhode Island
Our bipartisan Infrastructure 2.0 Act is the way to
get this done: Combine international tax reform with infrastructure
investment.
We agree with Treasury Secretary Jacob Lew’s
diagnosis of our flawed international tax system (“Europe’s Bite Out of the
Apple Shows the Need for U.S. Tax Reform,” op-ed, Sept. 13) and we agree,
directionally, with his description of the proper solution. We encourage the
secretary and congressional leadership to focus on our bipartisan
Infrastructure 2.0 Act. The way to get this done is to combine international
tax reform with infrastructure investment. The $2 trillion of existing
overseas earnings would be “deemed” repatriated and subject to a minimum tax
of 8.75% (less any tax already paid) and on a “go forward” basis, deferral
would end and the rate would be 12.25% for profits in low-tax jurisdictions
with deductions for taxes already paid.
This bipartisan approach generates $170 billion of
revenue that would be applied to our nation’s infrastructure and creates a
new national infrastructure fund that would provide an additional $750
billion in financing to state and local governments. The urgency of this
problem demands embracing a smart, practical plan that has bipartisan
support, like the Infrastructure 2.0 Act. This is the only way to actually
make progress.
Continued in article
Humor for September 2016
Is looking for
a gap between an object and its reflection a good way to distinguish two-way
mirrors from ordinary mirrors?
http://www.snopes.com/crime/warnings/mirror.asp
Jensen Comment
Reminds me of the time a Texas Aggie coed wore a see-through dress and nobody
wanted to
could become President; I'm beginning to believe it.
~Clarence Darrow~
Politicians
are people who, when they see
light at the end of the tunnel, go out and
buy some more tunnel.
~John Quinton~
Why
pay money to have your family tree
traced; go into politics and your opponents
will do it for you.
~Author unknown
Politics
is the gentle art of getting votes
from the poor and campaign funds from
the rich, by promising to protect each from the other.
~Oscar Ameringer~
I
offer my opponents a bargain: if they will
stop telling lies about us, I will stop telling
the truth about them.
~Adlai Stevenson, 1952~
A
politician is a fellow who will lay
down your life for his country.
~ Tex Guinan~
I
have come to the conclusion that politics
is too serious a matter to be left to the politicians.
~Charles de Gaulle~
Instead
of giving a politician the keys to the
city, it might be better to change the locks.
~Doug Larson~
There
ought to be one day -- just one --
when there is open season on Congressmen.
~Will Rogers~
Forwarded by Paula
You may not remember the old-time Jewish comedians:
Shecky Green, Red Buttons, Totie Fields, Milton Berle,
Henny Youngman, and others.
But some of us miss their kind of humor. Not a single
swear word in their routines, and you don't have to be
Jewish to enjoy their jokes.
*A car hit an elderly Jewish man. The paramedic asks, "Are you
comfortable?" The man says, "I make a good living."
*I just got back from a pleasure trip. I took my mother-in-law to the
airport.
*I've been in love with the same woman for 49 years. If my wife finds
out, she'll kill me!
*Someone stole all my credit cards, but I won't be reporting it. The
thief spends less than my wife did.
*We always hold hands. If I let go, she shops.
*My wife and I went to a hotel where we got a waterbed. My wife calls it
the Dead Sea.
*My wife and I revisited the hotel where we spent our wedding night. This
time I was the one who stayed in the bathroom and cried.
*My Wife was at the beauty shop for two hours. That was only for the
estimate. She got a mud pack and looked great for two days. Then the mud
fell off.
*The Doctor gave a man six months to live. The man couldn't pay his bill,
so the doctor gave him another six months.
*The Doctor called Mrs. Cohen saying, "Mrs. Cohen, your check came
back."Mrs. Cohen replied, "So did my arthritis!"
*Doctor: "You'll live to be 60!"
Patient: "I AM 60!"
Doctor: "See! What did I tell you?"
*A doctor held a stethoscope up to a man's chest. The man asks, "Doc, how
do I stand?"
The doctor says, "That's what puzzles me!"
*Patient: "I have a ringing in my ears."
Doctor: "Don't answer!"
*A drunk was in front of a judge. The judge says, "You've been brought
here for drinking."
The drunk says, "Okay, let's get started."
*Why do Jewish divorces cost so much?
They're worth it.
*Why do Jewish men die before their wives?
They want to.
*The Harvard School of Medicine did a study of why Jewish women like
Chinese food so much.
The study revealed that the reason is Won Ton spelled backward is Not
Now.
*There is a big controversy on the Jewish view of when life begins. In
Jewish tradition, the fetus is not considered
viable until it graduates from law school.
*Q: Why don't Jewish mothers drink?
A: Alcohol interferes with their suffering.
*Q: Have you seen the newest Jewish-American-Princess horror movie? A:
It's called, "Debbie Does Dishes."
*Q: Why do Jewish mothers make great parole officers?
A: They never let anyone finish a sentence.
*A man called his mother in Florida . "Mom, how are you?"
"Not too good," said the mother. "I've been very weak."
The son asked, "Why are you so weak?"
She replied, "Because I haven't eaten in 38 days."
The son said,"That's terrible. Why haven't you eaten in 38 days?"
The mother answered, "Because, I didn't want my mouth to be full in case
you should call."
*A Jewish man said that when he was growing up, they always had two
choices for dinner - Take it or leave it.
*A Jewish boy comes home from school and tells his mother he has a part
in the play. She asks, "What part is it?"
The boy says, "I play the part of the Jewish husband."
The mother scowls and says, "Go back and tell the teacher you want a
speaking part."
*Q: Where does a Jewish husband hide money from his wife?
A: Under the vacuum cleaner.
*Q: How many Jewish mothers does it take to change a light bulb?
A: (Sigh) "Don't bother. I'll sit in the dark. I don't want to be a
nuisance to anybody."
*A Jewish mother gives her son a blue shirt and a brown shirt for his
birthday. On the next visit, he wears the
brown one. The mother says, "What's the matter
already? Didn't you like the blue one?"
*Did you hear about the bum who walked up to a Jewish mother on the
street and said, "Lady I haven't eaten in three days." "Force yourself," she
replied.
*Q: What's the difference between a Rottweiler and a Jewish mother?
A: Eventually, the Rottweiler lets go.
*Q: Why are Jewish Men circumcised?
A: Because Jewish women don't like anything that isn't 20% off.
Jensen Comment
I'll resist commenting further on a tattoo of one's cat (mentioned in the
article)
I guess that beats making a tattoo of one's significant other who could become
insignificant most any time.
Accountants might consider a forehead tattoo of a green eyeshade.
But that might lead to lonely times in singles bars.
I think I'll get a tattoo that reads "Test Checker for Your Inventory"
Any better suggestions?
Awful Punish Humor from Paula
Venison for dinner again? Oh deer!
* How does Moses make tea? Hebrews it.
* England has no kidney bank, but it does have a Liverpool.
* I tried to catch some fog, but I mist.
* They told me I had type-A blood, but it was a typo.
* I changed my iPod's name to Titanic. It's syncing now.
* Jokes about German sausage are the wurst.
* I know a guy who's addicted to brake fluid, but he says he can stop any time.
* I stayed up all night to see where the sun went, and then it dawned on me.
* This girl said she recognized me from the vegetarian club, but I'd never met
herbivore.
* When chemists die, they barium.
* I'm reading a book about anti-gravity. I just can't put it down.
* I did a theatrical performance about puns. It was a play on words.
* Why were the Indians here first? They had reservations.
* I didn't like my beard at first. Then it grew on me.
* Did you hear about the cross-eyed teacher who lost her job because she
couldn't control her pupils?
* When you get a bladder infection, urine trouble.
* Broken pencils are pointless.
* What do you call a dinosaur with an extensive vocabulary? A thesaurus.
* I dropped out of communism class because of terrible Marx.
* I got a job at a bakery because I kneaded dough.
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
Ross L. Watts Massachusetts Institute of Technology (MIT) - Sloan School
of Management
Luo Zuo Cornell University - Samuel Curtis Johnson Graduate School of
Management
Abstract
This paper explains how and why Anglo-American
accounting and auditing, along with corporate governance and capital
markets, evolved over many centuries in response to changes in market forces
and technology. We first trace the development of practices that were
included in U.S. corporate governance (including accounting and auditing)
before the 1930s. We then describe the nature and effect of the increase in
U.S. regulation from the 1930s and the development of fair value accounting.
Finally, we give an assessment of the current state of accounting, auditing
and corporate governance. Our historical accounts suggest that the approach
to accounting and financial reporting is more consistent with stewardship
(care of net assets) than an attempt to value the firm, and that
conservatism (prudence) is a critical information control and governance
mechanism. We echo the U.K. Financial Reporting Council’s call on standard
setters to reintroduce an explicit reference to conservatism (prudence) into
the Conceptual Framework for financial reporting.
The MAAW site has thousands of citations of journal articles in accountancy,
auditing, AIS, etc. --- http://maaw.info/
Thank you Jim Martin for this painstaking work.
Time-Series Non-Stationarity ---
https://en.wikipedia.org/wiki/Stationary
In my opinion this is the biggest hurdle in statistical analysis in general and
time-series analysis in particular
In 2013, the bottom 50 percent of taxpayers
(those with AGIs below $36,841) earned 11.49 percent of total AGI. This
group of taxpayers paid approximately $34 billion in taxes, or 2.78
percent of all income taxes in 2013.
Walmart’s
Out-of-Control Crime Problem
Is Driving Police Crazy ---
https://www.bloomberg.com/features/2016-walmart-crime/?cmpid=BBD081716_BIZ
Jensen Question
In this era on not wanting to incarcerate non-violent people, how do you stop
the hard core of shop lifters who repeatedly defy the law?
There are gangs of shoplifters, many of them teenagers, that now attack fast and
furiously.
Jensen Comment
In general, white collar crimes usually pay if the amount stolen is enormous
enough. The reason is that the courts are excessively lenient on white collar
crime even when the culprits know they will get caught ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
SEC Charges Former NFL Football Player With Running $10 Million Fraud
Washington D.C., Aug. 10, 2016 — The Securities and
Exchange Commission today charged Merrill Robertson Jr., a former player for
the Philadelphia Eagles, with defrauding investors, including coaches he
knew from his time playing football for the Fork Union Military Academy and
the University of Virginia.
The SEC’s complaint, filed in federal court in
Richmond, Virginia, charges Robertson, Sherman C. Vaughn Jr., and the
company they co-owned, Cavalier Union Investments LLC. According to the
complaint, the defendants promised to invest in diversified holdings but
diverted nearly $6 million of the more than $10 million they raised from
investors to pay for personal expenses and used other funds to repay earlier
investors.
Robertson and Vaughn, both of Chesterfield,
Virginia, are alleged to have lied about the unregistered debt securities
they sold, saying they would yield as much as 20 percent “while providing
safety and security for our investors.” According to the complaint, the
defendants claimed that Cavalier had investment funds operated by
experienced investment advisers when it did not have any funds or investment
advisers and was functionally insolvent shortly after it was formed. The
defendants allegedly hid this fact from potential investors and relied on
cash from new investors to stay afloat. The complaint further alleges that
Cavalier’s only investments were in restaurants that had all failed by 2014,
something the defendants never disclosed as they continued soliciting and
accepting investors’ money. The scheme allegedly targeted seniors and
coaches, donors, alumni, and employees of schools Robertson had attended.
“Our complaint alleges that Robertson and Vaughn
preyed on elderly victims and others who placed their trust in these
individuals, only to have their savings stolen,” said Sharon B. Binger,
Director of the SEC’s Philadelphia Regional Office. “We will continue to
aggressively pursue fraudsters who exploit their relationship of trust with
victims and promise returns that appear to be too good to be true.”
The SEC encourages investors to check the
backgrounds of people selling them investments. A quick search on the SEC’s
investor.gov website would have shown that Robertson and Vaughn are not
registered to sell securities.
In a parallel action, the U.S. Attorney’s Office
for the Eastern District of Virginia today announced criminal charges
against Robertson.
Jensen Conclusion
In spite of previous efforts by the PCAOB to improve audits of brokers and
dealers, progress has been frustratingly slow. This seems to be one of the least
proud lines of work for audit firms in terms of audit deficiencies and audit
independence.
Personal Finance
Possible Student Project on Deciding Who Should Take Out Long-Term Care
Insurance and What Coverage to Choose
Jensen Comment
Unless you're already on Medicaid or commit unethical/illegal effort to shed
assets in you're estate to qualify for Medicaid long-term care can become a very
expensive proposition with or without long-term care insurance since Medicare
does not pay for long-term care except under very restrictive rules of hospital
confinement (rather than nursing home confinement and home care). Bad things are
happening in the long-term care insurance industry. About 90% of the insurers in
the 1990s dropped their coverage. And the deals are worse for more expensive for
more limited coverage.
This is not those "cheap" burial insurance policies advertised ad nauseam
on television. These are very expensive policies with possibly high payouts. The
real problem is uncertainly over how long a patient will need long-term care
outside a hospital combined with the explosion in the costs of providing
long-term care, especially in nursing homes. Regulations increased the quality
of care, but those regulations also added greatly to the coverage costs.
Jensen Comment
I know of a case in the 1990s where a son (of one of my cousins) sold this type
of insurance for a time. I sighed when I thought he sort of conned his
grandmother into taking out an expensive policy. But it turned out to be a darn
good deal when she was covered for nearly 10 years in an Iowa nursing home.
Having said this, I'm still pretty negative about this type of insurance.
Part of the reason is the increased cost of the insurance combined with the
newer coverage limitations that make the insurance less exciting in recent years
--- when the only thing "exciting" about going to a nursing home is the huge
cost involved one way or another. What some heirs need to learn is that one
purpose of building up a nest egg for old age is being able to pay for long-term
care coverage in addition to providing an estate to inherit. This is no longer
an era where it's expected that children almost always care for their elderly
parents by moving them into the homes of those children (like the Amish continue
to do in this era). Most children these days want to put the old folks into
nursing homes.
If we don’t destroy ourselves first, we will someday discover intelligent
life on another planet. But when we do, the chances are about one in a
billion that we’ll find hedge accounting standards more complex than our
own.
Now would also be as good a time as any to peel the onion on hedge
accounting since the FASB has recently reached a
consensus on a
revisions to rules that have been in place since the issuance of
SFAS 133 in
1998.
The Basics
At the risk of oversimplifying, the FASB addressed three problems in SFAS
133:
First,
there was the problem of accounting for derivatives, which without
additional guidance would be measured at historic cost. Historic cost
accounting is always suboptimal, but it is especially problematic
when it comes to derivatives. Consider, for example, a financial
institution with $9 billion in liabilities covered by $10 billion of assets.
Next, assume that said financial institution enters into a (near) cashless
interest rate swap with a notional amount of $10 billion — or a credit
default swap, or a commodities future contract. Basically, it enters into
any kind of financial derivative contract, I don’t care which.
All accounting measurement conventions applied to this derivative would
produce a net value of (near) zero at inception because the present value of
the contract’s receivable leg would be (nearly) equal to its payable leg.
But, should the “underlying” of the contract (e.g., an interest rate, a
commodity price, a credit rating) change even a tiny bit, there will
be a large change in the fair value of the derivative contract — owing to
its relatively large national amount .
You don’t need to be a derivatives expert to figure out what’s going on
here: derivative contracts are the soft underbelly of historic cost
accounting. Failure to recognize the economic effects of the market risks
from being a party to a derivative contract renders the entire endeavor of
accounting for entities like this hypothetical financial institution an
utter sham. Consequently, the FASB correctly decided that interests in
derivative contracts must be, without exception, measured at fair value.
First problem solved. But, it creates two additional and related problems,
which I will call Problems 2a and 2b:
Problem 2a is
how to deal with the irony that if a company were to enter into a derivative
contract reduce a source of risk — i.e., reducing the volatility of future
enterprise value — then marking a derivative to market through net income
could be expected to increase the volatility of future net income.
This could be the case if GAAP requires that the item creating the risk in
the first place (e.g., a commodity held as inventory or a fixed-rate
mortgage loan) is measured at historic cost.
Problem 2a was addressed in SFAS 133 by the so-called “fair value hedge
accounting” treatment if the source of the risk is the change in the fair
value of a recognized asset, liability, or “firm commitment.” The issuer may
elect to offset the gain/loss recognized in income on the derivative
with an offsetting change to the hedged item.
Fair value hedging might seem like a reasonable accounting treatment, but
there are a number questionable aspects to it. Two of these are:
Inconsistencies in measurement
— Assets, liabilities and firm commitments that happen to be linked with a
derivative in fair value hedge accounting are measured one way, and unlinked
items are measured another way. Moreover, an added source of inconsistency
exists since “special” hedge accounting is optional. For example, both
Kellogg and
General Mills report
that they hedge their commodities positions with derivatives. But Kellogg
uses hedge accounting and General Mills doesn’t. Obviously, this is not
helpful when trying to analyze the differences in their gross margins.
Arbitrary measurement
— The measurement of the assets and liabilities in the hedging relationship
are neither historic cost nor fair value. They are something in between —
what former FASB member Tom Linsmeier dubbed “mutt accounting.” This is not
much different than the insane numbers generated by the FASB’s treatment of
foreign subsidiaries set forth in
SFAS 52, and
which I described in a
recent post as
one of the worst and most divisive accounting standards ever written. One
of the reasons I was particularly harsh in my assessment of SFAS 52 is
because I don’t think that the SFAS 133 fair value hedge accounting
provisions would have been at all palatable (or even considered) if SFAS 52
had not opened up a Pandora’s box of arbitrary accounting measurements.
(And, as we will see later in this post, it also legitimized the concept of
dirty surplus — euphemistically termed “other comprehensive income).
Problem 2b
is that if a company were to enter into a derivative contract for the
purposes of risk reduction, but the risk was not a recognized asset,
liability or firm commitment, then marking the derivative to market through
net income would again increase the volatility of future net income.
However, fair value hedging would not be an effective solution since there
is no recognized hedged item on which the offsetting changes could be lumped
into.
The solution to Problem 2b that the FASB came up with is known as “cash flow
hedging.” It temporarily parks the portions of the gains/losses on marking
the derivative to market that are actually “effective” (more on that term
later) as a hedge in Accumulated Other Comprehensive Income (AOCI). When the
risk being hedged actually hits the income statement, the appropriate
offsetting amounts in AOCI are transferred to net income.
Are you with me so far? These are just the first layers of the onion. I
still have to tell you about additional provisions that can make hedge
accounting very difficult to pull off in practice. Many of these details
Continued in article
August 22, 2016 reply from Bob Jensen
Hi Tom,
In the
past your alternatives for derivatives contract accounting did not distinguish between speculation and hedging with those
contracts. Until you show me an a
derivatives contract accounting alternative that does so I will prefer FAS
133 or IFRS 9. Simply appealing to "full disclosure" is a cop out since
annual reports with over a million footnotes are not practical.
Your
statement that General Mills hedges with derivatives without applying FAS
133 is misleading. General Mills applies FAS 133 in a backhanded way. I do
not think that any company can simply ignore FAS 133 for derivative
contracts scoped into FAS 133. Here's what General Mills says about using
hedge accounting --- http://sec.edgar-online.com/general-mills-inc/8-k-current-report-filing/2008/09/17/section10.aspx
Regardless of designation for accounting purposes, we (at General Mills)
believe all of our commodity hedges are economic hedges of our risk
exposures, and as a result we consider these derivatives to be hedges for
purposes of measuring segment operating performance. Thus, these gains and
losses are reported in unallocated corporate expenses outside of segment
operating results until such time that the exposure we are hedging affects earnings. At that time we reclassify the hedge gain or loss from
unallocated corporate expenses to segment operating profit, allowing our
operating segments to realize the economic effects of the hedge without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate expenses. We no longer
have any open commodity derivatives previously accounted for as cash flow
hedges.
Continued in article
Note
that General Mills is trying to exclude those
mark-to-market earning fictions I've talked about in
our past debates.
From
what I can tell I pretty much go along with the proposed 2016 revisions in
FAS 133 even though I hate some of the previous revisions in IFRS 9. You
seem to think that commodity prices in Chicago can be used satisfactorily
for all commodity inventories. The fact of the matter is that for most
commodities there's a huge difference between commodities held as local
inventory hundreds or thousands of miles from Chicago and the CBOT, CBT,
CBOT, or CME prices in Chicago. Having grown up on an Iowa farm I'm well
aware that the commodities we stored on the farm should not have been valued
at Chicago exchange prices. Firstly, our inventories on the farm differed
greatly in quality from the Chicago exchange standards.
We (on
our Iowa farm) held these inventories sometimes because the local elevator
did not want our lower quality inventories. Instead we either fed our crops
to our own livestock or sold them to nearby feeders who would buy these
inventories at serious price discounts. Today's corn farmers are often
selling corn to nearby livestock containment feeding operations for the same
reasons.
Secondly the Chicago exchange prices were quite different from local prices
due to future shipping costs. If you look at the original FAS 133 Appendix
illustrations of hedge ineffectiveness you will find that almost all those
illustrations for commodities focused on hedge ineffectiveness due to
shipping cost --- http://www.cs.trinity.edu/rjensen/000overview/mp3/000ineff.htm
(Note that the FASB Codification does not include the Appendix illustrations
that were in the original FAS 133 hard copy standard.)
Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen:
Differences Between Mark-to-Market Accounting for Derivative Contracts
Versus Commodity Inventories --- http://www.trinity.edu/rjensen/Mark-to-MarketCorn.htm
August 22, 2016 reply from Tom Selling
Bob,
My responses to your concerns are indented, below:
You wrote: In the past your alternatives for
derivatives contract accounting did not distinguish between speculation and
hedging with those contracts. Until you show me an a derivatives contract
accounting alternative that does so I will prefer FAS 133 or IFRS 9.
Under extant GAAP, you can: (1) hold a
freestanding derivative; (2) “hedge" and apply hedge accounting, or (3)
“hedge" and not apply hedge accounting. I put “hedge” in quotes, because
the FASB has not defined “hedge.” You say you are happy with SFAS 133
even though it does not, as you demand of me, distinguish between (1)
and (3). That’s because the FASB no longer defines a “hedge.” Indeed,
the whole purpose of SFAS 133 was to supply a hedge accounting solution
without having to actually consider the difference between hedging and
speculation.
You wrote: Simply appealing to "full disclosure" is
a cop out since annual reports with over a million footnotes are not
practical.
I did nothing of the sort. I would prefer
disclosures that allow an analyst to unwind hedge accounting if they think
it is a stupidity (as I do), but it is not a necessary condition. I want all
commodities and financial instruments to be measured the same way. After
that, feel free to screw up the income statement as much as you please.
You wrote: Your statement that General Mills hedges
with derivatives without applying FAS 133 is misleading. General Mills
applies FAS 133 in a backhanded way. I do not think that any company can
simply ignore FAS 133 for derivative contracts scoped into FAS 133. Here's
what General Mills says about using hedge accounting —
Bob, please be careful when you use the term
misleading. I regard your use of the term very much like the way you took
offense when you thought Zafar called you a liar. Surely, you can think of a
more respectful and appropriate term than “misleading" … perhaps,
“inaccurate”?
That said, I provided a link to a 10-K. It reads in
relevant part as follows:
“We use derivatives to manage our exposure to
changes in commodity prices. We do not perform the assessments required
to achieve hedge accounting for commodity derivative positions.
Accordingly, the changes in the values of these derivatives are recorded
currently in cost of sales in our Consolidated Statements of Earnings.”
It appear that you provide a link to an 8-K, which
I have not read. As best as I can tell, you describe GM’s presentation of
segment disclosures (where departures from GAAP are permitted). That’s a far
cry from the consolidated financial statements.
You wrote: From what I can tell I pretty much go
along with the proposed 2016 revisions in FAS 133 even though I hate some of
the previous revisions in IFRS 9. You seem to think that commodity prices in
Chicago can be used satisfactorily for all commodity inventories. The fact
of the matter is that for most commodities there's a huge difference between
commodities held as local inventory hundreds or thousands of miles from
Chicago and the CBOT, CBT, CBOT, or CME prices in Chicago. Having grown up
on an Iowa farm I'm well aware that the commodities we stored on the farm
should not have been valued at Chicago exchange prices. Firstly, our
inventories on the farm differed greatly in quality from the Chicago
exchange standards.
Again, “perfection is the enemy of the good,” even
for your family farm. Do you mean to tell me that your parent’s actually
gave a hoot about the historic cost of your corn after it was harvested?
When they asked themselves, “how did we do?” is that what they talked about?
If you are going to provide examples of practical
barriers, I suggest you use public companies. And, don’t try to tell me that
Kellogg and GM don’t know the current values of their commodity inventories
on a daily basis.
Best,
Tom
August 23, 2016 reply from Bob Jensen
Hi Tom,
You miss the point
when you say that our farm's distant (from Chicago) less than top quality
corn would not be valued at Chicago exchange prices.
That's my whole point. When you hedge most
often it will be done with net settlement derivative contracts priced at
Chicago exchange prices. This is what gives rise to hedging ineffectiveness
because your local inventory valuation differs from the Chicago exchange
pricing in your hedging contracts. See the definition of "ineffectiveness"
under the "I" letter at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Therefore, the extent your
hedges are ineffective you are speculating and not hedging due to those differences in prices between your inventory
valuation and Chicago exchange price valuation of your hedging contracts. To
the extent hedges are effective then you are hedging and should choose to
not show earnings fluctuations to the extent the hedges are effective
(ala General Mills). To the extent hedges are ineffective you are
speculating and should post the ineffective portion to retained earnings.
The FASB does have a definition of a derivative contract, and I
elaborate on it at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Click on "D" and then scroll down.
For the definition of a hedging contract click on "H" and scroll down.
The IASB's
definition differs somewhat from the FASB's definition of a derivative.
Where it gets even messier is in the definitions of derivatives for macro
hedges. A "macro" contract hedges a portfolio with multiple types of risks
with a hedging instrument that only hedges one of those risks. An exception
now allowed under FAS 138 (that amended FAS 133) is a cross-currency hedge
that hedges both FX risk and interest rate (price) risk simultaneously using
one hedging instrument. The IASB and FASB departed when it comes to
accounting for some (very limited) types of macro hedges.
Any USA company that has derivative contracts under the FASB's
definition had better consult its attorneys and auditors before deciding to
depart from FAS 133 and its amendments.
Are you trying to tell us that, unlike in its 8K discussion of
derivative contracts, that General Mills has what the FASB calls derivatives
contracts in its 10K that it elects not to account for under FAS 133
rules? I really, really doubt that!
One piece of information in the 8K is that General Mills does
not hedge cash flows. If it did so it would abide by FAS 133 rules or
worry about lawsuits.
To the extent that General Mills does have fair value hedging
contracts meeting the FASB definition it does have to resort to FAS 133 for
accounting purposes. An to the extent it acquires other types of hedging
contracts (like cash flow hedges) meeting the FAS 133 definition it will
resort to FAS 133 accounting whether in an 8K or a 10K.
If you find an exception in the General Mills 10K please let us
and the auditors and the SEC know about it.
And my parents cared about the historic cost of corn. For one
thing this affected taxes. Secondly when the great scorer comes to write
against your aggregate lifetime profit the aggregate "cash in" versus the
aggregate "cash out" is what determined how good you were as a farmer
(adjusted of course when you butchered your own livestock to eat). All the
unrealized commodity value ups and downs were fictions --- like it
says in the General Mills 8K that you
conveniently selected only part of to quote from my longer quotation.
Of course my parents looked at
current fair values of their inventories. They even made decisions based on
changes in values. But they did that in a two-column set of financial
statements rather than confine themselves to one fair value column
containing fiction accounting
August 23. 2016 reply from Tom Selling
Bob,
We are talking past each other. I don’t even think
you read what I write, even though I specifically address each of your
points. Just for one example, I did not state that the FASB doesn’t have a
definition of a derivative; I stated that it does not have a definition of
“hedge” apart from what “hedge accounting” is.
This is my last word on this subject.
Best,
Tom
August 23, 2016 reply from Bob Jensen
FAS 133 does not scope in weather derivatives mostly because the underlying
(e.g., cumulative rainfall for the months of July and August) are not exchange
traded like commodity price underlyings.
ASC 815-45 provides guidance on the financial accounting and reporting for
weather derivatives
ASC 815-45 provides guidance on the financial accounting and reporting for
weather derivatives.
Why is asymmetric information so crucial to an
understanding of financial markets? It’s probably related to the reason
people want financial assets in the first place. People want cars and
bananas and microwave ovens because those things are immediately useful. But
most people who buy and sell financial assets have no intrinsic desire for
the asset itself -- they only care about how its value to other people will
change in the future. That means that while information is important for
many products, when it comes to financial markets, information is the
product.
Many major economics papers have explored this
fact. One example is the famous 1980 paper “On the Impossibility of
Informationally Efficient Markets,” by Sanford Grossman and Joseph Stiglitz.
The authors showed that if it costs money (or time) to gather information
about financial assets, then market prices can’t be perfectly efficient --
if they were, there would be no incentive for people to go out and pay the
costs to gather data. That paper showed why the famed Efficient Markets
Hypothesis can only be approximately true at best.
A 1982 paper by Paul Milgrom and Nancy Stokey is no
less important. Entitled “Information, Trade, and Common Knowledge,” it
demonstrated why rational financial markets should have a lot less trading
than they do. Suppose you come to me offering to sell me a stock for $100 a
share. Why are you offering to sell it to me for $100? Maybe you’re selling
stocks because you’re shifting into bonds, or ready to retire, or need to
pay a sudden medical expense. But chances are, you think the stock is worth
less than $100, and you’re trying to unload it. That should make me wary
about taking you up on your offer. But on the other hand, if I jump at the
offer, that should tell you that I have reason to believe the stock is worth
more than $100 … and that should make you wary. In an ideal market filled
with rational agents, this means that trading is very rare. The fact that
trade volumes are huge is a continuing puzzle for economists, not explained
by the classic theories of perfect rationality.
So with all this asymmetric information, why are
financial markets so active? A pair of papers in 1985 attempt to explain
why. These studies -- the first by Lawrence Glosten and Paul Milgrom, the
second by Albert “Pete” Kyle -- model the interaction between informed
traders, market makers and liquidity traders. The liquidity traders need to
buy or sell immediately for reasons unrelated to the market, but the
informed traders are trading because they know something about the asset’s
fundamental value. The market-makers -- basically, middlemen -- profit off
of the former and lose money to the latter. At the end of the day, this
delicate dance gets information out of traders’ heads and into the price.
But as some other researchers showed over a decade later, if the information
is too complicated, this process can lead to bubbles and crashes.
The upshot of all this -- which will be confirmed
by the experience of anyone who has ever traded for real -- is that
asymmetric information, which is a nothing more than a nuisance in most
markets, is at the core of finance. It’s key to the way traders, including
high-frequency traders, make their profits. And it’s probably at the root of
why markets break down and crash.
So when someone -- say, a presidential candidate --
proposes big rollbacks of financial regulation, we should be suspicious. In
many cases that might be a good idea, but finance is no ordinary market.
Two auditors for an international accounting
company tried to get the Securities and Exchange Commission to overturn the
suspensions they got for professional misconduct related to work they did
for Lincoln's TierOne Bank before it collapsed in 2010.
Instead, a divided Securities and Exchange
Commission ruled last week that the two men who worked for KPMG deserved
harsher sentences.
The commission voted 2-1 to bar John J. Aesoph, a
KPMG partner from Omaha, from working with SEC-regulated companies for three
years, and Darren M. Bennett, a senior manager from Elkhorn, for two years.
In 2014, an SEC judge recommended bans of one year
for Aesoph and six months for Bennett. The two filed an appeal of those
suspensions within weeks of the judge's decision, but oral arguments were
not held until last month.
The proposed suspensions were based on their work
on the year-end 2008 audit of TierOne, which SEC administrative law judge
Carol Fox Foelak called "a single instance of highly unreasonable conduct."
The SEC had charged the two auditors with
professional misconduct, alleging that they failed to appropriately
scrutinize management's estimates of TierOne's allowance for loan and lease
losses.
The SEC had originally sought a three-year
suspension for Aesoph and two years for Bennett.
In Friday's order, the SEC said the two committed
"egregious violations of multiple auditing standards," and it called their
methods in conducting the TierOne audit "highly unreasonable."
The commission also said the auditors failed to
acknowledge any wrongdoing or provide any assurances that they would not
commit future violations.
"Taken together, these facts lead us to conclude
that there is a risk that respondents will commit future violations," the
commission said.
Not only did the SEC extend the period during which
the two auditors cannot work with publicly traded companies, but by barring
them rather than suspending them, it made it harder for them to resume such
work.
Aesoph and Bennett will have to apply to be
reinstated. Under the previous suspension order, they would have been
reinstated automatically.
Nearly half of big banks around the world are
unprepared for an international accounting standard due to take force in
less than two years, even as they expect provisions for bad loans to soar as
a result of the new rules.
A poll of 91 banks across the globe — excluding US
banks that are governed by their own rules — has found that 46 per cent of
those surveyed do not believe they have enough resources to deliver changes
by the 2018 implementation date, with a significant minority going on to say
there were not enough skilled candidates in the market to hire.
With less than 18 months to go before the change,
nearly two-thirds of banks are unsure how the rules might impact their
balance sheets, according to Deloitte, which undertook the global survey.
The rules force banks to have a provision on their
balance sheets for expected losses in the future rather than actual losses
already suffered.
Those banks that have made the calculations reckon
the rules will result in a surge of at least 25 per cent in total impairment
provisions across all asset classes.
Banks are also forecasting that the rules, dubbed
IFRS 9, will cause their capital ratios to deteriorate: they are expecting
core tier one capital — one of the most keenly watched metrics of the health
of a bank’s balance sheet — to decrease on average by half a per cent as a
result of moving to the new standard, according to Deloitte.
Uncertainty is not limited to the banking industry:
99 per cent of respondents said their local financial regulator had yet to
say how they might incorporate IFRS 9 numbers into regulatory capital
requirements.
IFRS 9 is part of a suite of measures by the
International Accounting Standards Board to overhaul accounting since the
financial crisis. The reform package is an attempt to increase regulatory
co-operation between the US and international standard setters. Converging
the different corporate reporting frameworks has been fraught.
By moving from an “incurred loss” to an “expected
loss” model in 2018, under IFRS 9 the regulators hope to avoid the problems
that occurred during the crisis, when banks could not book accounting losses
until they happened, even though they could see them coming. This should
help to keep banks properly capitalised for the loans they have made. UK
banks have experienced historically low impairments recently because of the
record low interest rate. However, there are some concerns that if economic
growth were to stall following the Brexit vote, impairments could go up even
without the new rules. Steven Hall at KPMG said the estimated increase in
provisions as a result of IFRS 9 was actually “cautious”. “IFRS 9 will be
almost as difficult to implement as it is to say,” he said. “Firms need to
consider a range of future scenarios, and in today’s uncertain economic
environment assessing the impact of that is not an easy task.” Mr Hall has
called for a grace period during which the new systems might be tested and
embedded.
At PwC, our purpose is to build trust in society
and solve important problems. We think there's an opportunity to do this by
sharing our experience and expertise with anyone who wants to learn. We’re
joining forces with Coursera to create a series of courses designed around
topics that address big global issues, drawing on the real-world knowledge
and experience of PwC experts from around the globe from multiple
disciplines. Our first course is focused on data and analytics, one of the
biggest areas of opportunity to help solve problems in an increasingly
complex world.
All course materials can be accessed at no
charge. (Those who want to take the
assessments and get a certification will pay a small charge). As
instructors, you may identify portions of the courses which you wish to
incorporate into your classes as assignments to help demonstrate concepts
you are teaching. We hope you will agree that this will be a valuable
resource. To learn more about and access Coursera, click here.
Glen L. Gray, PhD, CPA
Professor Emeritus
Dept. of Accounting & Information Systems
David Nazarian College of Business & Economics
California State University, Northridge
18111 Nordhoff ST Northridge, CA 91330-8372
http://www.csun.edu/~vcact00f
Ryan D. Guggenmos
Cornell University - Samuel Curtis Johnson Graduate School of Management
Abstract
Chief Executive Officers identify creativity as one
of the most desired business leadership competencies. Accordingly, managers
are increasingly looking to build creative and innovative cultures within
their organizations. However, research in psychology suggests that these
attempts may have unintended negative consequences. In this study, I predict
and find that an innovative company culture leads to higher levels of real
earnings management (REM). To reduce REM in innovative cultures, I design
and test interventions based on lower-level and higher-level construals. As
I predict, an intervention based on lower-level construal reduces REM, but a
higher-level construal intervention reduces REM to a greater extent. I also
provide evidence that these interventions reduce the desirability of
self-interested behavior that is a consequence of innovation-focused
culture. My findings contribute to the emerging accounting literature
regarding REM. In addition, I extend the psychology literature investigating
the link between self-interested behavior and creativity, as well as expand
research on the effects of mental construal on decision making
Benjamin P. Foster University of Louisville - College of Business and
Public Administration
John M. Mueller California State University, Fresno; Western Michigan
University
Trimbak Shastri University of Louisville - Department of Accountancy
Abstract
The number and importance of private companies in
the United States indicates that reliable quality of financial accounting
reports (QFAR) of private companies that are useful for decision making is
likely to be important for economic growth. Most previous research examining
QFAR addressed earnings management among publicly-traded companies. This
study extends prior literature by examining whether abnormal production of
public and private companies is impacted by (i) assurance type (PCAOB-audit,
GAAS-audit, and SSARS-Review), (ii) tax status (separately taxed versus
pass-through entity) of private companies, and (iii) relative size. An audit
of financial statements provides a high degree of assurance, whereas a
review provides limited assurance. Due to data limitations with our private
company sample, this study focuses on earnings management through abnormal
production by manufacturing companies. When examining companies that just
met the benchmark of prior years' earnings or zero earnings we found
positive abnormal production for publicly traded companies and privately
held audited-taxable companies, but not for other privately held companies.
Not identified in previous studies, we find that abnormal production of
similarly sized public companies and private companies differ. Our findings
provide evidence relevant to the Big GAAP/Little GAAP debate and that one
set of accounting standards may not satisfy all public and private company
financial statement users. Also, results of this study support the
recommendations of the Financial Accounting Foundation’s Blue Ribbon Panel’s
Report for establishing a separate private company standards board to help
ensure appropriate modifications to GAAP.
Sebastian Kronenberger University of Graz, Doctoral Program for
Accounting, Reporting, and Taxation (DART), Students
Volker Laux University of Texas at Austin - Department of Accounting
Abstract
We show that a firm's optimal financial reporting
bias and an auditor's choice of audit effort are inextricably intertwined.
Aggressive or conservative accounting practices influence the auditor's
optimal choice of audit effort, and the auditor's incentive and ability to
detect misstatements in turn influence the firm's optimal accounting bias.
Due to this interplay, a shift to more aggressive accounting can reduce,
rather than increase, the incidence of overstatements and hence
overinvestment and investor litigation. While ex ante litigation risk is
typically considered to be a major driver of conservative accounting
practices in corporations, we derive conditions under which a heightened
threat of litigation can encourage more aggressive accounting.
The Interaction of the IFRS 9 Expected Loss Approach with Supervisory
Rules and Implications for Financial Stability
SSRN, August 5, 2016
Accounting in Europe (Forthcoming)
Author
Zoltán Novotny-Farkas
Lancaster University - Management School
Abstract
This paper examines the interaction of the IFRS 9
expected credit loss (ECL) model with supervisory rules and discusses
potential implications for financial stability in the European Union.
Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model
incorporates earlier and larger impairment allowances and is more closely
aligned with regulatory expected loss. The earlier recognition of credit
losses will reduce the build-up of loss-overhangs and the overstatement of
regulatory capital. In addition, extended disclosure requirements are likely
to contribute to more effective market discipline. Through these channels
IFRS 9 might enhance financial stability. However, due to the reliance on
point-in-time estimates of the main input parameters (probability of default
and loss given default) IFRS 9 ECLs will increase the volatility of
regulatory capital for some banks. Furthermore, the ECL model provides
significant room for managerial discretion. Bank supervisors might play an
important role in the implementation of IFRS 9, but too much supervisory
intervention bears the risk of introducing a prudential bias into loan loss
accounting that compromises the integrity of financial reporting. Overall,
the potential benefits of the standard will crucially depend on its proper
and consistent application across jurisdictions.
Constitutional principles are sometimes invoked in
adjudication as a bridge to foreign law. This article argues that a
cosmopolitan approach, such as that advocated by Jeremy Waldron through his
ius gentium theory, is useful in accounting for the use of constitutional
principles by courts insofar as the commonality of language and methodology
surrounding the use of constitutional principles is connected to societal
and institutional needs. The article argues that constitutional principles
often serve as a connection to foreign law because the principles are
applied as representations of a societal need for order and stability. At
the same time, the article cautions that transnational judicial dialogue is
impacted by compartmentalisation and divergence. Consequently, arguments for
a ius gentium must be more cautious and nuanced. As a step in this
direction, the article proposes two ideas for modifying the ius gentium
theory: conceiving of the ius gentium as an emerging but not yet fully
realised system and characterising the ius gentium as a convergence of
methodology rather than substantive norms.
Elizabeth A. Gordon Temple University - Department of Accounting
Elaine Henry Stevens Institute of Technology
Bjorn Jorgensen London School of Economics & Political Science (LSE) -
Department of Accounting
Cheryl L. Linthicum University of Texas - San Antonio
Abstract
International Financial Reporting Standards (IFRS)
allow managers flexibility in classifying interest paid, interest received,
and dividends received within operating, investing, or financing activities
within the statement of cash flows. In contrast, U.S. Generally Accepted
Accounting Principles (GAAP) requires these items to be classified as
operating cash flows (OCF). Studying IFRS-reporting firms in 13 European
countries, we document firms’ cash-flow classification choices vary, with
about 76%, 60%, and 57% of our sample classifying interest paid, interest
received, and dividends received, respectively, in OCF. Reported OCF under
IFRS tends to exceed what would be reported under U.S. GAAP. We find the
main determinants of OCF-enhancing classification choices are capital market
incentives and other firm characteristics, including greater likelihood of
financial distress, higher leverage, and accessing equity markets more
frequently. In analyzing the consequences of reporting flexibility, we find
some evidence that the market’s assessment of the persistence of operating
cash flows and accruals varies with the firm’s classification choices, and
the results of certain OCF prediction models are sensitive to classification
choices.
Jensen Comment
This is one of the many times when I question why a research paper needs so many
authors.
Gary Burtless Brookings Institution; Boston College - Retirement Research
Center
Anqi Chen Center for Retirement Research at Boston College
Wenliang Hou Center for Retirement Research at Boston College
Alicia H. Munnell Boston College - Center for Retirement Research
Anthony Webb Boston College - Center for Retirement Research
Abstract
Some
observers believe that investing a portion of the Social Security Trust Fund
in equities would strengthen its finances and improve the program’s
intergenerational risk-sharing. However, equity investments would also
expose the program to greater financial risk and potentially greater
political risk. Monte-Carlo simulation methods are used to investigate
whether equity investments would likely strengthen the long-term outlook of
the Trust Fund relative to the current policy of investing 100 percent of
reserves in U.S. government bonds. The issues surrounding equity investments
also go beyond expected returns on the Trust Fund portfolio. Concerns of
government interference with the allocation of capital in the economy and
with corporate decision-making as well as the
accounting treatment of equity
investments are also discussed.
This paper found that:
- Both prospective and retrospective analyses suggest that investing a
portion of the Social Security Trust Fund in equities would have improved
its finances.
- Little evidence exists that Trust Fund equity investments would disrupt
the stock market.
- Accounting for returns on a
risk-adjusted basis would not show any up-front gains from equity
investment, but gains would become evident over time if higher returns were
realized.
- Equity investments could be structured to avoid government interference
with capital markets or corporate decision-making.
The policy implications of this paper are:
- Investing a portion of trust fund assets in equities would likely reduce
the need for higher payroll taxes.
- At the 50th percentile of outcomes, equity investing has the potential to
maintain a healthy Trust Fund ratio through the 75-year period.
- The experience with the Thrift Savings Plan provides a road map for
separating the government from actual investment decisions.
Jensen Comment
The article fails to mention how investing pension funds sector differs from
investing pension funds in the private sector. The main reason is that the
public sector funds can take on bigger financial risks because of the greater
assurance that they will be bailed out by taxpayers is their gambles do not pay
off. This is certainly the case of the SS Trust Funds, although this SSRN
research paper makes no mention of this.
Jensen Comment
It turns out that pension investing risk relies heavily on investment and
accounting rules where public-sector pension fund managers
are allowed to get their funds into riskier investments, including junk bonds.
