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Year 2017 Quarter 1:  January 1 - March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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March 2017


Bob Jensen's New Additions to Bookmarks

March 2017

Bob Jensen at Trinity University 

USA Debt Clock --- ubl

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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:  

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Accountics Takeover of Academic Accounting Research:  What Went Wrong?
The fall from grace of Accountic Science Sacred Cows:  P-Values

Beginning in the 1960s. academic accounting research commenced to rely mostly on the general linear (regression) model applied to purchased databases like CRSP, Compustat, AuditAnalitics, etc. Elite academic  journals like TAR, JAR, and JAE ceased accepting any submissions that did not have equations. Either the equations were analytical based upon unrealistic economic assumptions or empirical based upon dubious assumptions of efficient markets and the unreliable Capital Asset Pricing Model (CAPM). Down deep researchers knew correlation was not causation but results usually ignored this in the conclusions of the  GLM model applications. Errors in the purchased databases were overlooked by journal editors and referees. The accounting profession virtually lost interest in the tenure game being played by academic accounting (accountics) researchers ---
The above file loads very slowly. Be patient.

Is accounting research stuck in a rut of repetitiveness and irrelevancy?

"Accounting Craftspeople versus Accounting Seers: Exploring the Relevance and Innovation Gaps in Academic Accounting Research," by William E. McCarthy, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 833-843 --- 

Is accounting research stuck in a rut of repetitiveness and irrelevancy? 
(Professor McCarthy) would answer yes, and I would even predict that both its gap in relevancy and its gap in innovation are going to continue to get worse if the people and the attitudes that govern inquiry in the American academy remain the same. From my perspective in accounting information systems, mainstream accounting research topics have changed very little in 30 years, except for the fact that their scope now seems much more narrow and crowded. More and more people seem to be studying the same topics in financial reporting and managerial control in the same ways, over and over and over. My suggestions to get out of this rut are simple. First, the profession should allow itself to think a little bit normatively, so we can actually target practice improvement as a real goal. And second, we need to allow new scholars a wider berth in research topics and methods, so we can actually give the kind of creativity and innovation that occurs naturally with young people a chance to blossom.

"The new astrology:  By fetishising mathematical models, economists turned economics into a highly paid pseudoscience," by Alan Jay Levinovitz, AEON, May 2016 ---

Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest. In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major. In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme. The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes. Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.

But despite the funding crunch, it’s a bull market for academic economists. According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists. For the top 10 per cent of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering. These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)

Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect. In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?

In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.

Real Science versus Pseudo Science ---

Jensen Comment
Academic accounting (accountics) scientists took economic astrology a step further when their leading journals stopped encouraging and publishing commentaries and replications of published articles --- 
How Accountics Scientists Should Change:  
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"

Times are changing in social science research (including economics) where misleading p-values are no longer the Holy Grail. Change among accountics scientist will lag behind change in social science research but some day leading academic accounting research journals may publish articles without equations and/or articles of interest to some accounting practitioner somewhere in the world --- 
 See below


Academic accounting researchers shielded themselves from validity challenges by refusing to publish commentaries and refusing to accept replication studies for publication ---


Stanford University 2017 Update:  Fixing Big Data’s Blind Spot Susan Athey wants to help machine-learning applications look beyond correlation and into root causes ---

Data-fueled machine learning has spread to many corners of science and industry and is beginning to make waves in addressing public-policy questions as well. It’s relatively easy these days to automatically classify complex things like text, speech, and photos, or to predict website traffic tomorrow. It’s a whole different ballgame to ask a computer to explore how raising the minimum wage might affect employment or to design an algorithm to assign optimal treatments to every patient in a hospital.

The vast majority of machine-learning applications today are just highly functioning versions of simple tasks, says Susan Athey, professor of economics at Stanford Graduate School of Business. They rely in large part on something computers are especially good at: sifting through vast reams of data to identify connections and patterns and thus make accurate predictions. Prediction problems are simple, because, in a stable environment, it doesn’t really matter how or why the algorithm operates; it’s easy to measure performance just by seeing how well the program works on test data. All of which means that you don’t have to be an expert to deploy prediction algorithms with confidence.

Despite the proliferation of data collection and computing prowess, machine-learning algorithms aren’t so good at distinguishing between correlation and causation — determining whether the connection between statistically linked patterns is coincidental or the result of some cause-and-effect force. “Some problems simply aren’t solvable with more data or more complex algorithms,” Athey says.

If machine-learning techniques are going to help address public-policy problems, Athey says, we need to develop new ways of marrying them with causal-inference methods. Doing so would greatly expand the potential of big-data applications and transform our ability to design, evaluate, and improve public-policy work.

What Predictive Models Miss

As government agencies and other public sector groups embrace big data, Athey says it’s important to understand the realistic limitations of current machine-learning methods. In a recent article published in Science, she outlined a number of scenarios that highlight the distinction between prediction problems and causal-inference problems, and where common machine-learning applications would have trouble drawing useful conclusions about cause and effect.

One question that comes up in businesses is whether a firm should target resources on retaining customers who have a high risk of attrition, or “churn.” Predicting churn can be accomplished with off-the-shelf machine-learning methods. However, the real problem is calculating the best allocation of resources, which requires identifying those customers for whom the causal effect of an intervention, such as offering discounts or sending out targeted emails, is the highest. That’s a harder thing to measure; it might require the firm to conduct a randomized experiment to learn where intervention has the biggest benefits. Athey points to a recent study that showed that in one firm that carried out a more rigorous analysis, the overlap between customers with high risk of churn and those for whom intervention works best was only 50%.

In another case, predictive models already have been used to identify patients who, though eligible for hip replacement surgery, should not be given the operation due to the likelihood that they will soon die of other causes. What those methods fail to solve is the much harder problem of prioritizing patients who would most benefit from the procedure.

“If you’re just trying to crunch big data and not thinking about everything that can go wrong in confusing correlation and causality, you might think that putting a bigger machine on your problem is going to solve things,” Athey says. “But sometimes the answer’s just not in the data.”

That’s especially true in many of the real-world contexts where public policy takes shape, she says.

The gold standard for picking apart correlation and causality is the randomized controlled experiment, which allows for relatively straightforward inferences about cause and effect. Such experiments are commonly used to test the efficacy of new drugs: A randomly selected group of people with a particular illness is given the drug while a second group with the same illness is given a placebo. If a significant portion of the first group gets better, the drug is probably the cause.

But such experiments are not feasible in many real-world settings. For instance, it would be politically and practically impossible to conduct a massive controlled experiment examining what happens when the minimum wage is raised or lowered across a variety of locations. Instead, policy analysts have to rely on “observational data,” or data generated in ways other than through random assignment. And drawing useful conclusions from observational data — which are often muddied by uncontrolled and thus unreliable input — is a challenge beyond the reach of common predictive methods.

Continued in article

The State of Personal Finance, Faculty-Staff Edition:
Survey of campus employees finds professors focus on saving for retirement and doubt their financial literacy; administrative staff worry more about the near term

Jensen Comment
What many workers in general forget is that the Federal Reserve virtually eliminated low risk, safe financial savings that in the past paid upwards of six percent per year in interest and now pay very close to zero interest. This means that savers must take on more financial risk to get decent returns on savings, particularly now that employers are shying away from fixed-benefit retirement plans.

Bob Jensen's free helpers on personal finance are at

I'm a long-time advocate that financial literacy should be added to the common core of skills in higher education. For example, the most common cause in breakdowns in relationships like marriage is ignorance about finance at the heart of relationships.

Sitting Requirements and the CPA Exam
Issues in Accounting Education, Volume 32, Issue 1 (February 2017)


sJared S. Soileau --- Louisiana State University

Spencer C. Usrey  --- The University of Tennessee at Chattanooga

Thomas Z. Webb --- The University of Mississippi


This study examines the association between jurisdictions' CPA exam educational requirements and exam pass rates, scores, and number of candidates from 2006 to 2013. More specifically, we examine provisional candidacy to sit for the CPA exam. Provisional status allows a candidate to sit for the CPA exam prior to obtaining the required number of hours or graduate degree. Our results indicate that while 150-hour exam jurisdictions outperform 120-hour jurisdictions, provisional jurisdictions outperform both 150- and 120-hour jurisdictions for pass rates and average scores. We also find that the number of candidates sitting for the exam is significantly lower for provisional and 150-hour jurisdictions than for 120-hour jurisdictions. Our study contributes to the literature by considering the potential benefits of sitting in provisional jurisdictions and is likely to be of interest to accounting educators, state boards, and public accounting firms.

Bob Jensen's threads on the CPA Examination ---

Analyzing Data for Decision Making: Integrating Spreadsheet Modeling and Database Querying
issues in Accounting Education, Volume 32, Issue 1 (February 2017)


A. Faye Borthick --- Georgia State University

Gary P. Schneider --- California State University, Monterey Bay

Therese R. Viscelli --- Auburn University


Although students begin with a spreadsheet to analyze the effect of a change in credit score cutoff on loan performance on sales, they discover that this approach becomes unwieldy as the analysis becomes more complex. As more attributes from more sheets are required, the spreadsheet solution becomes difficult to implement or audit. The case thus motivates students to develop the database skills of importing the spreadsheet data into a database manager, joining tables, and performing the analysis using database querying. The case requires students to think critically to model the business situation in spreadsheet formulas and database query expressions, structure relationships among the attributes across data tables, and manipulate attributes to achieve the business objective. The case is suitable for courses in accounting systems, managerial accounting, decision making, and database systems. Objective questions are provided for assessing students' ability to analyze transaction records using both spreadsheet and database tools.

Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2015 Edition (one of SSRN's Top 10 Papers)

SSRN, March 21, 2015


Aswath Damodaran --- New York University - Stern School of Business


Equity risk premiums are a central component of every risk and return model in finance and are a key input in estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. In the next section, we look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.

Blast from the Past (Accountics Science in Accounting Research)
An Analysis of the Evolution of Research Contributions by The Accounting Review, 1926-2005 . .
by Jean L. Heck and Robert E. Jensen
Accounting Historians Journal, 2007, Vol. 34, no. 2, pp. 109-142 
Or go to

Blast from the Past

The following links are among the thousands of free book links at

Over 1,000 CPA Questions for Free ---
You need to contact Professor Hoyle for permission to used these questions and answers ---
Note that the questions and answers are not updated for new and revised standards. This is more of a problem for intermediate and advanced accounting than it is for basic accounting. But some IFRS and FASB new and revised standards do impact elementary accounting as well such as in the areas of revenue recognition and inventory accounting and even impairments.

Thousands of Links to Free Books on Accounting ---
Search on various words or phrases such as "accounting," "cost accounting," etc.
Many of these books are very historic and often out of date. Still there are some things that never change in elementary bookkeeping.
The problem illustrations have answers. End-of-chapter problems do not generally provide answers.
Copyrights expired on many of the books. However, for many other books copyrights have not yet expired.

Note that just because a textbook (or other books, journal article, blog article, etc.) can be downloaded for free does not mean the copyright has necessarily expired.

Historical Text Archive---

 Free e-Book Directory ---

Law Schools are Taking Notice
The American Accounting Association published the Fall 2016 issue of the Journal of Legal Tax Research (Vol. 14, No. 2):---

Jensen Comment
This is a slow starter with only two articles in this edition ---

The Consequences of Wynne and a Proposed Congressional Response

Nancy B. Nichols and Blaise M. Sonnier
Abstract | Full Text | PDF (185 KB) 

No Access


What is Economic Income for Corporate Taxation?

Darcie M. Costello and Debra L. Sanders
Abstract | Full Text | PDF (151 KB) 

Nonprofessional Investors’ Reactions to the PCAOB's Proposed Changes to the Standard Audit Report
SSRN. March 9, 2017


Brian Todd Carver Clemson University - School of Accountancy & Legal Studies

Brad S. Trinkle Mississippi State University - School of Accountancy


As part of its efforts to improve the informational value of the standard audit report, the Public Company Accounting Oversight Board (PCAOB) proposed a new auditing standard that would require the auditor to report critical audit matters (CAMs) in the body of the audit report. The proposal met with approval from investor groups, while preparers have suggested the new disclosures could negatively affect the quality of the audit and the informational content of the audit report. This study examines how the proposed standard influences experienced, nonprofessional investors’ perception of the readability of the audit report, their valuation judgments, and their evaluations of management’s credibility. We find that the disclosure of a CAM negatively impacts the readability of the audit report, but does not, either directly or through its effect on readability, incrementally inform investors’ valuation judgments. Instead, investors focused on earnings benchmark performance when making valuation judgements. The disclosure of a CAM does, however, lower investors’ perceptions of management’s credibility when earnings just meet expectations. Our results suggest that the PCAOB’s proposed standard will have a significant, negative effect on the readability of the audit report but only a limited impact on the informational content of the audit report for investors.

Interest Rate Swap Valuation Using OIS Discounting - An Algorithmic Approach
SSRN, February 26, 2017


Oluwaseyi Adebayo Awoga


Companies have traditionally valued their interest rate swaps and other financial instruments using LIBOR. However, at the height of the 2008 financial crisis it became evident that LIBOR, which was once considered a proxy for the risk-free rate was no longer adequate as the benchmark reference rate for valuing financial instruments. LIBOR-OIS spread which had hovered around 50 basis points prior to the financial crisis skyrocketed to over 400 basis points in October 2008 thus leaving companies susceptible to counterparty credit risks. Consequently, experts have proposed and industry regulators have endorsed a "dual curve" interest rate curve construction methodology for valuing swaps that are collateralized and centrally cleared. Further, while a vast quantity of literature exists on the topic of OIS discounting, very few, if any, are dedicated to explaining how to implement the new methodology in a practical and reproducible manner. This essay thus seeks to discuss the algorithmic implementation of OIS discounting by drawing heavily from existing literature and by using the Python programming language. The author hopes that this approach will make the topic more accessible to practitioners and students alike and form the basis for further extending the new method to understanding and solving new risk management and quantitative finance challenges.