The enormous TIAA/CREF and some other pension funds give investors risk
choices. TIAA bond funds are doing worse due to the Fed's low-interest policy
such that teachers in TIAA/CREF are choosing more risky funds. Deals are no
longer as good for fixed-annuity plans on the date of retirement relative to
when I retired in 2006 (blind luck rather than brilliant strategy).
Sadly, riskier public-sector pension plans increase the expectation of future
taxpayer bailouts. Public-sector pension plans would probably not be as risky if
government declared there was zero chance of future bailouts. But then what
legislators seeking office are going to promise zero chance of a public-sector
pension bailout? Hence we can blame democracy for the high risk of public-sector
pension plans.
One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea
along with municipal workers. Public-sector workers opposed to gambling probably
don't even know they are gambling with taxpayer dollars.
Hagit Levy City University of New York (CUNY) - Stan Ross Department of
Accountancy
Ron Shalev New York University (NYU) - Leonard N. Stern School of
Business
Emanuel Zur University of Maryland - Robert H. Smith School of Business
Abstract
In Gantler v. Stephens (2009), the Delaware Supreme
Court makes explicit that corporate officers owe the same fiduciary duty to
the firm and shareholders as do board members. The decision increased the
risk of non-board-serving officers being added as named defendants to
investor litigation but did not change the risk of corporate litigation.
Analyzing the effect of the Gantler ruling on non-board-serving CFOs, we
find a significant change in their behavior as well as in their firms’
disclosure and accounting choices. Specifically, CFOs’ speech tone during
earnings calls becomes more negative and their firms disclose bad news
earlier and report more conservatively. Results are stronger for firms
incorporated in Delaware. Our findings suggest that CFOs respond to personal
litigation risk over and above corporate litigation risk.
Jensen Comment
I like this study in that it's not just another purchased database (e.g., CRSP,
Compustat, or AuditAnalytics) multiple regression fishing expedition.
Ivan Diaz-Rainey University of Otago - School of Business
Helen Roberts University of Otago
David H. Lont University of Otago - Department of Accountancy and Finance
Abstract
This paper uses inventory data from financial
accounts to explore whether companies involved in the physical oil market
were speculating in the run-up to 2008. Using quarterly inventory data over
the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil
companies in the world, we derive an Index of Scaled Physical Inventories (ISPI).
We find declining ISPI up to the early 2000s is consistent with firms
minimizing inventory for efficiency sake; then ISPI starts to increase,
suggesting physical inventories could have contributed to the run-up in oil
prices between 2003 and 2008. Highlighting heterogeneity in inventory
behaviors amongst the large oil companies, the structural break test on the
ratio of inventory to sales and the days to sales for individual companies
shows that five companies had positive structural breaks during the
speculation period, while the other companies had no or negative structural
breaks. Contrary to declining inventory expectations due to a tightening oil
market, the positive structural breaks suggest speculative behavior. We also
examine the relationship between changes in profitability and changes in oil
inventory over the pre-speculation and speculation period. Though some
coefficients for inventory do switch from negative to positive over the two
periods as hypothesized, they are on the whole not significant. The
conclusion based on these models is that inventory ‘positions’ have not
materially affected performance of most companies, save for a few
exceptions.
Jensen Comment
The article makes passing reference to Contango and Carry trade hedging of
inventories, but I would think that if companies were speculating in oil prices
that more mention would be made of other types of derivatives used for
speculation.
Redouane Elkamhi University of Toronto - Rotman School of Management
Denitsa Stefanova Universite du Luxembourg - School of Finance
Abstract
Among the stylized features of international equity
markets is the pronounced asymmetric nonlinear dependence and upward trend
in correlations. Such features call into question investors' efforts to
diversify internationally. We propose a model to capture those well
understood characteristics of international equity index returns. Casting
them in a dynamic portfolio problem, we evaluate the gains for a home-biased
investor from including foreign assets in her portfolio. We find that
accounting for the optimal dynamic demand for hedging on top of a standard
mean-variance portfolio policy brings substantial benefits from
international portfolio exposure. Such benefits become increasingly sizeable
over long investment horizons.
Jensen Comment
This may be one of those ways to mislead with statistics.
For example, I think an orthopedics surgeon corporation down the road in our
Alpine Clinic has a much higher percentage of return to owners than any
accounting firm in the State of New Hampshire. This is probably true for most
every MD specialty corporation in the State.
Much depends upon what you call an "industry."
One thing that helps accounting firms have high returns is relatively cheap
labor. For example, we have a granddaughter who graduated in pharmacy and then
interned with the Veterans Administration in Boston. She's now returning to
Maine (Portland) for her first real job at a starting salary of $125,000 plus
fringe benefits. Are there any accounting firms in New England with starting
salaries of entry level graduates of $125,000? There might be some who
specialize in computer and IT services, but I doubt that this salary is offered
to accounting graduates.
Having said this, I still recommend in many instances going to work for an
accounting firm at less than half this starting pharmacist salary. The reason is
that accountancy offers so many alternative tracks for advancement into much
higher paying careers. And believe it or not I think an auditor traveling from
client to client has more interesting and varied work. I watch those high paid
pharmacists in our Wal-Mart pharmacy working intently day-to-day and
year-to-year and thank my lucky stars that I never became a Wal-Mart pharmacist.
Up until a year ago, the shipping industry was
ordering ships in droves. This year, orders of new vessels have fallen to a
record low and companies can’t get rid of ships fast enough.
About 1,000 ships that have the combined capacity
to haul 52 million metric tons of cargo will be dragged onto beaches, cut
into pieces and sold for scrap metal this year. That is second only to the
record amount of capacity of 61 million so-called dead weight tons that were
scrapped and recycled in 2012.
The global economic slowdown is putting shipping
through its most bruising period since the 2008 financial crisis. Companies
including Maersk Line, a unit of Danish conglomerate A.P. Møller Maersk A/S,
Germany’s Hapag-Lloyd AG and China Cosco Bulk Shipping Co. have 30% more
capacity in the water than cargo. As the companies, mostly based in Europe
and Asia, fight for bigger shares of the global market, freight rates have
dropped so low they barely cover fuel costs.
In the five years through 2015, owners ordered an
average of 1,450 ships annually. This year orders through July fell to 293
vessels, or 11.6 million tons, according to U.K. marine data provider
Vessels Value.
“Given the tremendous overcapacity, it will take
much more recycling and at least two to three years of no growth in capacity
to see some balance between supply and demand,” said Basil Karatzas, chief
executive of New York-based Karatzas Marine Advisors Co.
Detroit’s population
fell by 25 percent in the last decade. And of those that stuck around,
nearly half of them are functionally illiterate, a new report finds.
According to estimates
by The National Institute for Literacy, roughly 47 percent of adults in
Detroit, Michigan — 200,000 total — are “functionally illiterate,” meaning
they have trouble with reading, speaking, writing and computational skills.
Even more surprisingly, the Detroit Regional Workforce
finds half of that
illiterate population has obtained a high school degree.
The DRWF report places
particular focus on the lack of resources available to those hoping to
better educate themselves, with fewer than 10 percent of those in need of
help actually receiving it. Only 18 percent of the programs surveyed serve
English-language learners, despite 10 percent of the adult population of
Detroit speaking English “less than very well.”
Additionally,
the report finds, one in three workers in the state of Michigan lack the
skills or credentials to pursue additional education beyond high school.
In March, the Detroit
unemployment rate hit 11.8 percent, one of the highest in the nation, the
U.S. Bureau of Labor Statistics reported last month. There is a glimmer of
hope, however: Detroit’s unemployment rate dropped by 3.3 percent in the
last year alone.
Continued in article
Jensen Question
Will nearly all the illiterate high school graduates in Detroit get a free
college diploma under the proposed "free college" proposal?
My guess is that they will get their college diplomas even though they will
still be illiterate, because colleges will graduate them in order to sop up the
free taxpayer gravy for their college "education."
Everybody will get a college diploma tied in a blue ribbon.
I doubt that illiteracy is much worse in Detroit than in other large USA
cities like Chicago and St Louis.
Have Villanova and OSU relegated admissions decisions for this
program to KPMG?
Have Villanova and OSU relegated curriculum decisions to KPMG
regarding such things as using KPMG software, KPMG datasets, and KPMG
proprietary audit procedure literature?
Is an entire semester of internship in KPMG offices for academic
credit under this program top heavy on non-academic credit in reality?
In other words is this just a KPMG training
program?
This KPMG program most certainly is outside the original stated
purpose of the fifth year accounting program that was supposed to
broaden the curriculum of accounting majors with non-accounting content
(e.g., in communications, ethics, critical thinking etc.) without adding
significantly more technical accounting, tax, and auditing content. Is
this program with 50% auditing data analytics in the spirit of the fifth
year program as originally designed?
Fair value of inventory before a sale may differ from net realizable value
because of unknowable future selling and delivery costs. For example, future
deliver costs are unknowable until the location of the customer is known.
For these and other reasons (such as different underlyings) the value of a
hedging instrument like a forward, futures, or option contract may differ from
the value of hedged-item fair value of inventory. This difference gives rise to
hedging instrument ineffectiveness. Both the FASB (in FAS 133) and the IASB (in
IFRS 9) require testing for hedge ineffectiveness although the IFRS tests are
more subjective.
Here are some helpers for learning about testing for hedge ineffectiveness.
Neither the FASB nor the IASC specify a single method for either assessing
whether a hedge is expected to be highly effective or measuring hedge ineffectiveness.
Tests of hedge effectiveness should be
conducted at least quarterly and on financial statement dates. The appropriateness of a given method can depend on the nature of the risk being
hedged and the type of hedging instrument used. See FAS 133 Appendix A,
Paragraph 62 and IAS 39 Paragraph 151.
How Wells Fargo's hedge
selection benefits from current climate.
Recent media coverage of
deflationary indicators like the recent CPI announcement of -.3% in
October has prompted some analysts to differentiate between
"bad" deflation caused by monetary policy mistakes and
"good" deflation attributable to increases in labor
productivity. Similarly, when it comes to risk management as practiced
in accordance with FAS 133, a case can be made for differentiating
between "bad" and "good" hedge ineffectiveness.
Since the beginning of the year, with the most aggressive Federal
Reserve rate cutting in memory, financial institutions involved in
mortgage originations, securitization and retention of mortgage
servicing rights (MRS) have been consistently the most prone to
reporting significant hedge ineffectiveness. As the Fed cut the over
night funds rate another 100 basis points during the third quarter,
Wells Fargo & Co, which is included in the Portfolio of '33' took
the prize for hedge ineffectiveness - the good kind.
A windfall
Specifically, Wells Fargo recognized a gain of $320 million for the
third quarter in non-interest income, representing the ineffective
portion of fair value hedges of mortgage servicing rights. This excess
hedging gain boosted quarterly EPS by $.19 to $.68, accounting for over
23% of third quarter earnings. If only hedge ineffectiveness was always
so kind.
How did Wells Fargo manage to rack
up such robust fair value hedging gains relative to their mortgage
servicing rights? Did they over hedge, or did the actual prepayment
speed of home mortgage re-financing turn out to be less than
anticipated? Perhaps it was a little bit of both.
Wells Fargos's third quarter 10Q
provides some insights about their hedging methodology, indicating that
the ineffectiveness windfall was primarily related to yield curve and
basis spread changes that impacted favorably on the derivative hedges
relative to the hedged exposures in the volatile interest rate
environment.
Divergent spread movement
Subsequent, to June 30 and especially after the September 11 attacks,
swap spreads were volatile but generally tended to narrow in the falling
interest rate environment, as ten-year swap spreads narrowed from 90
basis points on 7/2/01 to 63 basis points on 9/28/01. If the bank had
used Treasury instruments to hedge the prepayment risk on its MRS assets
instead of LIBOR based products, the hedges would have under performed.
However, Wells Fargo's third quarter 10Q discloses that the company uses
a variety of derivatives to hedge the fair value of their MSR portfolio
including futures, floors, forwards, swaps and options indexed to LIBOR.
The yield curve steepens
Moreover, the yield curve continued to steepen during the third quarter
with the yield spread between ten and thirty year Treasuries widening
from 33 basis points out to 88 basis points while the spread between
10yr and 30yr LIBOR swap rates widened from 28 basis points to 65 basis
points. Since the ten-year maturity is the duration of choice for
mortgage hedgers, it follows that these hedges would have out performed
hedges with longer durations.
In connection with this, the
company reported that all the components of each derivative instrument's
gain or loss used for hedging mortgage servicing rights were included in
the measurement of hedge ineffectiveness and was reflected in the
statement of income. However, time decay (theta) and the volatility
components (vega) pertaining to changes in time value of options were
excluded in the assessment of hedge effectiveness. As of September 30,
2001, all designated hedges continued to qualify as fair value hedges.
In addition, all components of each derivative instrument's gain or loss
used to convert long term fixed rate debt into floating rate debt were
also included in the assessment of hedge effectiveness.
Ineffectiveness
cuts both ways
There was also some of the bad kind of hedge ineffectiveness which
showed up in Wells Fargo's cash flow hedges which include futures
contracts and mandatory forward contracts, including options on futures
and forward contracts, all of which are used to hedge the forecasted
sale of its mortgage loans. During the third quarter the company
recognized a net loss of $54 million (-$.03 per share), accounting for
ineffectiveness of these hedges, all component gains and losses of which
were included in the assessment of hedge effectiveness.
It would appear that this hedge
ineffectiveness was the flip side of the coin of the ineffectiveness on
the fair value hedges because the futures contracts most commonly used
to hedge this kind of pipeline risk are ten year Treasury note futures
which would have tended to under-performed relative to the value of the
mortgage loans, given the steepening of the yield curve and the general
spread widening of mortgage rates relative to treasuries.
For example, ten year constant
maturity treasury yields fell 86 basis points, from 5.44% on 7/5/01 to
4.58% on 9/27/01 in contrast to the Freddie Mac weekly survey of
mortgage rates reports average 30-year fixed rate mortgages at 7.19% on
7/05/01 or a spread of 1.75% over the ten-year constant maturity
treasury rates, vs. average fixed mortgage rates of 6.72% on 9/27/01 or
a spread of 2.14% over ten-year treasury rates.
The net impact of the $320 million
of excess gains in the fair value hedges vs. net losses of $54 million
in the cash value hedges weighs in at a net hedge ineffectiveness of
$271 million or almost $.16 (16 cents) per share courtesy of a Federal
Reserve policy cutting interest rates with a vengeance. However, the
unprecedented interest rate volatility of this period could well turn
this quarter's ineffectiveness windfall into next quarter's shortfall.
Risk managers should at least be able to take some comfort though from
the fact that the fed can't lower interest rates below zero percent.
A Great Article!
"A Consistent Approach to Measuring Hedge Effectiveness," by
Bernard Lee, Financial Engineering News ---
http://www.fenews.com/fen14/hedge.html
During the past year Trema has worked with clients,
partners and consulting firms to ensure that all Finance KIT users will be FAS
133 compliant by Summer 2000, when the new U.S. accounting standards come into
effect. In Finance Line 3/99, Ms. Mona Henriksson, Director of Trema (EMEA),
addressed the widespread implications the FAS 133 accounting procedures will
have on the financial industry (see ‘Living Up to FAS 133’ in Finance Line
3/99). Now, in this issue, Ms. Marjon van den Broek, Vice President, Knowledge
Center – Trema (Americas), addresses specific FAS 133 requirements and their
corresponding functionality in Finance KIT.
We tend to think of commodity prices (think corn) in derivatives has highly
competitive because there are so very many buyers and sellers of options,
forwards, futures, and swaps.
However, what fail to do is think of the commodity prices (again think corn)
of physical inventories as highly concentrated.
This is something to think about when it comes to speculating in physical
inventories versus commodity derivatives.
Concentrations are significant: DuPont, Monsanto,
Novartis and Dow sell 69 percent of (corn) seeds; ADM, Cargill and two
others companies control 74 percent of buying side of the corn market. This
level of market share means that these industries are "highly concentrated
oligopolies."
Jensen Comment
If this trend continues for MBA degrees then it may increase demands from other
professions such as accountants, nurses, pharmacists, physicians, engineers,
etc.
I can't imagine the IRS giving up fighting the deduction of graduate degree
expenses.
Of course since the bottom half of taxpayers pay almost no income taxes, the
majority of students seeking graduate degrees may not need to deduct graduate
school expenses since they don't pay any income taxes in the first place. The
sticking point would be those substantially employed who are already in the top
half of the income ladder for taxpayers or spouses who are not employed but are
parties to higher income joint returns.
"Do Portfolio Managers Underestimate Risk by Overanalyzing Data? New
research questions whether “smart” beta is always smart," by Louise Lee,
Insights from the Stanford University Graduate School of Business, July 25,
2016 ---
The following two articles show how economists can put two different spins
on the same data (something that seems to be taught in social sciences in
general whenever politics gets involved).
The City of Seattle hired a group of economists to study the transitory
impact of minimum wage hikes on labor and business firms in Seattle. I say
"transitory" because the wage hikes are being phased in and won't reach the $15
level until
This report presents the short-run effects of the
Seattle Minimum Wage Ordinance on the Seattle labor market. The Seattle
Minimum Wage study team at the University of Washington analyzed
administrative records on employment, hours, and earnings from the
Washington Employment Security Department to address two fundamental
questions: 1) How has Seattle’s labor market performed since the City passed
the Minimum Wage Ordinance, and particularly since the first wage increase
phased in on April 1, 2015? 2) What are the short-run effects of the Minimum
Wage Ordinance on Seattle’s labor market? While quite similar at first
glance, these two questions address very different issues and require very
different methods to answer. The first question can be studied with a simple
before/after comparison. Although the comparison is simple, it risks
conflating the impact of the minimum wage with other local trends. Many
things have happened in Seattle’s labor market since June 2014, most of them
having little or nothing to do with the minimum wage itself. The City has
enjoyed steady expansion in tech sector employment, and a construction boom
fueled by rising residential and commercial property prices. Even the
weather – a key determinant of economic activity in the Puget Sound region –
was favorable in 2015, with record-low precipitation in the early months of
the $11 minimum wage. The before-after comparison can tell us the net impact
of all these simultaneous trends, but this comparison cannot distinguish
among them. Our second question – the more important one for purposes of
evaluating the policy – aims to isolate the impact of the minimum wage from
all the other regional trends seen over the same time period. Whereas the
first question asks “are we better off than we were when Seattle raised the
minimum wage” and requires only a simple comparison of yesterday to today,
the second asks “are we better off than we would have been if Seattle had
not adopted a higher minimum wage?” To answer it requires imagining how the
local economy would look in absence of a Minimum Wage Ordinance. While it is
impossible to directly observe what would have happened if no wage ordinance
had been implemented, this report uses widely accepted statistical
techniques to compare Seattle in its current state—with the presence of the
Minimum Wage Ordinance—to an image of what Seattle might have looked like
today if not for the Minimum Wage Ordinance. We take advantage of data going
back to 2005 to build a model of the way Seattle’s labor market typically
works. We also take advantage of data on nearby regions that did not
increase the minimum wage to better understand how other factors might have
influenced what we observe in the City itself.
3 In this report, we present findings on wages,
workers, jobs, and establishments. Our findings can be summarized as
follows: Wages: The distribution of wages shifted as expected. The share
of workers earning less than $11 per hour declined sharply. This decline
began shortly after the ordinance was passed. However, similar declines
were seen outside of Seattle, suggesting an improving economy may be the
cause of the change in the distribution of wages. Low-Wage Workers: In the
18 months after the Seattle Minimum Wage Ordinance passed, the City of
Seattle’s lowest-paid workers experienced a significant increase in wages.
The typical worker earning under $11/hour in Seattle when the City Council
voted to raise the minimum wage in June 2014 (“low-wage workers”) earned
$11.14 per hour by the end of 2015, an increase from $9.96/hour at the time
of passage. The minimum wage contributed to this effect, but the strong
economy did as well. We estimate that the minimum wage itself is responsible
for a $0.73/hour average increase for low-wage workers. In a region where
all low-wage workers, including those in Seattle, have enjoyed access to
more jobs and more hours, Seattle’s low-wage workers show some preliminary
signs of lagging behind similar workers in comparison regions. The minimum
wage appears to have slightly reduced the employment rate of low-wage
workers by about one percentage point. It appears that the Minimum Wage
Ordinance modestly held back Seattle’s employment of low-wage workers
relative to the level we could have expected. Hours worked among low-wage
Seattle workers have lagged behind regional trends, by roughly four hours
per quarter (nineteen minutes per week), on average. Low-wage individuals
working in Seattle when the ordinance passed transitioned to jobs outside
Seattle at an elevated rate compared to historical patterns. Seattle’s
low-wage workers did see larger-than-usual paychecks (i.e., quarterly
earnings) in late 2015, but most— if not all—of that increase was due to a
strong local economy. Increased wages were offset by modest reductions in
employment and hours, thereby limiting the extent to which higher wages
directly translated into higher average earnings. At most, 25% of the
observed earnings gains—around a few dollars a week, on average—can be
attributed to the minimum wage. Seattle’s low-wage workers who kept
working were modestly better off as a result of the Minimum Wage Ordinance,
having $13 more per week in earnings and working 15 minutes less per week.
4 Jobs: Overall, the Seattle labor market was
exceptionally strong over the 18 months from mid2014 to the end of 2015.
Seattle’s job growth rate tripled the national average between mid-2014 and
late 2015. This job growth rate outpaced Seattle’s own robust performance
in recent years. Surrounding portions of King County also had a very good
year; the boom appears to fade with geographic distance. Job growth is
clearly driven by increased opportunities for higher-wage workers, but
businesses relying on low-wage labor showed better-than-average growth as
well. For businesses that rely heavily on low-wage labor, our estimates of
the impact of the Ordinance on the number of persistent jobs are small and
sensitive to modeling choices. Our estimates of the impact of the Ordinance
on hours per employee more consistently indicate a reduction of roughly one
hour per week. Fewer hours per employee could reflect higher turnover
rather than cutbacks in staffing. Reductions in hours are consistent with
the experiences of low-wage workers. Establishments: We do not find
compelling evidence that the minimum wage has caused significant increases
in business failure rates. Moreover, if there has been any increase in
business closings caused by the Minimum Wage Ordinance, it has been more
than offset by an increase in business openings. In sum, Seattle’s
experience shows that the City’s low-wage workers did relatively well after
the minimum wage increased, but largely because of the strong regional
economy. Seattle’s low wage workers would have experienced almost equally
positive trends if the minimum wage had not increased. Although the minimum
wage clearly increased wages for this group, offsetting effects on low-wage
worker hours and employment muted the impact on labor earnings. We strongly
caution that these results show only the short-run impact of Seattle’s
increase to a wage of $11/hour, and that they do not reflect the full range
of experiences for tens of thousands of individual workers in the City
economy. These are “average” effects which could mask critical distinctions
between workers in different categories. Our future work will extend
analysis to 2016, when Seattle’s minimum wage increased a second time and
began to distinguish between businesses of different sizes and industries.
It will also incorporate more detailed information about workers by linking
employment records to other state databases. This will give us a greater
capacity to answer key questions, such as whether the workers benefiting
most from higher minimum wages are more likely to be living in poverty. We
are also in the process of collecting additional survey information from
Seattle businesses and conducting interviews with a worker sample tracked
since early 2015. The next report, expected in September, will focus
specifically on how the minimum wage has affected nonprofit organizations.
Jensen Comment
The issue of minimum wage became an enormous political issue when the workers
receiving the wage changed. When I grew up in the 1950s and 1960s and those
McJobs having low pay were primarily intended to be temporary jobs where
students could earn a little outside the classroom and where younger people in
general could get a start in the work place. Nobody with normal capabilities
intended to make careers out of those very low paying McJobs. Somewhere along
the way things changed to where now those McJobs became careers for many folks
who are not destined for bigger and better careers in the economy. With that
change came increasing demands to increase the minimum wage to a more suitable
wage for longer-term careers.
The real question that the Seattle study is trying to answer is whether
raising the minimum wage in Seattle had a positive or negative impact on
employers, employees, and low-skilled unemployed. The answer seems to be varied
(depending upon what economist and what workers you consult.) Impact on is hard
to isolate statistically because Seattle is a relative boom town due to the high
tech economic sector. Thus just because a lot of McJob employers are still
thriving is confounded by the boom times apart from the minimum wage increase.
McJob employers are likely to be hit harder in communities having less boom
success in general. Also the wage increases are being phased in over time (until
2021)such that there is not one big boom to study.
It's hard judge impact on some McJob employers in very large or otherwise
isolated communities relative to those surrounded by competition not required to
raise minimum wage. For example, restaurant customers in in Seattle are not
likely to go elsewhere because their favorite restaurant had to raise prices
slightly. Restaurant customers on the very edge of Seattle might drive a bit
further for better prices.
Thus the impact of the Seattle's minimum wage hike focuses more on
labor/employment impact than on employer impact. And herein commences the lying
or possible lying with statistics. I would dwell on all the issues since you can
read them for your self in the above links.
Personally, I think the $15 minimum wage eventually is a good idea in a high
cost city like Seattle.
But I would like to conclude with what I think is trickery in Jared
Bernstein's rejoinder. He skirts important issues like how entry level employees
without skills (like students in need of part-time jobs and employees who messed
up their early years (e.g., with drugs and crime) get a start without higher
turnover in the minimum wage jobs that open up entry-level jobs.
At times he totally ignores the study's findings such as:
Wages:
The distribution of wages shifted as expected.
The share of workers earning less than $11 per hour declined sharply.
This decline began shortly after the ordinance was passed.
However, similar declines were seen outside of Seattle, suggesting an
improving economy may be the cause of the change in the distribution of
wages.
Second he seems to imply without more data or foresight that in larger firms
the minimum wage is an even better idea than it is at fast-food restaurants.
What he fails to note that it is in the larger firms where robotics alternatives
to low-paying jobs are exploding. :
McJobs in those Wal-Mart distribution centers have already disappeared with
advances in robotics. Perhaps this was inevitable but eliminating McJobs with
higher minimum wages will speed up job sacrices to robots and drive more and
more low skilled workers to welfare rolls and crime.
The Seattle experiment is hard to extrapolate to every town and city in the
USA. I think higher minimum wages where the cost of living is very high is
probably a good idea. For example, the cost of living is even high in the
suburbs of Seattle and San Francisco. But the same minimum wage successes for
those metropolitan areas can be a disaster in rural America where the job losses
are likely to be enormous, For example, down the road from our mountain cottage
is an old fashioned hardware store that is already struggling to compete with
stores 10 miles away (in Littleton, NH), stores like Wal-Mart, Home Depot, and
Lowes. A $15 minimum wage might close the doors on my favorite and struggling
little hardware store that now makes almost zero profit. The workers in this
store are typically part-time spouses who supplement the family income with a
bit of added wage within walking distance of the store.
The main conclusion from this illustration is that professional economists
cannot agree on much of anything!
Jensen Comment
The IRB reviews also apply to disciplines other than the the social sciences.
For example, accounting researchers using human subjects generally face IRB
reviews as well.
If you follow the headlines, your confidence in science may have taken a hit
lately. Peer review? More like self-review. An investigation in November
uncovered a scam in which
researchers were
researchers were rubber-stamping their own work,
circumventing peer review at five high-profile
publishers. Scientific journals? Not exactly a badge of legitimacy, given
that the International Journal of Advanced Computer Technology recently
accepted for publication
a paper titled “Get Me Off Your Fucking Mailing List,”
whose text was nothing more than those seven words,
repeated over and over
for
10 pages.
Two other journalsallowed
an engineer posing as Maggie Simpson and Edna Krabappel to publish a paper,
“Fuzzy, Homogeneous Configurations.” Revolutionary findings? Possibly
fabricated. In May, a couple of University of California, Berkeley, grad
students discovered irregularities in
Michael LaCour’s influential paper
suggesting that an in-person conversation with a gay person could change how
people felt about same-sex marriage. The journal Science retracted the paper
shortly after, when LaCour’s co-author could find no record of the
data.Taken together, headlines like these might suggest that science is a
shady enterprise that spits out a bunch of dressed-up nonsense. But I’ve
spent months investigating the problems hounding science, and I’ve learned
that the headline-grabbing cases of misconduct and fraud are mere
distractions. The state of our science is strong, but it’s plagued by a
universal problem: Science is hard . . .
Continued in article
Jensen Comment
Accounting researchers have a bit easier since it's almost certain their
research will never be subjected to replicaWhy Pokémon Go’s technology is no fad
tion ---
http://faculty.trinity.edu/rjensen/TheoryTaR.htm
After years of missteps, controversy and even crisis, Harvard Management
Corp., which oversees the university’s $37.6 billion endowment, began
assembling a new corps of equity traders and analysts in 2014, in hopes of
recapturing a part of the investment magic that had once made the fund the
envy of the world.
Only now, just two years later, that plan has collapsed. Stephen Blyth,
48, the former bond trader behind that effort, stepped down as HMC’s chief
executive Wednesday for personal reasons after just 18 months on the job.
His resignation
follows the departure in June of Michael Ryan and Robert Howard, the two
former Goldman Sachs Group Inc. partners he had brought in to guide the new
equity strategy.
Pulled Plug
While Blyth’s exit was said to be unrelated to those of his star hires, the
talk inside HMC’s offices at the Federal Reserve Bank of Boston centered on
why management had pulled the plug on the team so quickly amid a volatile
equities market.
According to people familiar with the matter, some traders in Ryan’s group
posted losses in 2015 significant enough to trigger internal temporary
stop-loss orders. Ryan also lost money in a portfolio he managed. The extent
of the losses is unclear, however, and came at a time when most hedge funds
were struggling to beat market indexes.
But now, Harvard is once again confronting the same, uncomfortable question
that has dogged it for years: why can’t the world’s richest university, for
all its brains, make smarter investments?
Top IRS officials knew the agency was targeting
conservatives because of their ideology and political affiliation two years
before disclosing it to Congress and the public, according to a Judicial
Watch report released on July 28.
“Senior IRS officials knew that agents were
targeting conservative groups for special scrutiny as early as 2011,” the
report said.
Lois Lerner revealed the targeting in May 2013 when
she responded to a planted question at an American Bar Association
conference.
Continued in article
Jensen Comment
Lois Lerner continues to refuse to testify whether or not the conservative
targeting was at the behest of somebody in the Whitehouse (not necessarily
President Obama who was up for re-election).
The IRS admits to destroying the evidence in Virginia that might answer the
question of who instigated the targeting of the conservative fund raising
groups.
It would become a tremendous scandal if the Whitehouse manipulated the IRS or
any other government agency to aid in the election of a USA President. But
without testimony and other evidence the genuine scandal cannot be proven. The
shadow of scandal will probably last long into history after President Obama
leaves office. By not investigating the scandal himself he has not cleared his
own record.
As a minor scandal, Lois Lerner was given a bonus by the IRS after her
resignation in disgrace.
Corporate Income/Revenue Taxes Increases Are Either Avoided (such as
sweetheart deals from the Illinois Governor)
or They Get Passed Along in Higher Prices
or They Drive Companies Out of State (as Wisconsin learned the hard way)
Progressives claim they can pay for their grand
spending ambitions by soaking the rich, but the little guy invariably gets
wet. The latest illustration is Oregon, where unions are campaigning for a
gross-receipts tax on large corporations that even state budget analysts
warn will drench the 99% too.
Last week Governor Kate Brown endorsed a November
referendum that would impose a 2.5% tax on corporate sales exceeding $25
million. Oregon’s top income tax rate of 9.9% is the second highest in the
country after California, and it hits at an income of only $125,000 for a
single tax filer.
The Beaver State last raised income taxes in 2009,
and state revenues have grown by nearly 30% in the last four years. But
unions say the new business tax is needed to close a $1.4 billion deficit
and pay for baked-in spending—the same justification for the last tax
increase.
Health-care costs will rise by $1 billion in the
next two-year budget thanks in part to the state’s ObamaCare Medicaid
expansion. Generous new union contracts that increase worker pay and reduce
their health-care premium contributions will add hundreds of millions to the
fisc, while public pension costs are projected to swell by 150% to $4.5
billion by 2021.
The gross-receipts tax, which would throw off $3
billion annually and expand the budget by a third, would be a revenue gusher
because of its pyramiding effect. As the Tax Foundation notes, “In effect,
the tax gets built into prices and compounded as a product moves through the
production process.” So low-margin businesses at the end of the supply
chain—particularly retailers—get walloped.
Only five states assess a gross-receipts tax. Many
including Michigan and New Jersey have dumped theirs due to its economic
distortions. Oregon’s would be the highest and most onerous since it
wouldn’t include deductions or differential rates to ameliorate the burden
on low-margin industries. For instance, Texas allows businesses to deduct
the cost of goods sold and employee compensation—and the Lone Star State has
no income tax.
Businesses will respond by raising prices, reducing
investment and laying off workers. The state Legislative Revenue Office
estimated that the tax would cost 38,200 jobs in the private economy
including 13,600 in retail trade while increasing government employment by
17,700. By 2022 state income would decline by 0.17% while prices would edge
up 0.89% relative to the office’s baseline forecast.
The analysts also forecast that the measure would
increase the state’s per capita tax burden by $600, and that “the marginal
impact of the tax will be regressive.” Households making less than $21,000
in income would experience a 0.9% decline in after-tax income—about twice as
much as those earning more than $206,000.
Continued in article
Jensen Comment
Actually I favor a VAT tax to replace the easily-avoided corporate income tax,
but the VAT tax will only work well if it is imposed nationally.
Questions
How do WebLedgers differ from other types of accounting software"
How is this difference changing in the era of cloud storage?
How is there still a difference betwee WebLedgers and other accounting software
in this era of cloud storage?
The software giant, which has its own growing cloud
computing business, is making a $9.3 billion bid to acquire NetSuite,
another cloud software provider, the companies said Thursday.
Oracle will pay $109 in cash per NetSuite share in
the transaction, expected to close in 2016, a 19% percent premium to
NetSuite's closing share price of $91.57 Wednesday. NetSuite's board has
unanimously approved the deal, the company said.
Shares of NetSuite (N) were up 18% in midday
trading Thursday to $108.15 after rising 9% Wednesday on speculation of a
deal.
Oracle (ORCL) shares were up 0.13% to $40.99
midday.
Redwood Shores, Calif.-based Oracle has been
growing its cloud business beyond its traditional corporate software
offerings. In NetSuite, Oracle gets the company that became the first to a
full suite of enterprise resource planning (ERP) applications, said Ray
Wang, principal analyst and founder at Constellation Research.
Located in San Mateo, Calif., NetSuite was
co-founded in 1998 by current NetSuite Chairman and Chief Technology Officer
Evan Goldberg and Oracle founder Larry Ellison
as NetLedger, a cloud accounting
company. Ellison, who stepped down as Oracle CEO two years ago, is now
Oracle's executive chairman. He and his family remain the largest
shareholders of NetSuite, owning more than 45% of outstanding shares as of
March 31, 2016, according to filings with the Securities and Exchange
Commission.
With NetSuite’s IPO in 2007, the company was valued
at $2.1 billion and had grown to $7.7 billion by the end of 2013. Today,
NetSuite has more than 30,000 companies in more than 100 countries using its
cloud-based business management software. Current NetSuite CEO Zach Nelson,
who handled global marketing for Oracle from 1996 to 1998, has said he
expects NetSuite to hit $1 billion in revenue for the first time.
Continued in article
Jensen Comment
Cloud computing as we know it today was nonexistent in 1998 when NetLedger and
other WebLedger accounting systems were formed. NetLeger was probably the most
successful of the WebLedger ventures. WebLedgers like NetLedger differed from
other accounting software in that the ledgers and journals of a company were
remotely stored databases such as huge Oracle databases. The good news is that
the expensive costs of acquiring and maintaining accounting databases were
provided by WebLedger systems thereby relieving clients, especially smaller
clients, from having to install accounting systems and hire the IS experts to
maintain local databases. The bad news, of course, was the loss of some controls
that arise from having your own databases locally.
Today cloud storage offers some of the WebLedger advantages of offsite storage
and maintenance. However, WebLedgers still offer the advantages and
disadvantages of offsite accounting software.
Friends, Partners, or Dummies on the Inside Are More Important Than
Hacking Skills
Jensen Comment
Note the other certifications in the tabs at the top of the page.
Badges and certifications will probably replace college diplomas in terms for
both landing jobs and obtaining promotions in the future.
But not all badges and certifications are created equally. The best ones will
be those that have both tough prerequisites and tough grading and tough
experience requirements. There's precedence for the value of certifications in
medical schools. The MD degree is now only a prerequisite for such valuable
certifications in ophthalmology, orthopedics, neurology cardio-vascular surgery,
etc.
What will be interesting is to see how long it will take
badges/certifications to replace Ph.D. degrees for landing faculty jobs in
higher education. At present specializations are sort of ad hoc without
competency-based testing. For example, accounting professors can advance to
specialties like auditing and tax corporate tax accounting with self-study and
no competency-based testing. This may change in the future (tremble, tremble).
Watch this video link forwarded by Denny Beresford --- Watch the video at
https://www.youtube.com/watch?v=5gU3FjxY2uQ
The introductory screen on the above video reads as follows (my comments are in
parentheses)
In Year 2020 most colleges and universities no
longer exist (not true since residential colleges provide so much
more than formal education)
Academia no longer the gatekeeper of education
(probably so but not by Year 2020)
Tuition is an obsolete concept (a
misleading prediction since badges will not be free in the USA that already
has $100 trillion in unfunded entitlements)
Degrees are irrelevant (yeah,
one-size-fits-all diplomas are pretty much dead already)
From the CFO Journal's Morning Ledger on August 26, 2016
Europe's radical copyright reform trains
cross hairs on Google
The European Commission is finalizing reforms that
will allow European news publishers to levy fees on internet platforms such
as Alphabet Inc.’s Google if search engines show
snippets of their stories, the Financial Times
reports. The proposals, to be published in September, aim to dilute the
power of big online operators that can lead to imbalanced commercial
negotiations between search engines and content creators, officials say.
Jensen Comment
What's a snippet?
If this restricts anything from being quoted it Europe will be shutting down
academic debate. The whoe purpose of allowing "short" quotations is to allow
scholars to write critiques and inspire debate.
As a rule copyright holders cannot prevent you from quoting their published
works as long as the quotations are short in length. One of the main reasons is
that authors cannot use copyright law to put their works above criticism.
Sometimes it's really not effective to criticize a work without quoting some
parts of that work. Europe's "radical copyright reform" will hopefully not make
authors' works above criticism.
Will the largest for-profit training school (with 130 campuses) be thrown
under the bus?
From the CFO Journal's Morning Ledger on August 26, 2016
This could be it for ITT
The Obama administration took steps
Thursday that could effectively force the
closure of one of the nation’s largest for-profit college chains,
banning ITT Technical Institute from enrolling new students who receive
federal aid. ITT, which has about 43,000 students nationwide, is facing
accusations from its accreditor of chronic mismanagement of its finances and
using questionable recruiting tactics. The company is also under
investigation by state and federal authorities. Parent ITT Educational
Services Inc.’s stock plunged.
From the CFO Journal's Morning Ledger on August 23, 2016
U.S. and German
audit regulators sign cooperation pact The Public Company Accounting
Oversight Board and the German Auditor Oversight Body agreed to cooperate in
oversight of audit firms subject to both regulatory jurisdictions, the
Journal of Accountancy reports. The deal provides a framework for joint
inspections and allows the regulators to exchange confidential information
in accordance with German laws and the Dodd-Frank Act.
From the CFO Journal's Morning Ledger on August 23, 2016
Court rules against
EY in overtime case
A federal appeals court has ruled in favor of two
Ernst & Young employees who wanted to participate in a class-action
lawsuit against the firm about overtime pay rather than submit to mandatory
arbitration, Accounting Today reports. The U.S. Court of Appeals for the
Ninth Circuit handed down an opinion Monday
in favor of two EY employees, vacating a district court’s order that would
have compelled they submit to individual arbitration of their claims. The
class-action lawsuit they wished to participate in alleged that EY
misclassified employees in order to deny them overtime wages, in violation
of the Fair Labor Standards Act and California labor laws.
From the CFO Journal's Morning Ledger on August 23, 2016
BofA gets nod against DOJ appeal An appellate
court
on
Monday declined to reconsider its decision to
throw out a mortgage-fraud case against Bank of America Corp., a blow
to the Justice Department as it tried to rescue one of its highest-profile
cases tied to the financial crisis. Judges for the Second U.S. Circuit Court
of Appeals in New York said in a filing that they had considered the Justice
Department’s request and would deny it. The judges didn’t elaborate on their
decision.
From the CFO Journal's Morning Ledger on August 23, 201
Wells Fargo settles with CFPB
Wells Fargo Bank agreed to pay $4 million to resolve
allegations by the Consumer Financial Protection Bureau that it used illegal
payment-processing practices resulting in higher costs for some borrowers.
The settlement includes a $410,000 refund to affected consumers and a $3.6
million civil penalty to the CFPB, which has recently stepped up its
scrutiny of student-loan servicing companies. The unit of Wells Fargo &
Co. said it disagreed with the CFPB’s assertions.b
From the CFO Journal's Morning Ledger on August 19, 2016
FASB tweaks nonprofit reporting
The Financial Accounting Standards Board’s updated
rules aim to make it simpler for nonprofits to classify and report their
assets. The new rules also make it easier for donors, creditors and other
interested parties to see how a nonprofit’s funds are being used. Nonprofits
will now report two classes of assets, instead of three, which should reduce
some of the burden of deciding which charitable assets can be used, and
when. The new reporting will separate cash that is available now from cash
that may have time contingencies or other strings attached.
Record Dividend Payouts Hurting Bond Investing Since the Fed Drove Interest
Rates to Virtually Zero
From the CFO Journal's Morning Ledger on August 19, 2016
Big companies are handing more of their profits to
shareholders than at any time since the financial crisis, as record-low bond
yields put a premium on dividends,
Mike Bird, Vipal Monga and Aaron Kuriloff
write. Payouts at S&P 500 companies for the 12 months
were nearly 38% of net income. Moreover, 44 of those firms paid more than
they earned over the previous year, the most in a decade and a practice some
analysts deem unsustainable. The dividend yield on the S&P 500, or annual
payouts as a share of the current price, has been steadily above the 10-year
U.S. Treasury yield for most of 2016, after only occasionally doing so for
decades.
The shift has forced many investors to conclude there is no alternative to
investing in stocks, a mantra that has accompanied the rise this year of the
Dow Jones industrial Average and S&P 500 to records.The increase also
underscores the intense pressure on corporate earnings. Earnings at S&P 500
companies are set to decline from a year earlier in five straight quarters,
a retreat not seen since in the financial crisis. Companies paying more than
their income over the past 12 months included drug firm Pfizer Inc., aluminum
smelter Alcoa Inc., toy maker Mattel Inc. and food companies
Kellogg Co. and Kraft Heinz Co.
From the CFO Journal's Morning Ledger on August 19, 2016
Harley settles on emissions probe
Harley-Davidson Inc. reached
a $15 million settlement to resolve U.S. claims that it violated
air-pollution laws amid growing government scrutiny of vehicle emissions on
the road. The company made or sold 340,000 “super tuner” devices that
improved engine performance but increased engine exhaust to levels beyond
the emissions levels the company had certified with regulators, according to
a complaint and consent decree, both filed
Thursday by the Justice Department on behalf of
the Environmental Protection Agency.
From the CFO Journal's Morning Ledger on August 17, 2016
Hain’s problematic revenue accounting
Something could be rotten in Hain Celestial Group
Inc.’s revenue, Miriam Gottfried writes for Heard on the Street. Hain,
which specializes in natural and organic foods, said Monday it
will delay its earnings report because of a potential problem with how it
has accounted for revenue. Hain is evaluating whether revenue associated
with concessions it granted certain U.S. distributors was recorded in the
correct period. The company has historically recognized it at the time
products are shipped to distributors, but is examining whether that revenue
should have been recognized when products were sold through distributors to
stores
From the CFO Journal's Morning Ledger on August 17, 2016
Health care a sticky wicket
Many companies are cutting jobs in response to rising
health-care costs spurred by the Affordable Care Act, according to a new
survey by the Federal Reserve Bank of New York. Roughly one-fifth of service
sector and manufacturing company executives said they are reducing the
number of workers in response to provisions in the health-care law, Vipal
Monga reports. The results add to a bevy of bad news related to the Obama
administration’s signature health-care law.
From the CFO Journal's Morning Ledger on August 16, 2016
Aetna bails on many Obamacare exchanges Aetna Inc. will withdraw from 11 of the 15
states where it currently offers plans through the Affordable Care Act
exchanges, becoming the latest of the major national health insurers to pull
back sharply from the law’s signature marketplaces after steep financial
losses. Aetna’s move will sharpen concerns about competitive options in the
exchanges—and it puts at least one county at risk of having no insurers
offering exchange plans in 2017.
From the CFO Journal's Morning Ledger on August 12, 2016
Home equity loans come back to haunt
borrowers, banks
The bill is coming due for many homeowners on a type
of loan that was widely popular in the run-up to the housing bust, causing a
rise in delinquencies at banks. More homeowners are missing payments on
their home-equity lines of credit, or Helocs, a type of loan that allows
borrowers to withdraw cash from their house to pay for renovations, college
tuition or almost any other expense. These loans typically require
interest-only payments for the first 10 years, but then principal payments
kick in for the next 15 or 20 years. Borrowers who signed up for Helocs in
early 2006 were at least 30 days late on $2.8 billion of balances four
months after principal payments kicked in this year, according to Equifax
Roughly 840,000 Helocs taken out in 2006 are resetting this year, with
principal payments on an additional nearly one million loans expected to hit
in 2017.
From the CFO Journal's Morning Ledger on August 12, 2016
GM continues to seek shield from
ignition-switch suits General Motors Co. sought a rehearing of an
appeals court ruling that exposes it to hundreds of potential lawsuits and
some $10 billion in liabilities from faulty ignition switches. Lawyers for
the nation’s largest auto maker said the court made two “fundamental errors”
last month when it ruled against the company’s efforts to use its 2009
bankruptcy to shield itself from the litigation over the ignition switches.
GM said the court’s decision, if not reversed, would permanently damage the
bankruptcy process that saved it from collapse in 2009.
Reminds me of the 1990s when companies reported bartering of Website
advertising as revenue
From the CFO Journal's Morning Ledger on August 11, 2016
Comscore delays quarterly report on
accounting probe, names new leadership ComScore Inc.on Wednesday
said it needs more time to file its June quarterly report, as the
media measurement and analytics company completes an internal
investigation into its accounting. Separately, comScore named a new
management team, including replacing its chief executive Serge Matta,
who has been accused of benefiting from
the company’s boosted results from the
recording of “nonmonetary” revenue.
This reflects revenue from barter agreements, where actual cash
doesn’t change hands. As the WSJ’s Anne Steele writes, comScore
replaced finance chief Melvin Wesley with chief revenue officer
David Chemerow. Mr. Chemerow was CFO for Rentrak Corp., which ComScore
bought in January.
From the CFO Journal's Morning Ledger on August 10, 2016
Tipsters are poised for big payouts.
U.S. government settlements with State Street Corp.
and Bank of New York Mellon Corp. could produce a windfall for three
former employees who blew the whistle on the banks’ alleged mistreatment of
foreign-currency-trading clients. The awards could exceed a combined $100
million, the largest such awards on record, according to an analysis by The
Wall Street Journal.
Harry Markopolos,
the forensic accountant who repeatedly blew the lid
off Bernard Madoff’s Ponzi scheme, assembled the group and advised them. He
could reap a slice of any payouts awarded to the whistleblowers, according
to people familiar with the matter.
From the CFO Journal's Morning Ledger on August 4, 2016
Age is more than
just a number for the U.S. economy.
New research by
Harvard economists shows that an aging population not only reduces the labor
force, it also robs U.S. companies of critical knowledge and experience as
skilled workers retire. And that, in turn, undermines productivity across
the whole economy.
As the
WSJ’s Greg Ip reports, demographics could be a
crucial factor in why the current economic expansion is the weakest on
record. The new
paper by Nicole Maestas of Harvard
University and Kathleen Mullen and David Powell of the Rand Corp. think
tank, was able to analyze the impact of aging on economic growth, because
the 50 states are aging at different rates.
On average, every 10% increase in the share of a state’s population over the
age of 60 reduced per capita growth in gross domestic product by 5.5%, it
found.
There were two
reasons for this. First, as more workers retire, the labor force grows more
slowly, accounting for one-third of the 5.5% hit to growth. The bigger
effect, however, resulted from the lower productivity of the remaining
workers. This couldn’t be explained by emigration, mortality or an influx of
younger, inexperienced workers. Rather, the researchers found that everyone
became less productive in an aging state. “An older worker’s experience
increases not only his own productivity but also the productivity of those
who work with him,” the authors noted. By applying their state-level
findings to the whole country, the authors estimate that aging will reduce
growth by 1.2 percentage points between 2010 and 2020, with two-thirds of
the effect attributable to reduced productivity.
From the CFO Journal's Morning Ledger on August 3, 2016
IASB pressed to fix 'wishy-washy' accounting
rules
The Australian Accounting Standards Board is urging
the international accounting standards watchdog to tighten up the language
used for global regulations, which the local body says is injecting
ambiguity into the rules. Following research in conjunction with its South
Korean counterpart, the AASB is urging the International Accounting
Standards Board to fix indecisive language that leaves too much room for
interpretation. According to AASB research director Angus Thomson,
increasing use of terms like "probable", "likelihood" and "remote" creates
confusion on when firms should recognize assets and liabilities. Researchers
picked 13 out of about 30 different terms used in international accounting
standards to infer the likelihood of an event occurring or not.
From the CFO Journal's Morning Ledger on August 3, 2016
Washington State files $100 million lawsuit
against Comcast
Washington State Attorney General Bob Ferguson has
filed a $100 million lawsuit against Comcast Corp. saying the cable giant
deceived customers into paying tens of millions of dollars in fees for a
“near-worthless” service protection plan. Mr. Ferguson also accused
Philadelphia-based Comcast of committing more than 1.8 million violations of
the state’s Consumer Protection Act, by charging improper service call fees
and using improper credit screening practices. “This case is a classic
example of a big corporation systematically deceiving Washington state
consumers and putting profits above those consumers,” said Mr. Ferguson.
A Billion Here a Billion There: Facebook May Owe an Additional $3-$5
Billion in Taxes
From the CFO Journal's Morning Ledger on July 29, 2016
Speaking of Facebook Facebook Inc. said
it could be on the hook for $3 billion to $5 billion in additional taxes as
a result of an Internal Revenue Service investigation into how the social
network transferred assets overseas. The company said in a quarterly filing
that the IRS had issued a “statutory notice of deficiency” saying Facebook
owes more taxes for 2010. The IRS earlier this month sued Facebook for
documents related to the transfer, saying it suspected that Facebook’s
accountants had undervalued some of those assets by “billions of dollars.”
A Billion Here a Billion There: Amazon Doubles Profit
From the CFO Journal's Morning Ledger on July 29, 2016
Amazon doubles profit
Amazon.com Inc.on
Thursday reported in its third consecutive
record profit, nearly doubling its prior high-water mark, and its fifth
straight quarter in the black. Amazon’s revenue jumped by almost a third,
and it also more than doubled its operating margin, which historically has
been razor thin, and issued a cheery outlook for the coming quarter. The
results show Amazon moving toward investors’ long-held hope of consistent
profitability after a lengthy period of heavy investments and quarterly
losses. The Seattle company hasn’t had five consecutive profitable quarters
since 2012.
From the CFO Journal's Morning Ledger on July 27, 2016
FASB proposes tax-reporting tweaks The Financial
Accounting Standards Board has proposed a new accounting standards
update that would require companies to change the way they report income
taxes, Accounting Today reports. Companies would have to disclose more about
the differences between foreign and domestic taxes, plus more surrounding
decisions about indefinitely reinvested foreign profits and the effects of
new tax laws, plus a better breakdown of where cash is parked among foreign
subsidiaries.
Jensen Comment
It turns out that pension investing risk relies heavily on investment and
accounting rules where public-sector pension fund managers
are allowed to get their funds into riskier investments, including junk bonds.
The enormous TIAA/CREF and some other pension funds give investors risk
choices. TIAA bond funds are doing worse due to the Fed's low-interest policy
such that teachers in TIAA/CREF are choosing more risky funds. Deals are no
longer as good for fixed-annuity plans on the date of retirement relative to
when I retired in 2006 (blind luck rather than brilliant strategy).
Sadly, riskier public-sector pension plans increase the expectation of future
taxpayer bailouts. Public-sector pension plans would probably not be as risky if
government declared there was zero chance of future bailouts. But then what
legislators seeking office are going to promise zero chance of a public-sector
pension bailout? Hence we can blame democracy for the high risk of public-sector
pension plans.
One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea
along with municipal workers. Public-sector workers opposed to gambling probably
don't even know they are gambling with taxpayer dollars.
The New York Times has highlighted the use of
made-up financial metrics that have resulted in “phony-baloney financial
reports.” However, even the New York Times Company can’t resist using a few
non-GAAP numbers each quarter to present its earnings in a flattering way.
In its press release accompanying first-quarter
earnings The New York Times Company says that the measures “provide useful
information to investors.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016
SUMMARY: As
part of its current focus on non-GAAP measures, the SEC has questioned
whether companies and audit committees have implemented appropriate controls
regarding the disclosure of such measures. The article discusses the types
of controls that could be established and provides high-level examples of
control issues and related responses for consideration in connection with
non-GAAP measures.
CLASSROOM
APPLICATION: This
article addresses the increased concerns regarding popular non-GAAP/pro
forma financial reporting articles by discussing the use of internal
controls.
QUESTIONS:
1. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
2. (Advanced) What is non-GAAP reporting? Why do companies engage in
non-GAAP reporting? What are the benefits of this type of reporting?
3. (Advanced) What are internal controls? What are the benefits of
establishing and enforcing good internal controls?
4. (Advanced) How can internal controls be used for non-GAAP
reporting? What benefits does it offer?
5. (Advanced) What is ICFR? What are DCPs? How do they differ? How do
they relate to controls over non-GAAP measures?
6. (Advanced) What does the SEC say about Section 302 of the
Sarbanes-Oxley Act? How does this affect companies that use non-GAAP
measures? What procedures should companies consider?
Reviewed By: Linda Christiansen, Indiana University Southeast
As part of its current focus on non-GAAP measures,
the SEC has questioned whether companies and audit committees have
implemented appropriate controls regarding the disclosure of such measures.*
Deloitte’s Heads Up newsletter discusses the types of controls that could be
established and provides high-level examples of control issues and related
responses for consideration in connection with non-GAAP measures. In
addition, the Heads Up outlines a sample approach for consideration.
Following is an excerpt from the full newsletter.
Disclosure Controls and Procedures versus Internal
Control over Financial Reporting
Before diving into a detailed discussion about
types and examples of controls, the stage should be set by clarifying
whether controls over non-GAAP measures are related to disclosure controls
and procedures (DCPs), to internal control over financial reporting (ICFR)
or to both.
ICFR, which is defined in both SEC and PCAOB rules
(see Appendix B in the full Heads Up newsletter), focuses on controls
related to the “reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.” DCPs, on the other hand, are more broadly
defined and pertain to all information required to be disclosed by the
company (see Appendix B).
Because the starting point for a non-GAAP measure
is a GAAP measure, ICFR would be relevant to consider up to the point at
which the GAAP measure that forms the basis of the non-GAAP measure has been
determined. However, regarding controls over the adjustments to the GAAP
measure and the related calculation of the non-GAAP measure—including the
oversight and monitoring of the non-GAAP measure—it is appropriate to
consider such controls within the realm of DCPs.
For a discussion of controls over non-GAAP measures
in which the Committee of Sponsoring Organizations (COSO) Internal
Control—Integrated Framework is considered, see Appendix A.
Non-GAAP Measures, Earnings Releases and DCPs
The SEC’s final rule on certifications states that
Section 302 of the Sarbanes-Oxley Act of 2002 requires management to certify
on a quarterly basis that DCPs are effective “to ensure that information
required to be disclosed by the issuer in the reports filed or submitted by
it under the Exchange Act [footnote omitted] is recorded, processed,
summarized and reported, within the time periods specified in the
Commission’s rules and forms.” Earnings releases containing non-GAAP
measures are often furnished on Form 8-K, which does not require
certifications of the effectiveness of DCPs. However, the final rule also
indicates that “[d]isclosure controls and procedures . . . are required to
be designed, maintained and evaluated to ensure full and timely disclosure
in current reports.”
Therefore, registrants that use non-GAAP measures
in earnings releases furnished on Form 8-K—or those that use them in Forms
10-Q and 10-K (outside the financial statements), which would be explicitly
covered by Section 302 certifications—should consider the appropriateness of
their DCPs in the context of their non-GAAP information. Registrants should,
at a minimum, consider designing DCPs to ensure that procedures are in place
regarding:
1. Compliance—Non-GAAP measures are presented in
compliance with SEC rules, regulations and guidance.
2. Consistency of preparation—Non-GAAP measures are
presented consistently each period, and potential non-GAAP adjustments are
evaluated on an appropriate, consistent basis each period.
3. Data quality—Non-GAAP measures are calculated on
the basis of reliable inputs that are subject to appropriate controls.
4. Accuracy of calculation—Non-GAAP measures are
calculated with arithmetic accuracy, and the non-GAAP measures in the
disclosure agree with the measures calculated.
5. Transparency of disclosure—Descriptions of the
non-GAAP measures, adjustments and any other required disclosures are clear
and not confusing.
6. Review—Non-GAAP disclosures are reviewed by
appropriate levels of management to confirm the appropriateness and
completeness of the non-GAAP measures and related disclosures.
7. Monitoring—The registrant’s monitoring function
(e.g., internal audit, disclosure committee or audit committee)
appropriately reviews the DCPs related to non-GAAP disclosures. The audit
committee is involved in the oversight of the preparation and use of non-GAAP
measures.
A critical aspect of such DCPs is the involvement
of the appropriate levels of management and those charged with governance.
Depending on the registrant, this may include reviewing the selection and
determination of non-GAAP measures with a disclosure committee, the audit
committee or both.
Establishing a written policy that clearly
describes the nature of allowable adjustments to GAAP measures, defines the
non-GAAP measure(s) to be used under the policy, and explains how potential
changes in the inputs, calculation or adjustments will be evaluated and
approved may help management identify its DCPs.
For example, a policy might describe qualitatively
the types of adjustments that are nonrecurring and abnormal and thus within
the defined policy. It may also outline specific quantitative thresholds for
which income or expense items might be evaluated in the determination of
whether they should be included in non-GAAP adjustments. This could help
ensure that appropriate non-GAAP measures are used as well as eliminate the
need for numerous immaterial adjustments in the reconciliation that may
confuse investors.
Disclosure Committee Considerations
Some companies may find it helpful to use a
disclosure committee to assist the CEO, CFO and audit committee in preparing
and overseeing disclosures, including those related to non-GAAP measures.
Disclosure committees are typically management committees, although some
companies prefer that the disclosure committee function as a subcommittee of
the board and audit committee.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016
SUMMARY: This
article offers information regarding the tax issues students should know
about their summer jobs. Beyond the basics, the article includes: being
employed by a parent, employment status, taking care of the W-4, shifting an
education tax break, and funding an IRA.
CLASSROOM
APPLICATION: This
article is a nice addition to an individual tax class for its content, but
also because it is full of helpful information for all of our students,
regardless of class or major.
QUESTIONS:
1. (Introductory) What are the basic requirements for filing a tax
return? What is the threshold of earned income required to file? Who must
pay Social Security and Medicare taxes?
2. (Advanced) What are the rules regarding parents employing their
children? Do the tax rules offer advantages or cause disadvantages for this
situation? Is this something parents should consider doing?
3. (Advanced) What is an employee? What is an independent contractor?
How do they differ for tax purposes?
4. (Advanced) What is a W-4? What should a student choose on a the
W-4?
5. (Advanced) What are education tax breaks are available? What
options should parents and students consider to maximize tax benefits?
6. (Advanced) What is an IRA? What are the types of IRAs? How can
students fund an IRA to maximize the tax benefits?
Reviewed By: Linda Christiansen, Indiana University Southeast
Some children’s returns are as complicated as their
parents’
Summertime living is supposed to be easy, but for
those who take seasonal jobs the taxes can be tricky.
Now is a good time for a checkup if you are a
student with a summer job or have a young worker in the family.
“Some children’s returns are almost as complex as
their parents’, even though they don’t have much income,” says Ken Rubin, a
certified public accountant with RubinBrown in St. Louis.
One common complication is the need for multiple
state returns if a child’s home is in one state, a college or on-campus job
is in another and a summer job is in a third.
Slip-ups can mean aggravation later or lost
opportunities, so here are tax tips for summer earners.
Know the basics. For many young workers who are
dependents—meaning that someone else provides more than half their
support—the threshold for federal income tax in 2016 will be $6,300 of
earned income. That’s the amount of the standard deduction.
Employees typically owe 7.65% in Social Security
and Medicare tax on all earned income, while self-employed workers generally
owe 15.3% for these levies on earned income above about $430, according to
Troy Lewis, a CPA who practices in Draper, Utah.
If the employee is your child. Parents who hire
children under 18 to work in a sole proprietorship, a spousal partnership or
a single-member limited-liability company can deduct the child’s pay, and no
payroll taxes are due.
Payroll taxes are due if the child is 18 or older,
but children under 21 who are employed by a parent are exempt from federal
unemployment taxes and possibly state unemployment taxes as well.
Parents who plan to deduct a child’s pay should pay
fair wages for real work, says Mr. Lewis, and be sure to keep careful
records. Many tech-savvy teens have expertise in building or maintaining
business websites or marketing via social media.
Check employment status. Young workers may not know
whether they are employees or independent contractors, but there’s a big
difference. Contractors don’t have income or payroll taxes withheld, so
these workers could have a surprise tax bill if a 1099 form arrives next
spring.
Independent contractors should also track
deductible expenses for mileage, special uniforms or equipment used in their
work, says Mr. Lewis, because such expenses can be hard to reconstruct.
Take care with the W-4. If an employee won’t have
taxable income for 2016, the W-4 form should say “exempt” on line 7, to
avoid having to file a return next spring. Payroll taxes due will still be
withheld.
Consider shifting an education tax break. Last
year, Congress made permanent the American Opportunity Tax Credit, which is
often the best college tax break. Those claiming it can use up to $4,000 of
college expenses for tuition, books and equipment to reduce their income
taxes by as much as $2,500.
The catch: This benefit isn’t available to most
couples who have more than $160,000 of adjusted gross income or singles with
more than $80,000.
If the parents have too much income to claim the
American Opportunity Credit for college costs, the young worker may be able
claim it instead, says Mr. Rubin, even if the employee is still a dependent
of his or her parents. Often families are unaware of this option, according
to Mr. Rubin.
In this case, neither the parents nor the child
claim the personal exemption for the child. This benefit may be of little
value to the parents because of a phaseout for affluent taxpayers.
The student then claims the American Opportunity
Credit on his or her own return, which offsets up to $2,500 of taxes. The
student doesn’t have to pay the college costs to use this benefit.
Mr. Rubin adds that the credit can apply to the
student’s “unearned” income (as from investments or a trust) as well as his
or her earned income, even if the unearned income is taxed at the parents’
rate due to a provision known as the “kiddie tax.”
Fund an IRA. Summer workers can contribute their
earned income up to $5,500 this year to either a traditional or a Roth
individual retirement account. Assets in either account compound tax free.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016
SUMMARY: The
SEC issued a proposed rule that would amend some of its disclosure
requirements that may be redundant, duplicative or outdated, or may overlap
with other SEC, U.S. GAAP or IFRS disclosure requirements. The proposal also
seeks comment on whether certain SEC disclosure requirements that overlap
with U.S. GAAP requirements should be retained, modified, eliminated or
referred to the FASB for potential incorporation into U.S. GAAP. The
proposed amendments are the next step in the SEC's ongoing disclosure
effectiveness initiative, which is a broad-based review of the commission's
disclosure, presentation and delivery requirements for public companies.
CLASSROOM
APPLICATION: This
summary of the SEC's proposal is appropriate for use in a financial
accounting class when covering disclosure requirements.
QUESTIONS:
1. (Advanced) What is the SEC? What are it areas of authority? What
types of disclosures does it require?
2. (Introductory) What is GAAP? What is its purpose? What body
determines GAAP? To what companies does it apply?
3. (Introductory) What is IFRS? What is its purpose? To what
companies does it apply?
4. (Advanced) What new rule is the SEC proposing? What is the reason
for this new rule? What issues is the SEC attempting to address?
5. (Advanced) What are the details of the new proposal? What
companies would be affect by these changes?
6. (Advanced) Why do some reporting requirements overlap? Is this
overlap beneficial for users of this information or is the overlap
burdensome for companies?
Reviewed By: Linda Christiansen, Indiana University Southeas
The SEC issued a proposed rule¹ that would amend
some of its disclosure requirements that may be redundant, duplicative or
outdated, or may overlap with other SEC, U.S. GAAP or IFRS disclosure
requirements. The proposal, issued on July 13, also seeks comment on whether
certain SEC disclosure requirements that overlap with U.S. GAAP requirements
should be retained, modified, eliminated or referred to the FASB for
potential incorporation into U.S. GAAP.
Following is an excerpt from the latest Deloitte
Heads Up newsletter covering the SEC proposal, which includes a table
summarizing some of the proposed changes.
The proposed amendments are the next step in the
SEC’s ongoing disclosure effectiveness initiative, which is a broad-based
review of the commission’s disclosure, presentation and delivery
requirements for public companies. As part of the initiative, the SEC also
issued a concept release² in April of this year that sought feedback on
modernizing certain business and financial disclosure requirements of
Regulation S-K as well as a request for comment³ last September on the
effectiveness of certain financial disclosure requirements in Regulation
S-X.⁴
The proposed amendments to the disclosure
requirements would affect U.S. issuers, foreign private issuers (FPIs),
investment advisers, investment companies, broker-dealers and nationally
recognized statistical rating organizations. The effect on each type of
issuer varies depending on the amendment proposed. The SEC intends to
improve the disclosure requirements and simplify registrants’ compliance
efforts without significantly altering the total mix of information that is
ultimately provided to investors.
The proposal’s request for comment on overlapping
requirements notes that “proposals related to some topics would result in
the relocation of disclosures from outside to inside the financial
statements, subjecting this information to annual audit and/or interim
review, internal control over financial reporting, and XBRL tagging
requirements.”
For example, the requirements in Regulation S-K,
Item 103,⁵ to disclose certain legal proceedings can in certain cases be
more expansive than those in U.S. GAAP, under which loss contingencies must
be disclosed. The commission is seeking input on whether incorporation of
Item 103, among other requirements, into U.S. GAAP may impose greater
burdens on issuers and auditors related to the development and auditing of
additional estimates and disclosures. The SEC also notes that the location
of some disclosures in a filing could change as a result of the proposal to
address overlapping requirements, which might affect users by changing the
prominence of the disclosures.
The proposal may result in the removal or addition
of a bright-line disclosure threshold (i.e., a threshold below which no
disclosure is required), which may change the disclosure burden on issuers
and the amount of information disclosed to investors. For example, unlike
U.S. GAAP, Regulation S-K&⁶ requires disclosure of the amount of revenue
from any class of similar products and services that account for 10% or more
of revenue.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016
SUMMARY: The
departure of a third auditor for a Malaysian government investment fund is
putting focus on another global company that apparently failed to raise
questions about what investigators are calling a large-scale fraud. The
fund, 1Malaysia Development Bhd. or 1MDB, said that its auditor, Deloitte
Touche Tohmatsu Ltd., resigned in February. Earlier disputes over the fund's
accounts led to the firing of 1MDB's previous auditors, KPMG and Ernst &
Young. The fund also said its 2013 and 2014 financial statements, which were
audited by Deloitte, should no longer be relied on. Deloitte joins a long
list of financial firms that have worked with 1MDB without identifying the
alleged fraud there.
CLASSROOM
APPLICATION: This
article is appropriate for an auditing class or as part of a discussion on
these topics in a financial accounting class.
QUESTIONS:
1. (Introductory) What is auditing? What is it purpose? What
companies are audited?
2. (Introductory) What are the Big Four firms? What services do they
offer? Geographically, where do they offer these services?
3. (Introductory) What is 1MDB? What are the facts of the legal
issues facing 1MDB?
4. (Advanced) What Big Four firms have worked with 1MDB? What
services did they provide? Why did they fail to detect the fraud? Should
they have done additional work to detect it? Should they have reported the
issues they found?
5. (Advanced) What are auditor responsibilities for fraud detection?
Should the auditors in this case have detected the fraud? Could they be
found liable for not finding it? Why or why not?
6. (Advanced) Why were these U.S. firms auditing a Malaysian
government investment firm? If they had not taken on the audit engagement,
who would have done the auditing? Should U.S. firms do this kind of work?
Reviewed By: Linda Christiansen, Indiana University Southeast
Malaysian government investment fund says Deloitte
Touche Tohmatsu resigned in February
The departure of a third auditor for a Malaysian
government investment fund is putting focus on another global company that
apparently failed to raise questions about what investigators are calling a
large-scale fraud.
The fund, 1Malaysia Development Bhd. or 1MDB, said
Tuesday that its auditor, Deloitte Touche Tohmatsu Ltd., resigned in
February. Earlier disputes over the fund’s accounts led to the firing of
1MDB’s previous auditors, KPMG and Ernst & Young, according to a Malaysian
auditor general’s report last year.
The fund also said its 2013 and 2014 financial
statements, which were audited by Deloitte, should no longer be relied on.
Deloitte joins a long list of financial firms that
have worked with 1MDB without identifying the alleged fraud there. These
include Goldman Sachs Group, Swiss private banks Falcon Private Bank Ltd.
and BSI SA, and other banks such as DBS Bank Ltd, Standard Chartered PLC and
UBS Group AG. All have said they were unaware of the alleged fraud at 1MDB,
though investigators have said they could have done more to spot it.
The Swiss attorney general’s office said earlier
this year it suspected $4 billion had been misappropriated from 1MDB. Last
week, the U.S. Justice Department filed a civil lawsuit aiming to seize
assets that it said were bought with $3.5 billion misappropriated from the
fund. The Wall Street Journal has reported that hundreds of millions of
dollars originating with 1MDB flowed into the personal bank account of
Malaysian Prime Minister Najib Razak .
Deloitte said in a statement Tuesday that the
information in the Justice Department lawsuit against 1MDB “would have
impacted the financial statements and affected the audit reports” if it had
been known at the time, and so its audit reports for 2013 and 2014 should no
longer be relied upon.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016
SUMMARY: Most
videogames these days have online functions that demand continual upgrades
and, hence, bear costs for publishers. So accounting rules require some of
the revenue generated from the sale of such games to be deferred over
several months, and even more than a year in some cases. Videogame
publishers have gotten around this by reporting a form of adjusted revenue
every quarter that includes the effect of deferrals. The practice doesn't
alter reported cash flows of the businesses. But those days are ending as
regulators cast a more critical eye on metrics that don't conform to
generally accepted accounting principles, or GAAP.
CLASSROOM
APPLICATION: This
fact situation is a good example to use when covering deferred revenues and
non-GAAP reporting.
QUESTIONS:
1. (Introductory) What revenue recognition issues do videogame
companies face? How do these differ from revenue recognition of most
products and services?
2. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
3. (Advanced) What is non-GAAP reporting? Why do companies engage in
non-GAAP reporting? What are the benefits of this type of reporting?
4. (Advanced) What has Electronic Arts announced it will do regarding
its financial reporting? Why did the company make this decision? What impact
will this decision have on the company's financial reporting?
5. (Advanced) The article says that the differences tend to smooth
over time. What does that mean? What differences? What was does the
smoothing do for financial reporting purposes? How are users of the
financial statements affected?
Reviewed By: Linda Christiansen, Indiana University Southeast
Revenue recognition rules make tracking videogame
sales activity a challenge
Many things about the videogame business have
changed in the past decade. One very important thing hasn’t: Gamers still
need to actually buy the games.
But tracking this important activity has become
rather difficult, and not just because fewer games are being sold at retail
stores. Most games these days have online functions that demand continual
upgrades and, hence, bear costs for publishers. So accounting rules require
some of the revenue generated from the sale of such games to be deferred
over several months, and even more than a year in some cases.
Videogame publishers have gotten around this by
reporting a form of adjusted revenue every quarter that includes the effect
of deferrals. The practice doesn’t alter reported cash flows of the
businesses. But those days are ending as regulators cast a more critical eye
on metrics that don’t conform to generally accepted accounting principles,
or GAAP.
Electronic Arts said last week that it will stop
including such non-GAAP figures in its quarterly reports. Other videogame
publishers are likely to follow suit. EA, Activision Blizzard and Take-Two
Interactive will all report quarterly results next week.
To be sure, there are plenty of good reasons to be
suspicious of non-GAAP numbers. But one problem in the videogame business is
that revenue recognition rules tend to obfuscate how much game content is
actually sold in a given period. This is an important metric, given that it
is the economic activity on which the entire industry is based.
Take the case of EA, which has been reporting
adjusted revenue in the same way for the past nine years. Online-enabled
games have grown to account for the majority of its business, which still
follows the seasonal fluctuations common in the industry. So the spread
between GAAP and non-GAAP revenue can be wide in quarters when the release
of a big game like “Madden NFL” causes more revenue to be deferred.
But these differences tend to smooth out over time.
For EA, the difference between annual GAAP and non-GAAP revenues has
averaged only 4% over the last nine years.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: PricewaterhouseCoopers
LLP faces a lawsuit over civil claims that it failed to catch signs of fraud
that helped lead to one of the biggest U.S. bank collapses during the Great
Recession. The closely watched case could lead to billions of dollars in
damages depending on how a jury answers a fundamental question in
accounting: How much responsibility do auditors have for catching fraud? A
bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once one of
the nation's biggest privately held mortgage companies, is suing PwC,
seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that
PwC was negligent in not detecting a massive fraud scheme that brought down
Taylor Bean and helped trigger the 2009 collapse of a Montgomery, Ala. bank
with $25 billion in assets. The Taylor Bean trustee contends that PwC should
have found the fraud even though it wasn't Taylor Bean's auditor. PwC was
the outside auditor for Colonial's holding company. Taylor Bean's auditor,
Deloitte & Touche LLP, reached a confidential settlement with the trustee in
2013 over related allegations. PwC argues that it was deceived, and
shouldn't have been expected to catch the Taylor Bean fraud when neither
bank regulators nor Colonial or Taylor Bean did.
CLASSROOM
APPLICATION: This
is an excellent article to use when discussing whether auditors have a
responsibility to detect fraud. It would also be good for coverage of fraud
or in a forensic accounting class.
QUESTIONS:
1. (Introductory) What are the facts of this lawsuit? Who is the
plaintiff and who is the defendant?
2. (Advanced) What is PricewaterhouseCoopers? Who was its client?
What work was it doing for the client in this case? What is the firm's
response to being sued?
3. (Advanced) What are the rules regarding an auditor's
responsibility to detect fraud? In what situations could the auditor be
liable?
4. (Advanced) Why aren't auditors responsible to detect fraud in many
cases? Should they be? Why or why not?
5. (Advanced) Why did the plaintiff choose to sue PwC in this case?
Should this be one of those situations in which auditors are responsible to
detect fraud?
6. (Advanced) Why isn't the plaintiff recovering all of the damages
from the parties who perpetrated the frauds? Was PwC one of the
perpetrators?
Reviewed By: Linda Christiansen, Indiana University Southeast
Banks, housing agencies, bond raters and many
others have faced legal action over the 2008 financial crisis. Now, an
accounting giant is taking its turn.
PricewaterhouseCoopers LLP faces a trial starting
Monday over civil claims that it failed to catch signs of fraud that helped
lead to one of the biggest U.S. bank collapses during the Great Recession.
The trial in Florida state court in Miami is one of the few allegations of
wrongdoing during the financial crisis that has reached a courtroom.
The closely watched case could lead to billions of
dollars in damages depending on how a jury answers a fundamental question in
accounting: How much responsibility do auditors have for catching fraud?
The bankruptcy trustee for Taylor Bean & Whitaker
Mortgage Corp., once one of the nation’s biggest privately held mortgage
companies, is suing PwC, seeking $5.5 billion in damages. The trustee
alleged in the 2013 suit that PwC was negligent in not detecting a massive
fraud scheme that brought down Taylor Bean and helped trigger the 2009
collapse of Colonial Bank, a Montgomery, Ala., bank with $25 billion in
assets.
The trial is expected to last about six weeks. Such
a trial isn't only rare—most crisis-related legal probes have ended in
settlements at most—but it is also one of the few attempts to hold auditors
liable for events stemming from the meltdown.
“This is basically holding an auditor responsible
for its failure to do its job,” said Steven W. Thomas, an attorney
representing Neil Luria, the Taylor Bean trustee.
But Elizabeth Tanis, an attorney for PwC, said the
accounting firm did its job properly, and is “confident that a jury will
understand the applicable rules and standards in this case and decide
accordingly.”
The Taylor Bean trustee contends that PwC should
have found the fraud even though it wasn’t Taylor Bean’s auditor. PwC was
the outside auditor for Colonial’s holding company, Colonial BancGroup Inc.
Taylor Bean’s auditor, Deloitte & Touche LLP, reached a confidential
settlement with the trustee in 2013 over related allegations. Deloitte
declined to comment.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: Facebook
Inc. said it could be on the hook for $3 billion to $5 billion in additional
taxes as a result of an Internal Revenue Service investigation into how the
social network transferred assets overseas. The company said in a quarterly
filing that the IRS had issued a "statutory notice of deficiency" a day
earlier saying Facebook owes more taxes for 2010. The July 27 notice came
the same day that Facebook said second-quarter profit nearly tripled to
$2.06 billion.
CLASSROOM
APPLICATION: This
article would be a good example to use in a corporate tax class or when
covering the topic of asset valuation.
QUESTIONS:
1. (Introductory) What did Facebook announce regarding the IRS
allegations? What is Facebook's possible tax liability?
2. (Advanced) Why is the IRS suing Facebook? What is the timeline of
actions and events related to the lawsuit?
3. (Advanced) What is Facebook's relationship with Ireland? Why did
it transfer assets? What is the company hoping to do?
4. (Advanced) What is the IRS alleging in this case? What is
Facebook's response to the allegations?
5. (Advanced) How does the tax assessment amount compare to the
company's revenues? If the company had to pay the taxes, what would be the
impact on its financial statements?
Reviewed By: Linda Christiansen, Indiana University Southeast
Facebook Inc. said it could be on the hook for $3
billion to $5 billion in additional taxes as a result of an Internal Revenue
Service investigation into how the social network transferred assets
overseas.
The company said in a quarterly filing Thursday
that the IRS had issued a “statutory notice of deficiency” a day earlier
saying Facebook owes more taxes for 2010. The July 27 notice came the same
day that Facebook said second-quarter profit nearly tripled to $2.06
billion.
The notice flows from an investigation that started
in 2013 into the company’s treatment of assets it transferred to Ireland in
2010.
The IRS earlier this month sued Facebook for
documents related to the transfer, saying it suspected that Facebook’s
accountants had undervalued some of those assets by “billions of dollars.”
But neither the agency nor Facebook had said before Thursday what the
company’s potential tax liability could be.
The IRS notice applies only to the 2010 tax year,
but if the IRS takes a similar position for other years it is investigating
and wins in court, it could result in an additional federal tax liability of
between $3 billion and $5 billion, plus any interest or penalties.
Facebook said it disagrees with the IRS’s position
and plans to file a petition in U.S. Tax Court challenging the notice. If
the IRS prevails, it would have a “material adverse impact to Facebook’s
finances,” the company said in the filing. Tax Court cases can take years to
conclude and can be appealed into other federal courts.
If Facebook were required to pay an additional $5
billion in taxes, that amount would exceed its entire tax cost for 2014 and
2015 combined.
Other major companies like Microsoft Corp. ,
Amazon.com Inc. and Coca-Cola Co. have tangled with the IRS over the issue
of attributing profits to foreign subsidiaries. Last year, Coke received
notice of a potential $3.3 billion federal income-tax liability and is
challenging that in tax court. Amazon, like Coke, is also challenging the
IRS in tax court. Microsoft said in a securities filing Thursday that its
audit is continuing and could have a “significant” impact on the company’s
finances.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: There's
too much adjusting going on when it comes to healthcare earnings, according
to analysts at Mizuho Securities USA Inc. Several companies in the sector
report adjusted earnings that are too far afield from the results they
report based on U.S. Generally Accepted Accounting Principles, analysts Ann
Hynes and Sheryl Skolnick wrote in a report. The companies then go on to
provide investors guidance using those adjusted figures alone. The
Securities and Exchange Commission requires U.S. listed companies to compile
their financial reports using GAAP figures. While companies may supplement
their reports with non-GAAP metrics, the SEC clarified that GAAP figures
should be given prominence and that any adjustments should be kept to a
minimum.
CLASSROOM
APPLICATION: This
article is appropriate for use in financial accounting classes.
QUESTIONS:
1. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
2. (Advanced) What is non-GAAP reporting? Why do companies engage in
this type of reporting? What are the benefits of non-GAAP reporting?
3. (Advanced) Why do some companies adjust their financial
statements? What are the main areas of adjustments? Which of these
adjustments are most common? Why?
4. (Introductory) What is Mizuho Securities? What did its analysts
announce?
5. (Advanced) According to this article, what companies are adjusting
their financial reporting? What adjustments are they making? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
There’s too much adjusting going on when it comes
to healthcare earnings, according to analysts at Mizuho Securities USA Inc.
Several companies in the sector report adjusted
earnings that are too far afield from the results they report based on U.S.
Generally Accepted Accounting Principles, analysts Ann Hynes and Sheryl
Skolnick wrote in a report. The companies then go on to provide investors
guidance using those adjusted figures alone, the report said.
The Securities and Exchange Commission requires
U.S. listed companies to compile their financial reports using GAAP figures.
While companies may supplement their reports with non-GAAP metrics, the SEC
in May clarified that GAAP figures should be given prominence and that any
adjustments should be kept to a minimum.
In light of renewed scrutiny of these practices,
the Mizuho analysts said they expect companies in the healthcare sector to
make changes in their financial reporting.
“It’s probably taking them a little longer to
prepare their earnings releases and their commentary around earnings,” said
Ms. Skolnick, director of research at Mizuho. “We do anticipate that there
are several companies…that will need to change their guidance basis,” she
added.
Several companies have already changed tack.
Pharmacy chain Walgreens Boots Alliance Inc. furnished investors with a
revamped earnings release on July 6, placing GAAP results up front and
reducing the use of non-GAAP figures. By contrast, the company’s April 5
earnings release focused on adjusted earnings.
The changes were made in response to the SEC
guidance and to further enhance disclosure to investors, a company spokesman
said in an email. However, Walgreens Boots has not made any changes to how
it adjusts its earnings, he said.
Similarly, Quest Diagnostics Inc. said it moved its
GAAP earnings per share higher in the layout of its second quarter earnings
release on July 21 compared with April’s release in response to the SEC
guidelines.
“We carefully considered the latest [SEC] guidance
as part of our normal process of developing our quarterly earnings release,”
a Quest Diagnostics spokesman said in an email.
However, Mizuho analysts outlined other issues with
the non-GAAP reporting practices of several healthcare companies, including
Kindred Healthcare Inc., Amedisys Inc., and Quest Diagnostics.
Amedisys, which the report describes as undergoing
a turnaround, adjusts its earnings per share from GAAP by adding back legal
fees, which appear to be an ongoing expense due to a regulatory
investigation. Amedisys also adds back restructuring charges, “without which
the turnaround wouldn’t be possible,” the bank said.
Amedisys finance chief Ronald LaBorde said the
company aspires to ensure its adjusted and GAAP results are as close
together as possible.
Adjusted results are “not meant to substitute, in
any way, for GAAP results,” Mr. LaBorde said. Rather, the adjusted numbers
should give investors a deeper understanding of Amedisys’ business, he
added. Amedisys is scheduled to report its second quarter earnings on August
2.
Meanwhile, Quest Diagnostics’ adjusted earnings
exclude restructuring and integration charges which relate to “integration
and restructuring efforts of acquisitions that closed years ago,” Mizuho
says.
Quest Diagnostics hasn’t changed the way it adjusts
its earnings for the company’s most recent earnings report, a spokesman said
in an email.
“Since 2013 our cumulative reported (GAAP) earnings
per share are essentially the same as our cumulative adjusted earnings per
share,” he added.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
TOPICS: data
analytics, Fraud, Governmental Accounting, Internal Controls
SUMMARY: Awareness
of fraud, waste, and abuse in government benefits programs has risen
markedly during the past decade. The U.S. Government Accountability Office
found $137 billion in improper payments in 2015. That's up from $38 billion
in 2005, or 197 percent in inflation-adjusted dollars - and those figures do
not even account for waste. Demand for government benefits such as Medicaid,
Medicare, and disability compensation is increasing, as are health care
costs, which comprise 17 percent of U.S. GDP and continue to grow. Advanced
analytics techniques give the government greater opportunity to dig into the
data and understand where fraud, waste, and abuse problems lie and what
processes can help address those issues. A broad array of analytics
techniques can be used in tandem to detect improper and wasteful activity,
establish effective compliance programs, and recover funds as appropriate.
The article discusses some of these techniques.
CLASSROOM
APPLICATION: This
article discusses controls and data analytic techniques government and
businesses can use to reduce fraud waste, while increasing compliance and
recovery of funds. It could be used in governmental or financial accounting
classes, and when covering fraud prevention and detection.
QUESTIONS:
1. (Introductory) What types of frauds occur against the government?
What is the extent of the fraud? What are similar frauds that occur in the
business world?
2. (Advanced) What is data analytics? What are some of the tools and
benefits provided by these analytics?
3. (Advanced) How can data analytics be used to prevent and detect
fraud? Discuss how some specific techniques have an impact in the battle
against fraud.
4. (Advanced) What are some limitations of using data analytics to
prevent and detect fraud? What other actions should accountants and others
take to fill in the gaps data analytics leaves?
Reviewed By: Linda Christiansen, Indiana University Southeast
Government agencies are increasingly using advanced
analytics techniques to confront instances of fraud, waste, and abuse in
their benefits programs.
The first hint that something was amiss in the city
of Klamath Falls, Oregon, came in 2012, when a food stamp recipient told a
state Department of Human Services caseworker that a local market was making
fraudulent sales to beneficiaries in return for cash payouts.¹ State
officials began examining these small-scale food stamp infractions. The
investigation eventually led law enforcement to a criminal ring linked to
Mexican drug cartels that was laundering an estimated $20,000 each month in
food stamp benefits. Two years later, police arrested 65 people in
connection with the case.²
This is not an isolated instance—far from it, in
fact. Awareness of fraud, waste, and abuse in government benefits programs
has risen markedly during the past decade. The U.S. Government
Accountability Office found $137 billion in improper payments in 2015.³
That’s up from $38 billion in 2005,⁴ or 197 percent in inflation-adjusted
dollars⁵—and those figures do not even account for waste.
“There is not necessarily more fraud, waste, and
abuse than in the past. Rather, our ability to use analytics to discover it
has increased,” said Brien Lorenze, a principal at Deloitte Advisory, during
a Deloitte Dbriefs webcast in June. According to the webcast presenters,
fraud is illegal and intentional, abuse is improper but not necessarily
illegal, and waste is driven by inefficient or ineffective management, vague
policy, and poor decision-making.
As a result of this enhanced awareness, “There is a
growing call today among government leaders, the media, the public,
politicians, and other stakeholders to identify, report, and mitigate acts
of fraud, waste, and abuse in the public sector,” says William Eggers, a
public sector research director at Deloitte Services LP and author of the
recent Deloitte University Press book “Delivering on Digital: The Innovators
and Technologies That Are Transforming Government.”
Demand for government benefits such as Medicaid,
Medicare, and disability compensation is increasing, as are health care
costs, which comprise 17 percent of U.S. GDP and continue to grow.⁶
“Containing fraud, waste, and abuse is therefore essential if we wish to
improve access to and timeliness of care as well as other benefits,” Lorenze
says.
Fraud, waste, and abuse can take many forms. For
instance, according to Rachel Frey, a principal at Deloitte Consulting LLP,
service providers may record inaccurate information about recipients or
accidentally double-bill for services. Service recipients might
intentionally falsify or incorrectly report eligibility information. Agency
employees could even collude with service recipients. All of these cases may
lead to government agencies improperly disbursing funds, then expending time
and energy to recover them, a “pay-and-chase” model that government
increasingly looks to avoid, Frey says. Additionally, agencies are looking
to uncover waste in their internal operations, such as the misallocation of
employees, she says.
Enter Analytics
Government agencies, of course, have been trying to
provide cheaper, faster, better service for many years. Advanced analytics
techniques are now giving them the ability to examine and draw conclusions
from large volumes of information. “Analytics gives the government greater
opportunity to dig into the data and understand where fraud, waste, and
abuse problems lie and what processes can help address those issues,”
Lorenze said during the webcast.