Bob Jensen's threads on interest rate swap valuation are at

Why Regulate Private Firm Disclosure and Auditing? Accounting and Business Research
SSRN, March 9, 2017


Michael Minnis University of Chicago - Booth School of Business

Nemit Shroff Massachusetts Institute of Technology (MIT) - Sloan School of Management


Private firms face differing financial dsclosure and auditing regulations around the world. In the United States and Canada, for example, private firms are generally neither required to disclose their financial results nor have their financial statements audited. By contrast, many firms with limited liability in most other countries are required to file at least some financial information publicly and are also required to have their financial statements audited. This paper discusses and analyzes the reasons for differential financial reporting regulation of private firms. We first discuss various definitions of a private firm. Next, we examine theoretical arguments for regulating the financial reporting of these firms, particularly related to public disclosure and auditing. We then provide new survey based evidence of firms’ and standard setters’ views of regulation. We conclude by identifying future research opportunities

Brooks:  The Definitions Of (Tax) Income ---

Neither the FASB or the IASB have a definition of income, the IASB has a five-year plan to work on an income (earnings) and some other undefined financial reporting terms

The standard setters' (IASB and FASB) balance sheet priority over the income statement totally destroyed the concepts of "income" and "earnings."
I'm anxiously awaiting to see the IASB's operational definition of "earnings" underlying the forthcoming definition of EBIT, etc.
One of my main concerns in this definition is the jumbling of legally earned revenues with unrealized value changes.

From the CFO Journal's Morning Ledger on November 3, 2016

IASB evaluating EBIT
The International Accounting Standards Board said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit. The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants, Nina Trentmann reports.

IASB Plans Overhaul of Financial Definitions 

The International Accounting Standards Board, or IASB, which sets reporting standards in more than 120 countries, said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit.

The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants.

The changes will not result in new standards but will require the board to overhaul existing ones.

At the moment, terms like operating profit are not defined by the IASB. The aim is to help market participants judge the suitability of a particular investment.

“We want to give investors the right handles to look at a balance sheet,” said IASB chairman Hans Hoogervorst.

Up until now, International Financial Reporting Standards, known as IFRS, leave companies too much flexibility in defining such terms, which often makes it difficult to compare financials, Mr. Hoogervorst said.

“Even within sectors, there is a lack of comparability,” Mr. Hoogervorst said. This affects both investors and companies, he added.

It is too early to tell what the changes will mean for companies reporting under IFRS, according to Mr. Hoogervorst. “They should be less revolutionary than the introduction of new standards but every change results in work”, he said.

Some firms might find that they have less latitude when reporting financial results, he said. That could mean more work.

Firms that decide against adopting the new IASB definition for ebit, for example, could be required to reconcile their own ebit calculation into one based on the IASB’s definition.

The IASB in 2017 also plans to finalize a single accounting model that would be applied to all forms of insurance contracts.

Besides that, the board will work on updating the system through which filers add disclosures to the electronic versions of their financial statements. The system is updated on a regular basis and the IASB produces an annual compilation of all changes each year.

Earnings, Retained Earnings, and Book-to-Market in the Cross Section of Expected Returns
Chicago Booth Research Paper No. 17-03 44
SSRN, March 1, 2017

Authors (talk about multiple co-authorships)

Ray Ball University of Chicago - Accounting

Joseph J. Gerakos Tuck School of Business at Dartmouth College

Juhani T. Linnainmaa USC Marshall School of Business; National Bureau of Economic Research (NBER)

Valeri V. Nikolaev University of Chicago Booth School of Business


Book value of equity consists of two main parts: retained earnings and contributed capital. Retained earnings-to-market subsumes book-to-market's predictive power in the cross section of stock returns, despite comprising only 42% of book value on average. Contributed capital has no predictive power. Retained earnings represent the difference between accumulated past earnings and accumulated past dividends. We find that the predictive power of retained earnings arises entirely from accumulated past earnings. Our results imply that book-to-market predicts returns because it is a proxy for earnings yield (Ball, 1978). These results cast doubt on the notion that book-to-market identities over- and undervalued securities

Investment Dynamics and Earnings-Return Properties: A Structural Approach (a very long paper)
SSRN, January 12, 2017


Matthias Breuer University of Chicago - Booth School of Business

David Windisch University of Graz - Center for Accounting Research


We propose the standard neoclassical model of investment under uncertainty with short-run adjustment frictions as a benchmark for earnings-return patterns absent accounting influences. We show that our proposed benchmark produces a number of earnings-return relations commonly attributed to accounting influences. In particular, we show that given short-run adjustment frictions and long-run optimal investment behavior, the relation between earnings and returns is naturally concave, as documented by Basu [1997]. We explain the model intuition, estimate its key parameters, test its empirical predictions, and discuss the implications of our proposed benchmark for the accounting literature. We suggest that our benchmark for earnings and return properties absent accounting influences is useful in identifying the incremental effect of accounting after considering first-order economic influences in a wide number of contexts and can, therefore, contribute to the improvement of existing measures of and approaches to identifying accounting-related effects.

Occupational Licensing and Accountant Quality: Evidence from Linkedin
SSRN, January 7, 2017


John Manuel Barrios Jr. University of Chicago - Booth School of Business


I use the staggered state-level adoption of the 150-hour Rule (the Rule) as a natural experiment along with the career histories of professional accountants’ from LinkedIn to examine the effects of mandatory occupational licensure on the individual quality of Certified Public Accountants (CPAs). Using a difference-in-difference and synthetic control research design, I document that the Rule marginally increases CPA exam pass rates and reduced the candidate supply, leading to an overall decline in the number of successful candidates. My analysis of LinkedIn data shows that individuals subject to the Rule are more likely to be employed at a Big 4 public accounting firm and specialize in taxation. However, Rule individuals have the same likelihood of promotion, the same duration until promotion, and exit public accounting at faster rates than their non-Rule counterparts. These findings suggest that restrictive licensing laws reduced the supply of new CPAs while failing to effectively increase the quality of CPAs as measured by their labor market outcomes

Short-Termism and Capital Flows
Harvard Business School Accounting & Management Unit Working Paper No. 17-062, European Corporate Governance Institute (ECGI) - Law
Working Paper No. 342/2017
SSRN, February 11, 2017


Jesse M. Fried Harvard Law School; European Corporate Governance Institute (ECGI)

Charles C. Y. Wang Harvard Business School


During the period 2005-2014, S&P 500 firms distributed to shareholders more than $3.95 trillion via stock buybacks and $2.45 trillion via dividends — $6.4 trillion in total. These shareholder payouts amounted to over 93% of the firms' net income. Academics, corporate lawyers, asset managers, and politicians point to such shareholder-payout figures as compelling evidence that “short-termism" and “quarterly capitalism" are impairing firms' ability to invest, innovate, and provide good wages.

We explain why S&P 500 shareholder-payout figures provide a misleadingly incomplete picture of corporate capital flows and the financial capacity of U.S. public firms. Most importantly, they fail to account for offsetting equity issuances by firms. We show that, taking into account issuances, net shareholder payouts by all U.S. public firms during the period 2005-2014 were in fact only about $2.50 trillion, or 33% of their net income. Moreover, much of these net shareholder payouts were offset by net debt issuances, and thus effectively recapitalizations rather than firm-shrinking distributions. After excluding marginal debt capital inflows, net shareholder payouts by public firms during the period 2005-2014 were only about 22% of their net income. In short, S&P 500 shareholder-payout figures are not indicative of actual capital flows in public firms, and thus cannot provide much basis for the claim that short-termism is starving public firms of needed capital. We also offer three other reasons why corporate capital flows are unlikely to pose a problem for the economy. 

Professionalism and Performance Incentives in Accounting Firms
Accounting Horizone, Volume 31, Issue 1 (March 2017)


Paul J. Coram --- The University of Adelaide

Matthew J. Robinson --- The University of Melbourne


This study investigates the structure of profit-sharing schemes and performance incentives within accounting firms. Accounting firms have a strong historical tradition of professionalism but they are also commercial entities. In particular, the audit function within accounting firms serves an important public interest role. Profit-sharing schemes and performance incentives play a valuable role in managing the tension between commercialism and professionalism. Interviews with partners from all Big 4 firms and four mid-tier firms were conducted to gain insights into details of the firms' profit-sharing schemes and performance incentives. We found that the Big 4 firms have established sophisticated commercial performance measurement systems in an attempt to accurately measure the contributions of individual partners, and a number of these metrics are nonfinancial in nature. The range of partner salaries within firms has increased significantly in recent years, providing a further reason for a greater focus on measuring performance. From our sample of mid-tier firms we found a trend toward similar profit-sharing and performance incentives as currently exist within the Big 4, suggesting mid-tier firms are also moving toward a more commercial business model.

Audit Market Structure and Audit Pricing
Accounting Horizons, Volume 31, Issue 1 (March 2017)


John Daniel Eshleman --- Michigan Technological University

Bradley P. Lawson --- Oklahom State University


Extant literature finds mixed evidence on the association between audit market concentration and audit fees. We re-examine this issue using a large sample of U.S. audit clients covering 90 metropolitan statistical areas (MSAs) spanning 2000–2013. We find that audit market concentration is associated with significantly higher audit fees, consistent with the concerns of regulators and managers. We also find that increases in audit market concentration are associated with fewer initial engagement fee discounts (i.e., reduced lowballing), particularly for non-Big 4 clients. We reconcile our findings with those of prior research and find that our divergent findings are attributable to controls for MSA fixed effects. In supplemental analyses, we find that audit market concentration is associated with higher audit quality. We also find that concentration is associated with higher audit quality for first-year engagements, but only if the auditor does not lowball on the engagement. Our results are relevant to the ongoing debate regarding the consequences of increased concentration within the U.S. audit market (GAO 2003, 2008).

Forum on Auditor Ratification in the March 2017 Edition of Accounting Horizons ---




Introduction and Commentary on Ratification Research Forum

Brian W. Mayhew
Citation | Full Text | PDF (56 KB) 

No Access




Shareholder Votes on Auditor Ratification and Subsequent Auditor Dismissals

Abhijit Barua, K Raghunandan and Dasaratha V. Rama
Abstract | Full Text | PDF (140 KB) 

No Access




Market Reaction to Auditor Ratification Vote Tally

Paul N. Tanyi and Kristin C. Roland
Abstract | Full Text | PDF (167 KB) 

No Access




Auditor Ratification: Can't Get No (Dis)Satisfaction

Lauren M. Cunningham
Abstract | Full Text | PDF (187 KB) 

Michael Porter ---

Blast from the Past
MAAW's Blog:  Porter's 1980 Classic. Competitive Strategy ---

Bad news for the tens of thousands of newly minted lawyers who pass the bar every year and hope to get associate positions at big law firms sorting through documents for corporate clients: Robots are taking your jobs[,] Blommberg reports [JPMorgan Software Does in Seconds What Took Lawyers 360,000 Hours]. ---
Robotics:  The Big Law Massacre Approaches  ---

Standardization Importance Beyond Accounting Standardization ---

How to improve fraud controls in complex accounting areas ---

Advanced calculators for your smartphone ---

SEC Publishes IFRS Taxonomy for Foreign Private Issuers ---

2017:  Will GAAP, IFRS diverge from one another? ---

Four Things to Know About the New Going Concern Auditing Standard ---

Credit bureau Experian will pay a $3 million fine related to giving credit scores to consumers that were not their true credit score.
Peers Equifax and Transunion reached a settlement on similar allegations in January ---

Bob Jensen's Fraud Updates --- 

FinREC exposes 5 revenue recognition issues ---

A framework for continuous auditing: Why companies don’t need to spend big money ---

Wharton:  Will the USA Face a Shortage of Nursing Homes for Baby Boomers?
Capacity of nursing homes is on the decline (think of a changing regulatory climate that causes costs to soar) in the face of demand building up like flood water behind a dam that eventually overflow with gaga old folks.

Jensen Comment
It would seem that some national healthcare plans that fund nursing home care might have more capacity to handle increases in the aging population. However, there are some reports that in nations like Canada and the U.K. the rise in demand for funding long-term nursing care is reaching crisis levels ahead of the USA ---

Quiz:  How well do you know Excel PivotTables?

Blockchain ---

Harvard:  The Blockchain Will Do to the Financial System What the Internet Did to Media ---

Even years into the deployment of the internet, many believed that it was still a fad. Of course, the internet has since become a major influence on our lives, from how we buy goods and services, to the ways we socialize with friends, to the Arab Spring, to the 2016 U.S. presidential election. Yet, in the 1990s, the mainstream press scoffed when Nicholas Negroponte predicted that most of us would soon be reading our news online rather than from a newspaper.

Fast forward two decades: Will we soon be seeing a similar impact from cryptocurrencies and blockchains? There are certainly many parallels. Like the internet, cryptocurrencies such as Bitcoin are driven by advances in core technologies along with a new, open architecture — the Bitcoin blockchain. Like the internet, this technology is designed to be decentralized, with “layers,” where each layer is defined by an interoperable open protocol on top of which companies, as well as individuals, can build products and services. Like the internet, in the early stages of development there are many competing technologies, so it’s important to specify which blockchain you’re talking about. And, like the internet, blockchain technology is strongest when everyone is using the same network, so in the future we might all be talking about “the” blockchain.

The internet and its layers took decades to develop, with each technical layer unlocking an explosion of creative and entrepreneurial activity. Early on, Ethernet standardized the way in which computers transmitted bits over wires, and companies such as 3Com were able to build empires on their network switching products. The TCP/IP protocol was used to address and control how packets of data were routed between computers. Cisco built products like network routers, capitalizing on that protocol, and by March 2000 Cisco was the most valuable company in the world. In 1989 Tim Berners-Lee developed HTTP, another open, permissionless protocol, and the web enabled businesses such as eBay, Google, and Amazon.

The Killer App for Blockchains

But here’s one major difference: The early internet was noncommercial, developed initially through defense funding and used primarily to connect research institutions and universities. It wasn’t designed to make money, but rather to develop the most robust and effective way to build a network. This initial lack of commercial players and interests was critical — it allowed the formation of a network architecture that shared resources in a way that would not have occurred in a market-driven system.

The “killer app” for the early internet was email; it’s what drove adoption and strengthened the network. Bitcoin is the killer app for the blockchain. Bitcoin drives adoption of its underlying blockchain, and its strong technical community and robust code review process make it the most secure and reliable of the various blockchains. Like email, it’s likely that some form of Bitcoin will persist. But the blockchain will also support a variety of other applications, including smart contracts, asset registries, and many new types of transactions that will go beyond financial and legal uses.

Continued in article

PwC’s Other Debacle: A Tax Boondoggle That Has Ballooned Out Of Control ---

Bob Jensen's threads on large auditing firm litigations over past decades (including PwC litigations) ---

SEC:  Taxonomies for XBRL in 2017 ---
Allows companies to use the 2017 XBRL US GAAP taxonomy

Bob Jensen's Threads on OLAP and XBRL ---

EY:  Employers’ presentation of defined benefit retirement plan costs will change ---$FILE/TothePoint_01039-171US_NetPeriodicBenefitCost_10March2017.pdf

What you need to know

• The FASB issued new guidance that will change how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement.

• Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets.

• Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets.

• The guidance is effective for public business entities for fiscal years beginning after 15 December 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The guidance provides a practical expedient for disaggregating the service cost component and other components for comparative periods.

Bob Jensen's Threads on Pensions and Post-retirement benefits: Schemes for Hiding Debt --- 

EY:  SEC proposes requiring the use of Inline XBRL ---$FILE/TothePoint_00974-171US_XBRL_2March2017.pdf

What you need to know • The SEC proposed a rule that would require operating companies and mutual funds to use Inline XBRL and embed tags in their financial statements and their risk/return summaries, respectively, rather than provide this data in separate XBRL exhibits.

The requirement would be phased in over three years for operating companies based on their filing status and over two years for mutual funds based on net assets.

Officers would not have to certify and companies would not need to involve their auditors with the Inline XBRL information, just like XBRL exhibits today.

Comments are due 60 days after the proposal is published in the Federal Register.

Bob Jensen's threads on XBRL ---

EY:  Accounting Pronouncements Effective the First Quarter of 2017 ---$FILE/EffectiveDates_01244-171US_16March2017.pdf

EY:  Presentation on audit automation ---
Thank you Glen Gray for the heads up.

Finding Needles in a Haystack: Using Data Analytics to Improve Fraud Prediction
The Accounting Review,
Volume 92, Issue 2 (March 2017)


Johan L. Perols --- University of San Diego

Robert M. Bowen --- University of San Diego

Carsten Zimmermann --- University of San Diego

 Basamba Samba --- RWTH Aachen University


Developing models to detect financial statement fraud involves challenges related to (1) the rarity of fraud observations, (2) the relative abundance of explanatory variables identified in the prior literature, and (3) the broad underlying definition of fraud. Following the emerging data analytics literature, we introduce and systematically evaluate three data analytics preprocessing methods to address these challenges. Results from evaluating actual cases of financial statement fraud suggest that two of these methods improve fraud prediction performance by approximately 10 percent relative to the best current techniques. Improved fraud prediction can result in meaningful benefits, such as improving the ability of the SEC to detect fraudulent filings and improving audit firms' client portfolio decisions.

Tom Selling:  The Asset Impairment Song and Dance (Part 2 of 2)

My latest post was about general problems with asset “impairment” accounting —  its absurdity, high cost and dubious information value.  And I haven’t even begun to hone in on the wurst part: goodwill impairment.

Continued in article

Jensen Comment
First the humor. I don't know if Tom, like me, in our advancing years is using more "phonix/fonicks" or if he really means that goodwill impairment is part of a German lunch. Tom proofreads more carefully than me so I have to assume that he intended goodwill to be part of a German lunch along with the cheese and beer.

Second and not so humorous is that Tom still seems to be overly reliant on normative (bell jar) anecdotal reasoning without at referencing what academic research is available on his topics of interest.

In the above cited post Tom focuses on Exxon and is very critical. Perhaps this is justified in this recent Exxon impairment reporting. However, one problem with case method research is that cases often deal with particular circumstances and conclusions that do not extrapolate well to other circumstances. In other words Tom is prone to cherry picking anecdotal evidence that is useful to his normative reasoning  but always suspect in academic research.

Take impairment for example.
There's a considerable amount of academic accounting and finance research on impairment, some of which is worthy of his consideration at least for referencing in his posts when the conclusions are somewhat contrary to Tom's reasoning in anecdotes. For example

Take for example the following research study that I posted previously on the AECM.

"Implications of Impairment Decisions and Assets' Cash-Flow Horizons for Conservatism Research
The Accounting Review, Volume 92, Issue 2 (March 2017)


Rajiv D. Banker --- Temple University
Sudipta Basu --- Temple University
Dmitri Byzalov --- Temple University


Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments.

Once again I urge Tom to cite more academic research in his posts.

Having said this there are times when I do agree with Tom's conclusions (certainly not always).

The Asset “Impairment“ Song and Dance (Part 1 of 2)," by Tom Selling, The Accounting Onion, February 28, 2017 ---


Jensen Comment

The above article touches on goodwill impairment although ti focuses more on asset impairment in general (with Exxon's recent impairment charge for oil reserves as an illustration).

Tom has a succession of archived Onion posts criticizing the booking of purchased goodwill and the accounting for it afterwards (including write downs for "impairment" ----

In doing so he proposes a solution with a broad brush that has some promise.

A Proposed Solution

In olden days, the British permitted a charge to contributed capital for the amount that would otherwise have been recognized as goodwill.  While imperfect, it may well be the only reasonable solution to the problem; for as I have shown above, there can be no perfect solution.  If you can't describe what something is, than what possible good can come from purporting to measure it?
"What Good Comes from Goodwill Accounting," by Tom Selling, February 18, 2008.

Jensen Comment
I'm inclined to agree with Tom on accounting for purchased goodwill. The problem with booking of purchased goodwill is that it puts assets (possibly liabilities?) on the books that accountants don't traditionally book such as the value of human resources and other intangibles that accountants cannot reliably measure except when they are purchased in exchanges --- paying for them with items that can be measured (such as cash purchase prices). Personally, I've never liked putting the ambiguous purchased "goodwill" on the books, because purchase price is subject to a lot of error (Tom provided us with a number of real-world examples over the years such as Caterpillar's purchase of ERA Mining Machinery Limited). Even worse, companies that retain this type of "goodwill" and do not sell it have financial statements that are no longer comparable with financial reports of companies that acquired purchased goodwill.

Tom's contributed capital booking solution on the date goodwill is "acquired" is admittedly not a perfect solution, but I'm inclined to think is the best of the worst alternatives. I disagree with Tom on many accounting theory issues, but I'm inclined to lean his way on this one. I'm not yet convinced that he's correct about other issues of "impairment" on items other than purchased goodwill (such a impairments in values of oil reserves). But that's an issue for another day.

There are a lot of missing details in Tom's "proposed solution," but I like his initial 2008 suggestion.

Charles Mulford ---

Charles Mulford:  What’s Behind Financial Statement Placement Order?

Other Reports from Georgia Tech's Financial Analysis Lab ---

The IRS Scandal, Day 1410: Judicial Watch Forces Disclosure Of More Documents ---  ---

. . .

The corruption at the IRS is astounding. Our attorneys knew that there were more records to be searched, but the Obama IRS ignored this issue for years.

Remember that in July 2015, we released Obama IRS documents confirming that the agency used donor lists of tax-exempt organizations to target those donors for audits. The documents also show that IRS officials specifically highlighted how the U.S. Chamber of Commerce may come under “high scrutiny” from the IRS.

In September 2014, another JW FOIA lawsuit forced the release of documents detailing that the IRS sought, obtained, and maintained the names of donors to tea party and other conservative groups. IRS officials acknowledged in these documents that “such information was not needed.” The documents also show that the donor names were being used for a “secret research project.” The Obama IRS scandal continues, and President

Continued in article

Jensen Comment
IRS former manager Lois Lerner confessed to targeting conservative fund raising groups and apologized for her illegal actions when resigning from the IRS. But she still refuses to testify under oath whether the orders to target conservative fund raising groups came from the White House.

This makes me wonder how the White House with or without permission of any President could order the Secret Service to conduct illegal surveillance on a presidential opponent. Remember the Secret Service "protects" both Democratic and Republican candidates. One Service Agent alleged she would take a bullet for candidate Hillary Clinton but not candidate Donald Trump. This sort of makes me wonder if she would also would've conducted surveillance on Donald Trump at the behest of the White House

David Giles:  March Econometrics Reading List ---

Here are some suggestions for your reading this month:  

Coble, D. & P. Picheira, 2017. Nowcasting building permits with Google trends. MPRA Paper No. 76514.

Mullahy, J., 2017. Marginal effects in multivariate probit models. Empirical Economics, 52, 447-461.

Pagan, A., 2017. Some consequences of using "measurement error shocks" when estimating time series models. CAMA Working Paper 12.2017, Cantre for Macroeconomic Analysis, Australian National University.

Reed, W. R. & A. Smith, 2017.A time series paradox: Unit root tests perform poorly when data are cointegrated. Economics Letters, 151, 71-74.

Zhang, L., 2017. Partial unit root and surplus-lag Granger causality testing: A Monte Carlo simulation study. Communications in Statistics - Theory and Methods, online.

How to Mislead With Statistics

IMA releases salary survey for management accountants  ---

Jensen Comment
When you are in the business of selling or otherwise promoting a certification examination it's very easy to mislead with survey statistics. The most misleading part of the study is controlling who takes the examination. For example, these days virtually all people who pass the CPA examination have masters degrees (although technically only 150 hours of specified college credits are required). It's even more misleading to pass requirements to finally become a certified brain surgeon. The dummies who might skew the outcomes downward have mostly been eliminated by prerequisites to take the certification examinations.

The CMA and CGMA are not quite so restrictive regarding who is eligible to take the certification examination. But there are subtle ways where thousands of employees self-select not to take the examination and hundreds of others self-select to become certified.

My point is that the college graduates who take the CFA, CPA, CMA, CGMA, IIA, and the many other relatively prestigious certification examinations are probably graduates who are going to earn more compensation with or without becoming certified. These folks are sometimes, but not always, both the brightest graduates in their disciplines and the most motivated to earn higher compensation. This is especially the case when certifications are gravy not required for working in a discipline such as when the CMA is not required to advance as a managerial accountant and IIA certification is not required to advance as an internal auditor.

Why do employees take voluntary certification examinations not required for advancement in their careers?
 I think that often it's to often become noticed among the crowd on employees not certified. Sometimes it's to make up for having a less prestigious college diploma. If you graduated from the University of Phoenix and are working among employees with more prestigious diplomas you may feel compelled to stand out in other ways.

What's my main point?
The point is that spurious correlation creeps into analyses that attribute success to some badge of accomplishment such as graduation from college, passage of a certification examination, etc. This is especially the case when the badge is not required for advancement along a particular career path. For example, an auto dealership is going to know which mechanics are the best mechanics irrespective of their badges of professional accomplishments. Chances are the best mechanics also were so highly motivated that they earned those badges. But it's misleading to attribute their higher compensation to the fact that they earned the badges. The higher compensation is due to other causal factors such as talent and motivation.

I think back to my middle school years when I worked part-time washing cars, waxing cars, and sanding cars due for new paint jobs.
The highest paid mechanic in the dealership was a old German immigrant who spoke broken English with a heavy accent. He was a master mechanic, especially when repairing automatic transmissions, who would not have benefited one penny more in pay with badges or certifications in mechanics. He was paid a huge hourly wage for the times because he was so good at the technical aspects of his work on the job. If he elected, just for the pats on the back. to earn some General Motors certifications in mechanics he would be the highest paid mechanic in the dealership, but it would be a statistical mistake to attribute his huge huge hourly wage to his GM badges.

Four Key Risk Areas Internal Auditors Can’t Overlook ---

New GASB Standard Addresses Wide Range of Practice Issues ---

What Does Trump’s Released Tax Return Really Show?

SEC:  Executives Charged With Manipulating Company's Accounting Systems to Steal Money ---

Bob Jensen's Fraud Updates ---

Arthur Andersen returns to the world stage with global offices (including new offices in the USA)  ---

Jensen Comment
It's not clear if and when those services will include financial reporting audit services. In the late 1990s the two words "Arthur Andersen" became synonymous with "Auful Auditors). Before the firm  imploded having Andersen as an auditor was shown to raise a client's cost of captital ---

Names can be important in law. Down the road from me is a beautiful small hotel that was called the Sunset Hill House Hotel before it went bankrupt. When it was sold by the bank to new owners, those new owners changed the name to Inn on Sunset Hill. They tell me the reason for the name change was to avoid having to honor old financial obligations of the Sunset Hill House Hotel.  For example, the new owners did not want to have to honor discount coupons and lifetime golf memberships of the former Sunset Hill House Hotel ---

FASB New Not-for-Profit Standard: Maintaining Auditor Independence ---

Although the Financial Accounting Standards Board’s new not-for-profit financial reporting standard (ASU 2016-14) does not go into effect until 2018, it includes significant changes that both not-for-profits and auditors should begin preparing for now.  

ASU 2016-14 will require several modifications to the existing framework of the financial statements as well as new required disclosures related to liquidity, availability of assets and board-designated net assets. Further, it may require organizations to revise certain policies and procedures, update financial reporting practices and make net asset accounting adjustments. All of this could seem overwhelming.

- See more at:

If you are an auditor, many of your clients may reach out to you for help and guidance. During a recent Not-for-Profit Section webcast on the new standard, there were many questions about how auditors can help their clients navigate through these changes while maintaining independence. As such, here are some basic guidelines regarding the assistance auditors can provide through this transition, and which activities would be prohibited and impair independence.

In general, independence rules typically do not prohibit auditors from providing routine technical assistance, training, and guidance on best practices. Assisting management with preparing the financial statements, account reconciliations and other bookkeeping services, are considered nonattest services. These services require that auditors put certain safeguards in place to protect independence. The underlying principles of AICPA Code of Professional Conduct section 1.295, Nonattest Services, are that auditors cannot function as management, make management decisions or audit their own work. As such, activities such as designing, implementing and monitoring internal controls and information systems, and assuming management responsibilities, are strictly prohibited for attest clients. Before performing any nonattest services, the auditor should document the objectives of the engagement, and the client’s acceptance of its responsibility for the results of the nonattest service, in the engagement letter or internal firm file.

With proper considerations, there are several areas wherein auditors could help clients implement FASB’s new not-for-profit financial reporting standard. These are outlined below:

Proactively keeping clients informed and educated about the new reporting requirements and providing training opportunities.

Preparing the financial statements to incorporate changes for net asset classifications and drafting the new required disclosures based on information provided by management.

Helping management prepare any net asset reclassification entries that may be required. If an organization has underwater endowments that have previously been netted with unrestricted net assets (now net assets without donor restrictions according to ASU 2016-14), these will need to be reclassified to be netted with net assets with donor restrictions. In addition, if an organization previously had a policy to imply a time restriction on donations of, or contributions restricted for the purchase of, property and equipment, any remaining restricted net assets will need to be reclassified retroactively to net assets without donor restrictions.

Being available to address compliance questions and periodically check in on the implementation process.

Independence is considered impaired when auditors are acting as management. As such, any decisions about financial reporting policies and changes to internal controls should be made by management and not the auditors. Although auditors may advise on these matters, the following are areas related to the new standard that should be addressed by the not-for-profit’s management:  

The financial statements will require disclosure of all board designations and similar self-imposed limits on net assets without donor restrictions. As such, management should establish or update policies and practices related to such designations on net assets and make sure any designations are adequately documented.