A broad array of analytics techniques can be used
in tandem to detect improper and wasteful activity, establish effective
compliance programs, and recover funds as appropriate, says Dan Olson, a
senior manager at Deloitte Transactions and Business Analytics LLP. Examples
of these techniques include:
Rules-based monitoring for known risks. This
entails building business rules based on policies and regulations to
identify recognized patterns in data typically associated with fraud, waste,
and abuse.
Anomaly detection to locate potential new risks.
This requires using statistical profiling and outlier detection to identify
patterns inconsistent with normal activity.
Statistical modeling, including machine learning,
to predict future events. This involves uncovering patterns in historical
data to determine where and how compliance violations may emerge.
Text analytics to examine documents such as
electronic health records for insights buried in unstructured data. For
example, text analytics enables the comparison of doctors’ patient case
notes and billed procedure or diagnosis codes to determine if abuse is
occurring.
Network analytics to identify links across
entities. This leads to discovering unlikely relationships between groups to
recognize potential fraud networks and uncover collusion or kickback
activities.
Visual analytics and dashboards to create visual
representations. This can allow stakeholders to more easily identify
suspicious patterns hidden in data.
Fraud is dynamic, Olson says, so each of these
analytics approaches plays an important role in a broader compliance
program. “By using data-driven analytics, we can increase awareness of bad
actors,” he says.
Government Analytics in Action
During the webcast, speakers shared agency case
studies illustrating the value of analytics in government fraud, waste, and
abuse programs.
In one case, the New Mexico Department of Workforce
Solutions was striving to prevent improper payments in its unemployment
insurance program. The state combined advanced analytics and behavioral
analysis and recognized the value in “nudging,” or prompting, certain
program recipients—through carefully worded communications on initial
applications and ongoing weekly certifications—to report more reliable,
timely eligibility information. As a result, the state can now identify and,
more importantly, prevent potential overpayments rather than chase the money
after it has already been paid, Frey says.
Continued in article
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
TOPICS: Asset
Valuation, Business Valuation, Discounting, Estate Tax, Gift Tax
SUMMARY: The
Treasury Department and Internal Revenue Service proposed making it harder
for wealthy business owners to transfer assets to heirs without paying
estate and gift taxes with plans to place new limits on a common technique
used to transfer interests in illiquid businesses.
CLASSROOM
APPLICATION: This
article is a useful update for an estate and gift tax class, as well as for
any class that covers business valuations.
QUESTIONS:
1. (Advanced) What are the current tax rules regarding discounting
the value of fractional interests in closely held businesses or land? Why
has this been effective? What benefits does it offer? Who benefits?
2. (Introductory) What has the Treasury Department and Internal
Revenue Service proposed regarding to limit use of a common technique used
to transfer interests in illiquid businesses?
3. (Advanced) Why did the government make this proposal? How will the
change affect taxpayers?
4. (Advanced) What are the liquidity issues with a partial interest
in a closely held business? Are there control issues? Are there any
legitimate reasons for a discount in fair market value? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
WASHINGTON—The U.S. government on Tuesday proposed
making it harder for wealthy business owners to transfer assets to heirs
without paying estate and gift taxes.
The plan from the Treasury Department and Internal
Revenue Service would place new limits on a common technique used to
transfer interests in family businesses.
The regulations address the practice of discounting
the value of ownership stakes in closely held businesses or land. The
discounts are permitted because some stakes are worth less since they are
harder to sell or represent a minority interest. The reduced values allow
wealthy families to pack assets inside the $10.9 million lifetime exclusion
from estate and gift taxes for married couples.
A typical strategy would place, say, $14 million
worth of assets—stock, a business, real estate or even cash—into a company
with restrictions on some of the owners’ ability to sell their pieces, said
David Scott Sloan, a partner at Holland & Knight LLP in Boston who advises
high-net-worth families. Those restrictions could allow the owners to get an
appraisal saying that the actual value of those assets was about $10
million.
“By taking advantage of these tactics, certain
taxpayers or their estates owning closely held businesses or other entities
can end up paying less than they should in estate or gift taxes,” Mark
Mazur, the assistant secretary for tax policy, said in a statement.
“Treasury’s action will significantly reduce the ability of these taxpayers
and their estates to use such techniques.”
The government’s proposal would make it harder for
taxpayers to claim valuation discounts that taxpayers typically have used to
reflect the diminished value of minority interests, said Richard Dees, a
partner at McDermott Will and Emery in Chicago. “This is going to be a major
problem for all family-owned businesses,” Mr. Dees said. “This all boils
down to the question of whether a family business should be valued as if
it’s owned by one person.”
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: For
high-income Americans covered by Medicare, now is the time to make tax moves
to minimize an increase in premium surcharges. For those in that expanding
pool of Medicare premium surcharge payers, the premium can often be reduced
with careful planning. The key number for planning is "modified adjusted
gross income," which in this case usually means a person's adjusted gross
income (AGI) plus any tax-exempt interest income.
CLASSROOM
APPLICATION: This
article is appropriate for an individual taxation class.
QUESTIONS:
1. (Introductory) What is the Medicare surcharge? Who pays this
charge?
2. (Advanced) Who pays the Medicare surcharge? How is the surcharge
calculated?
3. (Advanced) What is AGI? What is modified adjusting gross income?
How is it calculated? What can taxpayers do to reduce it? If it is reduced,
what impact could it have on a taxpayer's tax liability?
4. (Advanced) Of the planning ideas listed in the article, which is
available to most taxpayers? Which would be easiest to accomplish?
5. (Advanced) Which planning options require planning in advance of
the current tax year? Which options do not require advance planning and
could be accomplished within the year savings are desired?
Reviewed By: Linda Christiansen, Indiana University Southeast
For high-income Americans covered by Medicare, now
is the time to make tax moves to minimize an increase in premium surcharges.
These surcharges apply because Congress has decided
the top 5% or so of Medicare recipients should contribute more for their
coverage than lower earners. Last year, about 3 million Americans owed extra
premiums for Part B coverage for medical services, such as doctors, and
about 2 million owed them for Part D coverage for drugs.
This year’s combined Part B and D surcharges range
from $737 to $4,090 per person above the base annual premium of $1,462 per
person. They begin above income of $85,000 for singles and $170,000 for
couples.
Soon, those numbers could rise further, as Congress
decided last year that some recipients will pick up an even greater share of
the costs starting in 2018. For example, the total annual Part B premium for
a single person with income between $133,500 and $160,000 is expected to
rise 30% in 2018—from $2,856 to $3,720, according to research by the Kaiser
Family Foundation, a nonpartisan health-policy nonprofit based in Menlo
Park, Calif.
The overall number of Medicare recipients who owe
these fees will also rise because the income thresholds aren’t indexed for
inflation. Last year, 5.7% of Part B recipients owed the surcharges compared
with 3.5% in 2011, and the number is expected to grow to 8.3% by 2019,
according to Kaiser.
For those in that expanding pool of surcharge
payers, the premium can often be reduced with careful planning.
“A very modest effort can result in real savings,”
says David Roberts, a professor of accounting at DePaul University in
Chicago.
In part, that is because the surcharges have a
unique structure: an extra dollar of income can incur a much higher premium.
Thus, a single person with $107,000 of income this year owes a $584
surcharge for Part B, compared with $1,462 for someone earning $107,001.
And this year’s planning will affect 2018 Medicare
premiums, because surcharges are based on the recipient’s income earned two
years before.
The key number for planning is “modified adjusted
gross income,” which in this case usually means a person’s adjusted gross
income (AGI) plus any tax-exempt interest income. AGI is the number at the
bottom of the front page of the 1040 form. It doesn’t include itemized
deductions such as those for mortgage interest, property taxes or charitable
donations, so raising such deductions won’t help lower surcharges.
Here are moves that could help, especially for
people close to a surcharge threshold.
*Revamp charitable contributions. Charitably-minded
taxpayers who usually give cash should consider donating appreciated assets
such as stock shares instead. Donors of such assets often get to skip
capital-gains tax and to deduct the full market value of the donation, and
the gift doesn’t raise AGI.
Taxpayers age 70 1/2 and older should also consider
making direct donations of individual retirement account assets to charity
instead of cash. Each IRA owner is allowed to give a total of $100,000 a
year from his IRA to certified charities and have the donations count as
part of their required annual withdrawal.
There is no deduction for such donations, but they
don’t count as income either—which lowers AGI.
*Look to a Roth IRA. Payouts from Roth IRAs often
aren’t taxable, so they don’t raise AGI. Assets shifted from a traditional
IRA into a Roth IRA are taxable in the year of the conversion, however, and
that does raise income.
*Manage capital gains and losses. Taxable capital
gains raise AGI, but capital losses can offset gains plus $3,000 of other
income a year.
“Passive” investments, such as broad-based index
funds, tend to pay out less annually in capital gains than actively managed
funds.
*Time the receipt of income. It may be possible to
time the sale of an asset or payment of income so that it is split over two
years, keeping AGI below a threshold. If not, it could make sense to bunch
income so that some years have lower surcharges than others.
*Look to work-related savings. Medicare
participants who are still employed can lower their AGI by contributing to
401(k) plans or traditional IRAs, says Ed Mendlowitz, a CPA with
WithumSmith+Brown. Those who are self-employed can often deduct Medicare
premiums for themselves and their spouse as a health insurance cost.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: Videogame
developer Zynga Inc.'s second-quarter loss narrowed despite a shrinking user
base and revenue decline, thanks mostly to an accounting change. The company
has been trying to shore up cash, announcing layoffs last year that brought
its staff to about half its peak and this year saying it would sell its
seven-story San Francisco headquarters. It has also worked to cut marketing
costs. The second-quarter improvement was driven by lower expenses,
primarily because of a benefit stemming from a change in the estimated fair
value of recent acquisition's liability.
CLASSROOM
APPLICATION: This
article is appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What is Zynga's financial situation? What changes
and trends has it been experiencing?
2. (Advanced) What is an accounting change? What must companies do
when they have one?
3. (Advanced) What was Zynga's accounting change? How did the change
affect the company's financial statements? How would this be reported by the
company?
4. (Advanced) What are some causes of these changes in Zynga's
financial results? Which of these are under Zynga's control? Which are not
controllable by the company? How should management handle both types of
causes?
5. (Advanced) State the cost behavior of each of the changes Zynga
has done or is considering. What are the benefits of changes in variable
costs? Of changes in fixed costs? What are the possible problems of the
variable cost changes? Of the fixed cost changes?
Reviewed By: Linda Christiansen, Indiana University Southeast
Videogame developer Zynga Inc. ’s second-quarter
loss narrowed despite a shrinking user base and revenue decline, thanks
mostly to an accounting change.
Zynga said its loss would widen in the current
quarter, with revenue coming in below expectations. Shares dropped 8.1% in
after hours trading.
The San Francisco company, known for its social
games Farmville and Words with Friends, has been trying to steady its
business. Zynga had a meteoric rise, thanks largely to a marketing
relationship with Facebook in its early days, but since the company went
public in late 2011 the stock has tumbled. Shares made their debut at $11
and most recently closed at less than $3.
The company has been trying to shore up cash,
announcing layoffs last year that brought its staff to about half its peak
and this year saying it would sell its seven-story San Francisco
headquarters. It has also worked to cut marketing costs.
“We have more work to do in our turnaround,” said
Chief Executive Frank Gibeau, though he expressed optimism over steps the
company has taken to “do more with less.”
The second-quarter improvement was driven by lower
expenses, primarily because of a benefit stemming from a change in the
estimated fair value of recent acquisition’s liability. Zynga bought the
social casino Rising Tide Games last year. Mr. Gibeau said lower marketing
costs also helped. Such expenses declined 1.2%.
During the quarter, Zynga’s user base continued to
shrink. The company reported 61 million average monthly users—down 26% from
a year earlier and 11% from the first quarter. Most of those users play
Zynga’s games on mobile devices. Average monthly mobile users dropped 23%
year-over-year and 11% from the first quarter. Users who play daily fell 15%
from last year’s quarter to 18 million.
As the company’s user base declined, so did
revenue. Total sales slid 9.1% to 181.7 million, with online game revenue
down 16%. Advertising jumped 22% from a year earlier, though from the first
quarter it fell 8%.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: Companies
that report significantly stronger earnings by using tailored figures like
"adjusted net income" or "adjusted operating income" are more likely to
encounter some kinds of accounting problems than those that stick to
standard measures. The research suggests that heavy use of metrics outside
of generally accepted accounting principles - sometimes referred to
derisively as "earnings before bad stuff" - could be a warning sign. Just
3.8% of those exclusively using standard GAAP metrics had formal earnings
restatements from 2011 to 2015. Among heavy users of non-GAAP measures-those
whose non-GAAP earnings were at least twice as high as their GAAP net
income-the rate was 6.5%. Similarly, 7.5% of the GAAP-only group had
material weaknesses in internal controls - flaws in their procedures to
prevent financial errors and fraud - versus 11% of the non-GAAP group.
CLASSROOM
APPLICATION: This
article is appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
2. (Advanced) What is non-GAAP reporting? Why do companies engage in
non-GAAP reporting? What are the benefits of this type of reporting?
3. (Advanced) How many companies use non-GAAP reporting? Why? Name
some examples of differences between GAAP and non-GAAP reporting.
4. (Advanced) What issues or problems can non-GAAP reporting present
to users of the financial statements? What do the statistics reveal
regarding the contrast of companies using non-GAAP reporting versus those
not using non-GAAP reporting?
5. (Advanced) Should non-GAAP reporting be regulated? If so, how?
Reviewed By: Linda Christiansen, Indiana University Southeast
Regulators and investors are increasingly wary when
companies overemphasize their own customized earnings metrics. New research
shows they may have a point.
Companies that report significantly stronger
earnings by using tailored figures like “adjusted net income” or “adjusted
operating income” are more likely to encounter some kinds of accounting
problems than those that stick to standard measures, according to research
by consulting firm Audit Analytics.
The rules allow companies to report such tailored
figures, and the research, conducted for The Wall Street Journal, doesn’t
necessarily mean such companies are less scrupulous in their bookkeeping.
But it does suggest that heavy use of metrics outside of generally accepted
accounting principles—sometimes referred to derisively as “earnings before
bad stuff”—could be a warning sign.
“I would say an overprominent user of non-GAAP
metrics would justify more attention and is a red flag,” said Olga Usvyatsky,
Audit Analytics’s vice president of research. Heavy use of non-GAAP metrics
may indicate a company’s accounting is “more aggressive,” she said.
The study focused on companies in the S&P 1500
index. It found that just 3.8% of those exclusively using standard GAAP
metrics had formal earnings restatements from 2011 to 2015. Among heavy
users of non-GAAP measures—those whose non-GAAP earnings were at least twice
as high as their GAAP net income—the rate was 6.5%.
Similarly, 7.5% of the GAAP-only group had material
weaknesses in internal controls—flaws in their procedures to prevent
financial errors and fraud—versus 11% of the non-GAAP group.
Some of the numbers are small, and the use of non-GAAP
metrics didn’t specifically cause or relate directly to the companies’
accounting flaws. Audit Analytics cautioned more research is needed.
Still, the results suggest companies using non-GAAP
metrics heavily “may be somewhat less rigorous in other accounting areas”
than companies using only GAAP, said Robert Pozen, a senior lecturer at the
MIT Sloan School of Management.
Two examples are Valeant Pharmaceuticals
International Inc. and LendingClub Corp. Both companies have been heavy
users of pro forma metrics, and both have run into accounting and other
problems that have hammered their shares.
Valeant restated earnings earlier this year over
revenue-booking issues and said it had material weaknesses relating to its
“tone at the top,” or the commitment by a company’s leadership to doing
business ethically. Valeant has used non-GAAP metrics for years, often
benefiting significantly. In 2015, the company had a GAAP loss of $291.7
million but an “adjusted” non-GAAP profit of $2.84 billion after stripping
out amortization of intangible assets, acquisition costs and other expenses.
Valeant spokeswoman Laurie Little said the company
believes its non-GAAP measures “are useful to investors in their assessment
of our operating performance and the valuation of our company.”
Online lender LendingClub forced its chief
executive to resign in May after it found disclosure problems on some loans,
and it too cited a “tone at the top” material weakness. The company had a
2015 GAAP loss of $5 million but non-GAAP net income of $56.8 million.
LendingClub declined to comment.
Neither company was in the pool Audit Analytics
examined.
Companies are allowed to use nonstandard metrics as
long as they also provide GAAP numbers and show the differences between the
two. The tailored measures strip out unusual or noncash items to present
what companies say is a clearer picture of performance.
Even critics acknowledge the tailored metrics can
sometimes be helpful—showing a company’s results in constant currency is a
legitimate adjustment, for instance, Mr. Pozen said.
But there is also a concern they are being abused,
that companies are stripping out normal, ongoing costs to make themselves
look healthier.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
TOPICS: Auditing,
Finance, Financial Markets, International Business, Investing, PCAOB
SUMMARY: A
long-running dispute between the U.S. and China over the ability to vet
auditors of Chinese companies listed on American exchanges could be edging
toward a breakthrough. Two big U.S.-listed Chinese companies - Alibaba Group
Holding Ltd. and Baidu Inc. - and their outside auditors are preparing for
audit inspections by officials from the Public Company Accounting Oversight
Board. The PCAOB is expected to gain access in coming months to audit firms'
records of the work they did to review Alibaba's and Baidu's books. That
could be a prelude to fuller PCAOB inspections of the audit firms, a move
long blocked by the Chinese government. PricewaterhouseCoopers' Hong Kong
affiliate is Alibaba's auditor; Ernst & Young's Beijing affiliate is Baidu's
auditor. The ability to check auditors of foreign firms listed in the U.S.
is important to ensure auditing standards are upheld and investors in U.S.
markets are protected.
CLASSROOM
APPLICATION: This
article is useful for auditing courses, and courses dealing with financial
markets.
QUESTIONS:
1. (Introductory) What is the PCAOB? What is its purpose and
function? When was it created? Why?
2. (Advanced) What is Alibaba? Where is it based? How is it connected
to the United States?
3. (Advanced) What have been the auditing issues related to Alibaba?
Who is concerned or should be concerned? What are their concerns?
4. (Advanced) What are the possible new developments that could occur
with the auditing of Chinese firms? How could a change like this affect
American markets? How could they affect auditing? Should these changes be
made? Why or why not?
5. (Advanced) Should Alibaba and other companies similarly situation
be subject to U.S. regulations or jurisdiction? Why or why not?
6. (Advanced) The article states the companies' auditors are
affiliates of U.S. Big Four firms. What does that mean? How much control do
the U.S. firms have in those audits? How could that be handled to ensure
proper audits?
Reviewed By: Linda Christiansen, Indiana University Southeast
A long-running dispute between the U.S. and China
over the ability to vet auditors of Chinese companies listed on American
exchanges could be edging toward a breakthrough.
Two big U.S.-listed Chinese companies— Alibaba
Group Holding Ltd. and Baidu Inc. —and their outside auditors are preparing
for audit inspections by officials from the Public Company Accounting
Oversight Board, the U.S. audit-industry regulator. The PCAOB is expected to
gain access in coming months to audit firms’ records of the work they did to
review Alibaba’s and Baidu’s books, according to people familiar with the
situation. That could be a prelude to fuller PCAOB inspections of the audit
firms, a move long blocked by the Chinese government.
PricewaterhouseCoopers’ Hong Kong affiliate is
Alibaba’s auditor; Ernst & Young’s Beijing affiliate is Baidu’s auditor.
The ability to check auditors of foreign firms
listed in the U.S. is important to ensure auditing standards are upheld and
investors in U.S. markets are protected, experts say. U.S. regulators have
been particularly eager to vet how Chinese companies have been audited,
after a wave of alleged accounting fraud and investor complaints about lack
of financial transparency at smaller U.S.-listed Chinese firms starting
around 2011.
“It’s critical for investors in the U.S. market
that the PCAOB is able to inspect Chinese audit firms,” said Joseph Carcello,
a University of Tennessee accounting professor.
The PCAOB has long attempted to inspect the
performance of China-based firms that audit many U.S.-traded Chinese
companies, the way the accounting board regularly inspects other audit
firms. But to date, the Chinese government has refused to allow the
inspections, citing sovereignty concerns: The Chinese government has
indicated the information contained in audits of Chinese companies could be
considered “state secrets.”
The new developments may be a move toward resolving
that yearslong dispute, which has been marked by seeming steps toward
agreement followed by reversals. Most recently, the PCAOB last year said
publicly it was close to an agreement to proceed with inspections, only to
have negotiations break down.
One person at a Big Four accounting firm said that
the firm has been preparing for years for the possibility that the PCAOB
will inspect its working papers for U.S.-listed Chinese companies. The firm
has been conducting mock reviews of PCAOB audits for the past few years,
going over questions and grading the employees on how well they answered,
the person said.
It is still possible the Alibaba- and Baidu-related
inspections might not proceed. The audit documents provided to the PCAOB may
be heavily redacted and the board may face other restrictions in conducting
the inspections, said the people familiar with the situation, raising
questions about whether the board will be allowed to conduct the thorough
inspections it is seeking.
The move toward inspections is a “good first step”
in thawing relations between U.S. and Chinese regulators, said Paul Gillis,
an accounting professor at Peking University’s Guanghua School of
Management. “But that doesn’t mean that the inspections will be meaningful.”
Mr. Gillis says he expects audit work papers to be
moved to Hong Kong for inspection, a way to ease the Chinese government’s
concerns about foreign regulators working on Chinese soil.
The PCAOB wouldn’t confirm the move toward
inspections, saying only that it continues “to work toward obtaining access
to the information we need in order to conduct the necessary inspections of
registered firms in China and Hong Kong.” The auditing regulator said it
doesn’t comment on specific audits.
PwC in Hong Kong didn’t immediately respond to a
request for comment. E&Y’s affiliate in Beijing declined to comment. The
China Securities Regulatory Commission had no immediate comment.
PCAOB inspections are meant to assess the
performance and compliance with auditing rules of firms that audit
U.S.-traded companies. They are done on a regular basis and aren’t a sign
the auditors or the companies have done anything wrong. But an inspection
would come at a sensitive time for Alibaba in particular, as the U.S.
Securities and Exchange Commission is investigating the accounting practices
of the e-commerce giant.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016
SUMMARY: Only
13% of more than 1,200 chief audit executives (CAEs) surveyed in 29
countries across eight industries are "very satisfied" that their functions
have the skills to meet expectations of stakeholders. The top five skills
gaps are cyber, cloud computing and other specialized information technology
skills, cited by 42% of respondents, followed by data analytics (41%); risk
modeling (27%), innovation (26%) and fraud detection (24%). CAEs also
indicate risk anticipation (39%) and data analytics (34%) as the two
innovations most likely to impact internal audit over the next three to five
years.
CLASSROOM
APPLICATION: This
article provides excellent information for an audit class, as well as for
coverage of the internal audit function in any class.
QUESTIONS:
1. (Introductory) What is a CAE? What does a CAE do?
2. (Advanced) What are the top five skills discussed in the article?
What do CAEs think about these skills? How are they ranked?
3. (Advanced) What is internal audit? What are the responsibilities
and areas of authority of the internal audit function?
4. (Advanced) What do CAEs think about their internal audit
functions?
5. (Advanced) What are analytics? How could analytics be used by the
internal audit function? What purpose would they serve? What benefits would
they offer? What costs are involved?
Reviewed By: Linda Christiansen, Indiana University Southeast
Only 13% of more than 1,200 chief audit executives
(CAEs) surveyed in 29 countries across eight industries are “very satisfied”
that their functions have the skills to meet expectations of stakeholders,
according to a global study, Evolution or Irrelevance? Internal Audit at a
Crossroads, by Deloitte Touche Tohmatsu Limited (DTTL).
The top five skills gaps are cyber, cloud computing
and other specialized information technology skills, cited by 42% of
respondents, followed by data analytics (41%); risk modeling (27%),
innovation (26%) and fraud detection (24%). CAEs also indicate risk
anticipation (39%) and data analytics (34%) as the two innovations most
likely to impact internal audit over the next three to five years.
Meanwhile, 72% of surveyed CAEs believe their
internal audit functions do not have a strong impact and influence on their
organizations. Further, 16% of respondents believe that their internal audit
function has little to no impact and influence over the board of directors,
executive team and other key personnel.
“These findings are concerning and indicate a need
for internal audit groups to substantially increase their relevance within
their organizations,” says Terry Hatherell, Global Internal Audit leader for
DTTL. “Internal audit plays a critical role in effective corporate
governance within an organization. The apparent lack of impact and influence
is surprising and represents a clear call to action for change,” he adds.
The study also found that 57% of CAEs are not
satisfied that their internal audit groups have the skills and expertise to
deliver on stakeholder expectations for efficient audits, insightful reports
and effective decision support. The majority of respondents say they use
analytics in fieldwork, but fewer do so in annual planning and audit
scoping.
Over the next three to five years, 58% of
respondents expect to be using analytics in at least half of their audits.
Thirty-seven percent expect to move to high usage—employing analytics in at
least 75% of their audits. The survey revealed gaps in stakeholders’
expectations for more forward-looking, predictive activities (e.g., risk
anticipation) from internal audit―the kind of activities enabled by
analytics.
“The need to
enhance analytics tools and techniques stands out among the most urgent
priorities for internal audit,” says Neil White, an Advisory partner and
internal audit analytics leader for Deloitte & Touche LLP. “While using
analytics to deliver audits more efficiently is an important goal, the
survey results lead us to believe internal audit should capitalize on the
wealth of available data to deliver more insightful views of business issues
and risks to stakeholders.”
Sixty-four
percent of respondents believe it will be important to have strong impact
and influence in their organizations over the next three to five years.
While about one-third of internal audit groups have evaluated their
organization’s strategic planning process in the past three years, over half
expect to do so in the next three years. In the next three years, 70% expect
to evaluate their organization’s risk management process, up from 54% over
the past three years.
Other Report
Highlights
—The current use
of analytics is largely at basic levels:
While 86% of respondents use analytics, only 24% use them at an intermediate
level and 7% at an advanced level. Most (66%) use basic, ad hoc analytics
(e.g., spreadsheets) or no analytics.
—Dynamic
reporting is poised to increase: Use of static text documents and
presentations to communicate with stakeholders will decrease as usage of
dynamic visualization tools, such as those used to generate heat maps,
bubble charts, interactive graphs and other easy-to-grasp representations of
data, is anticipated to increase from 7% to 35% among respondents.
—CAEs expect to
expand advisory services:
More than half of respondents (55%) expect the proportion of advisory
services they provide internally to expand over the next three to five
years.
—Alternative
resourcing for talent will likely expand:
The percentage of respondents with formal rotation programs is expected to
double over the next three to five years, from 10% to 20%. The percentage
with guest auditor programs also will likely increase from 20% to 29%, and
respondents expect the use of cosourcing to rise as well.
—Budgets
are expected to remain stable, which may present challenges: In a
time when internal audit may need to make significant investments to
strengthen its impact and influence, half of CAEs expect their budgets to
remain stable, and another third expect them to increase somewhat. Only 10%
expect budget decreases.
Considerations
for CAEs
The business
environment demands that organizations develop certain capabilities over the
next several year, such as the ability to anticipate risks and implement
responses. Organizations might find the following considerations useful:
—Seek ways to
increase impact and influence.
—Embed
analytics into internal audit activities.
—Streamline
and visualize communications and reports.
—Assess and
address talent and skills gaps.
—Review
strategic planning and risk management.
—Promote a
culture of innovation within the organization.
—Marshall
senior-level support.
“Organizations
—especially the audit committee and the executive team—need internal audit
to inform them about the future rather than report on the past, and they are
seeking insights as well as information and advice as well as assurance,”
says Mr. White. “Increased investment in analytics presents major
opportunities for CAEs to increase efficiency, value and, perhaps most
important, the impact of internal audits on their organizations.”
SUMMARY: A
specialized court's decision should embolden more students enrolled in
M.B.A. programs across the country to deduct their tuition - especially if
they are getting an executive M.B.A. A married couple deducted $18,879 for
tuition, commuting and other expenses on their 2011 tax return that the IRS
disallowed, in part because he was unemployed for several months of the
year. But the judge disagreed with the IRS, saving the taxpayers $2,111 in
taxes - and providing more ammunition to M.B.A. students who want to deduct
education expenses in the future. The decision was released earlier this
month by the Tax Court, a specialized tribunal. Although the case is of a
type that can't be appealed or formally cited as precedent, experts say such
cases often are influential both inside and outside the IRS. Many M.B.A.
students qualify for a deduction, however, because they have worked before
enrolling in a program and are seeking to "maintain or improve" their
skills, as the law requires. In addition, the degree doesn't lead to a
license.
CLASSROOM
APPLICATION: This
is an excellent article to use in individual tax classes, and also for the
information it provides our students who may be in graduate school or
considering graduate school in the future.
QUESTIONS:
1. (Introductory) What is Tax Court? How does it differ from other
courts?
2. (Advanced) What was the ruling in this case? What is the reasoning
behind that decision? What tax rules support the decision?
3. (Advanced) Why did the IRS fight the deduction in this case? What
was the reasoning the IRS was asserting? What are the merits of the IRS's
position?
4. (Advanced) What is precedent? How is the decision treated for
precedent purposes? Why? How will that impact tax planning for other
taxpayers?
5. (Advanced) What makes earning an MBA different from earning other
degrees? Does the graduate vs. undergraduate distinction make a difference?
For what programs or courses is a taxpayer most likely to deduct the costs?
For what courses or programs are education expenses are not allowed? In what
situations would MBA expenses be less likely to be deductible?
Reviewed By: Linda Christiansen, Indiana University Southeast
A specialized tax court’s decision seen as a win
for M.B.A. students.
A specialized court’s decision should embolden more
students enrolled in M.B.A. programs across the country to deduct their
tuition—especially if they are getting an executive M.B.A.
In the case, Kopaigora v. Commissioner, the
Internal Revenue Service had hoped to collect thousands of dollars from Alex
Kopaigora, a 42-year-old who came to the U.S. from Ukraine in 1994 on a
Mormon mission and later became a citizen. In 2011, he was employed at a
hotel in Los Angeles and commuted to Brigham Young University in Salt Lake
City, for its executive M.B.A. program.
Mr. Kopaigora and his wife, Elizabeth, deducted
$18,879 for tuition, commuting and other expenses on their 2011 tax return
that the IRS disallowed, in part because he was unemployed for several
months of the year.
But the judge disagreed with the IRS, saving the
Kopaigoras $2,111 in taxes—and providing more ammunition to M.B.A. students
who want to deduct education expenses in the future.
“This case is a big win for all M.B.A. students,”
says Robert Willens, a tax expert who teaches at Columbia University’s
business school and has advised hundreds of M.B.A. students on the ins and
outs of deducting tuition.
The decision was released earlier this month by the
Tax Court, a specialized tribunal. Although the case is of a type that can’t
be appealed or formally cited as precedent, experts say such cases often are
influential both inside and outside the IRS.
According to the Department of Education’s most
recent data, about 110,000 students were pursuing graduate degrees in
business in 2014. About 12,000 students were enrolled in executive M.B.A.
programs in the U.S. in 2015, according to the Executive MBA Council, and
three-quarters of them paid all or part of their own expenses.
To see why the case has broad implications, it is
necessary to grapple with intricacies in the tax law. The rules allow
deductions for education costs as “unreimbursed business expenses” on
Schedule A (for employees) and on Schedule C (for the self-employed)—but not
if the courses prepare the student for a new type of business or license,
such as for law or nursing.
In practice, this requirement often precludes
taxpayers from taking deductions for both undergraduate and graduate
education expenses, although other tax benefits may help with these costs.
Continued in article
Jensen Comment
Most students in other graduate programs will find this MBA student favoritism
by the IRS to be discriminatory.
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016
SUMMARY: ComScore
Inc. said it needs more time to file its June 2016 quarterly report, as the
media measurement and analytics company completes an internal investigation
into its accounting. ComScore said in a regulatory filing with the
government that its investigation is "substantially complete," and that its
audit committee has identified "certain areas of potential concern,
including with respect to certain accounting and disclosure practices and
controls that the company...is further analyzing."
CLASSROOM
APPLICATION: This
article is appropriate for coverage of revenue recognition and internal
investigations.
QUESTIONS:
1. (Introductory) What accounting-related issues ComScore is
investigating? What reporting has the investigation delayed?
2. (Advanced) The article discusses "nonmonetary" revenue. What is
that? What were the issues regarding this kind of revenue? How should the
company account for it?
3. (Advanced) What is an audit committee? What are its duties and
areas of authority? How would it be involved in a case like this?
4. (Advanced) How has the investigation affected the company's stock
price? Why can stock price affected by this kind of investigation?
Reviewed By: Linda Christiansen, Indiana University Southeast
Analytics company said
audit committee identified ‘certain areas of potential concern’
ComScore Inc. on Wednesday said it needs more time
to file its June quarterly report, as the media measurement and analytics
company completes an internal investigation into its accounting.
Separately, comScore named a new management team,
including replacing its chief executive, who has been accused of benefiting
from the company’s boosted results from the recording of “nonmonetary”
revenue. This reflects revenue from barter agreements, where actual cash
doesn’t change hands.
ComScore said in a regulatory filing with the
government that its investigation is “substantially complete,” and that its
audit committee has identified “certain areas of potential concern,
including with respect to certain accounting and disclosure practices and
controls that the company…is further analyzing.”
Last August, The Wall Street Journal called
attention to comScore’s practice of reporting nonmonetary revenue, which
appeared to have helped boost the compensation of comScore’s top executives.
The company said in the filing Wednesday that it hasn’t concluded whether
any transactions were incorrectly recorded.
In a news release, comScore said it named a slate
of new executives, continuing a shake-up at the company. Co-founder Gian
Fulgoni will become chief executive, replacing Serge Matta, who will stay on
as executive vice chairman and adviser to Mr. Fulgoni.
Mr. Matta was among the executives receiving the
special market-based equity awards. ComScore has said Mr. Matta’s awards
were consistent with the company’s equity-incentive plan for all employees.
On a call with investors Wednesday comScore said
its revenue for the first half of 2016 was about $214 million to $218
million, including $10 million of “nonmonetary” revenue. The company said
this was about $20 million below what it expected andgave three reasons for
the shortfall: distraction related to the investigation; challenges with the
speed of scaling its mobile measurement panels; and sales to clients that
were delayed because of the clients’ own deal-making activity.
ComScore said it had about $150 million of cash and
marketable securities on its balance sheet as of June 30. The company
declined to provide further details on its accounting investigation on the
call, but it offered a nonfinancial update on its various measurement
products.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016
SUMMARY: New
guidance from the FASB is set to significantly change the accounting for
credit impairment. Banks and certain asset portfolios (e.g., loans, leases,
debt securities) likely will need to modify their current processes for
establishing an allowance for loan and lease losses and other-than-temporary
impairments to ensure that they comply with the standard's new requirements.
To do so, organizations should consider making changes to their operations
and systems associated with credit modeling, regulatory compliance and
technology. ASU 2016-13 adds to U.S. GAAP an impairment model (known as the
current expected credit loss (CECL) model) that is based on expected losses
rather than incurred losses. Under the new guidance, an entity recognizes as
an allowance its estimate of expected credit losses, which the FASB believes
will result in more timely recognition of such losses. The ASU is also
intended to reduce the complexity of U.S. GAAP by decreasing the number of
credit impairment models that entities use to account for debt instruments.
CLASSROOM
APPLICATION: This
article would be appropriate for discussions of accounting for credit
losses, as well as for coverage of FASB and GAAP in general.
QUESTIONS:
1. (Introductory) What is FASB? What is its area of authority?
2. (Advanced) What is credit impairment? Why is it reported? What
does it tell users of the financial statements?
3. (Advanced) What is an ASU? What changes is this ASU making? What
were the previous rules? Why were these changes made?
4. (Advanced) What is the impairment allowance? How is it determined?
Reviewed By: Linda Christiansen, Indiana University Southeast
New guidance from the FASB is set to significantly
change the accounting for credit impairment, as discussed in a recently
released Heads Up newsletter from Deloitte & Touche LLP. Banks and certain
asset portfolios (e.g., loans, leases, debt securities) likely will need to
modify their current processes for establishing an allowance for loan and
lease losses and other-than-temporary impairments to ensure that they comply
with the standard’s new requirements. To do so, organizations should
consider making changes to their operations and systems associated with
credit modeling, regulatory compliance and technology.
For public business entities that meet the U.S.
GAAP definition of an SEC filer, the ASU is effective for fiscal years
beginning after December 15, 2019, including interim periods within those
fiscal years. For public business entities that do not meet the U.S. GAAP
definition of an SEC filer, the ASU is effective for fiscal years beginning
after December 15, 2020, including interim periods within those fiscal
years.
Following is an excerpt from the full Heads Up
newsletter which provides details on the new guidance known as ASU 2016-13.¹
ASU 2016-13 adds to U.S. GAAP an impairment model
(known as the current expected credit loss (CECL) model)² that is based on
expected losses rather than incurred losses. Under the new guidance, an
entity recognizes as an allowance its estimate of expected credit losses,
which the FASB believes will result in more timely recognition of such
losses. The ASU is also intended to reduce the complexity of U.S. GAAP by
decreasing the number of credit impairment models that entities use to
account for debt instruments.
The CECL Model
Scope
The CECL model applies to most³ debt instruments
(other than those measured at fair value), trade receivables, lease
receivables, reinsurance receivables that result from insurance
transactions, financial guarantee contracts⁴ and loan commitments. However,
available for-sale (AFS) debt securities are excluded from the model’s scope
and will continue to be assessed for impairment under the guidance in ASC
320⁵ (the FASB moved the impairment model for AFS debt securities from ASC
320 to ASC 326-30 and has made limited amendments to the impairment model
for AFS debt securities, as discussed in the full Heads Up newsletter).
Recognition of Expected Credit Losses
Unlike the incurred loss models in existing U.S.
GAAP, the CECL model does not specify a threshold for the recognition of an
impairment allowance. Rather, an entity will recognize its estimate of
expected credit losses for financial assets as of the end of the reporting
period. Credit impairment will be recognized as an allowance—or
contra-asset—rather than as a direct write-down of the amortized cost basis
of a financial asset. However, the carrying amount of a financial asset that
is deemed uncollectible will be written off in a manner consistent with
existing U.S. GAAP.
Measurement of Expected Credit Losses
The ASU describes the impairment allowance as a
“valuation account that is deducted from the amortized cost basis of the
financial asset(s) to present the net carrying value at the amount expected
to be collected on the financial asset.” An entity can use a number of
measurement approaches to determine the impairment allowance. Some
approaches project future principal and interest cash flows (i.e., a
discounted cash flow method) while others project only future principal
losses. Regardless of the measurement method used, an entity’s estimate of
expected credit losses should reflect those losses occurring over the
contractual life of the financial asset.
When determining the contractual life of a
financial asset, an entity is required to consider expected prepayments
either as a separate input in the determination or as an amount embedded in
the credit loss experience that it uses to estimate expected credit losses.
The entity is not allowed to consider expected extensions of the contractual
life unless it reasonably expects to execute a troubled debt restructuring
with the borrower by the reporting date.
An entity must consider all available relevant
information when estimating expected credit losses, including details about
past events, current conditions and reasonable and supportable forecasts and
their implications for expected credit losses. That is, while the entity is
able to use historical charge-off rates as a starting point for determining
expected credit losses, it has to evaluate how conditions that existed
during the historical charge-off period may differ from its current
expectations and accordingly revise its estimate of expected credit losses.
However, the entity is not required to forecast conditions over the
contractual life of the asset. Rather, for the period beyond the period for
which the entity can make reasonable and supportable forecasts, the entity
reverts to historical credit loss experience.
Continued in article
Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016
SUMMARY: Orbital
ATK Inc. said that accounting errors obscured losses of up to $450 million
on a Pentagon arms contract, forcing the aerospace and defense company to
restate its financials. The company said it didn't believe there was any
fraud involved. Orbital ATK said the misstatements overestimated revenue by
$100 million to $150 million in total and that a forward loss provision,
related to the unprofitable contract, would reduce previously reported
pretax operating income by about $400 million to $450 million.
CLASSROOM
APPLICATION: This
article would be appropriate for financial accounting classes.
QUESTIONS:
1. (Introductory) What did Orbital ATK Inc. announce regarding its
financial statements? Why did the problems occur?
2. (Advanced) What are the details of the accounting errors? How did
the correction of the errors affect the company's financial statements?
3. (Advanced) What is immateriality? Were the errors material for the
company's financial position?
4. (Advanced) How did the report of errors affected the company's
stock price? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Company says accounting errors obscured losses
of up to $450 million on a Pentagon arms contract.
Orbital ATK Inc. said Wednesday that accounting
errors obscured losses of up to $450 million on a Pentagon arms contract,
forcing the aerospace and defense company to restate its financials.
The company said it had failed to meet cost-cutting
targets at an ammunition plant it manages for the Army in Missouri that left
it nursing a loss rather than breaking even on the fixed-price contract won
in 2012.
Orbital ATK shares fell by almost a fifth in early
trade following the announcement as the company said it would delay its
quarterly filings with regulators for around 45 days.
The company said it didn’t believe there was any
fraud involved. “We don’t think there was any misbehavior,” said Orbital ATK
Chief Executive David Thompson on a call with analysts after the company
reported forecast-beating quarterly earnings.
The problems were uncovered as the company
installed new enterprise systems and relate primarily to a $2.3 billion
contract with the U.S. Army to manufacture and supply ammunition at the Lake
City Army Ammunition Plant in Independence, Mo., for an initial period of
seven years and up to 10 years total.
Mr. Thompson said the problems had been “obscured”
by a combination of unusual factors and called the incident “very
distressing.” A review of other large and midsize contracts hadn’t revealed
any material problems.
Orbital ATK said the misstatements overestimated
revenue by $100 million to $150 million in total and that a forward loss
provision, related to the unprofitable contract, would reduce previously
reported pretax operating income by about $400 million to $450 million.
The contract accounts for around 5% of group sales
and was inherited from Alliant Techsystems Inc., which merged last year with
Orbital Sciences Corp. to form Orbital ATK.
Deloitte & Touche LLP audited the company through
March 31, 2015, with the role then taken by PricewaterhouseCoopers LLP. Both
are assisting with the continuing probe.
Orbital ATK shares were recently down 18% at
$73.43.
SUMMARY: Wal-Mart
Stores Inc. signed a $3.3 billion deal to buy web retailer Jet.com Inc.,
bringing in some outside help to jump-start growth at the retail giant's
e-commerce operations. Jet.com Inc. pitches itself as a lower-priced
alternative to Amazon.com Inc., partly by not tacking on sales taxes in most
states. But tax experts say Jet's proposed $3.3 billion sale to retail giant
Wal-Mart Stores Inc. could jeopardize that price advantage by forcing it to
collect taxes nationwide. A 1992 Supreme Court ruling allows online
retailers to avoid collecting sales taxes in states where they don't have a
physical presence like a warehouse, a local store or office.
CLASSROOM
APPLICATION: This
is a rare and good article to save for coverage of sales tax.
QUESTIONS:
1. (Introductory) What is sales tax? How is it collected and
remitted?
2. (Advanced) What is Jet.com? Why did Wal-Mart purchase Jet.com?
What strategy was involved?
3. (Advanced) What are the sales tax issues associated with
Wal-Mart's purchase of Jet.com? What problems could the acquisition pose for
either company?
4. (Advanced) Should Wal-Mart management be concerned about the sales
tax issues? Should they have considered this before the acquisition? Could
it have been a factor leading them to decide against the acquisition? Why or
why not?
5. (Advanced) How do companies determine where they are required to
collect sales tax? Why aren't companies required to collect sales tax in
every state? How could that change?
6. (Advanced) Should companies be required to collect sales tax in
all states? Please state reasons supporting companies collecting sales tax:
(1) in all states, (2) in no states, and (3) in states under the current
rules.
Reviewed By: Linda Christiansen, Indiana University Southeast
Isn’t yet clear how Wal-Mart will handle tax
collections on Jet.com
Jet.com Inc. pitches itself as a lower-priced
alternative to Amazon.com Inc., partly by not tacking on sales taxes in most
states.
But tax experts say Jet’s proposed $3.3 billion
sale to retail giant Wal-Mart Stores Inc. could jeopardize that price
advantage by forcing it to collect taxes nationwide.
A 1992 Supreme Court ruling allows online retailers
to avoid collecting sales taxes in states where they don’t have a physical
presence like a warehouse, a local store or office.
With far more distribution centers nationwide,
Seattle-based Amazon collects sales taxes in 28 states covering most of the
U.S. population.
New York-based Jet collects taxes in just seven
states, avoiding big ones like California and Texas.
On Wednesday, Amazon and Jet each listed a Le
Creuset French oven for $319.95. But an Amazon shopper in Chicago, for
example, would have to pay sales taxes of $32.79, unlike the Jet shopper.
Wal-Mart has a physical presence in every state,
according to a spokesman, so it does collect sales taxes for items it sells
on Walmart.com in all states that impose them.
Once the acquisition is closed, it isn’t clear how
Wal-Mart will handle tax collections on Jet.com. Tax experts say it will
depend on how ownership and operational integrations are structured.
If Jet uses Wal-Mart stores for returns or in-store
pickup, or its parent company’s warehouses to store inventory, then it
should have to collect sales taxes in those states, says Diane Yetter, who
runs a namesake sales-tax consulting firm.
With far more distribution centers nationwide,
Seattle-based Amazon collects sales taxes in 28 states covering most of the
U.S. population.
New York-based Jet collects taxes in just seven
states, avoiding big ones like California and Texas.
On Wednesday, Amazon and Jet each listed a Le
Creuset French oven for $319.95. But an Amazon shopper in Chicago, for
example, would have to pay sales taxes of $32.79, unlike the Jet shopper.
Wal-Mart has a physical presence in every state,
according to a spokesman, so it does collect sales taxes for items it sells
on Walmart.com in all states that impose them.
Once the acquisition is closed, it isn’t clear how
Wal-Mart will handle tax collections on Jet.com. Tax experts say it will
depend on how ownership and operational integrations are structured.
If Jet uses Wal-Mart stores for returns or in-store
pickup, or its parent company’s warehouses to store inventory, then it
should have to collect sales taxes in those states, says Diane Yetter, who
runs a namesake sales-tax consulting firm.
Double Counting Commodity Mark-to-Market Inventories?
Suppose that a dry summer doubles the prices of corn in both local and
international markets. Further suppose that this increase in corn is passed
along to hog inventories in Fred Farmer's hog confinement inventory. Suppose
that the doubling of corn corn inventory values in Fred Farmer's corn bins
correlates to a 25% increase in his hog inventories because increases in feed
prices are passed along to hog buyers.
Question
Is there double counting of mark-to-market inventory adjustments of both Fred
Farmer's hog feed inventory (corn he raised and stores)
and his hog inventory?
David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics
Science"
Bob Jensen
February 19, 2014
SSRN Download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296
How many statisticians does it
take to ensure at least a 50 percent chance of a
disagreement about p-values? According to a
tongue-in-cheek assessment by statistician
George Cobb of Mount Holyoke College,
the answer is two … or one. So
it’s no surprise that when the American Statistical
Association gathered 26 experts to develop a consensus
statement on statistical significance and p-values, the
discussion quickly became heated.
It may sound crazy to get
indignant over a scientific term that few lay people
have even heard of, but the consequences matter. The
misuse of the p-value can drive bad science (there was
no disagreement over that), and the consensus project
was spurred by a growing worry that in some scientific
fields, p-values have become a litmus test for deciding
which studies are worthy of publication. As a result,
research that produces p-values that surpass an
arbitrary threshold are more likely to be published,
while studies with greater or equal scientific
importance may remain in the file drawer, unseen by the
scientific community.
“The p-value was never intended
to be a substitute for scientific reasoning,” the ASA’s
executive director, Ron Wasserstein, said in a press
release. On that point, the consensus committee members
agreed, but statisticians have deep philosophical
differences1
about the proper way to approach inference and
statistics, and “this was taken as a battleground for
those different views,” said
Steven Goodman, co-director of
the
Meta-Research Innovation Center at Stanford.
Much of the dispute centered
around technical arguments
over frequentist versus Bayesian methods
and possible alternatives or supplements to p-values.
“There were huge differences, including
profoundly different views about the core problems and
practices in need of reform,” Goodman said. “People were
apoplectic over it.”
The group debated and discussed
the issues for more than a year before finally producing
a statement they could all sign. They released
that consensus statement on Monday,
along with
20 additional commentaries
from members of the committee. The ASA statement is
intended to address the misuse of p-values and promote a
better understanding of them among researchers and
science writers, and it marks the first time the
association has taken an official position on a matter
of statistical practice. The statement outlines some
fundamental principles regarding p-values.
Among the committee’s tasks:
Selecting a definition of the p-value that
nonstatisticians could understand. They eventually
settled on this: “Informally, a p-value is the
probability under a specified statistical model that a
statistical summary of the data (for example, the sample
mean difference between two compared groups) would be
equal to or more extreme than its observed value.” That
definition is about as clear as mud (I stand by my
conclusion that
even scientists can’t easily explain p-values),
but the rest of the statement and the ideas it presents
are far more accessible.
One of the most important
messages is that the p-value cannot tell you if your
hypothesis is correct. Instead, it’s the probability of
your data given your hypothesis. That sounds
tantalizingly similar to “the probability of your
hypothesis given your data,” but they’re not the same
thing, said
Stephen Senn,
a
biostatistician at the Luxembourg Institute of Health.
To understand why, consider this example. “Is the pope
Catholic? The answer is yes,” said Senn. “Is a Catholic
the pope? The answer is probably not. If you change the
order, the statement doesn’t survive.”
A common misconception among
nonstatisticians is that p-values can tell you the
probability that a result occurred by chance. This
interpretation is dead wrong, but you see it
again and
again and
again and
again.
The p-value only tells
you something about the probability of seeing your
results given a particular hypothetical explanation — it
cannot tell you the probability that the results are
true or whether they’re due to random chance. The ASA
statement’s Principle No. 2: “P-values do not measure
the probability that the studied hypothesis is true, or
the probability that the data were produced by random
chance alone.”
Nor can a p-value tell you the
size of an effect, the strength of the evidence or the
importance of a result. Yet despite all these
limitations, p-values are often used as a way to
separate true findings from spurious ones, and that
creates perverse incentives. When the goal shifts from
seeking the truth to obtaining a p-value that clears an
arbitrary threshold (0.05 or less is considered
“statistically significant” in many fields), researchers
tend to fish around in their data and keep trying
different analyses until they find something with the
right p-value, as you can see for yourself in
a p-hacking tool we built last year.
Analysis of data sets can
find new correlations
to "spot business trends, prevent diseases, combat crime and so on."[2]
Scientists, business executives, practitioners of medicine, advertising and
governments alike regularly meet difficulties with large data sets in areas
including Internet search, finance and business informatics. Scientists
encounter limitations in e-Science work, including meteorology, genomics,[3]
connectomics, complex physics simulations, biology and environmental
research.[
Jensen Comment
In the prime of my research years I devoted many, many hours seeking to improve
cluster analysis. I think there is an interesting similarity between Big Data
Analysis and Cluster Analysis. That similarity is what is tantamount to stirring
the pot of a data set to look for lumps. Traditional empirical research entails
forming hypotheses in advance, building testing models (often regression models
of some type or time series models), and then testing these models in a
database.
Big Data Analysis and Cluster Analysis take a different tack. Instead of
forming hypotheses and building testing models in advance, BD and CA analyses
stir the pot searching for hypotheses to test. For example, at a conference I
listened to a speaker who had a child diagnosed with a rare disease. The doctors
though this was one disease. The speaker went around the world and collected all
sorts of data on the small number diagnosed with this disease.
The speaker then used cluster analysis on the data he'd collected. What he
found is that the patients tended to cluster into three groups. This suggested
two hypetheses that might be tested. Hypothesis 1 is that what doctors were
calling one disease was really three separate diseases. Hypothesis 2 was that
this was one disease with three distinct sub-types.
The begs the question of whether cluster analysis can become a type of Big
Data Analysis in the 21st Century.
My opinion is negative. In my research years cluster analysis was never
practical for large databases due to computer limitations. Computers have
greatly improved but not to a point, in my opinion, where cluster analysis is
practical for Big Data. Of course in retirement I've not tracked advances in
cluster analysis. But cluster analysis faded from the scene largely due to
computing nightmares.
"A Dynamic Programming Algorithm for Cluster Analysis,"
The Journal of Operations Research,
Vol. 17, No. 6, November-December 1969.
"A Dynamic Programming Algorithm for Cluster Analysis,"
Mathematical Programming in Statistics,
Edited by Arthanari and Dodge, New York, John
Wiley & Sons.
"A Cluster Analysis Study of Financial Performance of Selected Business
Firms," The Accounting Review,
Vol. XLVI, No. 1, January 1971, 36-56.
"Isotropic Scaling of the Interior Components Inside Joiner
Scaler Block Clusterings
of Entities (Cases) and Variates (Attributes):
An Application to United Nations Voting Records,"
University of Manchester, England, October 3, 1988.
Seminar on cluster analysis, sponsored by The
Institute for Advanced Technology,
January 10 and 11, 1972, New York City.
Added Jensen Comment
I said I spent many, many hours of time in cluster analysis. including one
summer on a research grant at the University of Waterloo in Canada. Much
of this became wasted time looking for more efficient ways to perform cluster
analysis on larger databases.
Sigh!
Faculty hired 5-7 years ago were told
explicitly that a couple of peer-reviewed articles and a book
contract with a well-respected academic press was sufficient for
tenure. I often used the word “humane” to describe the requirements
for tenure, in that they rewarded both scholarship of a high caliber
and teaching prowess. Dartmouth had a reputation as a place where
work-life balance was valued, and the inconveniences associated with
its rural location were offset by the benefits of raising children
within a close-knit community.
Professors hired at that time are now
coming up for tenure, having been mentored by department members
whose curriculum vitae were far less impressive when they initially
made associate. Some of my peers were pressured into service
commitments that would have no bearing on tenure, and encouraged to
take on projects (writing for anthologies and organizing
conferences, for example) that would be time-consuming yet not lead
to professional advancement. Recent tenure decisions have many
members of my cohort scrambling for the exits—going on the market
and taking on visiting appointments elsewhere—now that they
understand that they were given a false impression of how different
aspects of their trajectories would be evaluated.
I hate to say this, but many younger
colleagues express regret at having agonized over their lesson plans
and expended so much effort on honing their skills as classroom
instructors, when a talent for teaching simply does not factor into
tenure decisions. Phil Hanlon’s recent remarks on education only
confirm what we already know, that Dartmouth is moving toward a
corporate state university model wherein professors are retained for
their “productivity”—quantity of publication over quality—and
ability to bring in large grants, while underpaid adjuncts teach
undergraduates.
The standalone graduate school announced in
October cements Dartmouth’s movement in this direction, since
teaching experience is mandatory for professionalization, and what
are graduate students but an easily exploitable workforce?
I hope readers appreciate this carefully
thought through and well expressed opinion. That Phil has tightened up
tenure standards is a good thing — we have noted in the past that Jim
Wright and his gang often granted tenure for political loyalty and
social ties (to people who will be in Hanover for 30+ years stuck at the
associate professor level) — but Phil’s search for prestige has gone too
far: the word is out there now among tenure-track faculty members that
Phil and Carolyn are looking only for prestige and publications, and
teaching and mentoring students count for little or nothing.
Continued in article
Jensen Comment
I think this article is probably a bit too broad brush. Firstly, I don't think
you can paint quite such a broad brush across all schools and departments of a
power university like Dartmouth. Secondly, I don't think you can paint such a
broad brush across all tenure cases.
For example, the medical school is probably an outlier that places more value
on clinical reputation within the medical school than external reputation. It
would be very hard expensive to hang on to an extremely skillful surgeon with a
national or international reputation. Perhaps the medical school must suffice
with more emphasis on internal and opposed to external reputation.
Prestigious universities like Dartmouth tend to place high value on a
combination of internal and external reputation. A tenure candidate with an
extremely high reputation for teaching across various departments is not exactly
like a tenure case for a lesser-known teacher. A strong researcher with a
miserable teaching reputation across various departments is not exactly like a
strong researcher with a better (not necessarily) stellar teachingt reputation.
Also Dartmouth is not exactly immune from diversity and affirmative action
concerns. For example Dartmouth has a well-funded program to attract native
American students at both the graduate and undergraduate levels. I can't imagine
denying tenure to a native American tenure candidate with a strong teaching
reputation who has slightly fewer hits in top journals than a white male tenure
candidate.
Having said this I do know that times have changed in prestigious schools of
business. Four decades ago some Harvard Business School faculty were not
necessarily known for their research publications in top business academic
journals. They sometimes built their reputations of their writings of textbooks
and teaching case books where they were also known for their consulting in the
boardrooms of huge multinational business firms. Reputation among corporate CEOs
trumped having ten multivariate regression studies in
The Accounting Review
or the Journal of Marketing Research.
Those days have changed somewhat in that the 21st
Century new tenure awards at prestigious universities go to rising faculty stars
with reputations in consulting who also have their names on 20 or more business
research journal where their names are alongside three or more co-authors who
maybe did a lot of the data mining in each published paper.
Having said this, I would be very shocked if the Harvard Business School or
Tuck School of Business (at Dartmouth) put a lousy teacher in front of an MBA
class. I do know of one lousy teacher in the Harvard Business School who was a
renowned international writer of cases, but I don't think the HBS put him in
front of MBA students, at least not in front of the typically large classes in
the MBA program at Harvard. He has since left Harvard. Actually I don't hear
anything about him anymore, but I'm told he's not yet fully retired. I think he
got tenure at Harvard when tenure hurdles were different than they are in the
21st Century. Now he would have to be a stellar teacher with 20 or more
published multiple regression studies (co-authored of course).
Harvard by the way has a ten-year tenure track, unlike most universities that
follow the traditional AAUP seven-year track.
Thomas
Kuhn, the well-known physicist, philosopher and historian of science, was
born 94 years ago today. He went on to become an important and broad-ranging
thinker, and one of the most influential philosophers of the 20th century.
Kuhn's
1962 book, The Structure of Scientific Revolutions, transformed the
philosophy of science and changed the way many scientists think about their
work. But his influence extended well beyond the academy: The book was
widely read — and seeped into popular culture. One measure of his influence
is the widespread use of the term "paradigm shift," which he introduced in
articulating his views about how science changes over time.
Inspired, in part, by the theories of psychologist Jean Piaget, who saw
children's development as a series of discrete stages marked by periods of
transition, Kuhn posited two kinds of scientific change: incremental
developments in the course of what he called "normal science," and
scientific revolutions that punctuate these more stable periods. He
suggested that scientific revolutions are not a matter of incremental
advance; they involve "paradigm shifts."
Talk of paradigms and paradigm shifts has since become
commonplace — not only in science, but also in
business,
social movements
and beyond. In a
column
at The Globe and Mail, Robert Fulford describes paradigm as "a
crossover hit: It moved nimbly from science to culture to sports to
business."
But
what, exactly, is a paradigm shift? Or, for that matter, a paradigm?
The
Merriam-Webster dictionary offers the following:
:
a model or pattern for something that may be copied
:
a theory or a group of ideas about how something should be done, made,
or thought about
Accordingly, a
paradigm shift is defined as "an important change
that happens when the usual way of thinking about or doing something is
replaced by a new and different way."
More
than 50 years after Kuhn's famous book, these definitions may seem intuitive
rather than technical. But do they capture what Kuhn actually had in mind in
developing an account of scientific change?
It turns out this question is hard to answer — not
because paradigm has an especially technical or obscure definition, but
because it has many. In a
paper
published in 1970, Margaret Masterson presented a careful reading of Kuhn's
1962 book. She identified 21 distinct senses in which Kuhn used the
term paradigm. (That's right: 21.)
Consider a few examples.
First,
a paradigm could refer to a special kind of achievement. Masterson
quotes Kuhn, who introduces a paradigm as a textbook or classic example that
is "sufficiently unprecedented to attract an enduring group of adherents
away from competing modes of scientific activity," but that is
simultaneously "sufficiently open-ended to leave all sorts of problems for
the redefined group of practitioners to resolve." Writes Kuhn: "Achievements
that share these two characteristics I shall henceforth refer to as
'paradigms.' "
But in
other parts of the text, paradigms cover more ground. Paradigms can offer
general epistemological viewpoints, like the "philosophical paradigm
initiated by Descartes," or define a broad sweep of reality, as when
"Paradigms determine large areas of experience at the same time."
Given
this bounty of related uses, Masterson asks a provocative question:
Is there, philosophically speaking, anything
definite or general about the notion of a paradigm which Kuhn is trying
to make clear? Or is he just a historian-poet describing different
happenings which have occurred in the course of the history of science,
and referring to them all by using the same word "paradigm"?
Continued in article
Jensen Comment
Ask your accounting theory students if there have been any paradigm shifts in
accounting?
Were these shifts tided to the paradigm shifts in finance?
The first issue below is
related to the one
addressed by Bennis and
O'Toole. According to
Hopwood,
research in
business schools is
becoming increasingly
distanced from the
reality of business.
The worlds of practice
and research have become
ever more separated.
More and more accounting
and finance researchers
know less and less about
accounting and finance
practice. Other
professions such as
medicine have avoided
this problem so it is
not an inevitable
development.
Another issue has to do
with the status of
management accounting.
Hopwood tells us that
the term management
accountant is no longer
popular and virtually no
one in the U.S. refers
to themselves as a
management accountant.
The body of knowledge
formally associated with
the term is now linked
to a variety of other
concepts and job titles.
In addition, management
accounting is no longer
an attractive subject to
students in business
schools. This is in
spite of the fact that
many students will be
working in positions
where a knowledge of
management control and
systems design issues
will be needed.
Unfortunately, the
present positioning and
image of management
accounting does not make
this known.
As our new organization of accounting historians
begins its endeavors, we might pause for a moment and reflect on just what
uses might be accomplished by efforts to attract more interest in account -
ing history. Each new member of The Academy, in his natural enthusiasm for
the subject area, could easily outline several responses to the editorial
question raised by this introductory note. would like to offer the following
suggestive views on this matter.
1. Every profession should take modest pride in its
background and development. In fact, one of the attributes of any recognized
profession is relative concern for, and its energy in, ferreting out items
concerning its origin and evolution. Accounting should be no exception to
this general prospective.
2. Study and research in accounting history are
open to almost everyone having an accounting bent. The eagle eyes and ears
of accounting historians will find few limits to possible surprise find -
ings and important discoveries. In other words, everyone has an opportunity
to make a contribution to the filling in of unknown details. Accounting
history research is somewhat similar to the search for oil, that is,
information regarding accounting history is where one finds it.
3. Many newcomers to the profession of accounting
and corporate reporting, when they read the frequent comments in the
literature of today concerning accounting problems and challenges, may not
be aware that the current situation is so much better than the “old days” as
to be almost shocking. Therefore, the study of accounting history should
tend to overcome the discouragement with the present status of this field of
endeavor. Analogies from the past might even assist in curing some of the
present imponderables
Continued in article
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We have, as accounting historians, all been
subjected to some form of intellectual affrontery by non-historians who
question the value of our pursuits. This is a rather uncomfortable feeling,
and places us on the defensive—when indeed non - historians are the ones who
may well have tarnished history’s name. It is they, being so desperate for
clever historical material about accounting, that have promoted and
perpetuated apocryphal items in order to pro - vide historical background in
support of contemporary illustrations. The time has clearly arrived for us
to take the offensive in citing these loose items and at the same time
conduct research to develop valid replace men ts.
For example, the excellent bit of research by our
colleague Mr. Albert Newgarden entitled “Goodbye, Mr. Hubbard” ( The Arthur
Young Journal , Spring/Summer 1969) destroys the mythical descrip - tion of
the “typical auditor” attributed to Elbert Hubbard. Haven’t we all heard it?
“ . . .[A] man past middle life, tall, spare . . . with eyes like a codfish
. . . as damnably composed as a concrete post. . . . ." But as Newgarden
shows, it is fiction—or folklore, for Hubbard did not write or say it at
all. Indeed the quote refers to “The Buyer” (Volume Ill, Selected Writings
of Elbert Hubbard, 1922).
Yet modern comments on the image of accountants
(“Young Man Be An Accountant,” Esquire , Sept. 1961, p. 71) and writings
dating back more than a quarter century (Theodore Lang, N.A.C.A. Bulle- tin,
Sec. 1, July 15, 1947, p. 1,377) relish the use of this fable.
Even Professor Horngren along with Professors Burns
and Hendrickson have been “taken in” during the last decade using Hubbard’s
“quote.” Horngren is victimized twice however, his most recent edition
(Chapter 6, p. 174, item 14) as well as a previous edition (Chapter 9, p.
291, item 15) both carry on the tale. While Burns and Hendrickson include
the story from Esquire in their 1967 edition of The Accounting Sampler , (p.
296) they make no reference to it in their 1972 revision. Of one point there
should be no question,
Continued in article
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Developing International Accounting Standards — The SEC's 20-Year Journey
(June 1995‒December 2015): Part 2 (August 2006‒December 2015)
SSRN, July 15, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2810302
Journal of Accounting, Ethics and Public Policy, Vol. 17, No. 3, 2016
Author
Helen M. Roybark Radford University - College of Business and Economics
Abstract
Cross-border investment opportunities soared in the
late 1980s and 1990s, resulting in a call to harmonize accounting standards.
For the past twenty years, the U.S. Securities and Exchange Commission (SEC
or Commission) has invested significant resources in support of achieving a
high quality set of global accounting standards that could be used in
cross-border transactions.
In March 1996, more than 750 foreign issuers,
representing over 45 countries, were registered with the SEC (Sutton, 1996).
The U.S. Congress also was interested and engaged in the international
accounting standards debate. In 1996, the Congress directed the SEC to
respond to the expanding global securities markets by supporting the
development of a high quality set of global accounting standards as soon as
realistically possible.
The purpose of this study is to evaluate the SEC,
and specifically, the Office of the Chief Accountant and its Chief
Accountants because accounting standards generally are established and
enforced by the SEC's Chief Accountant, and these individuals' actions and
relationships primarily with three external standard-setting bodies (FASB,
IASC, and IASB) — across two decades (June 1995‒December 2015) — for the
purpose of assessing the Commission's actions and furtherance of a high
quality set of global accounting standards that can be used for cross-border
transactions in the United States and across other global markets. This
study was presented as a two-part series. Part 1 covered the period of June
1995 to August 17, 2006, while Part 2 covers the period August 18, 2006
through December 2015.
Shyam Sunder Yale University - School of Management
Abstract
Since the passage of the US federal securities laws
more than eight decades ago, much regulatory effort has been devoted to
Improving financial reports of business, government and not-for-profit
organizations. Yet, evidence on improvements, or abatement of misreporting
by error or intent remains scarce. It is useful to explore what we might
mean by better financial reporting, and how we might define and implement
processes to move in that direction. A broad agreement on which way is ahead
seems necessary to make progress.
Creating and sustaining institutions that follow a
stable and conservative process for gradually adjusting the prevailing
practices toward any long-term shifts may help evolve a better financial
reporting environment. This approach departs from the tendency to issue new
rules, often disregarding the lessons of practice that has created much
confusion and failures in financial reporting over the past half-a-century.
The eagerness to deal with transaction innovations through new
pronouncements ends up fueling the cycle of more innovations,
misrepresentations and abuse and calls for yet newer rules. The enormous
resources and attention devoted to written rules have been accompanied by
waning professional responsibility for good judgment and regard for practice
and practicality. We argue for targeting a better balance between top-down
written rules and emergent social norms as reflected in business and
accounting practice through restraining activist institutions of accounting.
Suggestions on whether and how better social norms can be engineered are
only preliminary at this time.
Jensen Comment
Shyam is a long-time friend of mine and has been a leader in the American
Accounting Association.
Shyam also led the resistance movement among academics to the replacement of US
GAAP by IFRS. His main objection was a fear of giving the FASB a
global monopoly on the setting of accounting standards. Shyam is
mostly an economist with a history of academic research opposing monopoly powers
in the economy.
I also resisted this replacement largely in fear that America's detractors
(in the EU) and enemies in many USA-hating nations that have voices in setting
of IFRS would use this as another lever to hurt the USA economy ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting
In reality I don't think academics, including Shyam and I, were very
prominent in the total resistance movement in the USA against replacing US GAAP
with IFRS. The primary resistance came from business firms of all sizes that
just did not want to incur the enormous cost and the enormous implementation
problems (including training and software conversion) of the replacement
process. That is not to say that most multinational firms and multinational CPA
firms did not do their best in trying to persuade the SEC to not put off
adoption of IFRS.
Jensen Comment
The enormous difference between college education in Europe versus the USA is
that in Europe going to college is a competitive process based upon academic
rigor and less than half of the Tier 2 graduates are allowed into colleges. In
the USA, especially under the initiatives of Sanders and Hillary Clinton,
college will be free to almost everybody and colleges wanting the money will
admit students that would never get into college in Europe. What college
education in the USA will become is like a kindergarten pet competition. Every
person will get a top blue ribbon (diploma), and nobody will be denied
admission.
Already the median college grade in the USA is an A-. It can go higher. Soon
the median grade will be an A+.
Can We Predict
Success in the First Intermediate Accounting Course From Sophomore-Level
Performance?
SSRN, July 14, 2016 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809994 Journal of Accounting, Ethics and Public Policy, Vol. 17, No. 3, 2016
Authors
Marvin Lynn
Bouillon Central Washington University
Clemense
Edmond Ehoff Central Washington University
Abstract
The purpose of
this study was to determine potential predictors of success for transfer and
nontransfer students in their first intermediate accounting class. Data was
collected on the grades in the sophomore-level accounting classes,
cumulative GPA, transfer status and student’s gender for 251 students
completing the first intermediate accounting class. The data further
identified students with the main campus and two teaching centers offering
the intermediate accounting course. Further analysis was done on the 76
students that took the course at the main campus because the two teaching
centers enrolled mostly transfer students. The cumulative GPA and the grades
in the sophomore-level classes were highly correlated to the grade in the
first intermediate accounting course. Overall, we found that the managerial
accounting class was the best predictor of a student’s grade in the first
intermediate accounting class when we focused on the main campus sample. The
transfer status and student gender were generally not significantly
associated with the grade.
Jensen Comment
Do students with weak gpa performance take intermediate 1 accounting? I think
those few weak students are probably outliers who affect the outcomes of such a
study.
What about
transfer students with high
gpa performance?
My experience, as
Chair of the Accounting Department at Florida State University, when we were
forced to accept transfer students from 33 two-year community colleges is that
the community
college gpa performances were severely inflated.
We experienced high Intermediate 1 accounting failure rates from the transfer
students who were mislead by their high gpa transfer grades.
Of course there
were exceptions for very good transfer students, but these tended to be
outliers.
The FSU policy of
having to admit transfer students into Intermediate 1 accounting if they chose
to do so led to an extremely large number of sections of Intermediate I relative
to Intermediate 2 because of the filtering that took place in Intermediate 1.
Because we had to
staff so many sections of Intermediate 1 the first two courses in accounting at
FSU (before our own students took Intermediate 1 as juniors) the two sophomore
accounting principles courses were taught by adjunct faculty in very large
lecture halls plus recitation sections run mostly by accounting doctoral
students. In the four years I was at FSU the wife (Debbie) of our doctoral
student Chuck Mulford taught our first Principles 1 lecture sections having
hundreds of non-transfer students. Debbie had CPA experience but was not in our
doctoral program. The Principles 2 course was taught by an adjunct (Jan) who
eventually married Jim Hasselback
In my opinion,
the high-gpa non-transfer students in their second year at FSU who moved on into
Intermediate 1 tended to do much better on average than the high-gpa transfer
students that necessitated the large number of Intermediate 1 sections to be
staffed by me as department chair.
After those four
years as an administrator in my eventually 40 years as a full-time faculty
member I never wanted to again be in administration. I truly admire and respect
the faculty who sacrifice a lot to be administrators. I do want to thank KPMG
alumni of FSU who contributed a salary supplement during my experiment at being
an administrator. Those were tough years because there was almost no money for
faculty raises among my staff while I was at FSU.
I
think the Marvin Lynn Bouillon and Ehoff study cited above is probably
misleading for any universities that accept large
July 17, 2016 reply from Hossein Nouri
Bob:
In a study we conducted (HOW DO TRANSFER STUDENTS
IN ACCOUNTING COMPARE ACADEMICALLY TO “NATIVE” STUDENTS?), we found a
different results and found difference between native and transfer students
in intermediate I. See the article at:
Jensen Comment
I bought the Goodwin and Bach book out of curiosity. It is a book of rather, but
not completely, disappointing cartoons. It's not a textbook with end-of-chapter
material and does not have footnote referencing. It does have a reasonably good
index.
Jensen Comment
Are there any comparable "cartoon" books for accounting education?
Note that "cartoon" education books are not usually humorous.
Shutterstock does have images that you can paste into your own books and
articles ---
In email messaging it's best not to take up file size with graphics and pictures
unless they serve a justifiable purpose.
Measuring What Matters: Industry Specificity Helps Companies and Investors
Gain Traction on Sustainability
SSRN, Spring 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808222 Journal of Applied Corporate Finance, Vol. 28, Issue 2, pp. 34-38, 2016
Authors
Bob Herz (Sustainability) Accounting Standards Board
Jean Rogers (Sustainability) Accounting Standards Board
Abstract
Financial analysts interpret the performance of
companies and their securities through an industry lens. Just as an industry
approach is critical in financial analysis, it's also critical in helping
investors evaluate sustainability performance, since sustainability issues
differ from one industry to the next - in large because of differences in
how companies use natural and other social resources when bringing their
goods and services to market, and how they impact society and the
environment in the process. The Sustainability Accounting Standards Board (SASB)
was created in 2012 to deliver a full set of sustainability accounting
standards that can be used to guide industry‐specific corporate
sustainability disclosure to the capital markets. SASB has now issued
provisional standards for 79 industries, thereby enabling companies and
investors for the first time to identify patterns of sustainability risks
and opportunities both across and within industries. Although high‐level
issues such as climate change, product safety, and resource intensity and
scarcity have material impacts across a variety of sectors, those impacts
often vary greatly from one industry to the next. Thus, although the risk
may be ubiquitous, it is also differentiated to the point that each industry
has its own distinct sustainability profile. Understanding these unique
profiles can help companies better manage the issues that are most likely to
present material risks to their industries.
Jensen Comment
First let me say that this pay is exceptionally low. I can't imagine it attracts
quality adjuncts who need the money. Those going for the money must be
financially desperate. Or it could be desperation to add a few lines to a
resume.
Secondly the pay is so low that it discourages time commitment outside the
classroom.
Jensen Comment
This article is yet another example of how to mislead with statistics. Making
money in land parcels and homes is exactly like making money in the stock market
--- you've got to have picked the right ones to put into your portfolio. I sold
an Iowa farm that more than doubled in value after I sold it. One reason was the
idiotic decision to subsidize corn farmers by requiring upwards of 10% corn
ethanol in every gallon of gas. North Dakota farmers made a lot of money selling
oil rights. Owners of condos in Manhattan and San Francisco made small fortunes
on tiny bits of property. Houses purchased for less than $50,000 in 1980 in
Silicon Valley may be worth more than $5 million in 2016.
But what looks like good deals in stocks and real estate in hindsight is just
that --- hindsight! There are no guarantees of high returns without taking risks
unless you are in the Mafia where you can force your own returns. Expectations
of higher returns means acquiring more financial risk for most of us.
There are some serious advantages to investing as much as you can in a home
when you anticipate owning it for more than 10 years. Firstly, you get the added
non-financial enjoyment of living in a wonderful home. Secondly, there are some
tax breaks for the the 50% of taxpayers that really pay taxes. But there are a
drawbacks. Property taxes are the primary way the USA funds its K-12 schools as
well as pay for county and municipal services. In most instances growth rates
for property taxes outpaced the capital gains since the real estate bubble burst
in 2007.
There are also some wonderful instances where owners have successful rental
properties such as owning a duplex where the rent from one half of the house
pays all the expenses of the entire house. A friend of mine, Tom Selling, says
that when he moved from Dartmouth it was a good decision to continue to rent his
condo rather than sell it at the time. That is probably true of nearly all
rental property close to college campuses if the property was purchased before
the real estate bubble burst in 2007. There are some tax breaks of rental
housing such as depreciation and maintenance expense write-offs. For example,
half the cost of the roof on a duplex might be expensed.
Don't get carried away investing in land that has no serious annual cash
inflow. Of course there are exceptions, but in general the taxes and maintenance
fees (e.g., mowing) plus the eventual cost of selling the land take all the fun
out of trying to eventually make a profit.
With bank savings deposits earning virtually zero interest it's tempting to
take on more financial risks with your savings. Each investor is unique. I
advise getting "free" advice from reputable mutual funds like Vanguard or
Fidelity or TIAA. I don't advise paying dearly for it at your local investment
advisor service. Find out the range of alternatives from long-term tax exempt
mutual funds to diversified real estate fund to a variety of long-term and short
term equity alternatives. Learn enough to become your own adviser.
Will the FASB's proposed change in FAS 133 increase the use of derivatives
for risk management?
WILL PLANNED DERIVATIVES ACCOUNTING CHANGES STEM FLOW OF RESTATEMENTS, IMPROVE
RISK MANAGEMENT? ---
http://www.bna.com/planned-derivatives-accounting-b73014444911/
An oft-stated truism has it that accounting
shouldn’t drive economics—the business practices of companies. The deals
they make. The transactions they enter into.
However, as the vice chairman of the Financial
Accounting Standards Board suggested recently, accounting rules for
derivatives and hedging may be discouraging use of what otherwise would be
sound risk-cutting activities involving the complex financial instruments.
So changes in complex extant accounting standards
could lead enterprises back to considering (and actually using) reasonable
risk management tools that hinge on derivatives, FASB sub-chief Jim Kroeker
signaled recently.
And the perceived improvements might even stem the
flow of costly and not-so-useful restatements caused by “application of the
strict guidance in hedge accounting,” Kroeker suggested at FASB’s July 13
meeting. For chapter-and-verse quoters, the rules at issue are ASC 815, or
the old FAS 133, vintage 1998.
A bit paradoxically, it seems, investors seem to
find more useful the originally accounted-for numbers than those that
resulted from (millions of dollars in spending for corrective reporting
later) the restatement.
Worth a Long Quote.
Kroeker’s observations–drawn from years as an
auditor at Deloitte and as chief accountant (and, before that, deputy chief
accountant) at a certain regulatory agency that goes by the initials
SEC—warrant lengthy quoting.
He offered them in laying out what he sees as the
benefits of FASB’s package of streamlining and improvement— provisions for
hedge accounting. (FASB hopes to issue its multi-front proposal on hedge
accounting in September. Final rules are expected in early 2017.)
Kroeker, as does his board colleagues, sees
improvements in financial reporting for investors and other users of
financial statements. However, he also sees a beneficial tuning of
prescribed accounting practices “in a way that I think is going to be
operationally easier for many companies to achieve financial reporting that
is more consistent with the risk management that they’re employing.”
He continued: “Even though we say—and I fully
agree—accounting should not drive what transactions you get into, we
certainly hear that the challenges of matching the reporting with the
economics and hedge accounting has actually driven people away from engaging
in what they think is otherwise reasonable risk management activity.
“That is yet to be seen,” Kroeker said. The
accounting “can certainly be an excuse as to why somebody didn’t do
something as well.
“But I think this frees up people to do
that”—engage in the special deferral accounting more easily—“and to not hide
behind that as an excuse if, in fact, they chose not to hedge for economic
reasons, but want to blame it on accounting.”
Restatement Problems Mitigated?
Citing another benefit, Kroeker went on to tie the
derivatives accounting issues to companies’ restatements of financial
reporting. He suggested that FASB’s rulemaking has responded to expressions
of concerns it has heard.
“There have been restatements because of the
application of the strict guidance in hedge accounting that have actually
caused financial reporting results to deviate further from the economics,”
he said.
Continued in article
Jensen Comment
There are a lot of details to be fleshed in.before I will comment on this topic.
I think the IASB went too far in simplifying accounting for derivatives and
hedging activities. I hope the FASB does not take such a giant leap backwards in
this era of using derivatives for risk management.
There is, of course, an obvious principles-based
solution: to change the accounting for nonmonetary assets from historic cost
to current cost (or value). In that way, the gains/losses on the liabilities
would be largely balanced out by the losses/gains on assets. But, it is all
too obvious why issuers would want none of that either.
Continued in article
Jensen Comment
We've been round and round this horn before so I won't repeat the details here.
First, current (replacement) cost is not valuation and for items subject to
depreciation or depletion the same type of arbitrary accruals are required as in
historical cost measurement. Also there's the huge problem of technological
change. Valuing an aged 1978 Boeing 747 takes enormous subjectivity using the
prices of the technologically-advanced and fuel-efficient airliners built in the
2016.
Second, accounting at "exit value" makes sense for non-going concerns.
But only economists in the high clouds can measure "value in use" that requires
estimates of the higher order effects (synergies effects) of an asset integrated
with other booked and non-booked assets such as human resources and intangibles
that are impossible to value with any kind of precision.
Surely you jest about reporting inventories at current cost or value before
manufactured items are sold. Firms could make enormous profits without ever
selling anything they make. IPOs would love this kind of inventory-profit
buildup. I recall that in past Onion articles you came down as being against
carrying inventories at current cost or value.
Financial statements today are very difficult to audit and perhaps your
arguments about the words "fair" and "true" have merit. But auditing
non-financial assets at replacement costs or exit values entails enormous
fictional variations in annual earnings that will never be realized in cash
flows. And measuring such assets in terms of "value in use"
is too expensive to do realistically and too subjective to have much in the way
of consensus among management and auditors. Doing so is an open invitation to
more fraudulent financial reporting than we have today.
Accounting for non-financial assets like inventories and patents and even
factories at current cost or value is more insane that what we report today in
the FASB/SEC Funny Farm.
What you have done Tom is propose what theorists since McNeal (exit value)
and Canning (current) have proposed while at the same time overlook all the many
arguments against the McNeal and Canning theory.
The great Al Hirschfeld had been supplying his
much-loved caricatures to the New York Times for 37 years when, in 1962, tipped
over the edge by the newspaper's accounting department, he sent the following
amusing letter to the Sunday editor, Lester Markel.
(Keep scrolling down here)
http://www.lettersofnote.com/search?q=+accounting
Blockchain technology, which is best known for
powering Bitcoin and other cryptocurrencies, is gaining steam among finance
firms because of its potential to streamline processes and increase
efficiency. The technology could cut costs by up to $20 billion annually by
2022, according to Santander.
That's because blockchain, which operates as a
distributed ledger, has the ability to allow multiple parties to transfer
and store sensitive information in a space that’s secure, permanent,
anonymous, and easily accessible. That could simplify paper-heavy,
expensive, or logistically complicated financial systems, like remittances
and cross-border transfer, shareholder management and ownership exchange,
and securities trading, to name a few. And outside of finance, governments
and the music industry are investigating the technology’s potential to
simplify record-keeping.
As a result, venture capital firms and financial
institutions alike are pouring investment into finding, developing, and
testing blockchain use cases. Over 50 major financial institutions are
involved with collaborative blockchain startups, have begun researching the
technology in-house, or have helped fund startups with products rooted in
blockchain.
In BI Intelligence’s Blockchain Report, we explain
how blockchain works, why it has the potential to provide a watershed moment
for the financial industry, and the different ways it could be put into
practice in the coming years.
Here are some key takeaways from the report.
•Spending on capital markets applications
of blockchain is expected to grow at a 52% compound annual growth rate (CAGR)
through 2019, according to Aite Group, to reach $400 million that year.
•Banks and major financial institutions are
working both collaboratively and independently to develop blockchain
tech. Over 50 major financial institutions are involved with
collaborative blockchain startups, like R3 CEV or Chain. And many are
investing in the technology on their own as well.
•Putting blockchain to use for real-world
transactions is likely not that far off. If working groups' tests are
successful, firms could be using it to transact real value as early as
the end of this year and we could see widespread industry application
within the next few years.
In full, the report: •Examines the funding
increases that are pouring into blockchain •Assesses why blockchain is
becoming so popular and what factors are driving up increased research and
development •Explains in full how blockchain technology work and what assets
make it valuable and vulnerable •Identifies pain points in the financial
industry and profiles how various firms are using blockchain to solve them
•Demonstrates the challenges to mainstream adoption and their potential
solutions
I've had quite a bit
say about Logit and Probit models, and the Linear Probability Model (LPM),
in various posts in recent years. (For instance, see here.)
I'm not going to bore you by going over old ground again.
However, an important
question came up recently in the comments section of one of those posts.
Essentially, the question was, "How can I choose between the Logit and
Probit models in practice?"
I responded to that
question by referring to a study by Chen and Tsurumi (2010), and I think
it's worth elaborating on that response here, rather than leaving the answer
buried in the comments of an old post.
So, let's take a look.
Putting the LPM entirely to
one side (where,as far as I'm concerned, it rightly belongs!), the issue is
whether a standard normal distribution, or a logistic distribution, is the
better choice when it comes to modelling the link between our discrete
dependent variable and the regressors (covariates). If we choose the normal
distribution we end up with the so-called Probit model; and if we choose the
logistic distribution we end up with the Logistic model.
Let's begin by asking, "how
much are the results likely to differ when we make one of these choices or
the other?"
The short answer is, "not
very much, in general." So, this may seem to suggest that we can basically
flip a coin when it comes to deciding whether to go the Logit route or the
Probit route. However, it's not quite that simple.
Why not?
First, the answer given
above relates to the simple case where we have a
binomial Logit or
Probit model. That is, there are only two discrete choices for our
qualitative variable. As soon as we move to the multinomial case,
where there are three or more choices, the story changes fundamentally. In
particular, the multinomial Logit model is computationally simpler to
implement than is the multinomial Probit model, and this may factor into our
choice. On the other hand, there is the well-known problem associated with
the "Independence of Irrelevant Alternatives" that arises with the
multinomial Logit model, but not with the multinomial Probit model. So there
are pros and cons when it comes to making this choice in the multinomial
case.
Second, even when we
restrict ourselves to the standard binomial (zero-one) case, there can be
some marked differences between Logit and Probit results when we focus on
the tails of the underlying distributions (e.g., Cox, 1966)
So, it's still interesting
to think about whether we can come up with some formal statistical procedure
to help us to decide between the Logit and Probit models, when we have the
same (limited) dependent variable.
These two models are
"non-nested", so a natural way to proceed is to use some information
criterion or other to discriminate between them. This applies whether we're
talking about a binomial model or a multinomial model. Note that this is
not an example of hypothesis testing. Rather, we're effectively
"ranking" the Probit and Logit models. (For some general comments about the
use of information criteria in other contexts, see my earlier posts here and
here.)
One of the few studies to
evaluate the effectiveness of alternative information criteria to
discriminate between Logit and Probit models is that by Chen and Tsurumi
(2010). They consider five different criteria, namely:
The
deviance information criterion (DIC).
The
predictive deviance information criterion (PDIC).
The
unweighted sum of squared errors (USSE).
The
weighted sum of squared errors (WSSE).
Akaike's
information criterion (AIC).
The main conclusions
emerging from the Chen-Tsurumi paper are as follows, and they aren't all
that encouraging:
If the binary data that are
being modelled are "balanced" (i.e., there is roughly a 50-50 split
between the zero and one values), then none of the above information
criteria are very effective at discriminating properly between the Logit and
Probit models.
If the data are
"unbalanced", then only the DIC and AIC criteria are effective.
The more information that
is available about the higher moments of the underlying distribution of the
binary data, the more effective are these criteria in the "unbalanced" case.
Sample sizes of at least
1,000 or more are needed to be able to discriminate between the Logit and
Probit models using this approach.
If these information
criteria don't help us very much, is there some other way to choose between
the Logit and Probit specifications?
Continued in article
Accounting History Corner (I suspect Tom Selling will
like this one)
Book Review by Jacob S. Soll The Accounting Review
Article Volume 91, Issue 4 (July 2016)
http://aaajournals.org/doi/full/10.2308/accr-10493
In his prodigiously researched new book, Karthik
Ramanna makes a profession of faith in accounting. As he tells the reader,
accounting is the grease on the gears of capitalism; the numbers that allow
decisions to be made by the public, shareholders, investors, managers,
financiers, and the government. Audited financial statements are the
representations of companies (and, indeed, often public entities and even
individuals), and these numbers are what drive market capitalism. They are
the very essence of trust, as decisions of entrepreneurial risk, investment,
and management cannot be made without them. This trust is inherent to
flourishing capitalism—and capitalism, Ramanna insists, is an “ethic” that
“allocates resources” and enables individual economic and even political
“freedom” (p. 172). Ramanna is a believer.