Not-for-profits will now be required to add disclosure regarding how they manage liquidity and information about the availability of financial assets to meet cash flow needs. This could require organizations to establish methods for tracking this new information within the financial reporting process.

Not-for-profits should update endowment spending policies, as the financial statements will require disclosures of policies for appropriating funds from underwater endowments.

So go ahead and get the conversation started! It will be important for not-for-profits and auditors to be resourceful with each other. This will help minimize disruptions to processes that major reporting changes like this can cause and help ensure a smooth and successful implementation.

- See more at:

Islamic finance aims for easier sukuk investment with proposed new (accounting) standards ---

Bob Jensen's threads on Islamic accounting ---

Robert Preacher ---
Note the criticism section

Book::  The Socionomic Theory of Finance (challenges the conventional view of causality)+---
by Robert Prechter

Quotation from the Book's Cover

The socionomic theory of finance (STF) is a subset of the larger field of socionomics. Two of my previous books concentrated on socionomic theory overall, whereas this book focuses mainly on STF.

To put this volume in perspective: It is not just another book challenging conventional economic theory on the subjects of finance and macroeconomics; it is a book about what should replace it. It is not another book updating the age-old observation that investors are emotional; it is a book about the origin of those emotions. It is not another book about occasional investor irrationality; it is a book about contexts accommodating rational or impulsive thought. It is not another technical analysis book about interpreting financial market sentiment; it is a book about why there is even such a thing as financial market sentiment. It is not another book about market psychology; it is a book about psychology’s role in financial and social causality. It is not a how-to book about the craft of social futurism; it is a book about the primary cause of the social future.

Part I of this book dispenses with the ideas of exogenous cause and rational reaction in financial pricing.

Parts II through V introduce socionomic theory and explain the fundamentals of STF.

Parts VI through VIII expand the scope of the discussion. When pertinent, headers provide original composition dates for contributors’ chapters previously published elsewhere. I have edited them to fit smoothly into this book.

Quotations from news articles are excerpted and sometimes re-arranged for conciseness; ellipses are sometimes omitted for ease of reading. Parts of quoted publications are underlined or italicized for emphasis. All sources are cited if you want to access the originals.

With deepest gratitude, I (the author) would like to acknowledge Wayne Parker, Kenneth Olson, Alan Hall, Mark Galasiewski, Brian Whitmer, Wayne Gorman, Chuck Thompson, John Nofsinger, Euan Wilson and Dave Allman for their contributions to this book. Special thanks go to Matt Lampert for his contribution and for playing economists’ advocate, prompting an expansion of Chapter 12, and to Mark Almand for his contribution, editing suggestions and the initial idea for Chapter 39. Thanks also to Angela Hall for charts and production, Sally Webb for production and layout, Ohki Komoto for the rear flap photo and Pam Greenwood for collaborating on the dust jacket design. My co-authors and I are deeply indebted to the valiant souls who have stepped forward publicly to endorse this effort. Without their courageous support, the book may not be afforded the opportunity to find an audience.

Continued on book cover

Jensen Comment
This may be an outstanding book that I've not yet read. But in general I'm suspicious of Amazon reviews that all have five stars.

Even Moby Dick has Amazon reviews that range from 1-4 stars as well as plenty of 5-star reviews.

Please let me know the links to noteworthy reviews of this book.

This Week from Economist magazine

This week we have two covers. In Europe we ask what can be done to fix the European Union. As leaders gather to celebrate the club’s 60th anniversary, the project is in trouble. If it is to survive, the EU must become a lot more flexible

In the rest of the world our cover examines the extraordinary
expectations surrounding Amazon. Never before has a company been worth so much for so long while making so little money. If it fulfils its ambitions, it may attract the attention of an even stronger beast: government.

From the CFO Journal's Morning Ledger on March 29, 2017

In India, China’s way ahead of Western competitors.
As the U.S.’s top tech brands ramp up operations in India, they are running into unexpected resistance: their Chinese equivalents stepping in to bolster their Indian competitors with billions of dollars in investments and expertise.

Jensen Comment

The article fails to mention the enormous emerging market in Border-Tax Crying Towels.

From the CFO Journal's Morning Ledger on March 29, 2017

Brexit could have ‘significant implications’ for IFRS adoption: FRC
The Financial Reporting Council pledged to collaborate with other supervisors to deal with the impact of Brexit, Nina Trentmann reports. One of the bodies the FRC plans to continue working with is the IASB, the setter of International Financial Reporting Standards. “Brexit could have significant implications for the adoption of IFRS,” a statement by the FRC read.

From the CFO Journal's Morning Ledger on March 29, 2017

U.S. Concrete CFO leaves, auditor dismissed after material weakness notice
U.S. Concrete Inc.
may be looking for a new finance chief after disclosing a material weakness in internal controls two years in a row, Rheaa Rao writes

Have your students debate how they would book and report these two classes of GM stock?

From the CFO Journal's Morning Ledger on March 29, 2017

Investor David Einhorn is pressing General Motors Co. to create two classes of common stock that would separate its dividend from its operations, a novel proposal designed to invigorate a stock that has languished despite rising sales and profits, David Benoit and Mike Colias report.

Mr. Einhorn, founder of hedge fund Greenlight Capital Inc., on Tuesday publicly called on the auto maker to split its common stock into two classes: one that pays dividends and a second that would entitle its holders to all additional earnings.

His theory is that the two classes of stock would attract new yield-hungry investors and those looking for growth. The increased demand for the stocks, Mr. Einhorn said, could boost the auto maker’s $52 billion market capitalization by as much as $38 billion. GM rejected the proposal, saying it “creates an unacceptable level of risk,” including the potential loss of its investment-grade credit rating.

It also cited “unknown and uncertain market demand” for the proposed shares and raised concerns about governance challenges that could arise from having two groups of shareholders with competing interests. GM shares rose 2.5% to $35.56 Tuesday, a sign that investors are hopeful the campaign will produce gains in the stock.

From the CFO Journal's Morning Ledger on March 28, 2017

 U.S. Supreme Court to look into disclosure failures
The U.S. Supreme Court agreed to consider whether publicly traded companies can be sued for securities fraud by third parties for omitting “known trends or uncertainties” in filings to shareholders.

From the CFO Journal's Morning Ledger on March 28, 2017

Border-adjusted tax could hurt U.S. consumers: Dyson. Dyson Ltd., a British manufacturer of vacuum cleaners, hopes the U.S.—its single most important market—won’t move forward with introducing a border-adjusted tax, as suggested by House Republicans, Nina Trentmann reports. “I hope that does not happen,” said the company’s founder, James Dyson. “This is not free trade.” The proposals made by President Donald Trump and Republican legislators were “very complex,” Mr. Dyson said. With the firm producing solely in Singapore and Malaysia, a potential import tax could hurt Dyson as well as American consumers, Mr. Dyson said.Je

Jensen Comment
Think about how complicated this becomes for businesses and investors and labor. Take shoes for example. Most shoes sold in the USA are made in other nations, usually nations with relatively low labor costs. It would take a huge amount of capital and labor training to build new shoe factories in the USA because of the border-adjustment tax. But how long will this tax remain in effect before imported shoes once again are more competitive than domestic factory shoes? How long before the USA rescinds most or all of the border-adjustment tax? Trump has only a thin margin of bipartisan support for this tax. Elections in 2018 and 2020 may greatly erode this tax that, in my viewpoint, is an economic disaster.

Personally I doubt that we will see a huge resurgence of shoe factories in the USA because of this tax. In the meantime consumers will simply be paying much more for shoes because of the tax. And many types of popular shoes are really not repairable such that demand for shoes will not significantly decline due to higher prices.

Hedges that don't qualify for hedge accounting are accounted for as speculations
FASB's Forthcoming Rule Changes on Hedge Accounting

From the CFO Journal's Morning Ledger on March 28, 2017

One of the most Byzantine areas of corporate accounting is about to get simpler. The Financial Accounting Standards Board is putting the finishing touches on new rules governing how companies report their hedging activities, such as using futures and options to insulate profits from currency or interest-rate swings, Tatyana Shumsky writes.

Current rules allow companies to delay recording the economic impact of a hedge on their income statement until the same period as the transaction involved is completed. This typically results in less volatile earnings quarter to quarter.

The FASB’s proposal aims to give companies more time to meet the strict documentation requirements needed to qualify for hedge accounting. The new rules also expand its application to a broader range of circumstances, simplify the way hedges are recorded and offer relief for companies that made small errors in applying the rules.

At stake for companies is the treatment of futures, options and other derivatives worth billions of dollars that don’t currently qualify for hedge accounting. “It will simplify the documentation process, saving us time and money.” said Thomas Timko, vice president, controller and chief accounting officer at General Motors Co.

Bob Jensen's helpers, a huge glossary, and tutorials on hedge accounting are at ---

Where the Japanese and Germans Are Winning the Robotics Competitions
From the CFO Journal's Morning Ledger on March 27, 2017

For Vickers Engineering Inc., the past decade has been a successful one. The New Troy, Mich., company supplies parts to clients including Toyota Motor Corp. and Volkswagen AG, and exports to Canada and Mexico. Its staff numbers have increased fivefold, while average pay doubled.

Vickers’s success is based on industrial robots. On Japanese and German robots, to be more precise. “We were not aware of any American-made option,” says Chief Executive Matt Tyler. Vickers isn’t the only manufacturer struggling with the lack of supply of U.S.-built robots. As Daniel Michaels reports, America is losing the battle to supply the kind of cutting-edge production machinery that is powering the new automated factory floor, from digital machine tools to complex packaging systems and robotic arms.

Commerce Department data show the U.S. last year ran a trade deficit of $4.1 billion in advanced “flexible manufacturing” goods with Japan, the European Union and Switzerland, which lead the industry. That is double the 2003 deficit. It was down from $7 billion in 2001, but much of the decline came from foreign equipment suppliers expanding in the U.S., not from an American comeback.

The trade gap presents a conundrum for President Donald Trump, who wants the U.S. to manufacture more and import less. He has criticized makers of cars, air conditioners and farm equipment for moving production abroad. Companies have responded by touting investments in U.S. factories. Yet a resurgent U.S. manufacturing sector would fuel more equipment purchases from foreign firms, because companies have little other choice.

Repo Madness
From the CFO Journal's Morning Ledger on March 24, 2017

MF Global, PwC settle malpractice lawsuit
MF Global Holdings Ltd.
and PricewaterhouseCoopers LLP have settled their accounting malpractice lawsuit in which the brokerage alleged that poor advice from PwC contributed to its collapse in 2011. Terms of the settlement weren’t disclosed.

From the CFO Journal's Morning Ledger on March 24, 2017

Amazon defeats IRS in tax-court case Inc.
has won a $1.5 billion dispute against the IRS over its transactions with a Luxembourg subsidiary.  The U.S. Tax Court ruled that the Internal Revenue Service made “arbitrary determinations and abused its discretion in several instances.”

Towns, counties, and states in the USA are making generous deals to attract businesses
From the CFO Journal's Morning Ledger on March 17, 2017

From the CFO Journal's Morning Ledger on March 16, 2017It used to be places like Mexico or China that lured U.S. businesses away. These days, however, the competition oftentimes comes from across the street, from neighboring counties and towns which offer better incentives and lower corporate and individual income-tax rates, writes Ruth Simon.

The race to woo companies has intensified as state and local governments struggle with a slow economic recovery, sluggish new business formation and job losses resulting from automation. Many older industrial cities see tax incentives as one of the few levers they can pull.

The fight to attract and retain companies “is probably as competitive as it has ever been in the 30 years I have been doing this type of work,” said Lawrence Kramer, managing partner with Incentis Group LLC, a consulting firm.

Economic-development tax incentives more than tripled over the past 25 years, offsetting about 30% of the taxes the companies receiving incentives would have otherwise paid in 2015, compared with about 9% offset in 1990, according to an analysis of incentives covering more than 90% of the U.S. economy.

From the CFO Journal's Morning Ledger on March 16, 2017

SEC OKs GAAP taxonomy
The Securities and Exchange Commission has given its approval to the 2017 GAAP Financial Reporting Taxonomy, the annually updated set of accounting standards built using computer-readable tags, Accounting Today reports.

A Current Example of Convertible Debt to Use in Your Financial Accounting Course

From the CFO Journal's Morning Ledger on March 16, 2017

Tesla raises additional funds for Model 3
Tesla Inc.
said it is on track to launch a more affordable car this year, but it needs to raise $1 billion to make sure it happens. The electric-vehicle maker said Wednesday it is offering $250 million in common stock and $750 million in convertible notes to strengthen its balance sheet amid a ramp-up of Model 3 production.

Jensen Comment
A billion here and a billion there and pretty soon you have an affordable electric car. However, now that most other manufacturers either offer or offer electric cars at lower prices than the Tesla Model S Elon Musk will be facing some stiff competition.  Because of limited range (200-300 miles) electric cars are pretty much limited to buyers that have at lease one gasoline car and can afford a higher priced second car. Given the huge number of days that we've had this winter that have mornings ranging from -10F to 15F there's not much of a market in colder climates were electric car battery efficiency is low and bleak prospects for new electric car technologies for colder climates.

One disadvantage Tesla faces is that its electric car competitors (like GM, Ford, Volvo, BMW, Mercedes, etc.) have worldwide networks of dealers.

Where do you haul a dead Tesla for a naive buyer in Great Falls, Montana? I've heard that for show Tesla will occasionally send a mechanic to a remote location. But that's not a viable solution for all breakdowns around the world.

What irks me is that electric cars not only get taxpayer subsidies, they also pay nothing toward the roads and bridges they drive on. Oregon is an exception where electric car owners pay a small amount of road tax.

From the CFO Journal's Morning Ledger on March 15, 2017

Wal-Mart Mexico plans to invest big time
Retailer Wal-Mart de Mexico SAB said Tuesday it plans to increase its capital expenditures by a fifth this year, with investments in opening and remodeling stores and bolstering the firm’s logistics and online commerce.

From the CFO Journal's Morning Ledger on March 14, 2017

Trivago NV ramps up U.S. GAAP expertise after material weakness disclosure
The European travel company will phase out reliance on external accounting help this year, Nina Trentmann and Tatyana Shumsky report. In a filing with the U.S. Securities and Exchange Commission last week, it said it had “limited accounting personnel and other resources” prior to its initial public offering in December.

From the CFO Journal's Morning Ledger on March 13, 2017

Credit reports to exclude negative information
Tax liens and civil judgments soon will be taken off people’s credit reports, the latest move to omit negative information from the powerful financial scorecards. The decision by the three major credit-reporting firms— Equifax Inc., Experian PLC and TransUnion—could help boost credit scores for millions of U.S. consumers, but could pose risks for lenders.