It is because of Ramanna's faith in accounting's
under-celebrated fundamental role in capitalism that he believes the
protection of its reliability and independence is utterly necessary. Yet,
according to him, this is less and less the case as accounting standards and
laws have come under the “ideological capture” of certain “corporate
interests” that undermine market capitalism. Ramanna's work claims to be an
academic stress test of the independence, fairness, and function of
accounting rules. In his blunt opinion, the industry, in certain cases, is
undermining many of its core principles and the market itself by not
protecting reliable and accurate valuations due to the interpretive breadth
allowed by fair value accounting.
His central argument is that the accounting
standard-setters of the FASB have become beholden to corporate interests and
their political allies. Ramanna's broader story, as understood with the
example of mergers and acquisitions, goes like this: As the financial
industry began to make more and more money from advising on mergers and
acquisitions in the late 1990s, it became emboldened to argue that
amortizing goodwill acquired from target companies was “a drag” (p. 53) on
the earnings of acquiring firms. With the rise of tech companies and
companies claiming vast intangible assets—think Time Warner Inc.'s
disastrous acquisition of an inflated AOL and its subsequent $54 billion
write down— these companies, and the banks and auditing firms that did
business with them—think Arthur Andersen—pushed for more malleable valuation
standards. Yet even after the crash of 2008, banks and managers who oversaw
contributory mergers and acquisitions made the case for tailor-made fair
value accounting standards to reasonably measure the value of intangible
assets, now the prominent assets in tech and many other companies. His
evidence highlights the banking industry, in particular, for pushing for
accounting metrics with which it could “emphasize” good or bad numbers to
their advantage (p. 26).
Until 2009, says Ramanna, the FASB had hewn, at
least on paper, to a conceptual framework of financial information in
accounting based on “reliability” and “verifiability” (p. 34). But these
principles of conservative valuation—concepts essential to accounting since
its inception—continued to be seen by some as outmoded vehicles of
undervaluation. Indeed, many of the bankers who believed that their mortgage
bundles had been undervalued, thus leading to the crash of 2008, lobbied for
more creativity and less conservatism. The FASB and its IASB
standard-setting cousin were persuaded, and replaced the relatively clear
concepts of “reliability” and “verifiability” with the nebulous concept of
“faithful representation.” Ramanna's cited research evidence indicates that
the new precepts themselves are less reliable than the old conservative
ones.
Ramanna ascribes the broken standards process to
his ideas of a “thin political market” and “ideological capture” (p. 46).
This is the process by which interested companies—his examples include The
Goldman Sachs Group, Morgan Stanley, and Merrill Lynch, among others—secure
favorable regulatory outcomes through a combination of expertise, ideology,
and political power (often drawn from longstanding campaign contributions to
influential members of Congress). His data point to a direct correlation
between banking representation on the FASB, as well campaign contributions
to Congress members, with a successful move to support fair value standards
in the name of financial creativity and the “synergy” of mergers. These
mergers of aggressively valued companies, Ramanna argues, enables managers,
bankers, and lawyers to extract profits from ordinary shareholders.
Not content with anecdotes,
Ramanna produces regressions, graphs, and sets of
data, often reproduced from his peer-reviewed articles, to make his point
that it is common practice for deep-pocketed interested parties to push for
standards that are advantageous to them.
Due to the complexity and obscurity of proposed laws such as HR 5365, The
Financial Accounting for Intangibles Reexamination Act, this type of
legislation happens in “a thin political market,” that is to say only
between the interested parties and the standard-setters. According to this
theory, public debate is largely absent from the process due not only to
lack of awareness, but also to the fact that most players, aside from
Congress, come from accounting and finance backgrounds where they have been
imbued with a particular “ideology” or worldview. This is not easy to prove
and surely more complex than Ramanna lets on. Yet, almost no one outside the
financial professions would be aware of bills such as HR 5365 and rules such
as SFAS 142 and there has been little sustained discussion of them in any
serious public forum. And yet they have massive ramifications on the economy
and how valuation and performance information flows through the economy at
large.
Ramanna's argument that
standard-setters are beholden to political interests and cater to industries
from which they come is not conclusive, but rather is intriguing and
suggestive of a need for internal and public review. He never suggests that
FASB members have personally benefitted from the process. His prime example
of the process to push for fair value standards focuses on the influence of
political action committee (PAC) money and links between congressional
oversight and the standard-setting community. In light of Ramanna's claims,
many in the industry and, without doubt, the FASB, will take umbrage with
Ramanna's assertions, and it is their turn now to rebut his accusations.
Among the questions raised by Ramanna is why FASB
members come mostly from the accounting and financial industries and not
from a more disinterested track of financial civil servants and experts. The
talent is out there. And, there is little doubt that fair value standards
need to be further examined for their potential risks. Ramanna's questions
merit a very serious public debate. Alas, as Ramanna shows, it seems
unlikely that such a debate will happen outside of the industry itself,
unless Congress decides to get involved on behalf of the public. One would
imagine that, in the long tradition of accounting reform in the U.S., the
Big 4 auditing firms would want to follow the lead of the great accounting
leader of the 1930s, George O. May, and look into their own affairs before
another Enron-Andersen fiasco opens it up to even more litigation and
regulation. The industry is both monolithic and fragile. This condition is
not sustainable, and to remedy it will take sustained and visionary
leadership to address questions surrounding fair value standards.
Continued in article
Reply from Paul Williams
Bob, et al.
At the recent SASE meeting in Berkeley I was on a panel that provided
critiques of this book. Professor Ramanna was there as well. My critique
will eventually be published in Accounting, Economics and Law: A Convivium,
an online journal edited by Yuri Biondi and Shyam Sunder. The book is
profoundly ironic. Positive about the book is the assertion that standard
setting is incoherent (though the reasons for believing so are not all that
convincing), the focus it makes on the importance of public policy re
accounting (something the academy ignores because of its preoccupation with
navel gazing at the most obscure correlations one can find embedded in
archival data sets), and the acknowledgment that the ultimate solution to
the problem identified is an ethical, not a technical, one. It seems clear
that the book illustrates how much the U.S. academy in accounting has to
answer for. How do we undo the Ferengi culture we have made of the
accounting discipline? The irony of the book is that to do so would mean
giving up the The Methodology that forms the basis of the evidence in the
book. I highly recommend the book to anyone interested in accounting and
public policy. The academy has lost sight of what Carl Devine used to
admonish his students about, "What accountants do, matters." We must be
mindful of how true that statement is. PFW
"Do Accounting Faculty Characteristics Impact CPA Exam Performance? An
Investigation of Nearly 700,000 Examinations," by Dennis M. Bline. Stephen
Perreault, Xiaochuan Zheng, Issues in Accounting Education, August 2016,
Vol. 31, No. 3 ---
While many colleges and universities publicize CPA
examination pass rates as evidence of having a high-quality accounting
program, some have questioned whether program-specific characteristics are
legitimate predictors of examination success. To examine this issue, we
empirically investigate the link between accounting faculty characteristics
and performance on the CPA examination. We examine the results from nearly
700,000 first-time exam sittings taken during the period 2005–2013 and find
that faculty research and teaching specialization has a significant impact
on CPA exam performance. That is, when a program has a relatively higher
percentage of accounting faculty with expertise in a particular content area
tested on the exam (e.g., auditing), graduates achieve higher scores on the
related exam section (e.g., AUD). We also find that faculty research
productivity and CPA certification status are positively related to
candidate exam performance. We believe these results contribute to the
existing literature on the determinants of CPA exam success and also provide
important insights to those responsible for accounting faculty staffing and
development
Jensen Caution
I question the independence of variables in the regression models such as the
independence of SAT scores and research performance of professors where research
professors in R1 universities are apt to have higher SAT students.
There's also an issue of learning attribution such as where one of Tom
Selling's sons studied accounting as an undergraduate at Trinity University and
as a masters student at Ohio State University.
With such large sample sizes there's a possibility that statistical
significant outcomes are not substantively significant. This has been a
common error in most large-sample empirical accounting studies in the past seven
decades. As sample sizes increase insignificant differences become statistically
significant such as a random sample finding that 826,243 respondents prefer bran
flakes versus 826,241 who said they prefer corn flakes.
"Implementing a “Real-World” Fraud Investigation Class: The Justice for
Fraud Victims Project," by Sara M. Kern and Gary J. Weber,
Issues in
Accounting Education, August 2016, Vol. 31, No. 3, pp. 255-289 ---
http://aaajournals.org/doi/full/10.2308/iace-51287
The Justice for Fraud Victims Project class is an
innovative program developed at Gonzaga University as a partnership between
the university, local law enforcement, local and federal prosecutors, and
the local chapter of the Association of Certified Fraud Examiners (ACFE).
The class provides an opportunity for students to utilize their accounting
expertise for the benefit of the community while developing an understanding
of forensic accounting. At the same time, the course addresses, in some
small measure, the injustice arising from the inability of victims to pursue
fraudsters due to lack of resources to pay for an examination. We describe
the structure and organization of the course, provide statistics from
investigated cases (both at Gonzaga and at other universities that have
adopted the approach), and share results of participant surveys regarding
their experiences. We also describe the many benefits of the class, such as
student learning through hands-on experience, positive publicity for the
school, and the potential for justice and possible restitution for victims
of fraud who cannot afford to pay for a forensic accounting examination.
Last, we share advice on how to implement the class, including suggesting
potential solutions for some of the unique challenges that may arise.
In the United States, a progressive tax system is employed which equates
to higher income earners paying a larger percentage of their income in
taxes. According to the IRS, the top 1% of income earners for 2008 paid 38%
of income tax revenue, while earning 20% of the income reported.The top 5%
of income earners paid 59% of the total income tax revenue, while earning
35% of the income reported.The
top 10% paid 70%, earning 46% and
the top 25% paid 86%, earning 67%. The top
50% paid 97%, earning 87% and leaving
the bottom 50% paying 3% of the taxes collected and earning 13%
of the income reported.[
The direct cost of the EITC to the U.S. federal government was about $56
billion in 2012. The IRS has estimated that between 21% and 25% of this cost
($11.6 to $13.6 billion) is due to EITC payments that were issued improperly
to recipients who did not qualify for the EITC benefit that they received.
For the 2013 tax year the IRS paid an estimated $13.6 billion in bogus
claims. In total the IRS has overpaid as much as $132.6 billion in EITC over
the last ten years.]
The saddest part is that an estimated $2 trillion in the underground economy
is not reported to the IRS. The violators range from the rich to the really
poor. While much of that revenue is from criminal enterprise (such as drug
dealing) much of it comes from unreported work compensation such as my wife's
dentist who gave her a 50% discount of a big bill for paying in cash to the
undocumented house cleaners in San Antonio.
Bruce W. Klaw University of Denver, Daniels College of Business;
University of Denver, Daniels College of Business, Dept. of Business Ethics
and Legal Studies
Abstract
This Article makes the case for a new U.S. statutory provision that
defines and prohibits insider trading under an "equality of access" theory.
It supports this claim, and contributes to the important public dialogue
concerning this prevalent practice, by highlighting the moral and legal gaps
in existing U.S. law that result from understanding the harms of trading on
the basis of material nonpublic information solely with reference to
fiduciary breach or misappropriation, as evidenced by the recent cases of
United States v. Newman and United States v. Salman. It weaves legal
analysis together with current literature in business ethics, moral
philosophy, finance, and accounting to consolidate and offer new arguments
in the long-standing debate over insider trading based on Rawlsian social
contract theory, applied deontology, and empirically informed
utilitarianism. It then draws on lessons learned from empirical analysis of
European states' adoption of the equality of access theory under the Market
Abuse Directive. Finally, it analyzes three insider trading bills currently
pending in Congress and makes the case for a statute, like S. 702, that will
prohibit the use, by anyone, of material information concerning a financial
instrument that is not, at least in principle, available to others through
independent and otherwise lawful due diligence
This study investigates whether fair value
accounting contributes to the procyclicality of bank lending. Using banks’
approval/denial decisions on residential mortgage applications to capture
banks’ supply of credit, I find no evidence that fair value accounting has
procyclical effects on bank lending over the past two business cycles. I
further identify two reasons for this result. First, the main accounting
item distinguishing fair value accounting from historical cost accounting —
unrealized gains and losses on available-for-sale securities — does not
affect lending decisions. Second, unrealized gains and losses on
available-for-sale securities are not procyclical, as the risk-free interest
rate rises during some expansionary periods, resulting in unrealized losses,
while the risk-free interest rate (and sometimes the default spread) falls
during some recessionary periods, resulting in unrealized gains.
So, I was very
surprised to read the June CBO report on the consequences of federal
investment. It assumes,
from its reading of the literature (also
here), as its central
base case what it calls a 5 percent rate of return on infrastructure
investment but then finds that the payback effect of infrastructure
investment on the federal deficit is very small, contradicting my earlier
claims and more importantly raising doubts about the desirability of a big
infrastructure push.
Why the discrepancy? After carefully reading the report, and speaking at
some length with CBO officials, I think I understand at least one aspect of
it. CBO uses the term “rate of return” in a way that is very different than
what I would regard as standard usage. They take a 5 percent rate of return
to mean that one dollar more capital produces five cents more output. This
turns out to be quite different from assuming that investments in public
capital earn a 5 percent return.
For example, CBO does not subtract depreciation in calculating their rate of
return unlike what is standard in the private sector. Nor, contrary to what
I would have assumed was natural, do they suppose that rates of return are
reduced by the fact that on their (questionable) assumptions it takes many
years for dollars invested to turn into capital. (Think of R&D as an example
here). Adjusting for
these factors, CBO is actually assuming an economic return a little above 2
percent on public investment and then concluding it will not help much.
If
one assumes that public investment is basically unproductive, it is no
surprise that it does not yield large economic benefits. There is still the
question of if the 5 percent rate of return is misdescribed, whether or not
CBO has made a reasonable judgement about the productivity of public
investment. I’m pretty skeptical. They rely on aggregate econometric
estimates of an elasticity of GDP with respect to public capital. Such
estimates are plagued by all sorts of problems of heterogeneity,
simultaneity, limited variation in the exogenous variables and so forth.
I
would prefer to build up from individual projects by looking for example at
estimates of the return on fixing potholes, building dams, or repairing
water systems. I think anyone taking this kind of ground up approach will
conclude that the social return to public investment is far higher than 2
percent. This is, of course, a matter of judgement.
There are other, probably lesser, problems with CBO’s work. Much of the
adverse effect of public investment on the budget in their work comes from
an assumed increase in interest rates resulting from budget deficits. This
assumption would have been natural once, but is much less compelling in the
current liquidity trap, possible secular stagnation environment. They also
haircut the return to federal investment by assuming that it crowds out
state and local investment but do not recognize explicitly the benefits of
less state and local borrowing. And they focus on deficit impacts rather
than the more appropriate question of impacts on debt-to-GDP ratios.
On
balance, I do not think anyone should change her mind about public
investment based on CBO’s analysis. Great umpires never change their minds.
But they do learn from their mistakes. I hope CBO will do better next time
out.
Jensen
Comment
I think Professor Summers is being overly conservative here. In fact I don't
think it is possible to measure returns on infrastructure investment due to all
the externalities involved such as when fixing a bridge increases ambulance
response time. There are also impractical measurement issues such as measuring
the decrease in repair costs of every vehicle that would other wise be jolted
from a pothole.
In 2009, the US Securities and Exchange Commission
(SEC) required all public companies and mutual funds to report their
financial information to the SEC using a markup language called eXtensible
Business Reporting Language (XBRL). The purpose of this requirement was to
improve the accessibility to financial accounting data, increase the
information flow between companies and investors, and make it easier and
cheaper to collect and analyze data. Some controversy exists whether the
benefits from using XBRL based data outweigh the costs associated with the
creation of data and the use of the data. As part of that discussion, some
claimed that the XBRL filings are of low quality and are difficult to use.
The purpose of this paper is to examine the quality and usability of XBRL
filings by examining different filing characteristics and mistakes over
time. The focus of this paper is on the following characteristics: the use
of extended tags, Document and Entity Information (DEI) errors, scale
errors, and sign switches. Findings suggested that starting in 2012, there
has been a steady improvement in the quality and usability of the XBRL
filings in most aspects. Additionally, it seems that the lower quality and
usability originates in data in the notes to the financial statements and in
data filed by smaller companies. The results presented in the paper are
consistent with the notion of companies moving along a learning curve and
improving the quality and usability of the XBRL data as they gain more
experience tagging. These improvements make it easier to use the XBRL
filings and reap the benefits offered by this data. However, in spite of the
efforts and improvements, it seems like more work is needed to continue
improving the quality of the data.
Per-capita health care
spending by low-income individuals fell after 2004, while per-capita
spending by high-income individuals increased, according to a Harvard study.
Explanations for the shift may include wage stagnation and
the growth of
high-deductible Obamacare health insurance plans.
Jensen Comment My Barber's Formula for Medicaid Cheating
Of course in about half the states poor Americans are faring better because if
the greatly expanded number of them covered by the Obamacare Medicaid expansion
of the numbers covered.
Studies have also found widespread cheating
among Americans not eligible for Medicaid such as the finding that half the
Medicaid recipients in Illinois were not eligible for Medicaid.
Note that Medicare does not cover nursing home expenses. My barber explained
how cheating works. His mother sold her house and came to live with him. Over
several years her entire savings was bled off to him in inflated rent and other
living charges. I suspect her payments were not declared as income by him.
Then when she needed to enter a nursing home she was a poverty case and
became eligible for Medicaid to pay all of her nursing home expenses for about
ten years.
This type of Medicaid cheating (early liquidation of savings) for
nursing home coverage is illegal, but I suspect it's extremely commonplace. In
some cases grandma has to go on welfare and food stamps before she can get into
a nursing home
July 7, 2016 reply from Elliot Kamlet
Hi Bob
I have bad news for you. Not only can this be done
legally, there are many, many lawyers out there who specialize in setting up
a situation within the rules so Medicaid will pay for nursing homes. They
sell it to fair and reasonable people by saying it's not fair that your life
savings, that you intended to leave to your children, will all be taken by
the nursing home.
Elliot
July 7, 2016 reply from Paul Williams
Elliot,
The indictment is not of the people who are forced to impoverish themselves
to be warehoused until they die. People who worked all of their lives are
forced to suffer the indignity of impoverishment simply because they lived
longer than is convenient. Of course their desire to leave something to
their children and grandchildren is unworthy of consideration, so they are
labeled "cheaters."
Jensen Comment
I did not know that the IRS could not instigate DOJ investigations by sending
tax returns to the DOJ. My guess (and really a hope) that it happens on occasion
but not on a Lois Lerner scale.
I guess the theory is that criminals are less inclined to file "honest" tax
returns if they know that doing so increases their chances of being prosecuted
for crimes that are taxable. I can't imagine that the IRS does not meet in
secret with the DOJ to whisper "look into this guy."
But in theory a tax return is a bit like a confessional in the Roman Catholic
Church where the IRS Agent becomes like a priest that is duty bound not to
report crimes discovered in confessionals. However, TV shows frequently reveal
how priest cleverly break their vows of silence.
SFAS 52 ---
http://www.fasb.org/pdf/fas52.pdf
Note: To find historic original FASB standards go
www.bing.com and enter the "SFAS 52" or whatever X number you are searching
for such as "SFAS X"
For example go to
www.bing.com and enter "SFAS
133"
Note that these are historic and may have been modified in subsequent standards
and other modifications issued by the FASB
Current standards can only be accessed by in the FASB Standards Codification
which is not free --- https://asc.fasb.org/
Consistent with SFAS No. 52, "Foreign Currency
Translation" (SFAS 52), SFAS 133 allows hedging of the foreign currency risk
of a net investment in a foreign operation. Citigroup primarily uses foreign
currency forward contracts, short-term borrowings, and to a lesser extent
foreign currency future contracts and foreign-currency-denominated debt
instruments, to manage the foreign exchange risk associated with Citigroup's
equity investments in several non-U.S. dollar functional currency foreign
subsidiaries. In accordance with SFAS 52, Citigroup records the change in
the carrying amount of these investments in the cumulative translation
adjustment account within Accumulated other comprehensive income (loss).
Simultaneously, the effective portion of the hedge of this exposure is also
recorded in the cumulative translation adjustment
Question
How can MOOC students and other self-learners access the FASB's Standard
Codification without paying $895 per year?
Answer
I don't think it's possible unless they are also currently enrolled in a college
that pays for student access. These colleges only have to pay $250 for a license
for all students.
Current standards can only be accessed by in the FASB
Standards Codification which is not free --- https://asc.fasb.org/
Jensen Comment
I don't think the FASB anticipated MOOC-type learning where students take
courses (sometimes accounting courses) online for free without being registered
students in any college.
July 15,
2016 reply from the FASB
Thank you for your inquiry about access to the FASB Accounting Standards
Codification for MOOC students and other self-learners.
The Foundation offers a Basic View of the Codification at no cost. Basic
View users have access to the full content of the Codification, although not
to search or advanced navigation features that come with the Professional
View.
From the CFO Journal's Morning Ledger on July
22, 2016
Amazon enters student-loan business Amazon.com Inc. is
stepping into the student-loan marketplace. The online retailer has entered
into a partnership with San Francisco lender Wells Fargo & Co. in
which the bank’s student-lending arm will offer interest-rate discounts to
select Amazon shoppers. Amazon said this is the first time members of the
company’s “Prime Student” service are receiving a student-loan offer by a
lender through its site since that service was launched in 2010. The
discount will be offered both to students who want college loans and those
who want to refinance. The offer also represents the latest effort among
private student lenders to stand out by discounting.
Jensen Comment
Bezos and Musk may be trying to do too many things at the same time.
The Big Medical Insurance Companies are Pushing Out
Obamacare's Smaller ACA Plans
From the CFO Journal's Morning Ledger on July
20, 2016
ACA dings UnitedHealth UnitedHealth Group Inc.on
Tuesday posted a strong earnings beat as
revenue continued to surge in its pharmacy-services business, and it lifted
the low end of its profit guidance for the year. It also raised the low end
of its earnings guidance. But amid the positive news, the company included
one ongoing dark spot:
Affordable Care Act
plans, which it will almost completely stop selling next year.
The insurer booked another $200 million in full-year ACA-plan losses in the
second quarter, but more than that, costs mounted because enrollees were
even sicker than projected, with more chronic conditions than last year.
From the CFO Journal's Morning Ledger on July 19, 2016
CalPERS weathers storm, barely.
The largest U.S. public pension posted its lowest
annual gain since the last financial crisis due to heavy losses in stocks.
The California Public Employees’ Retirement System, or CalPERS, said it
earned 0.6% on its investments for the fiscal year ended June 30, according
to a Monday news
release. It was the second straight year CalPERS failed to hit its internal
investment target of 7.5%. Workers or local governments often must
contribute more when pension funds fail to generate expected returns
Jensen Comment
One would think that staying out of oil and gas would have helped the pension
fund returns of CalPERS. Perhaps the heavy shift into green investing,
especially renewable energy, has not been as profitable as CalPERS intended. In
any case
CalPERS wiggles out of providing details of
why their returns reported in 2016 are way below expectations.
From the CFO Journal's Morning Ledger on July 18, 2016
Pharma’s big (accounting) GAAP
The use of custom accounting metrics has spread across
the U.S. pharmaceuticals industry, Tatyana Shumsky reports. And the gap
between standard and adjusted earnings figures is widening, according to a
report from Credit Suisse. U.S. listed companies are required to file their
financial reports in accordance with U.S. generally accepted accounting
principles, but are free to supplement those figures with custom metrics.
Credit Suisse said the gap between standard and adjusted earnings figures
rose to 38% in the first quarter of 2016 from 37% in the year ago quarter
and 22% in the first quarter of 2014. Amortization expenses were the largest
contributor to the difference.
From the CFO Journal's Morning Ledger on July 18, 2016
Cloud costly, necessary for Microsoft
For Microsoft Corp., shifting its business to
the cloud has been the right decision—albeit an expensive one. While now
just one-third of the company’s revenues, Microsoft’s cloud business is the
company’s primary driver of growth—and its stock price. The latter point was
painfully clear in the company’s most recent quarterly report in April,
when a small miss for the cloud business translated into a big selloff in
the stock.
Jensen Comment
Virtually all accountants know that there is a wide
margin of error in net income numbers due to accrual errors (think
depreciation) and fair value estimation of financial instruments. Apparently
for Microsoft some errors can be costly.
From the CFO Journal's Morning Ledger on July 15, 2016
The Enron of biofuel Not unlike
Enron, Green Diesel was a Houston energy company, seemingly full of promise.
Like Enron, much of what the biodiesel company did was allegedly fabricated
and fraudulent, Bloomberg Businessweek reports. Rather than actually produce
biofuel, Green Diesel apparently traded the market for credits for biofuel,
based on production that didn’t exist, to take advantage of price swings.
From the CFO Journal's Morning Ledger on July 15, 2016
Congress rules trump Vermont In a victory
for food companies, Congress has passed a federal requirement for labeling
products made with genetically modified organisms that will supersede
tougher measures passed by Vermont and considered in others. The bill will
require labels to be reworked or updated to show whether any of the
ingredients had their natural DNA altered, but will take years to phase in
and will give companies the option of using straightforward language,
digital codes or a symbol to be designed later.
Jensen Comment
Taxpayers in Vermont are probably relieved. When Vermont's GMO-labelling law was
passed the biggest fear was that it would cost Vermont millions of dollars to
defend the law in the courts with a high risk of losing the entire law. Now
Vermont wins a piece of the law without further cost, although activists in
Vermont may be unhappy with the weaker law passed by Congress.
Actually the Vermont's law was sort of a joke anyway. It was
passed to hurt non-Vermont food manufacturers without hurting Vermont's most
important industries. For example, Vermont's beer and dairy product (think of
that popular Vermont Cheddar Cheese) manufacturing was exempt from the law as
were some other in-state businesses. If genetic labeling is so important to
health and well-being why exempt Vermont products?
Question
Why did the Department of Justice have zero interest in Hillary Clinton's or
Lois Lerner's questionable email messages while having a keen interest in
Microsoft's foreign email messages?
From the CFO Journal's Morning Ledger on July 15, 2016
Microsoft beats back DOJ
Microsoft Corp. won
a major legal battle with the U.S. Justice Department
Thursday when a federal appeals court ruled
that the government can’t force the company to turn over emails or other
personal data stored on computers overseas. The case, closely watched by
Silicon Valley, comes amid tensions between Europe and the U.S. over
government access to data that resides on the computers of social-media and
other internet companies. The ruling is another setback for the DOJ’s
efforts to force technology companies to comply with government orders for
data.
The Fed's Message to Retirees and Persons Still Working
Take financial risks with your retirement
savings or eventually eat your seed corn (read that as meaning spend your
savings on living with out any interest returns)
From the CFO Journal's Morning Ledger on July 15, 2016
The head of the world’s largest asset manager said
investors no longer know what to do
with their money as they wrestle with historically low
interest rates, the U.K.’s decision to exit the European Union and
uncertainty surrounding the next U.S. election. “They are afraid and they
are pulling back,” BlackRock Chief Executive Laurence Fink said as he
discussed the company’s second-quarter results with analysts
Thursday.
Individual savers and institutional investors are grappling with a
low-return environment that is forcing them to save more, revise their
targets or take greater risks to meet their goals.
That said, equity investors are nonetheless hoping to
pitch their first perfect game
in 18
years today. The S&P 500 has enjoyed a
record close every day this week,
the first such showing since late 2014. according to Howard Silverblatt, who
has kept an eye on the index for a long time. If the S&P can close higher
today, that will be just the 18 time since 1928 that the index has turned in
a weekly perfecto. To put that in perspective, only 18 professional baseball
pitchers have thrown a perfect game, one of the rarest feats in sports, over
that span. Futures are down slightly this morning, after markets shrugged
off news yesterday that the Bank of England would hold interest rates
steady. But the BOE telegraphed an August move
to support the economy in the wake of Brexit.
Jensen Comment
Is there any doubt about the major driver of current all-time highs in the
financial indices like the Dow and the S&P 500?
Workers are planting their seed corn and taking on risks that there will be a
severe drought (read that as market crash).
The silver lining is that highly diversified equity
investments are inflation hedges. In the long run the run-away entitlements
obligations not yet booked as Federal and State Debt will eventually cause
run-away inflation in the long term (but not the short term).
From the CFO Journal's Morning Ledger on July 14, 2016
Court rules against GM
A Manhattan federal appeals court denied General
Motors Co.’s attempt to use a bankruptcy shield to block
some lawsuits over faulty ignition switches, ruling GM’s failure to reveal
the defect violated consumers’ legal rights in chapter 11 court proceedings.
The court on Wednesday reversed
a bankruptcy judge’s decision that had barred lawsuits with up to $10
billion in potential claims that arose before the auto maker’s bankruptcy.
Separately, GM
resolved a dispute with financially troubled
auto-parts supplier Clark-Cutler-McDermott Co. in a deal
that averts a potential production shut down of some of GM North American
operations
Jensen
Comment
If it has not already done so, the time has come for GM to put numbers on the
estimated losses of future losses due to this negligence.
Uncounted by statisticians and
invisible to tax collectors,
a population the size of Texas -- or about 30 million people -- plies its
trade in the nooks and crannies of what’s become known as the “garage
economy.” There, professions such as mechanics, builders, dentists and
veterinarians conduct their business off-the-books and in cash. President
Vladimir Putin is zeroing in on the phenomenon, said two participants in a
recent Kremlin meeting on economic policy.
It’s the cops, prosecutors and taxes driving them
underground, he told a gathering of ministers, advisers and regional
bureaucrats, according to the people, who asked to remain unidentified
because the discussion wasn’t public. Putin asked the “serious,
bespectacled” lot in front of him to devise a way to ferret out the
businesses and motivate them to legalize their operations, the people said.
The scale of this underworld, estimated at as much
as a quarter of gross domestic product, presents Russia’s leader with a
dilemma. For an economy that’s struggling to shake off a recession in an era
of cheap oil, the millions of undocumented workers could prove an unrivaled
resource as government finances run dry.
Jensen Comment
It's too bad the USA does not put the same or greater priority on its own $ 2+
trillion underground economy most likely much larger than the underground
economy of Russia. In the USA this leads to great frauds such as working for
more than $20 per hour while collecting welfare, food stamps, Medicaid, etc. ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm
One of the most effectvie ways to clobber the underground economy and
underground crime is to do away with cash ala Kenya where it seems to be quite
effectie. Nigeria is one of the latest nations to experiment with a cashless
policy ---
https://en.wikipedia.org/wiki/Cashless_Policy_(Nigeria)
Jensen Comment
Although most of these children ended up with a grandparent for involuntary
reasons (incarceration, disability, or death of a parent) there is moral hazard
here in that some voluntrily abandon children in order to have these children
collect the benefits. Indeed a parent may still indeed play much of the role of
a parent in what is tantamount to fraud. Having said this the families are
generally poor and can add to food stamps and other forms of welfare in this
manner.
This is one of the many safety nets of the poor in the USA. Mitt Romney found
that mentioning safety nets for the poor was bad politics and drew a lot of
negative media attention.
Mentioning them is not politically correct. It's an example where welfare in
the USA tends to destroy traditional families of the poor.
It's also an example of another unfunded entitlement added to Social Security
that became an unfunded entitlement burden for future generations.
You
might ask students if there is any way to report these risks in ways other than
in footnotes to financial statements and M&A statements
From the CFO Journal's Morning Ledger on July 14, 2016
U.S. power grid precarious
The Wall Street Journal examined dozens of break-ins
to that show how, despite federal orders to secure the power grid, tens of
thousands of substations are still vulnerable to saboteurs. It’s a sobering
must-read. The U.S. electric system is in danger of widespread blackouts
lasting days, weeks or longer through the destruction of sensitive,
hard-to-replace equipment. Yet records are so spotty that no government
agency can offer an accurate tally of substation attacks.
Jensen Comment
There are two types of risk to report
One is the risk of overload due to unavailable capacity. The grid itself can
become overloaded due, in recent times, dependency upon solar and wind power
that led to reduction in conventional power plant capacity. For example, a
severe plunging of temperatures when people become more dependent on electric
heat to supplement solar power on the roof. Up where I live the winter days
become very short for solar power in late in the year.
The second type of
risk is the one focused upon in the article. We tend to think of grid risk in
the generating plants that feed the grid. But the real risk is in the
proliferation of substations that are easy to blow up to kingdom come.
In any case your
students might conduct some research on the reporting of both types of risk.
Each Fall I begin a Who's the Worst list
of fraudsters.This is preparation for the Accounting Ethics 5308 class
taught in the spring. One particular case has already caught my eye so let's
get underway.
CEO Mike Pearson is leaving, not a mutual
decision. Activist investor Bill Ackman is joining the Board. There will be
more on the firm in this space I am sure....
She had raised some $800,000 but only
dispensed one $1,000 scholarship. Apparently she deposited money from the
charity to her personal bank account.g Funds were also used to pay for
events hosted by Brown including lavish receptions and luxury boxes at
concerts. \
He routed a federal grant through his
consultants to pay back an illegal loan. The 59 year Old Democrat had beenin
Congress since 1995 and served on the powerful House ?Appropriations
Committee.
FBI's Comey confirms foreign hackers
probably have all 60,000 e mails including the 30,000 not released.
President Obama campaigns for her the same day the Attorney General is
supposedly deciding on prosecution. Hmm, do we have a double standard here?
Jensen Comment
Millions of Republicans and Democrats are calling Donald Trump a fraud.
Veteran Supreme Court Justice Ruth Ginsberg called him a "Faker" ---
https://en.wikipedia.org/wiki/Ruth_Bader_Ginsburg
She's since apologized for her remarks deemed inappropriate for a USA Supreme
Court Justice
Donald Trump may still be the biggest fraud of 2016 but there's no monetary gain
here --- it's costing him a sizeable share of his fortune to be a "faker."
All frauds committed along the way to November 2016 seem to be more a part of
his ego tri.
The damage to Ginsberg is probably beyond repair after such a long and
distinguished history on the Supreme Court (ignoring the time she was filmed
sleeping through a court session).
I have my on opinion as to
who the biggest fraudster continues to be from 2012, but the fraud may have been
one of his friends rather than he himself. There's no way of proving it since
the IRS destroyed the evidence.
Expanded
rule book on how to handle the discovery of corporate misdeeds
From the CFO Journal's Morning Ledger on July 12, 2016
Accountants will soon get a new,
expanded rule book on how to handle the discovery of
corporate misdeeds, from money laundering to
environmental abuses, Richard Teitelbaum reports
for CFO Journal in today’s Business & Tech. section. The International
Ethics Standards Board for Accountants is set to unveil new standards this
week aimed at resolving potential conflicts of interest for internal and
external accountants and auditors, who can feel bound by strict client
confidentiality rules, even when they uncover wrongdoing.
More than six
years in the making, the new standards come amid a spate of high-profile
corporate missteps—from Volkswagen AG’s emissions-cheating scandal to
allegedly inadequate money-laundering controls at financial firms like HSBC
Holdings PLC and U.S. Bancorp. Some experts, however, have doubts
about the usefulness of the guidelines, at least in the U.S., where the
Securities and Exchange Commission already takes accountants to task for
failing to raise a red flag when they learn of regulatory infractions.
Jensen Comment
One of the best teaching cases on this topic is the Koss Case.
Koss hired one of
the best accounting firms in the world, Grant Thornton, and
should have been able to rely on Thornton’s audits to uncover
wrongdoing, Avenatti said. The suit against the auditing firm
says auditors assigned to Koss were not properly trained.
The lawsuit lists
hundreds of checks that Sachdeva ordered drawn on company
accounts to pay for her personal expenses. She disguised the
recipients — upscale retailers such as Neiman Marcus, Saks Fifth
Avenue and Marshall Fields — by using just the initials. But the
suit says Grant Thornton could have ascertained the true
identity of the recipients by inspecting the reverse side of the
checks, which showed the full name.
Koss Corp. receives $8.5M
in settlement with former auditor Koss Corporation announced it
has settled the claims between Koss and its former auditor,
Grant Thornton, in the lawsuit pending in the Circuit Court of
Cook County, Illinois. As part of the settlement, the parties
provided mutual releases that resolved all claims involved in
the litigation between Koss and its directors against Grant
Thornton. Pursuant to the settlement, Koss received gross
proceeds of $8.5M on July 3.
Jensen Comment
Grant Thornton failed to detect former Koss Corp. executive's $34
million embezzlement. Normally external auditors rested easy when
such frauds did not materially affect the financial statements or
they had strong cases that they were deceived by the client in a way
that they were not responsible to detect such fraud in a financial
statement audit.
Both the SEC and the PCAOB are beginning to
make waves about having audit firms more responsible for detecting
major frauds like the SAC fraud. If one of the Big Four had been the
auditor of the Madoff Fund I think the audit firm probably would not
have gotten off with zero liability for negligence. Times are
changing since Andy Fastow pilfered around $60 million from his
employer (Enron).
Audits are
not designed to uncover fraud and Koss did not pay for a
separate opinion on internal controls because they are exempt
from that Sarbanes-Oxley requirement.
But
punching holes in that Swiss-cheese defense is like shooting
fish in a barrel. Leading that horse to water is like feeding
him candy taken from a baby. The reasons why someone other than
American Express should have caught this sooner are as numerous
as the
acorns you can steal from a blind pig…
Ok, you get the
gist.
Listing
standards for the NYSE require an internal audit function.
NASDAQ, where Koss was listed, does not. Back in 2003, the
Institute of Internal Auditors (IIA) made recommendations
post- Sarbanes-Oxley that were adopted for
the most part by NYSE, but not completely by NASDAQ. And both
the NYSE and NASD left a few key recommendations hanging.
In
addition, the IIA has never mandated, under its own standards
for the internal audit profession, a
direct reporting
of the internal audit
function to the independent Audit Committee. The
SEC did
not adopt this requirement in their final rules, either.
However,
Generally Accepted Auditing Standards (GAAS), the standards an
external auditor such as Grant Thornton operates under when
preparing an opinion on a company’s financial statements –
whether a public company or not, listed on NYSE or NASDAQ,
whether exempt or not from Sarbanes-Oxley – do require the
assessment of the internal audit function when planning an
audit.
Grant
Thornton was required to adjust their substantive testing given
the number of
risk factors
presented by Koss, based on
SAS 109 (AU 314),
Understanding
the Entity and Its Environment
and Assessing the Risks of Material Misstatement. If they had
understood the entity and assessed the risk of material
misstatement fully, they would have been all over those
transactions like _______. (Fill in the blank)
If they had
performed a proper
SAS 99 review (AU 316),
Consideration of Fraud in a Financial Statement Audit, it
would have hit’em smack in the face like a _______ . (Fill in
the blank.) Management oversight of the financial reporting
process is severely limited by Mr. Koss Jr.’s lack of interest,
aptitude, and appreciation for accounting and finance. Koss Jr.,
the CEO and son of the founder,
held the titles of COO and CFO, also. Ms.
Sachdeva, the Vice President of Finance and Corporate Secretary
who is accused of the fraud, has been in the
same job since 1992
and during one ten year period
worked remotely from Houston!
When they
finished their review according to
SAS 65 (AU 322),The Auditor’s
Consideration of the Internal Audit Function in an Audit of
Financial Statements, it should have dawned on them: There
is no internal audit function and the flunky-filled Audit
Committee is a sham. I can see it now. The Grant Thornton
Milwaukee OMP smacks head with open palm in a “I could have had
a V-8,” moment but more like, “Holy cheesehead, we’re
indigestible gristle-laden, greasy bratwurst here! We’ll never
be able issue an opinion on these financial statements unless we
take these journal entries apart, one-by-one, and re-verify
every stinkin’ last number.”
But I dug in and
did some additional research – at first I was just working the
“no internal auditors” line – and I found a few more interesting
things. And now I have no sympathy for Koss management and,
therefore, its largest shareholder, the Koss family. Granted
there is plenty of basis, in my opinion, for any and all
enforcement actions against Grant Thornton and its audit
partners. And depending on how far back the acts of deliciously
deceptive defalcation go, PricewaterhouseCoopers may also be
dragged through the mud.
Yes.
I can not
make this stuff up and have it come out more music to my ears.
PricewaterhouseCoopers was Koss’s auditor prior to Grant
Thornton. In March of 2004,
the
Milwaukee Business Journal
reported, “Koss
Corp.
has fired the
certified public accounting firm of PricewaterhouseCoopers L.L.P.
as its independent auditors March 15 and retained Grant Thornton
L.L.P. in its place.” The
article was short with the standard disclaimer of no disputes
about accounting policies and practices. But it pointedly
pointed out that PwC’s fees for the audit had increased by
almost 50% from 2001 to 2003, to $90,000 and the selection of
the new auditor was made after a competitive bidding process.
PwC had been Koss’s auditor since 1992!
The focus
on audit fees by Koss’s CEO should have been no surprise to PwC.
Post-Sarbanes-Oxley, Michael J. Koss the son of the founder, was
quoted extensively as part of the very vocal cadre of CEOs who
complained vociferously about paying their auditors one more red
cent. Koss Jr. minced no words regarding PwC in the
Wall Street Journal in August 2002, a
month after the law was passed:
“…Sure,
analysts had predicted a modest fee increase from the
smaller pool of accounting firms left after Arthur Andersen
LLP’s collapse following its June conviction on a
criminal-obstruction charge. But a range of other factors
are helping to drive auditing fees higher — to as much as
25% — with smaller companies bearing the brunt of the rise.
“The auditors are making money hand over fist,” says Koss
Corp. Chief Executive Officer Michael Koss. “It’s going to
cost shareholders in the long run.”
He should
know. Auditing fees are up nearly 10% in the past two years
at his Milwaukee-based maker of headphones. The increase has
come primarily from auditors spending more time combing over
financial statements as part of compliance with new
disclosure requirements by the Securities and Exchange
Commission. Koss’s accounting firm, PricewaterhouseCoopers
LLP, now shows up at corporate offices for “mini audits”
every quarter, rather than just once at year-end.”
A year
later, still irate, Mr. Koss Jr. was quoted in
USA Today:
“Jeffrey
Sonnenfeld, associate dean of the Yale School of Management,
said he recently spoke to six CEO conferences over 10 days.
When he asked for a show of hands, 80% said they thought the
law was bad for the U.S. economy.
When
pressed individually, CEOs don’t object to the law or its
intentions, such as forcing executives to refund ill-gotten
gains. But confusion over what the law requires has left
companies vulnerable to experts and consultants, who
“frighten boards and managers” into spending unnecessarily,
Sonnenfeld says.
Michael Koss, CEO of stereo headphones maker Koss, says it’s
all but impossible to know what the law requires, so it has
become a black hole where frightened companies throw endless
amounts of money.
Companies
are spending way too much to comply, but
the cost is due to “bad advice, not a bad
law,” Sonnenfeld says.”
It’s
interesting that Koss Jr. has such minimal appreciation for
the work of the external auditor or an internal audit function.
By virtue, I suppose, of his esteemed status as CEO, COO and CFO
of Koss and notwithstanding an undergraduate
degree in anthropology,
according to
Business Week,
Mr. Koss Jr. has twice
served other Boards as their “financial expert” and Chairman of
their Audit Committees. At
Genius Products,
founded by the Baby Genius DVDs creator, Mr. Koss served in this
capacity from 2004 to 2005. Mr. Koss Jr. has also been a
Director, Chairman of Audit Committee, Member of Compensation
Committee and Member of Nominating & Corporate Governance
Committee at
Strattec Security Corp.
since 1995.
If I were
the SEC, I might take a look at those two companies…Because
I warned you
about the CEOs and CFOs
who are pushing back on Sarbanes-Oxley and every other
regulation intended to shine a light on them as public company
executives.
No good will come
of this.
I don’t
want you to shed crocodile tears or pity poor PwC for their
long-term, close relationship with
another blockbuster Indian fraudster.
Nor should you pat them on the back for not being the auditor
now. PwC never really left Koss after they were “fired” as
auditor in 2004. They continued until today to be the trusted
“Tax and All Other” advisor,
making good money filing Koss’s now
totally bogus tax returns.