Mortgage landscape worries some analysts Some analysts are concerned risky borrowers are taking out an increasing share of mortgages backed by the Federal Housing Administration and delinquencies are rising. The share of FHA mortgage payments that were 30 to 59 days past due in the fourth quarter rose to 2.19%, up from 2.13% a year earlier ---

From the CFO Journal's Morning Ledger on March 13, 2017

U.S. extends leniency program for companies disclosing bribery
The U.S. Justice Department will extend a pilot program designed to entice companies to self-report bribery problems, an official said. The program gives a 50% discount to the bottom fine imposed under the U.S. Sentencing Guidelines for companies violating the Foreign Corrupt Practices Act if those companies self-disclose wrongdoing, fully cooperate with investigators and disgorge ill-gotten profits

From the CFO Journal's Morning Ledger on March 13, 2017

Good morning. With the Federal Reserve expected to raise rates this week, finance chiefs increasingly look at transferring their pension risks to insurance companies, Leslie Scism reports. Higher rates generally make it less expensive for employers to offload pension obligations.

The trend, led by companies such as General Motors Co., is forecast over time to transform the management of pensions for employers, resulting in less exposure to the fluctuations of the stock and bond markets. Taking over corporate pension plans, the insurance industry gains a source of growth at a time of declining revenues.

“If interest rates go up…there definitely will be a lot [of employers] lining up to do this,” said Robin Diamonte, chief investment officer of United Technologies Corp. The Connecticut manufacturer signed a $775 million deal in October to transfer about 35,000 pension-plan participants to the care of Prudential Financial Inc.

But firms willing to transfer their pension obligations often have to adjust their mix of assets backing the obligations, as insurers generally only want bonds. Rising life expectancy, on the other hand, poses a risk to insurers. Depending on whether retirees live shorter or longer lives than originally forecast, they are set to reap greater profits—or, if things turn out differently, may have to tap other financial resources.


From the CFO Journal's Morning Ledger on March 8, 2017

Two former finance chiefs say loosening the Sarbanes-Oxley corporate governance law is a bad idea. They should know—it’s the legislation that helped send them to jail, Tatyana Shumsky writes.

Aaron Beam and Weston Smith both went to prison in 2005 as part of the $2.7 billion accounting scandal at medical facility operator HealthSouth Corp. Now the pair, along with a former Federal Bureau of Investigation agent, are warning finance executives about ethics and compliance risks related to fraudulent accounting activities.

“Shining the light on it, raising public awareness of these types of things, I think it makes it better,” said Mr. Beam. The trio is speaking on Thursday to the New York chapter of Financial Executives International, a professional group. Mr. Smith was one of the first executives to go to prison under the Sarbanes-Oxley rules, which were enacted in 2002, because he signed off on false financial statements.

Congressional Republicans are now aiming to loosen a provision of Sarbanes-Oxley that requires an independent auditor to evaluate a public company’s internal controls of financial reporting and attest to their effectiveness. Those rules are under threat from the Financial Choice Act introduced last year by Jeb Hensarling (R., Texas), the chairman of the House Financial Services Committee.

From the CFO Journal's Morning Ledger on March 8, 2017

Cutting the U.S. corporate tax rate seems to be an enticing prospect for investors. At 35%, the country’s corporate tax rate is among the world’s highest. President Donald Trump has suggested dropping it to 15%, while a plan by House Republicans would lower it to 20%.

Nevertheless, the boost to corporate profits might not be quite as big, or come as soon, as investors hope, Justin Lahart writes for Heard on the Street

For a start, only a few large public companies pay the statutory rate. According to Goldman Sachs, the effective tax rate for companies in the S&P 500—which includes not just federal, but also state and local taxes—is 28%. Under the House plan, the bank figures it would drop to 24%, boosting after-tax earnings by about 10%.

Lower taxes would reduce companies’ cost of capital, which as a result makes investment more attractive. Some of the tax cut could thus end up going toward buying new equipment, while some would be spent on salaries. A lower corporate tax rate also might convince some companies to reassess their use of tax havens

From the CFO Journal's Morning Ledger on March 7, 2017

AICPA presses Senate on tax treaties
The American Institute of Certified Public Accountants is asking the U.S. Senate to quickly consider and approve various bilateral income-tax treaties and protocols that are currently pending in Congress, although some of them have not seen any progress in years, Accounting Today reports.

From the CFO Journal's Morning Ledger on March 7, 2017

Companies grapple with an accountant shortage as regulations change, Vipal Monga writes in today’s Business & Finance section. Businesses are increasingly scrambling to find regulatory experts or “technical accountants” who understand rules and ensure compliance amid accounting changes to the generally accepted accounting principles that govern U.S. financial reporting.

Increasingly, companies are competing for talent with major accounting and audit firms that had once served as a reliable pipeline for corporate finance back offices. Some firms are attempting to change their work culture to retain talen

The shrinking pool of available accountants is putting pressure on companies as they begin to apply new Financial Accounting Standards Board rules. The changes affect the way firms book revenue and report the value of leases held on their balance sheets.

The rules don’t take effect right away: Public companies must apply new revenue standards for fiscal years beginning after Dec. 15, and new lease rules begin in 2019. Still, corporations must assess and revise two years of past financial reports. “There is a demand for technical expertise, absolutely,” said Robert Grecco, controller at luxury fashion brand Ralph Lauren Corp. “And that demand is only going to increase.”


From the CFO Journal's Morning Ledger on March 1, 2017

General Motors Co. on Monday said it had agreed to sell its European operations, taking a charge of at least $4 billion, as the U.S.’s biggest auto maker withdraws from a region where it hasn’t made money for almost two decades,
Nick Kostov and Eric Sylvers report

GM will be liable for much of Opel’s pension obligations, estimated at as much as $10 billion by analysts, which had been a major sticking point during negotiations. GM said it would take an accounting charge of $4 billion to $4.5 billion in connection with the transaction. Still, the U.S. auto maker said the deal would free up about $2 billion in cash, which it plans to use for share buybacks.

From the CFO Journal's Morning Ledger on March 1, 2017

IRS goes after offshore earnings, transfer pricing
The Internal Revenue Service has put companies on notice: It is targeting offshore earnings and transfer pricing as part of a new audit push. The federal tax collector highlighted the two issues last month in connection with a new series of 13 audit “campaigns,” as opposed to the broader approach it has historically taken. The IRS changed its approach as it struggles with a shrinking budget, Vipal Monga reports.

From the CFO Journal's Morning Ledger on March 1, 2017

SEC, States probe Fiat Chrysler for emissions cheating
U.S. securities regulators and several states are investigating whether Fiat Chrysler Automobiles N.V. improperly manipulated some vehicles to allow them to spew excess diesel emissions, the auto maker said in a regulatory filing Tuesday.

Jensen Comment
What may be worse, Consumer Reports claims that Chrysler automobiles like Fiats and Jeeps are the least reliable vehicles you can purchase.

From the CFO Journal's Morning Ledger on March 1, 2017

FASB updates accounting standards for employee benefit plans.
The Financial Accounting Standards Board released an accounting standards update aimed at improving financial reporting for an employee benefit plan’s interest in a master trust, Accounting Today reports. 

Going Concern ---

Four Things to Know About the New Going Concern Auditing Standard ---

Teaching Case Writing Challenge: Sears Going Concern Warning in Its 2016 Annual Report

Sears Stock Stumbles After Going-Concern Warning ---

Jensen Comment
You might assign teams of students to write going concern cases. One such case could be the 2016 annual report for Sears. One thing to address is the neutrality issue of a going concern decision.

Standard setters attempt to write accounting standards that are "neutral" in the sense that the standard itself is as neutral as possible on portfolio decisions. Of course complete neutrality is impossible, but there are some standards that are more neutral than others. One of the most challenging standards in this regard is a going concern financial reporting and auditing standard. The mere decision by an auditing firm to require a going concern warning in a client's annual report may in and of itself hasten the bankruptcy declaration of the client.

Another thing to focus in when writing a going concern case is how accounting measurement rules change for firms that have going concern warnings in the annual reports.

An Earlier Illustrative Teaching Case on Going Concern Accounting
Teaching Case on Going Concern Accounting
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

Executive Responsibility For 'Going Concern' Disclosures Increases
by: Emily Chasan and Maxwell Murphy
Aug 28, 2014
Click here to view the full article on

TOPICS: Accounting Deficiency

SUMMARY: Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business' ability to survive, according to the Financial Accounting Standards Board. The FASB updated U.S. accounting rules, effective by the end of 2016, to define management's responsibility to evaluate whether their business will be able to continue operating as a "going concern," and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

CLASSROOM APPLICATION: This is a good article to discuss going concern, notes to the financial statements, and FASB, as well as management's responsibility in financial reporting.

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

Going Concern Opinions on Life Support With Investors
by Emily Chasan
Sep 12, 2014
Online Exclusive

"Executive Responsibility For 'Going Concern' Disclosures Increases," by Emily Chasan and Maxwell Murphy, The Wall Street Journal, August 27, 2014 ---

Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business’ ability to survive, the Financial Accounting Standards Board said Wednesday.

The FASB updated U.S. accounting rules, effective by the end of 2016, to define management’s responsibility to evaluate whether their business will be able to continue operating as a “going concern,” and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

Investors, however, have grown frustrated with a lack of going concern opinions during the financial crisis that failed to warn them of impending bankruptcies.

The FASB first issued a proposal at the peak of the financial crisis in 2008, but debate and revisions delayed the final standard, which didn’t go up for a vote until May.

Supporters of the changes have argued that corporate managers have better information about a company’s ability to continue financing their operations than auditors. The updated rule will force executives to disclose serious risks even if management has a credible plan to alleviate them, for example.

Information currently disclosed by companies can vary significantly. Only about 40% of companies that filed for bankruptcy in the past two decades have explicitly disclosed the possibility that they could cease to operate before running into trouble, according to a study this month from Duke University’s Fuqua School of Business

The Grumps Thought Rite Aid Should Get a Going Concern Report from Deloitte

"STILL SEARCHING FOR 'THE ‘RITE’ STUFF'," by Anthony H. Catanach Jr. and J. Edward, Ketz, Grumpy Old Accountants Blog, April 30, 2012 ---

There are no academy awards in the offing for Rite Aid’s version of the 1983 test pilot film classic.  Recently, the Company released its 10-K, and things are still a mess.  No rocket science here.  Rite Aid cannot earn a profit and cash flows are dwindling even with an extra week of operations included (2011 was a 53 week fiscal year).  And the balance sheet is disgraceful. The Company just cannot seem to do anything “rite!”  Maybe management would have done better with a comedy like “Failure to Launch.”

Things have only worsened since we initially visited the Company in Rite Aid: Is Management Selling Drugs or Using Them?  It has not posted a positive earnings number since 2007.  Sure, the net loss is less than it was for the past few years, but a loss is still a loss, and remember, it had an extra week for this year’s performance reports.  It continues to bleed lease termination and impairment charges, as well as losses on debt modifications and retirements.  Yet, managers continue to perpetuate a turnaround façade via “improving” adjusted EBITDA numbers which suggest almost a $1 billion in “real” earnings.  Instead, the Company needs a dramatically new business model that emphasizes operating effectiveness and efficiency.  Only then will revenues rise, and cost of sales and other operating costs decline, both requirements for the Company’s delivering a profit.  We understand that the Company has implemented cost cutting initiatives, but when will see some believable and meaningful results?

The balance sheet remains in shambles.  Okay, there are enough current assets to cover current liabilities, but that’s the end of any good news in the balance sheet.  Total assets are $7,364 (all accounts are in millions of dollars), while total liabilities are $9,951, thereby yielding a shareholders’ deficit of $(2,587).  How this firm avoids corporate bankruptcy we just don’t know!

Actually, the balance sheet condition is much worse because the Company has humongous lease obligations that are carried “off-balance sheet.”  Using the data in financial statement note 10, we estimate the present value of the Company’s lease liabilities to be $5,939.  This adjustment increases total liabilities to $15,890, causing the stockholders’ deficit to worsen to $(8,526).

At least Rite Aid does not carry goodwill on its books any more, having written off the last vestiges of this intangible “asset” in 2009.  The only remaining reported intangibles are for favorable leases and for prescription files.  Oh please…favorable leases for a Company in this financial condition…we would be inclined to reduce the favorable lease asset, but the amounts are just not big enough to fret over given the “death watch” status of the Company.

However, to its credit, Rite Aid has not followed the example of Citicorp and some other banks that pumped earnings up by recognizing gains due to market value declines of debt due to problems in its own creditworthiness.  This practice is a sham even if condorsed (condoned and endorsed) by the FASB.

Even though the cash flow statement does provide some positive news, reported cash flows are a bit down (and again there was that extra week in the fiscal period).  Cash flows from operating activities were $(325), $395, and $266 for 2009-2011, while free cash flows were $(519), $209, and $16, respectively.  So, Rite Aid is reporting a positive free cash flow, albeit smaller than last year’s.

Ironically, if the Company would capitalize all of its operating leases, the cash flow picture improves considerably!  That’s because rental expenditures under operating lease accounting are displayed as operating activities; however, when leases are capitalized, the cash flows are divided between interest payments and payments against the lease obligation, the latter payments being properly categorized as financing cash flows.  Interest payments are still considered part of operating activities.  Thus, adjusted free cash flows paint a rosier picture for Rite Aid:  they are $(45), $691, and $545 for 2009-2011.

Given the Company’s precarious state, why doesn’t the auditor, Deloitte & Touche, issue a going concern report?  After all, Rite Aid’s troubles make it a bankruptcy candidateClearly, profits are negative for five years, and there are significantly more liabilities than assets.  Perhaps the auditor also adjusts operating leases to obtain the healthier free cash flow numbers that we have estimated, and deduces that the firm can survive.  If so, then the auditor should persuade, if not require, Rite Aid to capitalize all of its leases.

Taking a long term perspective, most of the troubles endured by Rite Aid over the last several years seem a result of the failed Eckerd and Brooks business combination, which it bought from the Jean Coutu Group.  In short, Rite Aid paid too much for the business.  When the subsidiary did not generate enough cash flows, Rite Aid borrowed to the hilt, and has been operating under a heavy debt burden ever since.  (As a side note the Jean Coutu Group recently sold a substantial number of its Rite Aid shares, reducing its ownership to about 20 percent.)

Continued in article

The Grumps respond to their AECM critics on accounting for leasing at Rite Aid. I forwarded the AECM messaging concerning whether the Grumps made a mistake on their Rite Aid posting.

"A NOTE ON THE RITE AID ANALYSIS; AND A POX ON THE FASB," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, May ,, 2012 ---

Last time we discussed Rite Aid and claimed the balance sheet was in shamblesSome fellow accounting professors objected to the analysis, so we need to respond to them.  We’ll answer the criticism and point out the big point that they all missed.

You will recall that Rite Aid’s most recent balance sheets has total assets of $7,364, total liabilities of $9,951, and shareholders’ equity of $(2,587).  As before, all amounts are in millions of U.S. dollars.  We then said our estimate of the present value of the operating leases was $5,939, thereby increasing total debts to $15,890 and causing shareholders’ equity to dip to $(8,526).

The criticism we received concerns the hit to equity.  They state that the entire amount should not go against equity but that a sizable amount should be in assets.

The criticism is well taken—up to a point.  Our analysis indicated that the assets were over half depreciated, so only a relatively small portion would be added to the left-hand side of the balance sheet.  Besides, as Rite Aid is a Pennsylvania corporation, we have been in several of the stores, and we think that the fair value of the leases needs to be written down.  At that point we took a short cut and assumed none of it would be there.  It made the work a lot shorter and helped us to make our point succinctly.

But, since our friends and associates want a full-blown adjustment instead of this raw short cut, here goes.  We adjust the income statement by taking out rental expense and by adding in depreciation, interest, and the differential income tax.  We adjust the assets in the balance sheet for the leased resources minus their accumulated depreciation.  We adjust the current debts for the present value of next year’s lease payment.  We adjust noncurrent debts for the present value of the remaining lease payments and for deferred income taxes.  Finally, we adjust the stockholders’ equity for the cumulative effect of past year differences in the firm’s net income.

What we find is the following:










Net income



Current assets






Total assets



Current debts



Long-term debts  



Total debts  










Yes, the total assets are larger by $2.3 billion, but notice that the total debts are larger by $6 billion and the shareholders’ equity is lower by $3.7 billion.  (The liabilities are higher than the $5.9 we previously mentioned because now we are including the deferred income tax effect.)

So the criticism is correct inasmuch as the full $5.9 billion does not decrease equity, only $3.7 billion.  But given that we originally just wanted a rough approximation, we still don’t think it was off as badly as our colleagues thought.  As they obviously are watching carefully, we promise not to take this short cut again.

Having said that mea culpa, let’s observe that the thrust of our previous work is correct.  The balance sheet of Rite Aid is in shambles and the losses are habitual.  Operating cash flows are higher than reported, as we explained in the previous column, but that implies that financing cash outflows are correspondingly worse.  Rite Aid is in trouble.

Jensen Comment
I might note that to date the IASB and the FASB cannot agree on a new joint standard on leasing. The joint project is now entering a new Plan D under consideration. Until then, Rite Aid is subject to existing FASB rules on lease capitalization and expensing.

Whole contract, or Approach D, is a fourth possible approach for lease accounting that could be included in the second exposure draft for the lease accounting convergence project. It was added to the list of approaches after the International Accounting Standards Board and the Financial Accounting Standards Board could not agree on the other approaches. Whole contract "accrues the average rent as the reported lease cost ... and adjusts the lease liability on each balance sheet date to be the present value of the remaining lease payments," Erika Morphy writes in this article.
AICPA Newsletter


In 2015 after a critical audit Swisher fired the audit firm of BDO ---
In 2014 BDO reported concerns that Swisher had going concern issues.

Bob Jensen's threads on case method research and teaching ---


Teaching Case from The Wall Street Journal Accounting Weekly Review on March 3, 2017

Tesla Sets Targets for Model 3 Production
by: Tim Higgins
Feb 23, 2017
Click here to view the full article on

TOPICS: Capital Spending, Cash Management

SUMMARY: The article describes Tesla's unit production and sales budgets for the current Model S and Model X as well as the planned new Model 3. The Model 3 is planned to have a base price of $35,000 to be attractive to the mass market.

CLASSROOM APPLICATION: The article may be used to introduce master budgeting and cash budgeting in a managerial accounting class.

1. (Advanced) What is a master budget? Name its component parts.

2. (Introductory) Which of the component parts of a master budget are discussed in this article?

3. (Advanced) Why are these budgets important information to investors in and creditors of Tesla Corp?

4. (Advanced) Describe a cash budget in particular. When might a profitable company need short-term or long-term financing?

5. (Advanced) What does Elon Musk mean when he says the company's cash pile will drop 'close to the edge'? Would that statement raise concerns to you if you are an investor?

6. (Introductory) What impact could the United Auto Workers union have on the company and its budget plans? Why is this described as "a new challenge" and the "possibility of labor unrest"?

Reviewed By: Judy Beckman, University of Rhode Island

"Tesla Sets Targets for Model 3 Production," by Tim Higgins, The Wall Street Journal, February 23, 2017 ---

Tesla Inc. laid out an aggressive production plan to bring out the new Model 3 sedan by year’s end, raising the likelihood the auto maker will need to raise more cash to support the rollout.

The Silicon Valley auto maker said Wednesday it is on track to begin production in July on the car, and announced plans to ramp up to 5,000 vehicles a week in the fourth quarter.

Tesla chief Elon Musk faces intense scrutiny over whether he can debut the Model 3 on time after years of delays. The $35,000 sedan is part of Mr. Musk’s bet to transform Tesla from a luxury car maker into a sustainable energy company that sells electric vehicles to the masses, offers solar power to generate energy, and produces large batteries to store that power at home and offices.

Mr. Musk’s bold projections have ignited investors’ excitement, pushing the company’s market value to within reach of Ford Motor Co., which is 100 years older.

Tesla’s share price has risen about 50% since the company acquired solar panel maker SolarCity Corp., where Mr. Musk was also a major shareholder. The inflated market value could help the auto maker raise as much as $2.5 billion, said Barclays analyst Brian Johnson.

Tesla’s projections Wednesday came as it reported its fourth-quarter loss narrowed to $121.3 million, a return to red ink after posting its first quarterly profit three months ago. Revenue jumped 88% to $2.28 billion, ahead of analysts’ expectations.

Mr. Musk told analysts on a conference call Wednesday that while his plan to bring out the Model 3 doesn’t require additional money, the company’s cash pile will drop “close to the edge.”

“We are considering a number of options, but I think it probably makes sense to raise capital to reduce risk,” Mr. Musk said.

Tesla revealed that it spent only about half the $1 billion it projected to spend in the fourth quarter to prepare for production of the Model 3. The company said it shifted some payments with its capital equipment suppliers closer to Model 3 production to secure more favorable terms.

The approach helped Tesla reserve its cash pile, which has concerned investors as Tesla was buying SolarCity just as it would need to spend big to produce the Model 3.

Tesla finished the quarter with $3.39 billion in cash, up from $3 billion three months earlier. Tesla plans to spend between $2 billion and $2.5 billion this year ahead of Model 3 production.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 3, 2017

Salesforce's Outlook Rises
by: Rachael King and Jay Greene
Feb 28, 2017
Click here to view the full article on

TOPICS: Deferred Revenues, Revenue Recognition

SUMMARY: posted a 29% jump in deferred revenue for its fiscal fourth quarter [ending January 31, 2017]...." Revenue forecasts also rose, but the quarterly loss grew to $51.4 million from $25.5 million in the fiscal fourth quarter ended January 31, 2016. Deferred revenues consistent primarily of billings received in advance; the company gave guidance of deferred revenue growth from 22% to 23% for the quarter ended April 30, 2017.

CLASSROOM APPLICATION: Questions ask students to explain the concept of deferred revenues, to give the journal entries required when revenue is recorded on a deferred basis, and to understand the importance place on this accounting measure by analysts.

1. (Advanced) What is deferred revenue? Define the term and compare it to the term "billings" also used in the article.

2. (Advanced) When is deferred revenue recorded? When is deferred revenue earned?

3. (Advanced) Provide summary journal entries to record deferred revenue and recognize previously deferred revenue when it is earned.

4. (Introductory) Explain the following statement quoted from the article. "Because Salesforce relies on subscriptions of its web-based, on-demand software, deferred revenue provides a strong picture of the company's prospects.

Reviewed By: Judy Beckman, University of Rhode Islan

Salesforce's Outlook Rises," by Rachael King and Jay Greene, The Wall Street Journal, February 28, 2017 ---

Business-software company racking up customers moving to the cloud Inc. posted a 29% jump in deferred revenue for its fiscal fourth quarter, a sign the business-software company continues to rack up customers moving computing operations to the cloud.

Because Salesforce relies on subscriptions of its web-based, on-demand software, deferred revenue provides a strong picture of the company’s prospects.

The measure, which consists primarily of billings received in advance for subscription services, rose to $5.54 billion. Nomura Securities Co. analyst Frederick Grieb had forecast deferred-revenue growth of 22%.

In an interview, Salesforce operating chief Keith Block said the company continues to take away market share from the competition. “That’s outstanding execution,” he said.

Despite the strong quarter, Salesforce shares fell 1.9% in after-hours trading. Analysts said the results were tempered by the company’s guidance for deferred-revenue growth of 22% to 23% for the current quarter, which they translated into lower growth in billings.

Salesforce attributed that to seasonality, saying its fourth quarter is generally its strongest. “Fundamentally, our demand environment is very strong and as a result we raised our guidance for the whole year,” finance chief Mark Hawkins said on the company’s earnings call.

Revenue from Sales Cloud, the company’s flagship sales-force automation business, rose 14% to $804.9 million. That was the highest growth since the quarter ended April 2016.

Salesforce benefited from marketing its products to specific industries such as financial services and retail, Mr. Block said.

Other businesses continued to grow, but at a slower rate. Service Cloud, which helps companies run customer-service operations, grew 24%, down from 40% in the quarter that ended in July 2015.

Salesforce’s acquisition of Demandware Inc. last July drove revenue growth of 62% in the company’s Marketing Cloud, used for email and advertising campaigns.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 3, 2017

For More Chinese Firms, It Pays to Make It in the U.S.A.
by: Nina Trentmann
Feb 26, 2017
Click here to view the full article on

TOPICS: Capital Spending, Cost Analysis

SUMMARY: "A hefty U.S. import tax on goods produced in China could accelerate a trend already well under way: Chinese companies setting up factories and expanding in the U.S." The article focuses on Keer Group Co.'s American subsidiary planning capital investment in the U.S. The article examines reasons for capital investment decisions based on cost comparisons for labor and operating costs (electricity). Reference to Trump Administration's planned import taxes makes it clear that this trend of foreign capital investment already is underway but leaves such foreign corporations in a good position to handle this change in U.S. trade policy.

CLASSROOM APPLICATION: The article may be used in a managerial accounting class to discuss capital budgeting, cost comparisons, or both with a global focus.

1. (Introductory) Where is Keer Group Co. headquartered? What is the name of their American operations?

2. (Advanced) Where is Keer Group planning to invest in manufacturing plants? From what budgeting system can this planning information be taken?

3. (Advanced) From the information given in the article, name one specific item of justification for the capital investment plans that Keer Group has developed for North America. Is this a typical measurement to use in business decision-making? Explain.

4. (Introductory) Refer to the related graphic "Made in America." When did the dollar value of Chinese companies' investment in U.S. facilities increase significantly? Is that timing the same as increases in the number of investments made by Chinese companies?

Reviewed By: Judy Beckman, University of Rhode Islan

"For More Chinese Firms, It Pays to Make It in the U.S.A," by: Nina Trentmann, The Wall Street Journal, February,26 2017 --- 

Chinese manufacturers are setting up factories in the U.S., a trend set to accelerate if Trump taxes imports

A hefty U.S. import tax on goods produced in China could accelerate a trend already well under way: Chinese companies setting up factories and expanding in the U.S.

Manufacturers in China face a host of pressures. Wages have risen substantially, while land and electricity prices are up. This challenges China’s decadeslong orthodoxy of producing mass-market goods at extremely low cost.

At the same time, Chinese companies that have saturated their home market are looking elsewhere for growth.

“Many Chinese firms have become so dominant in their domestic market that they are now forced to look beyond the Chinese borders,” said John Ling, Georgia’s managing director for investment in China and president of the Council of American States in China. Mr. Ling helps attract and facilitate expansion by Chinese companies in the state.

President Donald Trump has called for a rejuvenation of U.S. manufacturing, in an effort to boost employment. He campaigned on a promise to tax Chinese imports at roughly 45%, and House Republicans are proposing a border-adjusted system that would effectively tax all imports. Since his inauguration, the president has talked of taxing imports from Mexico. A White House spokeswoman said the administration had no comment on taxing Chinese imports.

Some firms are already well-placed should there be a rise in tariffs for Chinese goods.

Keer America Corp., a subsidiary of Keer Group Co., a textile producer from Zhejiang province in China, plans to invest $68.5 million in the first phase of a $218 million, five-year project to double the capacity of its yarn-spinning facility in Indian Land, S.C., said chairman Zhu Shanqing.

The facility has been in operation since mid-2015. Keer now employs 208 full-time, mostly line workers in the U.S. and plans to hire another 300.

“There are obvious cost advantages,” Mr. Zhu said. Electricity prices, for example, are up to 40% lower in Lancaster County than in Hangzhou, he said.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 4, 2017

Tailored Accounting Takes Companies Into Alternate Reality
by: Michael Rapoport
Feb 23, 2017
Click here to view the full article on

TOPICS: Deferred Revenues, Non-GAAP Reporting, Securities and Exchange Commission

SUMMARY: "The Securities and Exchange Commission is increasingly calling out companies that offer...'non-GAAP accounting'...using assumptions or practices not permitted under generally accepted accounting principles." The SEC calls this reporting "individually tailored accounting" and assesses it as particularly worrisome. The article describes several companies who have received comment letters from the Division of Corporate Finance with concerns about non-GAAP reporting for revenues ignoring deferred revenues and about non-GAAP reporting of cash flows inconsistent with the amount presented as cash on the consolidated balance sheet.

CLASSROOM APPLICATION: The article may be use d in a financial reporting class to discuss nonGAAP metrics and Cash Flows from Operations metrics.

1. (Introductory) What is deferred revenue?

2. (Introductory) Where is deferred revenue shown in corporate financial statements?

3. (Introductory) When is deferred revenue recognized as earned? Where does the deferred revenue show in the financial statements when recognized as earned?

4. (Advanced) Refer to the filing by Glu Mobile with the U.S. Securities and Exchange Commission on Form 8-K made on February 8, 2017, available at Click on "Documents" then on the link to EXHIBIT 9.01, the company's announcement of its Fourth Quarter and Full Year 2016 Financial Results. List the items included as "Financial Highlights."

5. (Advanced) Proceed down the document to the Business Outlook section. What metrics does the company forecast for the quarter ending March 31, 2017 and the year ending December 31, 2017?

6. (Advanced) Read the statements about why management forecasts only the items listed in answer to the question above. What makes it difficult for the company to predict GAAP based revenues and net income? How do you think these difficulties impact expected revenue and deferred revenue amounts?

Reviewed By: Judy Beckman, University of Rhode Island

SEC Tightens Crackdown on 'Adjusted' Accounting Measures
by Michael Rapoport and Dave Michaels
May 18, 2016
Online Exclusive


"Tailored Accounting Takes Companies Into Alternate Reality," by: Michael Rapoport, The Wall Street Journal, February 23, 2017 ---

Recent moves by the Securities and Exchange Commission serve as a reminder that non-GAAP corporate results should be digested with a grain of salt

In these days of alternative facts, some companies are pushing alternative accounting.

The Securities and Exchange Commission is increasingly calling out companies that offer a different flavor of “non-GAAP” accounting—reporting their numbers as if they could calculate them using assumptions or practices not permitted under generally accepted accounting principles. This goes beyond the SEC’s crusade against companies using more traditional tactics like stripping out costs from their customized measures, generally making their numbers look better than under GAAP.

SEC staffers say what they call “individually tailored” accounting is a particularly worrisome variant of the non-GAAP issue. More examples have emerged in recent days, as the commission released previously confidential comment letters it sent to companies criticizing their practices.

One area highlighted by the SEC is deferred revenue—revenue received by a company before it delivers its product to a customer. Under standard GAAP rules, that revenue is recognized when the product is delivered, but some companies are adjusting their non-GAAP numbers to account for that revenue.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 3, 2017

PwC Partners Amid Best Picture Mix-Up Won't Work on Show Again
by: Michael Rapoport
Mar 01, 2017
Click here to view the full article on

TOPICS: Big Four Accounting

SUMMARY: Two Pricewaterhouse Coopers LLP partners were responsible for handing envelopes with award winners' information to announcers at the Oscars ceremony on Sunday night. The process by which the award winner for best picture, Moonlight, was mistakenly announced as La La Land is described in the related article.

CLASSROOM APPLICATION: The article may be used in an auditing class.

1. (Introductory) For how long has PwC been the auditor certifying the results of balloting for the Oscars ceremony?

2. (Advanced) What has been the impact of this event on the long-standing working relationship between the Academy of Motion Picture Arts and PwC?

3. (Introductory) What has been the effect on Mr. Cullinan and Ms. Ruiz in their professional portfolio at public accounting firm PwC?

4. (Advanced) Refer to the related article. How did the mix up occur?

5. (Advanced) Note the title of the related article, "PwC Partner at Oscards Tweeted Backstage Minutes Before Best Picture Mix-Up." What is the importance of this behavior? Do you think it would have been noticed had no announcement error ever occurred?

Reviewed By: Judy Beckman, University of Rhode Island

PwC Partner at Oscars Tweeted Backstage Minutes Before Best Picture Mix-Up
by Ben Fritz, Michael Rapoport, and Erich Schwartzel
Feb 27, 2017
Online Exclusive


"PwC Partners Amid Best Picture Mix-Up Won't Work on Show Again," by: Michael Rapoport, The Wall Street Journal, March 1, 2017 ---

Brian Cullinan and Martha Ruiz removed from dealings with Academy of Motion Picture Arts and Sciences, to remain partners with the firm.

The move follows the mix-up at Sunday’s Oscars in which Mr. Cullinan gave the wrong awards envelope to presenter Warren Beatty, leading to the mistaken announcement of “La La Land” as Best Picture when in fact “Moonlight” was the winner. The mistake was corrected minutes later.

The news was first reported by the Associated Press. Academy President Cheryl Boone Isaacs told the AP that Mr. Cullinan and Ms. Ruiz had been permanently removed from all dealings with the Academy. She also told the AP that Mr. Cullinan—who had tweeted a photo of Best Actress winner Emma Stone minutes before the error—had been distracted backstage.

PwC confirmed Mr. Cullinan and Ms. Ruiz had been removed from the Academy account and said both remain partners with the firm.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 11, 2017

Caterpillar Facilities Raided by Tax Agents
by: Andrew Tangel and Bob Tita
Mar 03, 2017
Click here to view the full article on

TOPICS: International Tax

SUMMARY: Three Illinois locations of Caterpillar, Inc. administration--the corporate headquarters in Peoria, an office building in Morton, and a data center in East Peoria--were raided on Thursday by agents from the Internal Revenue Service, the Federal Deposit Insurance Corp.'s inspector general, and the U.S. Department of Commerce. The company has stated it appears these authorities were looking for international shipping and other data that may relate to an ongoing dispute over tax structures for sales of replacement parts. The company disputes a $2 billion tax assessment for business activities through 2009 which assign all profit on these sales to a Swiss subsidiary.

CLASSROOM APPLICATION: The article may be used in an international tax class. As well, questions focus on the financial statement disclosures and contingent liability related to these issues so may be used in an advanced financial reporting class.

1. (Introductory) What happened at three corporate locations of Caterpillar, Inc.? What does the company report as the reason for this event?

2. (Advanced) Refer to the related article. What was the concern with the reporting of profits and Caterpillar's international tax related practices as reported in 2015? What is the current status of those issues?

3. (Advanced) What is Caterpillar's stance on the propriety of its international tax strategies? According to the article, where is this information disclosed?

Access the Caterpillar, Inc, annual report for the year ended December 31, 2016, filed with the Securities and Exchange Commission on 02/15/2017. Use the pdf version available at Proceed to page 101, note 5 on income taxes and to page 140, note 22 entitled Environmental and Legal Matters, focusing on the events dated January 8, 2015. Based on these disclosures, do you think the company assesses the investigation behind the international tax arrangements as material to the financial statements? Discuss. Research an appropriate reference to accounting requirements for the disclosures Caterpillar is making.

Reviewed By: Judy Beckman, University of Rhode Island

Caterpillar Gets More Grand Jury Subpoenas in Tax Probe
by James R. Hagerty and Richard Rubin
Oct 30, 2015
Online Exclusive

"Caterpillar Facilities Raided by Tax Agents," by Andrew Tangel and Bob Tita, The Wall Street Journal, March 3, 2017 ---

Search appeared to escalate investigation into tax issues and Swiss subsidiaries

Federal agents on Thursday raided three Caterpillar Inc. facilities in Illinois in search of any evidence that the machinery giant may have released false or misleading information about its financial documents and exports.

Investigators were seeking evidence of potential crimes including failure to file or submitting false electronic export information and false and misleading financial reports and statements, people familiar with the matter said.

These people said officials were looking for information about shipments between the U.S. and Switzerland and about a Caterpillar subsidiary in the latter, known as CSARL. Investigators also sought financial records and documents related to Caterpillar’s foreign sales, these people said.

Caterpillar Chief Executive Jim Umpleby said the company believes the search warrant is connected the Switzerland-based subsidiary, which he noted had been under review for more than three years.

“Because of the broad nature of today’s warrant, we don’t have enough information at this time to provide a full understanding of the authorities’ intent,” Mr. Umpleby wrote in an internal memo to employees that was reviewed by the Journal.

Mr. Umpleby pledged to continue working with authorities. “We were surprised by today’s actions primarily because we have been so cooperative with the authorities in this investigation,” he wrote. “We have acted in good faith and as a good corporate citizen.”

Caterpillar, whose yellow and black bulldozers, excavators and giant dump trucks are ubiquitous at mines and construction sites around the world, has previously said it received subpoenas from a federal grand jury seeking information related to the Swiss subsidiary. The investigation is being overseen by the U.S. attorney’s office for the Central District of Illinois.

The U.S. attorney’s spokeswoman declined to comment on what investigators were seeking. She said agents from the Internal Revenue Service, the Federal Deposit Insurance Corp.’s inspector general and the U.S. Department of Commerce took part in the raids and that no arrests were made. People familiar with the matter said officials searched company headquarters in Peoria, Ill., an office building in Morton, Ill., and a data center in East Peoria, Ill.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 11, 2017

New Rule Opens Book on Auditors
by: Michael Rapoport
Mar 04, 2017
Click here to view the full article on

TOPICS: Audit Reports, Auditing

SUMMARY: The PCAOB has begun requiring disclosure on Form AP of the names of the engagement partners responsible for U.S. public company audits. As of Friday, March 3, only 1091 records exist on the database. It is available on the PCAOB's web page with a click on the upper right hand corner link labeled "AuditorSearch." Beginning in July 2017, audit firms also must disclose other auditors who provide significant amounts of audit work on a particular engagement.

CLASSROOM APPLICATION: The article may be used in an auditing class.

1. (Advanced) How are U.S. publicly traded companies' auditor reports signed?

2. (Introductory) What new disclosure is now required by the PCAOB for publicly traded company audits? Does this new requirement change the answer you gave to question 1 above? Explain.

3. (Introductory) According to the article, why has the audit profession fought this new disclosure for some time?

4. (Introductory) What do proponents say are the benefits of engagement partner name disclosure?

5. (Advanced) Access the PCAOB's web site at and click on the AuditorSearch link. Input a name of a publicly traded company of interest. Has the engagement partner on that audit been input yet to the system?

Reviewed By: Judy Beckman, University of Rhode Island

"New Rule Opens Book on Auditors," by Michael Rapoport, The Wall Street Journal, March 4, 2017 ---

New rule makes information public for the first time

When a snafu caused the wrong Best Picture winner to be announced at the Oscars, the two PricewaterhouseCoopers LLP partners in the middle of it, Brian Cullinan and Martha Ruiz, quickly became household names.

But if a company audited by PwC or another firm had accounting problems, investors couldn’t learn who was in charge of its audit—until this year.

A new rule that went into effect at the end of January requires the naming of accounting-firm partners who head the audits of U.S. public companies. Under the move, which had long been in the works , investors can go online and find out with a few keystrokes the person who leads any company’s audit. Previously, a company’s auditor was unknown to shareholders; the audit report was simply “signed” by an accounting firm.

Among companies for whom lead audit partners’ names are now available: General Motors Co., Fannie Mae, Alphabet Inc., Inc., Facebook Inc., Boeing Co., American Express Co., Bank of America Corp. and Delta Air Lines Inc.

Although a seemingly small rule change, it was one the audit profession fought for some time. One argument was that it could open up a raft of investor lawsuits against individual audit partners.

But supporters of the rule argued the real reason audit firms didn’t like it was the increased accountability that potentially could result. And that accountability is why the new rule could prove useful for investors over time.

While it’s early days yet for the rule change, the disclosures eventually will build up a track record that will allow investors to gauge the performance of audit partners.

If a company has an accounting scandal and John Smith is the “engagement partner” on its audit, investors will be able to find out what other audits he’s been responsible for. If an audit partner’s companies tend to have more accounting restatements than the norm, investors will be able to sleuth it out.

The names of PwC’s Oscar partners were already public knowledge even before Sunday’s mix-up; PwC has widely promoted its work for the Oscars, including the partners’ identities, and the Academy of Motion Picture Arts and Sciences isn’t a public company.

Another potential benefit: Any new focus on individual auditors by shareholders could prompt audit-firm partners to more forcefully stand up to a company’s management in disputes about accounting practices. After all, it’ll be the partners’ own reputation on the line.

Disclosure “is good for investors, the markets and auditors who serve them,” said James Doty, the Public Company Accounting Oversight Board chairman who pushed through the change.

The additional disclosure also may benefit companies who employ auditors, Mr. Doty said. “With time, as more forms are filed, investors and audit committees can research these auditors to inform their investment and hiring decisions.”

How does the new regime work? The PCAOB has set up AuditorSearch, a database investors can use to look up the name of the partner who heads the audit of any public company.

Investors can click the AuditorSearch link on the PCAOB’s website, enter a company’s name, and the partner’s name will pop up. They also can search by accounting firm, to find all of the partner assignments a firm has disclosed, or by a partner’s name, to find all audits on record he or she has led.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 11, 2017

Tax Plan's Next Dilemma
by: Richard Rubin
Mar 02, 2017
Click here to view the full article on


SUMMARY: Among other proposals, Republicans in Congress have proposed reducing the corporate income tax rate. That rate reduction creates a bigger difference between compensation and earnings as an owner of a pass-through entity than exists under current tax law. Tax law change must now consider how to divide income between categories of "reasonable compensation" taxed at the personal income tax rate and firm income taxed at the corporate tax rate.

CLASSROOM APPLICATION: The article may be used in a corporate or personal income tax class covering pass-through entities.

1. (Advanced) What are pass-through entities? Specifically name the types of entities included in this category.

2. (Advanced) How are earnings at pass-through entities taxed under current law?

3. (Introductory) Why are Republican tax plan changes leading to decisions about dividing earnings received from pass through entities? What are the two earnings categories in question?

4. (Introductory) How could changing the law for pass-through entities create inequities in, say, law firms between staff associates and the firm partners they work for?

Reviewed By: Judy Beckman, University of Rhode Islan

"Tax Plan's Next Dilemma," by Richard Rubin, The Wall Street Journal, March 2, 2017 ---

WASHINGTON—House Republicans are struggling to write a crucial piece of their tax plan: the rules for partnerships, limited liability companies, and other “pass-through” firms that account for a majority of U.S. business income.

Republicans want to lower the tax rate for these businesses in conjunction with corporate rate cuts. But they haven’t decided what should be taxed at 25%, as a firm’s business income, and what should be taxed at 33%, as the owner’s wages at the firm.

Republicans are planning to advance their tax agenda using procedures that don’t require any votes from Democrats, who generally warn that GOP tax plans are too tilted to high-income households.

The rules would affect millions of business owners whose income passes through to their individual tax returns rather than appearing on corporate filings. They include law firms, hedge funds and manufacturers and they are a powerful force in Republican politics. They range from tiny businesses to the enterprises of some of the wealthiest Americans

Clarene Law said a lower tax rate on pass-throughs would free up capital to add rooms to her hotels in Jackson, Wyo. or buy new air conditioners and washing machines.

“25% if it’s pure, not all cobbled up with a bunch of surtaxes, it would be a great benefit,” said Ms. Law, chief executive officer of Elk Country Motels Inc. Her businesses own more than 400 hotel rooms and generate revenue of more than $10 million a year, she said.

The nettlesome issue of pass-through taxation has been overshadowed by other debates over the House Republican tax plan, including a border adjustment that would tax imports and exempt exports. Still, the details of pass-through taxes are crucial to the structure, arithmetic and politics of the Republican tax agenda.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 11, 2017

Mexican Home Builder Settles SEC Fraud Charges
by: Robbie Whelan
Mar 04, 2017
Click here to view the full article on

TOPICS: Fraudulent Financial Reporting, Securities and Exchange Commission

SUMMARY: Mexican home builder Desarrolladora Homex SAB, or Homex, settled charges on Friday 3/3/2107 with the U.S. SEC without admitting the sEC's claims that the company overstated its revenue by over 3.5 times in information posted on its website and in regulatory filings. The company already has been delisted from the New York Stock Exchange and has had other penalties imposed.

CLASSROOM APPLICATION: Questions ask students to consider the auditor's role in fraudulent financial reporting.

1. (Introductory) According to the SEC, what financial statement item did Mexican home builder Desarrollador Homex SAB report fraudulently?

2. (Introductory) What are the consequences to this company for its actions? Do you think they are appropriate? Explain.

3. (Advanced) Though not mentioned in the article, what does this finding imply about the company's auditor?

4. (Introductory) How did the SEC substantiate whether reported amounts by the Mexican company were reasonable or fraudulent?

5. (Advanced) Do you think the SEC's procedure could be a step used by an auditor to verify reported amounts during a financial statement audit? Explain.

6. (Introductory) What economic circumstances surrounded the time that the SEC charges Homex fraudulently prepared its financial reports?

7. (Advanced) Are the circumstances described above of concern to an auditor when conducting an audit? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

"Mexican Home Builder Settles SEC Fraud Charges," by Robbie Whelan, The Wall Street Journal, March 4, 2017 ---

Homex overstated its revenue by roughly $3.3 billion, SEC says

The U.S. Securities and Exchange Commission said Friday that embattled Mexican home-building company Desarrolladora Homex SAB has agreed to settle charges that it reported $3.3. billion in fraudulent sales revenue.

Terms of the settlement weren’t disclosed, and as part of the agreement filed in the U.S. District Court for Southern California, Homex didn’t admit or deny the allegations against it, the SEC said.

Over a three-year period, Homex overstated its revenue in information posted on its website and in regulatory filings by 355%, or roughly $3.3 billion, according to the SEC. The company reported fake sales of more than 100,000 homes, inflating the numbers of homes actually sold more than fourfold, the complaint alleges.

Read More

Mexican Builder Homex Renews Relationship With Infonavit

Mexican Home Builder Homex Files for Bankruptcy

Mexico Housing Plan to Address Overcrowding

The SEC used high-definition satellite images to examine Homex’s building sites, including one in the central Mexican state of Guanajuato. Homex had said all the homes in the project were sold by the end of 2011, but the photos showed that by March of 2012, the land in question remained undeveloped and the vast majority of the homes unbuilt.

“Homex deprived its investors of accurate and reliable financial results by reporting key numbers that were almost completely made up,” said Stephanie Avakian, acting director of the SEC’s enforcement division, in a release.

Culiacán, Mexico-based Homex said Friday in a filing with the Mexican stock exchange that under the settlement with the SEC it will withdraw its over-the-counter American depositary receipts, and for five years will abstain from offering securities in the U.S. and from publishing financial or business information in English on its website.

The SEC suspended trading in shares of Homex on over-the-counter market exchanges Friday. Homex’s shares were delisted from the New York Stock Exchange in May 2014, around the time the company filed for bankruptcy.

Homex was founded by the De Nicolás family in the state of Sinaloa in 1989, and made its name selling modest houses to the rural middle class. In 2002, Equity International, an investment arm of Chicago real estate titan Sam Zell, took a one-third stake in the company for $32 million, and two years later helped the company go public on the New Stock Exchange at $15.80 a share. Equity International unloaded its stake between 2006 and 2008.

The company, as well as other Mexican home builders, benefited from an ambitious home investment program by the Mexican government under the National Action Party, which held the presidency from 2000 to 2012. During that period, the federal mortgage agency Infonavit served as the lender behind 75% of the country’s mortgages, making 4.4 million loans, twice as many as it had made in the preceding 28 years.

Homex’s fortunes changed, however, after the Mexican government in 2011 began pulling back on subsidies for housing developments far from the urban centers where people work, requiring more construction of apartments in towns. In 2013, Homex defaulted on $250 million in bonds, and by the following year had filed for bankruptcy protection. The company emerged from bankruptcy under new ownership in October, 2015.

The SEC said the alleged misconduct all occurred under the watch of Chief Executive Gerardo de Nicolás and Chief Financial Officer Carlos Moctezuma, who were both placed on unpaid leave in May 2016 when the new ownership learned of the SEC investigation. In December, both were terminated, according to a person familiar with the situation and a draft memo prepared by the company. Homex said it would abide by the terms of the settlement and continue to cooperate with the SEC, but didn’t respond to requests for further comment.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 11, 2017

As Regulations Change, Companies Grapple with Accountant Shortage
by: Vipal Monga
Mar 06, 2017
Click here to view the full article on

TOPICS: Accounting Careers

SUMMARY: Companies implementing accounting changes in the U.S. are running into a problem: There aren't enough accountants to go around. One factor leading to the shortage is that big public accounting firms are reducing turnover by focusing on work/life balance issues in the profession. That reduces the talent willing to move to corporate accounting positions at the staff level.

CLASSROOM APPLICATION: The article may be used in any accounting class to discuss current trends and career planning.

1. (Introductory) What is the overall unemployment rate among accountant? Among the workforce in general?

2. (Introductory) What was the percentage increase in hiring accounting graduates by public accounting firms from 2012 to 2014?

3. (Advanced) What factors are leading to a shortage of available applicants for corporate accounting positions?

4. (Advanced) What accounting changes are emphasizing the need for "bench strength" in technical financial reporting areas? Would you call these accounting changes "regulations" as indicated in the title of this article? Explain.

5. (Advanced) What factors indicate the current shortage in available accounting staff may be temporary?

Reviewed By: Judy Beckman, University of Rhode Island

"As Regulations Change, Companies Grapple with Accountant Shortage," by Vipal Monga, The Wall Street Journal, March 6, 2017 ---

The competition increasingly includes the big accounting firms, which are getting better at holding onto employees

Companies adjusting to accounting-rule changes in the U.S. are running into a problem: There aren’t enough accountants to go around.

Health-products company Johnson & Johnson took six months last year to fill an open position for a junior-level accountant in its financial-compliance department, a delay that annoyed Stephen Rivera, a senior director.

“It’s very difficult to find qualified people,” he said. “The big accounting firms are taking them all.”

Amid accounting changes to the Generally Accepted Accounting Principles that govern U.S. financial reporting, companies are scrambling to find so-called technical accountants, regulatory experts who can understand the rules and ensure that management and staff comply.

Large companies can outsource the work to big accounting firms but would prefer to have their own expertise to maintain internal standards as regulators pay more attention to corporate-accounting practices, said Mr. Rivera.

“It’s a question of creating bench strength,” he said.

The unemployment rate for experienced accountants and auditors was 2.5% in 2016, compared with the overall rate of 4.4% for experienced workers, according to the Bureau of Labor Statistics. The jobless rate for accountants has come down steadily from 4.2% in 2011, the earliest year during which the BLS adopted new job classifications.

“Based on the unemployment rate, it’s going to be harder for everybody to fill a job,” said Paul McDonald, a senior executive director at staffing firm Robert Half International Inc.

Increasingly, the companies are competing for talent with major accounting and audit firms that had once served as a reliable pipeline for corporate finance back offices.

Some of the firms have changed their work culture in a bid to keep workers happy and keep them longer. When Len Combs started working at accounting and consulting firm PricewaterhouseCoopers LLP in 1992, long hours at the office were the norm, and work-life balance wasn’t a priority.

“The idea was, if you don’t like it, go do something else,” said Mr. Combs, now U.S. chief auditor for the firm. Accordingly, many young associates quit and took jobs in corporate-finance departments at public companies.

PwC has recently lowered its turnover rates, in part by allowing associates to work from home and permitting them more flexible hours. Employees also get perks at the office such as treadmill desks, and Ping-Pong and foosball tables.

Turnover in the company’s audit and compliance group for employees who had been there three to five years fell to 20% last year from 26% in 2014, according to a PwC report.

The shrinking pool of available accountants is putting pressure on companies as they begin to apply new Financial Accounting Standards Board rules. The changes affect the way firms book revenue and report the value of leases held on their balance sheets. The rules don’t take effect right away: Public companies must apply new revenue standards for fiscal years beginning after Dec. 15, and new lease rules begin in 2019. Still, corporations must assess and revise two years of past financial reports.

“There is a demand for technical expertise, absolutely,” said Robert Grecco, controller at luxury fashion brand Ralph Lauren Corp. “And that demand is only going to increase.”

Mr. Grecco has four technical accountants on his team. He is paying them annual salaries ranging from $150,000 to more than $250,000. The median salary for accountants and auditors in the U.S. was $67,190 a year, according to the of Labor Statistics.

Enrollment in accounting programs hit a record in 2014, surpassing 250,000 for the first time since at least the 1993-94 school year, according to a study by the American Institute of CPAs, a trade group.

Many accounting firms are plucking undergraduates soon after they complete their degrees, said Pat Hopkins, chair of the graduate accounting programs at Indiana University’s Kelley School of Business.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 17, 2017

A Really Great Time for Analyst Groveling
by: Jason Zweig
Mar 13, 2017
Click here to view the full article on

TOPICS: Analysts' Forecasts

SUMMARY: Accounting professors from Florida International University have published a study on the language used by analysts in earnings conference calls. The article describes the data used in the study and conclusions drawn by the academic accountants.

CLASSROOM APPLICATION: The article may be used in any financial reporting class when covering disclosure, earnings conference calls, or to provide a basic introduction into the importance of and attention paid to academic research.

1. (Introductory) Who has conducted the research on which this article is based?

2. (Advanced) Why are the researchers interested in studying "the language analysts use on conference calls"?

3. (Advanced) What source of data did the researchers use to conduct their study? In your answer, define conference calls, explaining their use in corporate disclosure.

4. (Introductory) According to the article, what conclusions do researchers draw from their results?

Reviewed By: Judy Beckman, University of Rhode Island

"A Really Great Time for Analyst Groveling," by Jason Zweig, The Wall Street Journal, March17, 2017 ---

Analysts said 'congratulations' on earnings calls 11,831 times in a decade

The phrase “Great quarter, guys” has been uttered by analysts so often on earnings conference calls that it’s become a standing joke on Wall Street. There’s even a Twitter account, with a skeptical take on earnings news, called @greatquarter.

Jonathan Milian and Antoinette Smith, accounting professors at Florida International University, have just published a study of the language analysts use on conference calls. Because groveling to management seems to help analysts secure what’s called “corporate access,” or face time for clients with companies’ top executives, it’s no wonder that many analysts come across as bootlicking sycophants.

Analyzing more than 16,000 earnings conference calls from almost 500 companies between early 2003 and the middle of 2013, the researchers found that analysts spoke the phrase “great quarter” roughly 3,000 times. They said “good,” “great” or “strong” more than 215,000 times.

More than half of all calls included some sort of praise from analysts, ranging from “good,” “solid” or “nice” to “amazing,” “incredible,” “phenomenal,” “tremendous” and other craven flattery.

Analysts sucked up to management an average of 2.5 times per call, with the number of compliments going as high as 21 times per call in the most extreme case.

In that epic call, when Urban Outfitters announced on May 15, 2008, that its earnings had increased by 45%, 19 out of 21 analysts exclaimed “congratulations.” One threw in a “fantastic,” one added “terrific” and another “amazing.”

Continued in article

Repo Madness
From the CFO Journal's Morning Ledger on March 24, 2017

MF Global, PwC settle malpractice lawsuit
MF Global Holdings Ltd.
and PricewaterhouseCoopers LLP have settled their accounting malpractice lawsuit in which the brokerage alleged that poor advice from PwC contributed to its collapse in 2011. Terms of the settlement weren’t disclosed.


Repurchase Agreement (Repo) Financial Securities Contract ---

Repo agreements are at the heart of the demise of Lehman Bros. and the near-demise of MF Global ---

But Repo Agreements are not going away in financial markets ---
The price of a safer financial system is going up. The tab for backstopping a type of short-term lending on Wall Street known as repurchase agreements has risen to $73.84 billion, according to a filing this month by Depository Trust & Clearing Corp., which operates the clearinghouse that facilitates trading in that market ---

The price of a safer financial system is going up.

The tab for backstopping a type of short-term lending on Wall Street known as repurchase agreements has risen to $73.84 billion, according to a filing this month by Depository Trust & Clearing Corp., which operates the clearinghouse that facilitates trading in that market.

That compares with a $50 billion estimate circulated two years ago by people familiar with the DTCC, a firm owned by banks and trading firms that is a key cog of Wall Street’s plumbing.

The total reflects an amount DTCC will seek in commitments from member firms to cover the cost of a special credit facility. That facility can be invoked if a member defaults and the clearinghouse’s other resources become exhausted, forcing its Fixed Income Clearing Corp. subsidiary to step into the shoes of the defaulting firm and assume its financial obligations.

Repurchase agreements, or repos, are short-term loans secured by U.S. Treasurys and other bonds. They play a leading role in the financial system by keeping cash and securities circulating among hedge funds, investment banks and other financial firms.

The proposal to set up a special credit facility is the latest iteration of suggested fixes to the repo market, which has come under scrutiny from traders and policy makers since the 2008 crisis for a tendency toward illiquidity and fragility at times of market stress.

Clearinghouses work by pooling capital from their members and assuming the risk of a failure of one of more members. Regulators believe the utilities can help prevent a recurrence of the panic that followed the failure of Lehman Brothers Holdings Inc. in the financial crisis.

The increased estimate reflects more activity in the $3.5 trillion U.S. repo market making its way into Fixed Income Clearing Corp. that processes some of the trades, as well as moves by that unit to expand its repo-clearing business.

The Federal Reserve has also pushed repo-market participants to rely less on intraday credit, thereby reducing the risks of a securities dealer going insolvent and any damaging fire sales of the collateral underlying repos.

Implementation of the plan should begin this time next year, giving participants about 12 months to prepare for its requirements. Meanwhile, DTCC executives have been talking to members about how to optimize their trading to bring down the aggregate cost, for example, by striking longer-dated repos rather than ones that mature overnight and use up more capital.

“We are actively working with members,”  Jim Hraska,  managing director of FICC, said in an interview. “Once this gets approved and we are in the implementation period, we will be meeting