Jensen Comment
You may want to compare Francine's above discussion of audit fees
with the following analytical research study:
In most instances the defense of
underlying assumptions is based upon assumptions passed down
from previous analytical studies rather than empirical or even
case study evidence. An example is the following conclusion:
We
find that audit quality and audit fees both increase with
the auditor’s expected litigation losses from audit
failures. However, when considering the auditor’s acceptance
decision, we show that it is important to carefully identify
the component of the litigation environment that is being
investigated. We decompose the liability environment into
three components: (1) the strictness of the legal regime,
defined as the probability that the auditor is sued and
found liable in case of an audit failure, (2) potential
damage payments from the auditor to investors and (3) other
litigation costs incurred by the auditor, labeled litigation
frictions, such as attorneys’ fees or loss of reputation. We
show that, in equilibrium,
an increase in the potential damage payment actually leads
to a reduction in the client rejection rate. This effect
arises because the resulting higher audit quality increases
the value of the entrepreneur’s investment opportunity,
which makes it optimal for the entrepreneur to increase the
audit fee by an amount that is larger than the increase in
the auditor’s expected damage payment. However, for this
result to hold, it is crucial that damage payments be fully
recovered by the investors. We show that an increase in
litigation frictions leads to the opposite result—client
rejection rates increase. Finally, since a shift in the
strength of the legal regime affects both the expected
damage payments to investors as well as litigation
frictions, the relationship between the legal regime and
rejection rates is nonmonotonic. Specifically, we show that
the relationship is U-shaped, which implies that for both
weak and strong legal liability regimes, rejection rates are
higher than those characterizing more moderate legal
liability regimes.
Volker Laux and D. Paul Newman, "Auditor Liability and
Client Acceptance Decisions," The Accounting Review,
Vol. 85, No. 1, 2010 pp. 261–285
http://faculty.trinity.edu/rjensen/TheoryTAR.htm#Analytics
Zero-based budgeting (ZBB) is elegantly logical:
Expenses must be justified for each new budget period based on demonstrable
needs and costs, as opposed to the more common method of using last year’s
budget as your starting point, then adjusting up or down. ZBB is a
straightforward, intuitively simple way to aggressively strip out costs that
cannot be rationally justified. Who would argue that a business should not
eliminate unjustifiable costs?
ZBB has been around for decades, but is currently
enjoying a revival driven by powerful investors like 3G Capital Partners,
the force behind the 2015 merger of Kraft Foods and H.J. Heinz. Such
high-profile exposure has prompted more companies to view ZBB as a fresh
“wonder diet” for achieving radical corporate leanness. ZBB’s resurgence is
further fueled by the uncertain markets hindering many companies’ efforts to
attract fresh capital, as we see venture capital and private equity funds
increasingly pushing ZBB on their portfolio companies, in the hope of
securing a more rapid and profitable exit on their investments.
Yet for all the promise of ZBB, many companies that
try it soon grow disenchanted. They find that the process is a distraction
to their people, that it does not deliver all the cost savings they
anticipated, and that many of the costs they do eliminate soon creep back
in, making the whole effort feel futile. One might conclude from such
failures that implementing zero-based budgeting is simply too ambitious. We
believe the exact opposite to be true. Most ZBB implementations are not
ambitious enough.
Traditional ZBB implementations focus almost
exclusively on simple SG&A, in part because SG&A benchmark data is far more
readily attainable than are relevant data from the core functions of
comparable companies. In comparison to other methods (such as Six Sigma or
activity-based costing), ZBB typically does not address operational
excellence in core processes (marketing, sales, supply chain, procurement,
manufacturing) or fundamental cost drivers such as portfolio complexity,
organizational complexity, customer complaints, and quality issues. Also,
ZBB does not challenge existing process design, which can now be completely
re-thought and often drastically improved through digitization. Rather, the
most visible outcomes of many ZBB efforts are burdensome policies (such as
travel cost restrictions) that fail to address the underlying fundamentals
(such as who needs to travel, why, and when). The result is a superficial
and simplistic focus on “policing” costs versus substantive cost prevention.
Continued in article
From the CFO Journal's Morning Ledger on March 26, 2015
Zero-based budgeting, an austerity measure that forces
corporate managers to justify from scratch their spending plans every year,
is getting its moment in the spotlight. The tactic is a critical element to
3G Capital Partners LP’s plan for making good with its
roughly $49 billion deal to acquire Kraft Foods Group Inc.
through its H.J. Heinz Co. unit,
the WSJ reports. Zero-based budgeting has
triggered sweeping cost cuts at 3G-related companies, including Heinz,
ranging from the elimination of hundreds of management jobs to jettisoning
corporate jets—and even requiring employees to get permission to make color
photocopies.
And it isn’t just 3G adopting the cost-cutting
measure. The budget tool has
attracted a wide following among big food companies
and has been used by many public agencies. But it does
have its downsides. Employees may perceive it as harsh, especially when it
eliminates office perks and leads to layoffs, and it can require staff
training and sometimes painful discussions. Some experts also say that it
doesn’t make sense for high-growth companies or those expanding into new
regions.
Jensen Questions
Will college-level algebra requirements fall like dominos in the common core
requirements of higher education?
Wayne State University dropped algebra and is considering replacing it with a
diversity course.
Michigan State will still have a math requirement that does not have formulas
and equations..
What the universities dropping algebra are not revealing, at least to my
knowledge. of
whether they are still requiring remedial math and algebra for students deemed
exceptionally weak in middle-school algebra on SAT/ACT admission tests.
My guess is no since the dropping of algebra seems to be an effort to make it
easier for those students to graduate.there will be no remedial algebra.
In terms of
math requirements for GRE, GMAT, MCAT, and other
graduate school admissions requirements undergraduates will now fall
into two classifications. The math dummies who graduate versus the the graduates
required to take math and algebra and statistics in their majors like
engineering students, science students, and business students. Humanities majors
who might want to go to graduate school are are advised to take college-level
algebra as an elective course, especially if they had lousy SAT/ACT scores in
high school.
Maybe SAT and ACT exam preparers will yield to pressures and drop algebra
from college admissions tests.
It all sound like dumbing down to me to make up for the lousy high schools in
the USA relative to those in Asia and Europe.
But in Asia and Europe less
than half the Tier 2 graduates are even allowed to go to college.
July 6, 2016 Reply from Ed
Scribner
Bob, et al.,
This does smell like a "dumbing down" decision,
which I have come to refer to as MEXIT (Michigan schools' (so far MSU and
Wayne State) EXIT from what we grizzled veterans would call "real courses").
It is similar to to the familiar movement to eliminate journal entries from
accounting content offered to non-accounting majors.
Nevertheless, it can be argued that (1) traditional
treatment of algebraic content may be less valuable to non-STEM students
than some other treatment of math concepts, (2) majors can still require
traditional algebra, (3) the head of the math department at MSU appears to
be on board, and (4) "quantitative literacy" courses could conceivably be
designed to be quite challenging and meaningful (though I doubt they will go
so far as to use Courant and Robbins).
Having said this, the real reason for MEXIT may lie
in the MTA (Michigan Transfer Agreement), mentioned toward the end of the
article. Ease of transfer from community college to a four-year school, with
maximum counting of credits, is a big deal to community colleges, to their
students, and to four-year schools seeking to sustain enrollments.
Three
PricewaterhouseCoopers managers and the contractor used the stolen funds to
pay for two “lavish” Las Vegas bachelor parties — one for the consulting
firm’s partner in charge in 2011 and another for a firm manager two years
later, the documents allege. In addition to the escorts, hotel stay and
alcohol, the DWP alleges that stolen ratepayer money was used for condoms, a
steak dinner and a poolside cabana party.
Continued in article
Jensen Comment
The perpetrators must have been consultants. Accountants don't know how to party
like that. There's an old saying that hookers schedule vacations when accounting
conventions will be in town.
July 6, 2016 reply from Glen
Gray
Well there are variations on the story (about why
the American Accounting Association is not welcome in Las Vegas). As you
know the AAA always announces where the next 3 annual will be. Las Vegas
appeared on that list. Suddenly as the Las Vegas year was approaching it
suddenly changed to Hawaii. I don't recall the exact date but it was the
last time the AAA was in Hawaii if someone wants to look it up. So far these
are facts.
My favorite back story, but I don't know if all
facts are 100% true, is that when the hotel found out who we were, not only
did they refund the $100,000 deposit, the hotel offered $200,000 for the AAA
to go away.
When the AAA annual meeting was in Las Vegas
before, the MGM Grand discovered that accounting professors don't drink,
gamble, will stand in line for an hour for the $1.99 buffet and not play the
slot machines that parallel the buffet line. On top of that the doormen were
about to go on strike because accounting professors don't tip doormen to
blow a whistle to call a cab parked a few feet away. Seriously, the doormen
were really angry! I know this because I was standing next to an angry
doorman who said, " who are these people?"--with a few swear words tossed
in.
I'm assuming we are also banned from Reno. I'm sure
the Hilton manager still talks about us. He was shocked by how much food we
consumed at the receptions. He said in his 20+ years of experience he had
never seen a group consume food the way we did.
From the
CFO Journal's Morning Ledger on July 5, 2016
Barclays trio get Libor-rigging conviction
Three former
Barclays employees have been
convicted of conspiracy to defraud in connection with an investigation into
the manipulation of Libor interest rates. British citizens Jonathan Mathew
and Jay Merchant as well as American Alex Pabon were convicted by a jury at
Southwark Crown Court after an 11-week trial. The jury couldn’t reach
verdicts for two of their co-defendants, the U.K.’s Serious Fraud Office
wrote in a press release
on
Monday.
From the
CFO Journal's Morning Ledger on July 5, 2016
Italian banks reeling
after Brexit Britain’s vote
to leave the EU has produced dire predictions for the U.K. economy. The
damage to the rest of Europe could be more immediate and potentially more
serious. Nowhere is the risk concentrated more heavily than in the Italian
banking sector. In Italy, 17% of banks’ loans have gone bad. That is nearly
10 times the level in the U.S. Among publicly traded banks in the eurozone,
Italian lenders account for nearly half of total bad loans. Years of lax
lending standards left Italian banks ill-prepared when an economic slump
sent bankruptcies soaring a few years ago.
For Britain, the
economic effects are two sided. On the one hand, a major jolt has been
delivered to confidence, to future unity and down the road to trade. On the
other, the currency has become more competitive, and liquidity will be in
very ample supply. I would expect that a significant deterioration in growth
and a recession beginning in the next 12 months has to be a substantial risk
though short of an odds on bet.
As suggested by the
fact that stock markets in Italy and Spain are down almost twice as much as
in the UK, the prospects for Europe may in some ways be worse than for the
UK. There is the real risk of “populist exit contagion” in a number of
countries. A credit crunch is a serious risk. Unlike in Britain, the trade
weighted exchange rate is unlikely to decline very much. The central bank
has less room for incremental policy measures.
The effects on the rest
of the world will depend heavily on psychology. I continue to be alarmed as
I wrote in this space a few days ago that this unexpected outcome in the UK
will raise the spectre of “Trump risk”. If the UK can vote for Brexit
perhaps the U.S. can vote for Donald Trump. I fear this possibility will
lead to a freezing up of spending decisions particularly on the part of
internationally oriented businesses. The odds of U.S. recession beginning
within the next 12 months are I think now in the 30 percent range. Also
noteworthy is that an environment of increased risk aversion and flight to
quality will complicate Japan’s problem of generating inflation, and China’s
challenge of attaining currency stability.
To an extent that is
underestimated in some quarters and understated in others, the world economy
is far more brittle than usual because of the inability almost everywhere to
lower interest rates substantially. Normally in response to incipient
downturns central banks lower rates by 400 basis points or more. Nowhere do
they have that kind of room. Nor is there large scope for reducing term and
credit spreads given their very low levels. This is no time for austerity.
Greater use of fiscal policy should be on the agenda almost everywhere and
certainly with the change of government in the UK.
Brexit will rightly be
taken as a signal that the political support for global integration is at
best waning and at worst collapsing. Dramatic exchange rate fluctuations
tend to portend upswings in protectionist pressure. And problems in European
banks could as in 2009 lead to a drying up of trade finance. Already global
trade has lagged global growth in recent years. A clear sense of commitment
to avoid backsliding towards protection from the G20 will be essential going
forward. Specific efforts with respect to trade finance may be appropriate.
Broader Observations
After Brexit, Trump,
Sanders and the misforecast British and Canadian general elections, it
should be clear that the term political science is an oxymoron. Political
events cannot be reliably predicted by pollsters, pundits or punters. All
three groups should have humility going forward. In particular no one should
be confident about the outcome of the U.S. presidential election.
The political challenge
in many countries going forward is to develop a “responsible nationalism”.
It is clear that there is a hunger on the part of electorates, if not the
Davos set within countries, for approaches to policy that privilege local
interests and local people over more cosmopolitan concerns. Channeling this
hunger constructively rather than destructively is the challenge for the
next decade. We now know that neither denying the hunger, or explaining that
it is based on fallacy is a viable strategy
From the CFO Journal's Morning Ledger on June 30, 2016
Non-GAAP reporting comes in all flavors
Nearly all large companies report adjusted financials
now, as we reported
Tuesday.
But like unhappy families in a Tolstoy novel, the ways in which they adjust
their numbers vary widely, Theo Francis writes. That holds true even beyond
the sometimes baffling adjustments many companies make. In its analysis of
more than 800 companies that tweaked their 2015 net income figures,
Calcbench extracted data from earnings releases about five key areas of
adjustments.
From the CFO Journal's Morning Ledger on June 30, 2016
GM can’t keep pace with demand.
For years, the thousands of U.S. dealers selling General
Motors Co. vehicles were saddled with large cars and trucks when
customers were looking for small vehicles. Now, as U.S. auto sales climb to
a record pace, many of these same dealers say they are begging for pickup
trucks and sport-utility vehicles. The mismatch is again costing GM precious
U.S. market share.
From the CFO Journal's Morning Ledger on June 30, 2016
Puerto Rico population slide exacerbates debt
woes
Puerto Rico has suffered a population slide that is
steeper and more financially disastrous than in any U.S. state since the end
of World War II. An exodus of workers, retirees and entire families has
shrunk Puerto Rico’s population by more than 9% in the past decade to less
than 3.5 million, magnifying the territory’s inability to repay its $70
billion in debt. Meanwhile, Congress completed
Wednesdaya
bipartisan compromise to oversee a
Puerto Rico rescue plan that would begin the largest municipal-debt workout
in U.S. history.
Costco repatriates more than $1.5 billion dollars over two years, virtually
tax-free
From the CFO Journal's Morning Ledger on June 29, 2016
Good morning. A
weak Canadian dollar
and a quirk in U.S. tax rules allowed Costco Wholesale
Corp. to repatriate more than $1.5 billion dollars over two years, virtually
tax-free, Vipal Monga reports. Costco said in a filing with the Securities
and Exchange Commission that it decided to bring back the funds “due to
fluctuations in exchange rates and other factors.” The company said it
repatriated the money from Canada “without adverse tax consequences.”
The filing is dated
May 18, but the
company posted it to the SEC
on Tuesday.The
company essentially paid no U.S. taxes on the repatriated money, said
Richard Galanti, the chief financial officer, in an interview. “The
weakening Canadian dollar was an opportunity to bring back the funds,” he
said. He didn’t elaborate, but tax experts say that Costco likely benefited
from a quirk in U.S. tax rules, which boosts the value of tax credits when
the U.S. dollar strengthens.
Pro Forma Reporting Gaining Ground on GAAP Reporting
From the CFO Journal's Morning Ledger on June 28, 2016
Good morning. Will the last company to abandon
reporting results that are solely based on U.S. generally accepted
accounting principles please turn out the lights?
Not even 6% of companies
in the S&P 500
provide GAAP results without also providing a view with qualifiers that
don’t adhere to that standard, Tatyana Shumsky and Theo Francis write for
CFO Journal in today’s Business & Tech. section. A decade ago, a quarter of
the index reported GAAP figures only.
Purists are dwindling as companies struggle to
increase their earnings in the wake of the 2008 financial crisis, analysts
and accountants say, and regulators are taking notice. The adjusted, or
customized, figures many finance chiefs use to supplement their company’s
standard financial reports inflate income by an average of 44% at profitable
companies, according to new research by financial-data provider Calcbench
Inc. Adjustments can exclude currency swings, restructuring costs and other
one-time charges. That can help mask the impact of tepid global economic
growth, which has left many businesses unable to raise prices and hindered
sales growth.
From the CFO Journal's Morning Ledger on
July 20,, 2016
EA’s new game is GAAP
Electronic Arts Inc. will
stop reporting many of the adjusted financial measures it has used for
years, addressing regulators’ stepped-up criticism of how companies apply
customized metrics in earnings. The Securities and Exchange Commission in
May issued new guidelines for the use of adjusted measures that don’t comply
with U.S. generally accepted accounting principles. In a
Tuesday conference call with analysts, EA said
results for its most recently ended quarter, due
Aug. 2,
will be the last to include revenue, gross margin and per-share earnings on
a non-GAAP basis.
EY: Accounting and Reporting Considerations Under Brexit
What you need to know
Entities
will need to consider the accounting and financial reporting implications of
both the uncertainty and the financial market volatility caused by the vote
by the British people to leave the EU.
Entities
also will need to monitor events and consider the accounting and financial
reporting implications of future actions by governments and any decisions
they make about their own business and/or investment strategies.
SEC
registrants should take a fresh look at their disclosures in management’s
discussion and analysis and other parts of their SEC filings.
EY: VIE guidance on evaluating indirect interests held by related
parties under common control may change
What you need to know
The FASB proposed a change to
the Variable Interest Entity Model (VIE Model) for determining the
primary beneficiary when indirect interests are held by related parties
under common control.
The proposal would no longer
require indirect interests held by related parties that are under common
control with a decision maker to be considered the equivalent of direct
interests when determining whether the decision maker is the primary
beneficiary.
The proposal could change
consolidation conclusions for some entities that are under common
control.
The Commodity
Futures Trading Commission would have stronger policing powers over the
derivatives market, along with a boosted budget, under legislation
introduced in the U.S. Congress on Wednesday.
The bill,
introduced by Democrats Elizabeth Warren and Mark Warner in the Senate and
Elijah Cummings in the House of Representatives, also would add new tasks to
the regulator's rulemaking agenda.
"The only way
to make sure that derivatives can never lead to a financial crisis and
taxpayer bailouts again is to put in place clearer rules and stronger
oversight," Warren said in a statement.
The bill
likely will fizzle in the Republican-led Congress. It could also become part
of this year's election fights, as the relationship between Wall Street and
Washington frequently moves to center stage in presidential and
congressional campaigns.
Democrats such
as Warren, who is campaigning for her party's presumptive nominee, Hillary
Clinton, regard the Dodd-Frank Wall Street reform law passed after the
2007-09 financial crisis as crucial for preventing another massive meltdown.
That law greatly expanded the CFTC's reach, as swaps and derivatives had
played a key role in the breakdown of banks and other firms.
They also seek
further regulation, saying vulnerabilities persist in the financial system.
The
presumptive nominee for the Republican Party, real estate developer and
television star Donald Trump wants to repeal Dodd-Frank. Many in the party
say the law has gone too far, drying up liquidity and freezing capital.
The proposed
legislation "gives the CFTC a stable funding stream and the tools necessary
to help deter future illegal acts by permitting penalties large enough to
impact the bottom lines of even the largest financial firms," Cummings said.
The CFTC
currently is funded through annual appropriations from Congress, unlike the
Securities and Exchange Commission, which is backed by user fees and fines.
CFTC Chair
Timothy Massad has sought a change, saying millions of dollars more in funds
would help the agency keep up with technology advancements in the markets it
oversees and with "high-powered defense teams" in its enforcement cases.
Continued in
article
Jensen
Comment
One of the problems of being such an activist against Wall Street is that
when a well-intended politician like Senator Warren has good idea I suspect
that the Wall Street defenders in Congress have a knee jerk reaction that
any and every bill proposed by Senator Warren must be defeated. Hillary
Clinton, on the other hand, has close ties with Wall Street and will
probably have more respect from the financial sector when she becomes
President of the USA. At the moment Wall Street trembles in fear of Donald
Trump. Wall Street money is backing Hillary Clinton.
The
salary of the chief executive of a large corporation is not a market award
for achievement. It is frequently in the nature of a warm personal gesture
by the individual to himself. John Kenneth Galbraith ---
Click Here
If you aren’t
(cynical)
now, you will by the time you finish the new Bebchuk and Fried
paper on executive compensation.They
paint a fairly gloomy picture of managers exerting their power to “extract
rents and to camouflage the extent of their rent extraction.”Rather than designed to solve agency cost problems, the paper makes the
case that executive pay can by an agency cost in and of itself.Let’s hope things aren’t this bad.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220
Jensen Note
This could be made into a good accounting teaching case on how to
account for all of this.
When compared with those companies’ earnings or
revenue, $20 million may not sound like much. But looking at pay another
way, said David J. Winters, chief executive at Wintergreen Advisers, a money
management firm in Mountain Lakes, N.J., brings a clearer picture of the
costs that these lush packages mean for shareholders.
The analysis suggested by Mr. Winters focuses on
the stock awards given to top corporate executives every year, and the two
kinds of costs they impose on shareholders. Stock grants are a substantial
piece of the pay puzzle: Last year, they accounted for $8.7 million of the
$20 million median C.E.O. package, according to Equilar, a compensation
analysis firm in Redwood City, Calif.
Cost No. 1 is the dilution for existing
shareholders that results from these grants. As a company issues shares, it
reduces the value of existing stockholders’ stakes.
A second cost to consider, Mr. Winters said, is the
money companies pay to repurchase their shares in trying to offset that
dilutive effect on other stockholders’ stakes.
“We realized that dilution was systemic in the
Standard & Poor’s 500,” Mr. Winters said in an interview, “and that buybacks
were being used not necessarily to benefit the shareholder but to offset the
dilution from executive compensation. We call it a look-through cost that
companies charge to their shareholders. It is an expense that is effectively
hidden.”
Mr. Winters and his colleague Liz Cohernour,
Wintergreen’s chief operating officer, totaled the compensation stock grants
dispensed by S.&P. 500 companies and added to those figures the share
repurchases made by the companies to reduce the dilution associated with the
grants.
What they found: The average annual dilution among
S.&P. 500 companies relating to executive pay was 2.5 percent of a company’s
shares outstanding. Meanwhile, the costs of buying back shares to reduce
that dilution equaled an average 1.6 percent of the outstanding shares.
Added together, the shareholder costs of executive pay in the S.&P. 500
represented 4.1 percent of each company’s shares outstanding.
Of course, these numbers are far greater at certain
companies. The 15 companies with the highest combination of dilution and
buybacks had an average of 10.2 percent of their shares outstanding.
“It’s not only today’s expense,” Mr. Winters said.
“It’s that the costs of dilution over time have been going up, so you have a
snowballing effect.”
Teaching Case
"Williams Community Hospital: An Internal Auditing Case," by Sandra Waller
Shelton, Michael Trendell, and Ray Whittington. Issues in Accounting
Education, August 2016, Vol. 31, No. 3, pp. 337-345 ---
http://aaajournals.org/doi/full/10.2308/iace-51273
Abstract
The internal audit function is a critical part of
an organization's control and governance structure. This case introduces
students to the complete internal audit process for a company, including
identification of risk, audit planning, execution of fieldwork, and
reporting. In this exercise students are asked to assume the role of an
internal auditor for a community hospital and perform risk assessment,
perform testing, and documentation based on an audit program, and prepare an
audit report, detailing findings and recommendations. The case includes both
testing for compliance with laws and regulations, and tests of compliance
with internal control policies and procedures. In response to an
ever-changing business environment and the expectations of stakeholders, the
internal audit profession identifies compliance with laws and regulations as
one of the top risks frequently cited by both audit committee and executive
management. The hospital setting is one of particular interest for
addressing this topic. This case is appropriate for undergraduate and
graduate students in internal auditing and external auditing classes.
Teaching Case
"The Marriage of Sharon and Henry Sawbones: A Forensic Case Illustrating the Use
of a Tax Return in a Litigation Advisory Services Context," byJeffrey J.
Quirin and David O'Bryan, Issues in Accounting Education, August
2016, Vol. 31, No. 3, pp. 347-354 ---
http://aaajournals.org/doi/full/10.2308/iace-51206
Abstract
This case is designed for use in a forensic
accounting curriculum at the undergraduate or graduate level. The case
contains no allegations of fraud. Rather, it illustrates the subset of
forensic accounting referred to as litigation advisory services and is based
upon an actual case that was investigated by the lead author working as a
litigation support consultant. The case utilizes the problem-based learning
approach wherein students are put in the role of the forensic accountant and
must request additional information from the instructor. Students must first
review a personal income tax return to develop a list of financial documents
that would serve as a discovery request when assisting a family law attorney
and his divorcing client. Using the information obtained from their
requests, students must then prepare an income exhibit and an
asset/liability exhibit that will support the client's need for a division
of the marital estate, spousal maintenance, and child support. The process
of using a completed income tax return to reconstruct the couple's asset and
income profile not only mirrors the real-world engagement, but also
complements and reinforces any prior courses in taxation. Student feedback
on the case was extremely positive across all dimensions. Students reported
having a better understanding of the role of a forensic accountant in the
litigation process and enhanced abilities in analyzing a personal income tax
return.
Teaching Case
"Trading Styles, Inc.: An Analysis of the Going Concern Assessment," by
Velina K. Popova and Sarah E. Stein, Issues in Accounting Education,
August 2016, Vol. 31, No. 3, pp. 355-366 ---
http://aaajournals.org/doi/full/10.2308/iace-51218
Abstract
This instructional case focuses on the auditor's
going concern decision for a private retail client. The primary objective of
this case is to understand and examine the auditor's consideration of the
client's ability to continue as a going concern in a real-world setting. The
case provides students with the financial aspects as well as the personal
aspects of such a decision. Specifically, students must complete analytical
procedures and evaluate information from several sources when forming their
opinion. We also ask students to contemplate the auditor's relationship with
the client in order to understand issues involving auditor independence.
Throughout the case, students have the opportunity to review applicable
auditing standards and to draft a going concern audit report. We expect this
case would be most applicable for an undergraduate or a graduate audit
course
Teaching Case on Going Concern
Accounting
From The Wall Street Journal Accounting Weekly Review on September 5,
2014
SUMMARY: Corporate managers will have to make more uniform
disclosures when there is substantial doubt about their business' ability to
survive, according to the Financial Accounting Standards Board. The FASB
updated U.S. accounting rules, effective by the end of 2016, to define
management's responsibility to evaluate whether their business will be able
to continue operating as a "going concern," and make relevant disclosures in
financial statement footnotes. Previously, there were no specific rules
under U.S. Generally Accepted Accounting Principles and disclosures were
largely up to auditors. Corporate executives had the option to make any
voluntary disclosures they felt relevant.
CLASSROOM APPLICATION: This is a good article to discuss going
concern, notes to the financial statements, and FASB, as well as
management's responsibility in financial reporting.
QUESTIONS:
1. (Introductory) What is FASB? What is its function? What is GAAP?
Why is GAAP used in accounting?
2. (Advanced) What does the concept "going concern" mean? Why is it
important? What kind of disclosures is FASB requiring? Who is required to
make the disclosures? Why are these parties included in the requirement?
3. (Advanced) In general, what is included in the notes to
financial statements? Why are notes required? Who uses the notes and how are
they used? Please give some examples of information regularly included in
the notes.
4. (Advanced) What is the benefit of this new rule? How can this
information be used? Are there other ways besides a note that someone could
access this information?
Reviewed By: Linda Christiansen, Indiana University Southeast
Corporate managers will have to make more uniform
disclosures when there is substantial doubt about their business’ ability to
survive, the Financial Accounting Standards Board said Wednesday.
The FASB updated U.S. accounting rules, effective
by the end of 2016, to define management’s responsibility to evaluate
whether their business will be able to continue operating as a “going
concern,” and make relevant disclosures in financial statement footnotes.
Previously, there were no specific rules under U.S. Generally Accepted
Accounting Principles and disclosures were largely up to auditors. Corporate
executives had the option to make any voluntary disclosures they felt
relevant.
The FASB first issued a proposal at the peak of the
financial crisis in 2008, but debate and revisions delayed the final
standard, which didn’t go up for a vote until May.
Supporters of the changes have argued that
corporate managers have better information about a company’s ability to
continue financing their operations than auditors. The
updated rule will force executives to disclose serious risks even if
management has a credible plan to alleviate them, for example.
Information currently disclosed by companies can
vary significantly. Only about 40% of companies that filed for bankruptcy in
the past two decades have explicitly disclosed the possibility that they
could cease to operate before running into trouble,
according to a study this month from Duke
University’s Fuqua School of Business.
Teaching Case from The Wall Street Accounting Weekly Review on July 8,
2016
SUMMARY: Just
29 companies in the S&P 500 index - or 5.7% of the total - closed their
books for 2015 exclusively using U.S. Generally Accepted Accounting
Principles, or GAAP. That's a sharp decline from 25% in 2006. The purists
are dwindling as companies struggle to increase their earnings in the wake
of the 2008 financial crisis, analysts and accountants say, and regulators
are taking notice. The adjusted, or customized, figures many finance chiefs
use to supplement their company's standard financial reports inflate income
by an average of 44% at profitable companies. Adjustments can exclude the
effects of such factors as currency swings, noncash charges like
restructuring costs and one-time charges.
CLASSROOM
APPLICATION: This
article is an excellent addition to the recent popularity and increased
concerns regarding non-GAAP/pro forma financial reporting articles.
QUESTIONS:
1. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
2. (Advanced) What is non-GAAP reporting? Why do companies engage in
non-GAAP reporting? What are the benefits of this type of reporting?
3. (Introductory) What is the SEC? What is its area of authority?
4. (Advanced) How many companies use non-GAAP reporting? Why? Name
some examples of differences between GAAP and non-GAAP reporting.
5. (Advanced) What issues or problems can non-GAAP reporting present
to users of the financial statements?
6. (Advanced) Is any or all non-GAAP regulated? Is any of it illegal?
How does the SEC view non-GAAP reporting? Should non-GAAP reporting be
regulated? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Customized detours from generally accepted
standards can inflate income by average 44%, analysis finds.
U.S. companies that rely solely on standard
accounting to report their financial results are in the minority, and their
numbers are shrinking fast.
Just 29 companies in the S&P 500 index—or 5.7% of
the total—closed their books for 2015 exclusively using U.S. Generally
Accepted Accounting Principles, or GAAP. That’s a sharp decline from 25% in
2006, according to research firm Audit Analytics.
The purists are dwindling as companies struggle to
increase their earnings in the wake of the 2008 financial crisis, analysts
and accountants say, and regulators are taking notice.
The adjusted, or customized, figures many finance
chiefs use to supplement their company’s standard financial reports inflate
income by an average of 44% at profitable companies, according to new
research by financial-data provider Calcbench Inc. Adjustments can exclude
the effects of such factors as currency swings, noncash charges like
restructuring costs and one-time charges.
That can help mask the impact of tepid global
economic growth, which has left many businesses unable to raise prices and
hindered sales growth.
In many cases these companies have exhausted
cost-cutting options.
“As the economy slows or grows companies are
incentivized to provide more or less [customized] metrics,” said Angela
Newell, partner at accounting firm BDO USA LLP.
“If everything is rosy and GAAP looks great, there
is no need to include a non-GAAP metric,” she added.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July 8,
2016
SUMMARY: A
little more than two years after the Internal Revenue Service issued
bare-bones guidance on bitcoin and other digital currencies, the agency
still hasn't addressed many important tax matters affecting them. The tax
questions are one of several hurdles on the path to broader acceptance of
digital currencies - money that exists only online and isn't backed by any
government. Many bitcoin advocates were delighted with the IRS's first
ruling on digital currencies in April 2014. It held that digital currencies
are property, akin to real estate or stocks. Thus the profit on an
investment in such currencies can be eligible for favorable capital-gains
tax rates if it is held longer than a year, and losses can be used to offset
gains. The downside, for people who want to use bitcoin as a medium of
exchange, is that each transaction can involve the sale of investment
property.
CLASSROOM
APPLICATION: This
is a very interesting article about taxation of bitcoin transactions we can
use when covering purchases and sales of investment property.
QUESTIONS:
1. (Introductory) What is bitcoin? What is its purpose? How is it
used?
2. (Advanced) What are the tax issues regarding bitcoin? What has the
IRS ruled regarding bitcoin? What are the implications and benefits of that
decision?
3. (Advanced) What tax issues regarding bitcoin remain unresolved?
How do these open issues affect taxpayers and tax planning?
4. (Advanced) How could tax issues limit the widespread use of
bitcoin? What rulings could encourage the use of bitcoin? What rulings could
limit its use?
5. (Advanced) What does "de minimus" mean? How could a de minimus
rule be drafted regarding use of bitcoin? What purpose could it serve? What
challenges could prevent it or resolve?
Reviewed By: Linda Christiansen, Indiana University Southeast
A little more than two years after the Internal
Revenue Service issued bare-bones guidance on bitcoin and other digital
currencies, the agency still hasn’t addressed many important tax matters
affecting them.
The American Institute of CPAs sent the IRS a
letter earlier this month requesting clarifications on 10 issues, including
the tax status of small transactions and rules for donating digital
currencies to charity.
“We’d like to know the tax rules before they turn
into audit issues,” says Annette Nellen, a professor at San Jose State
University in Silicon Valley, who helped draft the AICPA’s request.
The tax questions are one of several hurdles on the
path to broader acceptance of digital currencies—money that exists only
online and isn’t backed by any government. Bitcoin and its smaller rivals,
such as ether, ripple and litecoin, are maintained by a network of computers
that process and verify transactions using them.
Digital currencies gained favor in 2013 and 2014
when federal and state regulators issued rules for them and businesses such
as Overstock.com and the Sacramento Kings basketball team said they would
accept bitcoin payments. But volatility and scandals, such as the 2014
failure of Mt. Gox, an early bitcoin exchange, put off some investors.
According to Blockchain.info, which tracks bitcoin
data, the number of bitcoin transactions a day recently was 240,000,
compared with 50,000 two years ago. The price of bitcoin peaked at more than
$1,100 in late 2013 before dropping to a low of about $200 in early 2015,
and it was recently above $600.
Given this growth, the IRS has already conducted
audits of taxpayers holding bitcoin, according to Bryan Skarlatos, a tax
lawyer with Kostelanetz & Fink in New York. Some clients under audit paid
his fee using bitcoin, he says.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July 8,
2016
SUMMARY: Bolstered
by technology expansion, a surge in data growth, evolving business models
and motivated attackers, the threat from cyberattacks is significant and
continuously evolving. One estimate suggests that cybercrime could cost
businesses more than $2 trillion by 2019, nearly four times the estimated
2015 expense. In response to the increasing threat, many audit committees
and boards have set an expectation for internal audit to perform an
independent and objective assessment of the organization's capabilities of
managing the associated risks. A first step in meeting this expectation is
for internal audit to conduct a cyber risk assessment and distill the
findings into a concise report for the audit committee and board, which can
provide the basis for a risk-based, multiyear internal audit plan to help
manage cyber risks.
CLASSROOM
APPLICATION: This
article is appropriate for use in auditing classes, as well as for use in
fraud and forensic accounting classes.
QUESTIONS:
1. (Introductory) What is internal audit? What are the regular duties
and responsibilities of internal audit?
2. (Introductory) What are some of the cyberthreats facing
businesses? What are the potential financial ramifications of those threats?
3. (Advanced) How can the internal audit function help in the fight
against cybercrime? How is internal audit uniquely positioned and qualified
to address these issues?
4. (Advanced) What other areas of a business are used to fight
cyberthreats? How could those other areas complement what internal audit is
able to do?
5. (Advanced) What is maturity analysis? What other option does a
business have? How can maturity analysis used in the battle against
cybercrime?
Reviewed By: Linda Christiansen, Indiana University Southeast
Bolstered by technology expansion, a surge in data
growth, evolving business models and motivated attackers, the threat from
cyberattacks is significant and continuously evolving. One estimate suggests
that cybercrime could cost businesses more than $2 trillion by 2019, nearly
four times the estimated 2015 expense.* In response to the increasing
threat, many audit committees and boards have set an expectation for
internal audit to perform an independent and objective assessment of the
organization’s capabilities of managing the associated risks. A first step
in meeting this expectation is for internal audit to conduct a cyber risk
assessment and distill the findings into a concise report for the audit
committee and board, which can provide the basis for a risk-based, multiyear
internal audit plan to help manage cyber risks.
“The forces driving business growth and efficiency
are also opening pathways to cyber assaults,” says Michael Juergens, an
Advisory managing principal at Deloitte & Touche LLP. “Internet, cloud,
mobile and social technologies—now mainstream—are platforms inherently
oriented for sharing. At the same time, outsourcing, contracting and remote
workforces are shifting operational control,” he adds.
Many organizations are addressing cyberthreats with
multiple lines of defense. For example, business units and the information
technology (IT) function at many organizations integrate cyber risk
management into day-to-day decision-making and operations, which comprises
an organization’s first line of defense. Making up a second line of defense
are information and technology risk management leaders who develop
governance and oversight protocols, monitor security operations and take
action as needed, often under the direction of the chief information
security officer (CISO).
“Increasingly, many companies are recognizing the
compelling need for a third line of cyber defense—independent review of
security measures and performance by the internal audit function,” says
Sandy Pundmann, an Advisory managing partner at Deloitte & Touche LLP.
“Internal audit should play an integral role in assessing and identifying
opportunities to strengthen enterprise security. Advising stakeholders on
trends and leading practices in cyber and other areas is a growing
expectation for internal audit leaders,” she adds.
At the same time, internal audit has a duty to
inform the audit committee and board that the controls for which they are
responsible are in place and functioning correctly—a growing concern across
boardrooms as directors face potential legal and financial liabilities.
Since many organizations have cyber readiness initiatives still in flight,
some internal audit departments have elected to defer audit procedures until
these projects are completed. While this may allow for a deeper level
review, deferring cyber assurance procedures may not be the right answer.
Cyber Risk Assessment Framework
Many internal audit functions have developed and
tested procedures for evaluating components of the organization’s
preparedness for cyberthreats. These targeted audits, such as attack and
penetration procedures, are valuable, but do not provide assurance across
the spectrum of cyber risks. To provide a comprehensive view of an
organization’s ability to be secure, vigilant and resilient in the face of
cyber risks, internal audit should consider taking a broad programmatic
approach to cyber assurance and not perform only targeted audits, which
could provide a false sense of security.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July 8,
2016
TOPICS: Financial
Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, Pro Forma
Reporting, Restructuring
SUMMARY: In
its analysis of more than 800 companies that tweaked their 2015 net income
figures, Calcbench extracted data from earnings releases about five key
areas of adjustments, related to acquisitions, debt, legal activity,
restructuring and stock-based compensation. A third of all the adjustments
were for restructuring, but they made up 45% of the total dollar value
across sectors. Acquisitions, which made up a quarter of adjustments,
accounted for 31% of the dollar value. By contrast, 30% of adjustments were
for stock-based compensation, but in dollar terms, they accounted for just
20% of the total. In other words, where companies make stock-based pay
adjustments, they tend to be smaller; restructuring and acquisition
adjustments tend to be bigger.
CLASSROOM
APPLICATION: This
article offers a good explanation of the adjustments made in non-GAAP
reporting.
QUESTIONS:
1. (Introductory) What are adjusted financial statements? How many
companies participate in adjusting their financials?
2. (Advanced) Why do some companies adjust their financial
statements? What are the main areas of adjustments? Which of these
adjustments are most common? Why?
3. (Advanced) Which types of financial adjustments have the greatest
impact in dollar value? What are the potential issues or problems with
reporting with these adjustments?
Reviewed By: Linda Christiansen, Indiana University Southeast
Nearly all large companies report adjusted
financials now, as The Wall Street Journal reported Tuesday. But like
unhappy families in a Tolstoy novel, the ways in which they adjust their
numbers varies widely.
That holds true even beyond the sometimes baffling
adjustments many companies make, like restaurant chains that omit the cost
of opening new restaurants.
In its analysis of more than 800 companies that
tweaked their 2015 net income figures, Calcbench extracted data from
earnings releases about five key areas of adjustments, related to
acquisitions, debt, legal activity, restructuring and stock-based
compensation.
A third of all the adjustments were for
restructuring, but they made up 45% of the total dollar value across
sectors, according to data from the report, which Calcbench produced with
consulting firm Radical Compliance.
Acquisitions, which made up a quarter of
adjustments, accounted for 31% of the dollar value. By contrast, 30% of
adjustments were for stock-based compensation, but in dollar terms, they
accounted for just 20% of the total.
In other words, where companies make stock-based
pay adjustments, they tend to be smaller; restructuring and acquisition
adjustments tend to be bigger.
Similarly, adjustments by financial firms tend to
be big: The sector accounted for just 8% of the adjustments, but almost a
quarter of the dollar value. Most financial-firm adjustments were for
acquisitions, about 70% of the total value.
Technology company adjustments are far more
numerous — accounting for nearly 33% of the 4,555 adjustments Calcbench
identified — but made up only 22% of the value. That makes sense, given that
technology adjustments are heavily tilted toward stock-based pay
Overall, the majority of the adjustments serve to
make profits look bigger. As The Wall Street Journal reported Tuesday,
adjustments by profitable companies served to increase adjusted income
figures by about 45% overall, while companies reporting net losses made
those look almost 70% better.
But that masks a lot of variation. Net adjustments
by the healthcare sector improved reported profits by $2.25 billion — but
that includes $380 million of restructuring adjustments and $376 million of
legal adjustments that served to depress pro-forma profits.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July 8,
2016
SUMMARY: After
nearly a decade of on-again off-again rules, last December's Protecting
Americans from Tax Hikes (PATH) Act of 2015 finally made permanent the rules
allowing a so-called qualified charitable distribution (QCD) from an IRA to
a charity. For older IRA owners facing their annual required minimum
distribution (RMD) obligations, the QCD rules provide a more tax-efficient
means to do charitable giving than simply taking RMDs and separately
donating (other) money to claim a charitable tax deduction. The donation is
not claimed as a deduction, though the distribution from the IRA is not
reported in income, either.
CLASSROOM
APPLICATION: This
article is appropriate for an individual taxation class.
QUESTIONS:
1. (Introductory) What is an RMD? Who are required to take them? Why?
2. (Advanced) What is a QCD? What are the advantages of a QCD? What
are possible issues or problems associated with them?
3. (Advanced) Who can do a QCD? What rules must they follow?
4. (Advanced) What is PATH? How did PATH affect QCDs? Why was that
change made? What issues did the change solve? How did PATH change tax
planning? Was it a positive change for taxpayers or a negative one?
5. (Advanced) What are appreciated securities? What is the best way
to donate them? Why is this effective?
Reviewed By: Linda Christiansen, Indiana University Southeast
After nearly a decade of on-again off-again rules,
last December’s Protecting Americans from Tax Hikes (PATH) Act of 2015
finally made permanent the rules allowing a so-called qualified charitable
distribution (QCD) from an IRA to a charity. For older IRA owners facing
their annual required minimum distribution (RMD) obligations, the QCD rules
provide a more tax-efficient means to do charitable giving than simply
taking RMDs and separately donating (other) money to claim a charitable tax
deduction.
The distinction is that under the QCD rules, an IRA
can make a contribution directly from the IRA to a charity. The donation is
not claimed as a deduction, though the distribution from the IRA is not
reported in income, either. In fact, since the IRA itself is a pretax
account, contributing directly from an IRA to a charity is the equivalent of
a “perfect” pretax contribution.
Notably, the QCD rules do have two key requirements
though:
1) The contribution must be made directly from the
IRA to a public charity. As in, the check from the IRA should be made
payable directly to the charity (not payable to the IRA owner who merely
endorses the check to the charity).
2) The IRA owner must be at least age 70½ on the
date of the gift.
The reality that the IRA owner must be at least age
70½ does significantly limit who can take advantage of the QCD rules. But
that’s also what makes them so appealing: because anyone who is at least age
70½ and eligible to do a QCD will also be old enough to face RMD
obligations. And the QCD rules actually contemplated this; in fact, the tax
code allows a QCD to also count as the RMD for the year.
For instance, if Jeremy had a $120,000 IRA and was
71 years old this year, he will have a $4,529 RMD obligation. If Jeremy
takes the $4,529 RMD as a distribution, and separately donates that much
money to charity, he will have $4,529 as (RMD) income and report a $4,529
charitable donation.
Except the problem is that the RMD counts as
“above-the-line” income, increasing his adjusted gross income, which can
impact everything from the taxability of his Social Security benefits, to
the income-related adjustments to his Medicare Part B and Part D premiums,
while the charitable contribution may not even be useful if Jeremy is
already claiming the standard deduction.
By contrast, if Jeremy just distributes the $4,529
from his IRA directly to the charity, the IRA income never impacts his
Social Security benefits and Medicare premiums, and it doesn’t matter if he
claims a charitable deduction or not, because the money is already the
equivalent of a perfect pretax contribution when it left his IRA.
Notably, the QCD rules do not limit IRA giving to
“just” the amount of your annual RMD. You can contribute less (and take an
RMD for the rest), or more (up to a maximum of $100,000 per taxpayer every
tax year). Though it doesn’t make sense to do a QCD for more than you were
going to donate to charities that year in the first place; while tax
benefits are nice, you won’t finish with more money by giving a dollar away
and getting a tax deduction for a portion of that dollar. So do your
charitable giving because you want to be charitable, first; the QCD rules
just help you get more tax leverage out of the deal.
Ultimately, it’s important to note that for those
making significant charitable contributions, it’s still even more
tax-efficient in most situations to donate “appreciated securities”
(investments that have a gain) instead of doing a QCD. The reason is that a
QCD may be a perfect pretax donation, but contributing investments with a
large gain allows you to permanently avoid the capital-gains taxes and get a
charitable deduction for the contribution. Donating investments also allows
for a wider range of charitable giving vehicles, including using charitable
remainder trusts or a donor-advised fund (neither of which are permitted for
a QCD).
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
15,
2016
TOPICS: Accounting,
Accounting Deficiency, Code of Ethics, Ethics, IESBA
SUMMARY: The
International Ethics Standards Board for Accountants is releasing new
standards aimed at resolving potential conflicts of interest for internal
and external accountants and auditors, who can feel bound by strict client
confidentiality rules, even when they uncover wrongdoing. More than six
years in the making, this new and expanded rule book gives accountants
step-by-step guidance on what to do if they uncover corporate misdeeds, from
money laundering to environmental abuses.
CLASSROOM APPLICATION: This
article is good for including in any accounting classes as a way to
integrate ethics throughout the accounting curriculum.
QUESTIONS:
1. (Introductory) What is the IESBA? What
is its function? What is it releasing?
2. (Advanced) Why is it important for
accountants to have a code of ethics and to comply with it?
3. (Advanced) In what other ways is
accountant conduct regulated? Are these ways effective? Why or why not? Why
are there more than one set of standards or guidance?
4. (Advanced) What kinds of problems
could a code of ethics prevent? What behavior continues despite an ethics
code or regulation?
5. (Advanced) What new guidance does this
new set of rules provide? What value does the guidance add?
6. (Advanced) What are the penalties for
violation of this code? How does that affect the enforcement of ethical
behavior in accounting?
Reviewed By: Linda Christiansen, Indiana University Southeast
Accountants will soon
get a new and expanded rule book that gives them step-by-step guidance on
what to do if they uncover corporate misdeeds, from money laundering to
environmental abuses.
The International
Ethics Standards Board for Accountants plans to release new standards this
week aimed at resolving potential conflicts of interest for internal and
external accountants and auditors, who can feel bound by strict client
confidentiality rules, even when they uncover wrongdoing.
More than six years in
the making, the new standards come amid a spate of high-profile corporate
missteps—from Volkswagen AG ’s emissions-cheating scandal to allegedly
inadequate money-laundering controls at financial firms like HSBC Holdings
PLC and U.S. Bancorp.
“The standards clarify
that professional accountants must be active and not turn a blind eye to
noncompliance,” said Stavros Thomadakis, chairman of the IESBA, whose rules
are used in over 100 jurisdictions. “It’s trying to bring about early, early
detection, if you will, but also early action by management or authorities.”
“In times of crisis,
there may be more of a temptation to not comply,” he added.
Some experts have
doubts about the usefulness of the guidelines, at least in the U.S., where
the Securities and Exchange Commission already takes accountants to task for
failing to raise a red flag when they learn of regulatory infractions.
“If the SEC prosecutes,
and it turns out the auditor knew, the SEC has the power to go after the
accountant or auditor,” said Shivaram Rajgopal, a professor of accounting
and auditing at Columbia Business School. “Maybe it might help in other
countries” with less rigorous standards, he said.
Others wonder whether
more ethics policies are necessary. “All of the professional accounting
firms have codes of ethics,” said Cynthia Clark, director of the Harold
Geneen Institute of Corporate Governance at Bentley University. For example,
“if I violated the ethics code at KPMG, I would likely be fired,” she said.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
15,
2016
SUMMARY: The
federal government says U.S. corporations will spend a combined $13 million
annually complying with proposed tax rules on internal corporate debt. But a
trade group estimates that could be the cost for just one company. That
divide over compliance costs is one flashpoint in a widening regulatory
dispute between companies and the Obama administration, and the tensions
could rise in coming months as the Treasury tries to complete rules it says
are intended to curb tax avoidance. Corporations and business groups,
increasingly worried about the scope of the proposed Treasury rules, say
U.S. officials underestimate the difficulty of creating systems to track and
document internal loans and fail to understand how the rules disrupt common
business structures that aren't about dodging taxes. The proposed rules are
just one part of the Obama administration's multi-pronged attack on
tax-driven deals, including so-called corporate inversions that companies
registered outside the U.S. have used to reduce payments to the U.S.
Treasury.
CLASSROOM APPLICATION: This
article is excellent for a corporate tax class update, but also to use as an
example of the costs to comply with tax laws and regulations.
QUESTIONS:
1. (Introductory) What is internal
corporate debt? Why do companies use it?
2. (Advanced) What is included in the
proposed rules regarding internal corporate debt? What is the purpose of
this proposal?
3. (Advanced) What costs are involved
with the proposed tax rules? How do the compliance cost estimates from the
government and from taxpayers differ? Why is there a difference?
4. (Advanced) How could compliance costs
related to these new rules be expensive for businesses? What additional
burdens could they cause?
5. (Advanced) What are corporate
inversions? How could they be impacted by these new rules?
6. (Advanced) What other concerns to do
companies have with these new rules, besides the cost of compliance ? How
should the Treasury respond to these concerns?
Reviewed By: Linda Christiansen, Indiana University Southeast
The federal government
says U.S. corporations will spend a combined $13 million annually complying
with proposed tax rules on internal corporate debt. But a trade group
estimates that could be the cost for just one company.
That divide over
compliance costs is one flashpoint in a widening regulatory dispute between
companies and the Obama administration, and the tensions could rise in
coming months as the Treasury tries to complete rules it says are intended
to curb tax avoidance.
Corporations and
business groups, increasingly worried about the scope of the proposed
Treasury rules, say U.S. officials underestimate the difficulty of creating
systems to track and document internal loans and fail to understand how the
rules disrupt common business structures that aren’t about dodging taxes.
The proposed rules are
just one part of the Obama administration’s multipronged attack on
tax-driven deals, including so-called corporate inversions that companies
registered outside the U.S. have used to reduce payments to the U.S.
Treasury.
Comments are now
pouring into the government ahead of a July 7 deadline. Companies such as
S&P Global Inc. and Republic Services Inc. have proposed changes or raised
concerns, such as how the rules would treat partnerships and their effect on
the ability to claim foreign tax credits. Some firms, such as Nielsen
Holdings PLC, have spoken publicly about how their taxes could climb over
time under the regulations.
“In the last decade,
this is one of the biggest business tax issues that we have worked on,” said
Dorothy Coleman, vice president of tax and domestic economic policy at the
National Association of Manufacturers, a business group that says it might
cost one member $13 million to comply. “It took us by surprise and the
business community by surprise.”
Republican lawmakers
have complained about the breadth of the rules and asked for more time for
companies to respond to the proposals. Democrats have warned about adverse
effects on the financial-services, insurance and utilities industries. Top
Treasury officials will meet with lawmakers on Wednesday.
But the Treasury
Department is sticking to its plans to hold a July 14 hearing and finish the
rules swiftly.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
15,
2016
SUMMARY: U.S.
tax officials sued Facebook Inc. to force the company to hand over documents
related a transfer of assets to Ireland in 2010, part of a yearslong
investigation into whether some of those assets were undervalued "by
billions of dollars." According to the lawsuit, Facebook entered into
agreements in September 2010 with Facebook Ireland Holdings Unlimited to
transfer the rights to its "online platform" and its "marketing intangibles"
outside the U.S. and Canada. It also entered into a cost-sharing agreement
with the Irish subsidiary to cover future development. Facebook then hired
the accounting firm Ernst & Young, now known as EY, to assign a value to the
transfers. Such moves are common, particularly among technology firms, which
shift assets around the globe with an eye toward reducing corporate taxes.
Ireland's top corporate tax rate is 12.5%, much lower than the U.S. rate of
35%.
CLASSROOM APPLICATION: This
article would be a good example to use in a corporate tax class or when
covering the topic of asset valuation.
QUESTIONS:
1. (Introductory) Why is the IRS suing
Facebook? What is the timing of the actions and events related to the
lawsuit?
2. (Advanced) What is EY? What does it
do? How is it involved in this case? Could or should EY be a party in the
lawsuit?
3. (Advanced) What is Facebook's
relationship with Ireland? What is the company hoping to do?
4. (Advanced) What is the IRS alleging in
this case? What is Facebook's response to the allegations?
5. (Advanced) Why was Facebook required
to value some of its assets? What was valued? How are assets valued for
these purposes? Why might they not be properly valued in this situation?
Reviewed By: Linda Christiansen, Indiana University Southeast
U.S. tax officials sued
Facebook Inc. to force the company to hand over documents related a transfer
of assets to Ireland in 2010, part of a yearslong investigation into whether
some of those assets were undervalued “by billions of dollars.”
According to the
lawsuit, which was filed by the Internal Revenue Service on Wednesday in
U.S. District Court in San Francisco, Facebook entered into agreements in
September 2010 with Facebook Ireland Holdings Unlimited to transfer the
rights to its “online platform” and its “marketing intangibles” outside the
U.S. and Canada. It also entered into a cost-sharing agreement with the
Irish subsidiary to cover future development.
Facebook then hired the
accounting firm Ernst & Young, now known as EY, to assign a value to the
transfers.
Such moves are common,
particularly among technology firms, which shift assets around the globe
with an eye toward reducing corporate taxes. Ireland’s top corporate tax
rate is 12.5%, much lower than the U.S. rate of 35%.
In Facebook’s case,
corporate-tax experts said the company may have been trying to minimize the
amount of income the parent company received from the Irish subsidiary,
which would reduce Facebook’s tax bill.
Facebook rejected the
analysis. “Facebook complies with all applicable rules and regulations in
the countries where we operate,” a Facebook spokeswoman said Thursday.
EY said Thursday it
“does not have any additional remarks at this time.”
The government said the
IRS went to court because Facebook hasn’t responded to its recent requests
and the statute of limitations on its probe expires July 31. Facebook had
been ordered to produce the records in a San Jose, Calif., court on June 17,
but “failed to appear” and didn’t produce the information requested,
according to the filing.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
15,
2016
SUMMARY: For
the third consecutive year, about 30% of Deloitte poll respondents say their
companies experienced supply chain fraud, waste or abuse in the preceding
year. Yet, just 29.3% of the same respondents use analytics to mitigate
supply chain fraud and financial risks. Further, two-thirds (67.1%) of the
respondents are confident employees will report any schemes they see in the
coming year. Additional poll results include: some employee groups pose
larger supply chain fraud risk (project managers and invoice approvers and
procurement professionals present the largest risk of supply chain fraud,
waste and abuse in respondents' organizations); many organizations still
don't use supply chain analytics; and analysis of invoices for fraud prior
to payment is low.
CLASSROOM APPLICATION: This
article would be a good addition to a fraud and forensic classes, or when
discussing those topics in other accounting classes.
QUESTIONS:
1. (Introductory) What is forensic
accounting? What do forensic accountants do?
2. (Advanced) What is a supply chain?
What fraud can occur in a supply chain?
3. (Advanced) What are some ways
accountants can prevent fraud in a supply chain? How can accountants detect
fraud? Which is easier to do - prevent fraud or detect it? Of the two, which
is more important or valuable?
4. (Advanced) What are the statistics
regarding supply chain fraud? What industries are more affected? What are
some possible reasons for that?
5. (Advanced) What can companies do to
manage losses from fraud? What areas and activities are likely to produce
the greatest benefits for the least cost?
Reviewed By: Linda Christiansen, Indiana University Southeast
For the third
consecutive year, about 30% of Deloitte poll respondents say their companies
experienced supply chain fraud, waste or abuse in the preceding year. Yet,
just 29.3% of the same respondents use analytics to mitigate supply chain
fraud and financial risks. Further, two-thirds (67.1%) of the respondents
are confident employees will report any schemes they see in the coming year.
“In my 20 years
conducting forensic investigations, trust in employees and third parties is
often misplaced,” says Mark Pearson, Deloitte Advisory principal, Deloitte
Financial Advisory Services LLP. “As a result, many organizations are
trapped in a pay-and-chase model for fighting supply chain fraud—invoices
are paid first, then retribution is sought much later when fraud is found,
if it’s found at all. But, the supply chain forensics leading practice is a
comprehensive and proactive, predictive approach tailored to organizational
structure and industry sector,” notes Mr. Pearson.
Two industries cite a
rise in levels of perceived supply chain fraud between 2014 and 2016. Life
sciences and health care respondents report an increase to 35% in 2016, up
from 31% in 2014. Similarly, energy and resources respondents report an
increase to 34% in 2016, compared to 27% in 2014.
Conversely, surveyed
professionals in the technology, media and telecommunications sector report
a drop to 27% in 2016, from 33% in 2014.
“As distress from
falling oil and gas prices puts pressure on the energy and resources
industry, many leaders are working hard to avoid leaving any cash on the
table,” observes Larry Kivett, Deloitte Advisory partner, Deloitte Financial
Advisory Services LLP. “Using supply chain analytics to identify and
investigate supply chain financial risks can help stem fraud schemes that we
increasingly see in today’s challenging, complex, and global environment,”
he adds.
“From a life sciences
and health care perspective, regulatory and legislative pressure is expected
to heighten around pricing and transparency for plans, providers,
pharmaceutical companies and devices makers. It’s a good time to verify that
your supply chain is not hiding any unsavory vendors or other fraud, waste,
and abuse that could cause reputational harm and costly remediation later,”
notes Mr. Pearson.
Following are
additional poll results.
—Some employee groups
pose larger supply chain fraud risk. Project managers and invoice approvers
(26%) and procurement professionals (24.7%) present the largest risk of
supply chain fraud, waste and abuse in respondents’ organizations, according
to the poll.
—Many organizations
still don’t use supply chain analytics. While 13.7% of respondents’
organizations have analytics software, but don’t use it, another 19.3% don’t
use analytics for supply chain financial risk management at all.
—Analysis of invoices
for fraud prior to payment is low. Just 27% of respondents’ organizations
analyze unpaid invoices for evidence of supply chain fraud, waste, and abuse
prior to payment.
Turning Supply Chain
Risk into Opportunity
Supply chains are rich
places to look for competitive advantage because of their complexity and the
significant role they play in a company’s cost structure. One way to
identify such advantages is by using analytics to fine-tune supply chain
management models so they are based on more than past demand, supply and
business cycles.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
15,
2016
TOPICS: Accounting
for Income Taxes, Financial Accounting, Risk Assessment
SUMMARY: For
many organizations, tax issues impact key business decisions and strategies
making the risks associated with taxes a primary focus of management and
audit committees. While tax risks vary, some of the most worrisome relate to
income tax accounting because missteps in that area can result in material
weaknesses and misstatements in financial reporting as well as compliance
challenges. Traditionally, tax departments have played a role in planning,
reporting and managing tax risk, but management and the board are starting
to seek more from them.
CLASSROOM APPLICATION: This
article regarding tax accounting and compliance risks is appropriate for
both financial accounting classes and corporate tax classes.
QUESTIONS:
1. (Introductory) How are income taxes
reported on the income statement? How could they appear on the balance
sheet? Could income taxes appear on the statement of cash flows?
2. (Advanced) What is a tax accrual? What
is a tax deferral? How are these audited for accuracy?
3. (Advanced) What risks are discussed in
the article? What issues do those risks pose?
4. (Advanced) How can those risks be
addressed? What suggestions does the article provide?
5. (Advanced) Why is 'tax talent'
important? What could an accounting major or new accounting professional do
to become the "right type" of tax talent to succeed?
6. (Advanced) How are tax departments
becoming more important to upper management? What can the tax professionals
offer to the strategy and management of the company? What value do they
offer?
Reviewed By: Linda Christiansen, Indiana University Southeast
For many organizations,
tax issues impact key business decisions and strategies making the risks
associated with taxes a primary focus of management and audit committees.
While tax risks vary, some of the most worrisome relate to income tax
accounting because missteps in that area can result in material weaknesses
and misstatements in financial reporting as well as compliance challenges.
“Many of the issues
related to material weaknesses and misstatements are process driven,” notes
Patrice Mano, partner, Deloitte Tax LLP. Addressing tax accounting and
compliance risks requires organizations to leverage processes, people and
technology in ways that help management and boards recognize missteps early
and correct them.
Controls to Address
Risk
As companies evaluate
accounting and compliance risks, it is critical to assess whether
appropriate controls are in place and developed to protect transactional
data. For example, controls can be designed with enough precision to detect
or prevent material errors related to tax accruals and deferred taxes. The
design precision also should extend to significant judgments and estimates,
such as unrecognized tax benefits and valuation allowance, as well as
non-routine transactions, including those related to acquisitions,
divestitures and restructurings. Regulatory authorities, including the
Public Company Accounting Oversight Board (PCAOB), appear to be particularly
interested in such controls. For example, the PCAOB has made management
review controls a focus of its inspections.
“With regard to
regulatory authorities, the difficult part comes not from companies proving
they have controls in place, but rather, that those control processes were
performed,” says Vickie Carr, partner, Deloitte Tax LLP. “The proof is
called meeting the ‘standard of evidence’ and if companies put some focus on
the process, they often find simple ways of documenting the reviews,” she
adds.
Meeting agendas, notes
and minutes documenting that technical issues and conclusions were discussed
among management are examples of how to show evidence of management review
controls. Further, technology systems that generate schedules, as well as
reports that illustrate proof and review of reconciliation back to financial
statements and disclosures, also may serve as sources of proof that controls
were used.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
22,
2016
TOPICS: Net
Position, GASB, Governmental Accounting, Pension Accounting
SUMMARY: New
accounting rules are shining a light on more than $7 billion in pension
liabilities facing the Metropolitan Transportation Authority. MTA pension
costs came as no surprise to analysts, who are accustomed to seeing the
information in MTA financial documents. The authority has simply changed the
way it reports the data in its financial documents through the end of last
year, following new rules from the Governmental Accounting Standards Board.
The inclusion of more than $7 billion in net pension liabilities resulted in
a reduction of the MTA's "net position," akin to a company's book value in
corporate accounting.
CLASSROOM
APPLICATION: This
is a rare article to use for governmental accounting. It also could be used
when covering pension accounting to discuss the rules in corporate and
governmental entities.
QUESTIONS:
1. (Introductory) What is the GASB? What is its area of authority?
2. (Advanced) What changes did the GASB make regarding pension
accounting? What types of entities are affected? What was previously
required? What is required by the new rules?
3. (Advanced) Why were the pension rules changed? What are the
purposes of the changes? What additional information and value do the
changes add?
4. (Advanced) How have the changes to the rules affected each of the
financial statements? Should the changes to the statements be a surprise to
the users of the financial statements? Why or why not?
5. (Advanced) The article states a difference between corporate
balance sheets and government balance sheets. What is the difference? Should
there be a difference between the two? Why or why not?
6. (Advanced) What additional new accounting rules will be effective
next year? How will the MTA's financial statements be affected by those
rules?
7. (Advanced) What is net position? What is its equivalent in
financial accounting? How do they differ?
8. (Advanced) What changes in management of the MTA and similar
entities could occur as a result of these changes in reporting?
Reviewed By: Linda Christiansen, Indiana University Southeast
New accounting rules are shining a light on more
than $7 billion in pension liabilities facing the Metropolitan
Transportation Authority.
While the disclosures won’t force the MTA to raise
tolls or cut service, they quantify the authority’s tab for commitments to
pay retirees, and some critics detect a mounting potential burden on riders
and taxpayers.
“I would hope there would be some sticker shock”
with the pension-cost reporting, said Charles Brecher, director of research
at the Citizens Budget Commission, a civic group based in Manhattan. “You
want to inform people about the cost of these promises.”
The MTA pays steeper costs for employee pensions
and other retirement benefits than its peers in London and Paris, Moody’s
Investors Service analysts said in March report. For each ride, the MTA paid
$3.06 in overall personnel costs in 2014, compared with $1.05 for Paris and
75 cents for London, according to the report. Nearly $1 of every MTA ride
goes to health care, pension and retirement costs.
To be sure, as the report noted, French and British
taxpayers foot more of the bill for social-welfare benefits such as health
care and pensions.
But the MTA’s labor-related costs could reduce its
budget flexibility and compete with capital improvements, the Moody’s report
noted.
An MTA spokeswoman said the market understands the
authority’s cost structure “and still rates our bonds highly.” A downgrade
in the MTA’s bond ratings could increase its borrowing costs.
The MTA operates the New York City subway and buses
in addition to two commuter railroads and key tunnels and bridges.
The relatively high cost of the MTA’s pension
liabilities could increase pressure to raise fares and tolls or cut service.
“If you have some downturn in your revenues, those are expenses you can’t
cut so all the cuts have to come out what’s left of your budget,” said
Marcia Van Wagner, a Moody’s analyst.
John Samuelsen, head of the union representing MTA
employees who run New York City’s subway and buses, said the workers toil in
often backbreaking jobs at relatively lower pay in exchange for a pension
that offers them a “dignified retirement.”
Mr. Samuelsen, president of the Transport Workers
Union Local 100, dismissed scrutiny from financial analysts, saying they
didn’t understand how tough MTA jobs can be, citing assaults on bus drivers.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
22,
2016
SUMMARY: The
market for convertible bonds could be in for a shock, thanks to an Internal
Revenue Service plan to begin collecting taxes on certain payouts from the
hybrid securities. The securities are typically sold as ordinary
interest-bearing bonds, but with the twist that they can be converted into
stock. At issue are adjustments over the life of the bond that give holders
extra stock as compensation for corporate moves that might hurt the price of
the underlying stock, typically a dividend increase. The IRS long had viewed
those adjustments as taxable compensation but hadn't been collecting the
taxes, since they had fallen through the cracks. The Treasury Department,
which administers IRS policy, is expected to finalize a rule to enforce
taxation of the adjustments in short order.
CLASSROOM
APPLICATION: This
is a good update for an advance tax class, as well as for a financial
accounting class because it adds a tax burden to conversion ratio
adjustments.
QUESTIONS:
1. (Introductory) What is a convertible bond? How does this type of
bond differ from a bond that is not convertible?
2. (Advanced) What rule has the IRS proposed regarding convertible
bonds? What are the reasons for this rule?
3. (Advanced) How did this issue come to the attention of the IRS?
Why didn't the IRS have this rule and enforce collection in the past?
4. (Advanced) How will this rule affect taxpayers? How does it change
a taxpayer's liability?
5. (Advanced) How could this rule affect corporate decisions and
strategies? Is the rule likely to increase or decrease the issuance of
convertible bonds? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
The market for convertible bonds could be in for a
shock, thanks to an Internal Revenue Service plan to begin collecting taxes
on certain payouts from the hybrid securities.
The securities are typically sold as ordinary
interest-bearing bonds, but with the twist that they can be converted into
stock. At issue are adjustments over the life of the bond that give holders
extra stock as compensation for corporate moves that might hurt the price of
the underlying stock, typically a dividend increase.
The IRS long had viewed those adjustments as
taxable compensation but hadn’t been collecting the taxes, since they had
fallen through the cracks. That could change soon.
The Treasury Department, which administers IRS
policy, is expected to finalize a rule to enforce taxation of the
adjustments in short order. A 90-day comment period on a draft proposal
ended Tuesday, and investor representatives tried to convince government
officials this past week to change course.
The IRS proposed in April to enforce taxation of
the adjustments both in the future and retroactively for two years. About
10% to 15% of the $230 billion U.S. convertible-bond market has
conversion-ratio adjustments that may be affected, by some industry
estimates.
Citigroup Inc. sent a batch of letters in March
warning investors they may owe back taxes and that the bank may debit money
from certain accounts to cover the proposed IRS taxes. A spokesman for the
bank declined to comment.
An IRS spokesman declined to comment.
A Treasury spokeswoman declined to discuss what the
final rule would say, when it might be completed or what guidance might be
given about calculation measures. “We believe that the existing rules make
it clear that a change in the conversion ratio of a convertible bond may be
deemed a dividend to such bondholders when done so in connection with the
payment of dividends to stockholders,” the spokeswoman said.
She added that the changes will “help meet the
needs of industry and stakeholders by clarifying rules” that will “enable
withholding agents to fulfill their withholding obligations moving forward.”
The U.S. Chamber of Commerce said it was
disappointed the government didn’t conduct an economic-impact study. It said
changes to the taxes on the adjustments could have “significant impact on
capital formation” because companies would find convertibles a less
attractive form for financing and would have to introduce tracking systems
for any investor gains.
The issue was brought to light inadvertently by a
two-year-old tax report by the New York State Bar Association that alerted
the government to the fact it wasn’t collecting the tax. The May 2014 paper
was aimed at highlighting an issue the association believed was ambiguous
under existing regulations. Market participants asked the IRS for
clarification, and received it on April 12, when the IRS said the
adjustments were taxable.
The change would treat the make-whole provisions
called “conversion ratio adjustments” as taxable dividends even though
investors don’t receive any cash payouts.
“It is odd that this rule has been a sleeping dog
out there, and the IRS was awakened by a New York State Bar Association
report,” said David Garlock, a principal at Ernst & Young specializing in
taxation of debt instruments.
Investors, including hedge funds in a group called
the Concerned Convertible Bondholders Coalition, said the adjustments
shouldn’t be taxable because the feature is designed to cover the declining
value of the call option in the bond after a dividend increase has eroded
the bond’s value.
Continued in article
Teaching Case (GAPP verssus Non-GAAP Illustration) from The Wall Street Accounting Weekly Review on July
22,
2016
SUMMARY: Electronic
Arts Inc. will stop reporting many of the adjusted financial measures it has
used for years, addressing regulators' stepped-up criticism of how companies
apply customized metrics in earnings. The Securities and Exchange Commission
in May 2016 issued new guidelines for the use of adjusted measures that
don't comply with U.S. generally accepted accounting principles over
concerns such metrics could make earnings appear better than they are. The
changes won't have an impact on financial performance but could make it
harder to compare to past results. EA said it would provide the data it used
to calculate non-GAAP figures so others can make historical comparisons.
Cash flow remains a key valuation measure for the business, the company
said.
CLASSROOM
APPLICATION: This
article offers a good example of the company choosing to step away from non-GAAP
reporting.
QUESTIONS:
1. (Introductory) What is GAAP? How is it determined? What entities
use GAAP?
2. (Advanced) What is non-GAAP reporting? Why do companies engage in
non-GAAP reporting? What are the benefits of this type of reporting?
3. (Advanced) What is the SEC? What is its area of authority? What is
the SEC's position on non-GAAP reporting?
4. (Advanced) What has Electronic Arts decided to do regarding its
financial reporting? Why? What impact will this decision have on the
company's financial reporting?
5. (Advanced) What issues or problems can non-GAAP reporting present
to users of the financial statements?
6. (Advanced) Is this a wise move for Electric Arts? Should other
companies do this? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Move follows SEC criticism over companies’ use of
‘non-GAAP’ metrics in earnings
Electronic Arts Inc. will stop reporting many of
the adjusted financial measures it has used for years, addressing
regulators’ stepped-up criticism of how companies apply customized metrics
in earnings.
The Securities and Exchange Commission in May
issued new guidelines for the use of adjusted measures that don’t comply
with U.S. generally accepted accounting principles over concerns such
metrics could make earnings appear better than they are.
In a conference call with analysts Tuesday, EA said
results for its most recently ended quarter, due Aug. 2, will be the last to
include revenue, gross margin and per-share earnings on a non-GAAP basis.
The changes won’t have an impact on financial
performance but could make it harder to compare to past results, analysts
said. EA said it would provide the data it used to calculate non-GAAP
figures so others can make historical comparisons. Cash flow remains a key
valuation measure for the business, the company said.
“At the end of the day, every company should be
valued on its ability to generate cash,” said Robert W. Baird & Co. analyst
Colin Sebastian.
The SEC’s guidance applies to all publicly traded
companies, though the issue is particularly relevant to the videogame
industry. Under GAAP rules, revenue from games with online components is
deferred for however long companies think players will use those
services—typically six to nine months.
It reflects continuing expenses that go into online
games, such as keeping servers running and fixing bugs, Mr. Sebastian said.
The same rules apply to other software companies that accept payment from
customers upfront for services provided over time, such as cloud-storage
providers, he said.
Non-GAAP figures paint a more accurate picture of
near-term financial performance since they show the full amount of revenue
from games sold in the quarter, companies and analysts have said.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
22,
2016
TOPICS: Capital
Gains Tax, Corporate Taxation, Spinoffs
SUMMARY: Companies
would face new hurdles in completing tax-free spinoffs of appreciated assets
under rules proposed by the U.S. Treasury Department. The government would
make it harder for firms to complete some types of spinoffs, though the
rules likely wouldn't alter the tax landscape for routine separations of two
operating businesses. The rules provide a numerical standard - 5% - for the
amount of a spun-off company that must be an active trade or business for
the transaction to avoid capital gains taxes. This is known in tax circles
as the "hot dog stand" area of the law, for the theory that companies could
make a spinoff qualify for tax-free treatment by attaching a tiny fast-food
restaurant to a much larger pot of assets.
CLASSROOM
APPLICATION: This
article is appropriate for financial accounting classes, as well as
corporate tax classes.
QUESTIONS:
1. (Introductory) What is a spinoff? Why would a company wish to do
one? In what situations would they be appropriate? What benefits do they
offer?
2. (Advanced) What are the details of the new rules introduced by the
Treasury Department? How are the new rules different from the current rules?
Why did the Treasury Department propose these changes?
3. (Advanced) If the proposed rules go into effect, how would it
affect corporate strategy?
Reviewed By: Linda Christiansen, Indiana University Southeast
Five percent of a spun-off company must be an
active trade or business to avoid capital gains taxes
Companies would face new hurdles in completing
tax-free spinoffs of appreciated assets under rules proposed Thursday by the
U.S. Treasury Department.
The government would make it harder for firms to
complete some types of spinoffs, though the rules likely wouldn’t alter the
tax landscape for routine separations of two operating businesses.
The rules provide a numerical standard—5%—for the
amount of a spun-off company that must be an active trade or business for
the transaction to avoid capital gains taxes. This is known in tax circles
as the “hot dog stand” area of the law, for the theory that companies could
make a spinoff qualify for tax-free treatment by attaching a tiny fast-food
restaurant to a much larger pot of assets.
The rules also attempt to set clearer standards for
determining when a spinoff is an impermissible “device” for distributing
earnings and profits to shareholders. Under the proposal, the government
would look askance at spinoff transactions in which at least two-thirds of
one company is made up of nonbusiness assets and the other company has much
less.
If there is too big a gap, measured using formulas
in the proposed rule, the transaction would be deemed a “device” and would
be taxable.
That automatic rule was a “surprise,” New
York-based tax adviser Robert Willens wrote in a note to clients Thursday.
That change is the biggest difference from previous
rules, and the use of formulas will put pressure on valuations of assets as
companies and the IRS make calculations, said Scott Levine, a partner at
Jones Day in Washington.
“At least we have bright lines we can point to,”
Mr. Levine said. “We were in limbo for the past year.”
Treasury and the Internal Revenue Service signaled
their intention in September 2015 to study this area of the law. The
government expressed concerns about what “some taxpayers” were doing with
spinoffs that resulted in one company owning a significant amount of cash,
stock or other investments.
Continued in article
Teaching Case from The Wall Street Accounting Weekly Review on July
22,
2016
SUMMARY: The
IASB, which sets International Financial Reporting Standards, is considering
adding definitions of commonly used accounting terms, as well as guidance on
the formatting of financial statements, according to Hans Hoogervorst,
chairman of the International Accounting Standards Board. The move comes in
response to the proliferation of custom metrics in both U.S. and
international financial reporting that regulators and standard setters say
are often misleading. Current IFRS rules prescribe the definition of a
select few terms, including revenue and profit or loss. The Board is
considering adding formal definitions to frequently used accounting metrics
like operating profit and terms like earnings before interest and tax, or
EBIT, Mr. Hoogervorst said. The Board is also considering guidance on
formatting financial information, such as the line items of the income
statement.
CLASSROOM
APPLICATION: This
update is appropriate for coverage of IFRS in financial accounting classes.
QUESTIONS:
1. (Introductory) What is the IASB? What is its area of authority?
What is IFRS? To what entities does it apply?
2. (Advanced) What is the IASB considering doing? Why? What kind of
impact could it have for financial reporting?
3. (Advanced) In general, how does IFRS differ from GAAP? More
specifically, does GAAP currently have more and/or better definitions? Is
GAAP changing in the same way as IFRS is changing? Why or why not?
4. (Advanced) The article discusses custom accounting and custom
metrics. What are those? Why are companies using them? Should companies be
allowed to use them?
Reviewed By: Linda Christiansen, Indiana University Southeast
International accounting standards setter is
weighing rules for income statement formatting, Chairman says
The presentation of global financial reports could
soon get more regimented, according to Hans Hoogervorst, chairman of the
International Accounting Standards Board.
The IASB, which sets International Financial
Reporting Standards, is considering adding definitions of commonly used
accounting terms, as well as guidance on the formatting of financial
statements, Mr. Hoogervorst said. The move comes in response to the
proliferation of custom metrics in both U.S. and international financial
reporting that regulators and standard setters say are often misleading.
“We believe that we have to try to create a little
bit of order in this chaos,” Mr. Hoogervorst said.
Current IFRS rules prescribe the definition of a
select few terms, including revenue and profit or loss. The Board is
considering adding formal definitions to frequently used accounting metrics
like operating profit and terms like earnings before interest and tax, or
EBIT, Mr. Hoogervorst said. The Board is also considering guidance on
formatting financial information, such as the line items of the income
statement, he said.
For the IASB, the worry with custom accounting is
that “it almost always gives a rosier picture” to investors, Mr. Hoogervorst
said.
While U.S. companies are required to file their
financial reports using U.S. Generally Accepted Accounting Principles,
nearly 94% of the S&P 500 supplemented their 2015 earnings with non-GAAP
data, CFO Journal reported in June. In Europe and other regions that rely on
IFRS for financial reporting, the use of custom accounting measures is
equally popular.
However, not all non-standard accounting terms
deserve to be rigorously defined, Mr. Hoogervorst said. For example,
earnings before interest, tax, depreciation and amortization or EBITDA is an
inherently misleading measure that Mr. Hoogervorst said he wouldn’t want to
define.
A 91-year-old woman has been questioned by police in Germany — after she filled
in the blanks in a piece of modern art based on a crossword puzzle. The
pensioner, who has not been named under German privacy law, was questioned under
caution after she filled in the work valued at €80,000 (£67,000) with a biro.
"Reading-work-piece", a 1977 work by Arthur Köpcke of the Fluxus movement,
essentially looks like an empty crossword puzzle. Next to the work is a sign
which reads: “Insert words”. The hapless pensioner explained to police that she
was simply following the instructions. “The lady...
A pessimist sees the glass
as half empty, the optimist sees it as half full, and to the engineer, the glass
is twice as big as it needs to be.
If the world didn't suck,
you'd fall off.
A truly happy person is one
who can enjoy the scenery on a detour.
Which runs faster, heat or
cold?
Heat, everyone knows you can catch a cold.
My idea of housework is to
sweep the room with a glance.
Opportunities always look
bigger going than coming.
Experience is a wonderful
thing. It enables you to recognize a mistake when you make it again.
Blessed are they who can
laugh at themselves for they shall never cease to be amused.
If you try to fail, and
succeed, which have you done?
We can't change the weather,
we can only accept it which means we should all learn from the weather; it pays
no attention to criticism.
Forwarded by Paula
A lexophile of course!
How does Moses make tea? Hebrews it.
Venison for dinner again? Oh deer!
A cartoonist was found dead in his home. Details are sketchy.
I used to be a banker, but then I lost interest.
Haunted French pancakes give me the crêpes.
England has no kidney bank, but it does have a Liverpool .
I tried to catch some fog, but I mist.
They told me I had type-A blood, but it was a Typo.
I changed my iPod's name to Titanic. It's syncing now.
Jokes about German sausage are the wurst.
I know a guy who's addicted to brake fluid, but he says he can stop any
time.
I stayed up all night to see where the sun went, and then it dawned on me.
This girl said she recognized me from the vegetarian club, but I'd never met
herbivore.
When chemists die, they barium.
I'm reading a book about anti-gravity. I just can't put it down.
I did a theatrical performance about puns. It was a play on words.
Why were the Indians here first? They had reservations.
I didn't like my beard at first. Then it grew on me.
Did you hear about the cross-eyed teacher who lost her job because she
couldn't control her pupils?
When you get a bladder infection, urine trouble.
Broken pencils are pointless.
What do you call a dinosaur with an extensive vocabulary? A thesaurus.
I dropped out of communism class because of lousy Marx.
All the toilets in New York 's police stations have been stolen. The
police have nothing to go on.
I got a job at a bakery because I kneaded dough.
Velcro - what a rip off!
Don't worry about old age; it doesn't last.
A new study suggests that people are are overweight tend to be less intelligent
than those who are not. According to the study, people who are overweight have
less grey and white matter in key parts of the brain, meaning their brain
develops an “altered reward processing,” effectively meaning they lack the
ability to control their eating. The results were extracted from “very thorough”
brain scans of 32 people from Baltimore....
Gov. Maggie Hassan signed H.B. 1547 into law to ban
sexual assault on animals in New Hampshire. This bipartisan effort was initiated
to address the disturbing and prevalent issue of animal sexual assault in the
Granite State.
http://www.humanesociety.org/news/news_briefs/2016/06/nh-animal-sexual-assault-ban-062416.html
Jensen Comment
Time to move back to Texas where A&M sheep approach a fence backwards.
What do you call an Aggie with a sheep under each arm? A pimp!
This is a joke I first herd when I was on leave in New Zealand.
The great Al Hirschfeld had been supplying his
much-loved caricatures to the New York Times for 37 years when, in 1962, tipped
over the edge by the newspaper's accounting department, he sent the following
amusing letter to the Sunday editor, Lester Markel.
(Keep scrolling down here)
http://www.lettersofnote.com/search?q=+accounting
I was visiting my daughter last night when I asked if I could borrow a
newspaper.
"This is the 21st century" she said. "We don't waste money on newspapers.
Here… use my iPad."
I can tell you this….. that friggin fly never knew what hit him..
Forwarded by Auntie Bev
LOST WORDS OF OUR YOUTH
Heavens to Murgatroyd! Would you believe the email spell checker did not
recognize the word murgatroyd? Lost Words from our childhood: Words gone as fast
as the buggy whip! Sad really!
The other day a not so elderly (65) (I say 75) lady said something to her son
about driving a Jalopy and he looked at her quizzically and said "What the heck
is a Jalopy? OMG (new) phrase! He never heard of the word jalopy!! She knew she
was old but not that old.
Well, I hope you are Hunky Dory after you read this and chuckle.
About a month ago, I illuminated some old expressions that have become
obsolete because of the inexorable march of technology. These phrases included
"Don't touch that dial," "Carbon copy," "You sound like a broken record" and
"Hung out to dry."
Back in the olden days we had a lot of moxie. We'd put on our best bib and
tucker to straighten up and fly right.
Heavens to Betsy! Gee whillikers! Jumping Jehoshaphat! Holy moley! We were in
like Flynn and living the life of Riley, and even a regular guy couldn't accuse
us of being a knucklehead, a nincompoop or a pill. Not for all the tea in China!
Back in the olden days, life used to be swell, but when's the last time
anything was swell?
Swell has gone the way of beehives, pageboys and the D.A.; of spats,
knickers, fedoras, poodle skirts, saddle shoes and pedal pushers. Oh, my aching
back. Kilroy was here, but he isn't anymore.
We wake up from what surely has been just a short nap, and before we can say,
well I'll be a monkey's uncle! or, This is a fine kettle of fish! we discover
that the words we grew up with, the words that seemed omnipresent, as oxygen,
have vanished with scarcely a notice from our tongues and our pens and our
keyboards.
Poof, go the words of our youth, the words we've left behind We blink, and
they're gone. Where have all those phrases gone?
Long gone: Pshaw, The milkman did it. Hey! It's your nickel.
Don't forget to pull the chain. Knee high to a grasshopper.
Well, Fiddlesticks! Going like sixty. I'll see you in the funny papers. Don't
take any wooden nickels.
It turns out there are more of these lost words and expressions than Carter
has liver pills. This can be disturbing stuff !
We of a certain age have been blessed to live in changeable times. For a
child each new word is like a shiny toy, a toy that has no age. We at the other
end of the chronological arc have the advantage of remembering there are words
that once did not exist and there were words that once strutted their hour upon
the earthly stage and now are heard no more, except in our collective memory.
It's one of the greatest advantages of aging.
See ya later, alligator!
Forwarded by Paula
A blonde lady motorist was about two hours from San Diego when she was
flagged down by a man whose truck had broken down......
The man walked up to the car and asked, "Are you going to San Diego?"
"Sure," answered the blonde, "do you need a lift?"
"Not for me.
I'll be spending the next three hours fixing my truck. My problem is I've got
two chimpanzees in the back that have to be taken to the San Diego Zoo. They're
a bit stressed already so I don't want to keep them on the road all day.
Could you possibly take them to the zoo for me? I'll give you $200 for your
trouble”
"I'd be happy to," said the blonde.
So the two chimpanzees were ushered into the back seat of the blonde's car
and carefully strapped into their seat belts, and off they went.
Five hours later, the truck driver was driving through the heart of San Diego
when suddenly he was horrified!
There was the blonde walking down the street, holding hands with the two
chimps, much to the amusement of a big crowd.
With a screech of brakes he pulled off the road and ran over to the blonde.
"What are you doing here?" he demanded,
"I gave you $200 to take these chimpanzees to the zoo!
"Yes, I know you did," said the blonde.
"But we had money left over so now we're going to Sea World."
Some new and some old forwarded by Paula
A distraught
senior citizen
phoned her
doctor's office.
"Is it true,"
she wanted to know,
"that the
medication
you
prescribed has to be taken
for the rest
of my life?"
"'Yes, I'm
afraid so,"' the doctor told her.
There was a
moment of silence
before the
senior lady replied,
"I'm
wondering, then,
just
how serious is my condition
because this
prescription is marked
'NO
REFILLS'.."
***********************
An older
gentleman was
on the
operating table
awaiting
surgery
and he
insisted that his son,
a renowned
surgeon,
perform the
operation.
As he was
about to get the anesthesia,
he asked to
speak to his son.
"Yes, Dad ,
what is it?"
"Don't be
nervous, son;
do your best,
and just
remember,
if it doesn't
go well,
if
something happens to me,
your mother
is
going to come and
live
with you and your wife...."
(I LOVE IT!)
~~~~~~~~~~~~~~~~~
Aging:
Eventually
you will reach a point
when
you stop lying about your age
and
start bragging about it. This is so true. I love
to hear them
say "you don't look that old."
---------------------------------
The older we
get,
the
fewer things
seem
worth waiting in line for.
---------------------------------
Some people
try
to turn back their odometers.
Not me!
I want people
to know why
I look this
way.
I've traveled
a long way
and some of
the roads weren't paved.
********************
When you are
dissatisfied
and would
like to go back to youth,
think of
Algebra.
-------------------------------
One of the
many things
no one tells
you about aging
is that it is
such a nice change
from being
young.
~~~~~~~~~~~
Ah, being young
is beautiful,
but
being old is comfortable.
*********
First you forget
names,
then you forget
faces.
Then you forget
to pull up your zipper...
it's worse when
you forget to
pull it down.
```````````````
Two
guys, one old, one young,
are pushing
their carts around- WalMart
when they
collide.
The old guy
says to the young guy,
"Sorry about
that. I'm looking for my wife,
and
I guess I wasn't paying attention
to where I
was going."
The
young guy says, "That's OK, it's a coincidence.
I'm
looking for my wife, too...
I
can't find her and I'm getting a little desperate."
The
old guy says, "Well,
maybe
I can help you find her...
what
does she look like?"
The young guy
says,
"Well,
she is 27 years old, tall,
with red
hair,
blue eyes, is
buxom...wearing no bra,
long legs,
and is
wearing short shorts.
What does your wife
look like?'
To
which the old guy says, “Doesn't matter,
Let's look for yours."
"In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW Blog, June 26, 2013 ---
http://maaw.blogspot.com/2013/06/in-2008-hopwood-commented-on-number-of.html
Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://faculty.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Essays on the (mostly sad) State of Accounting Scholarship ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays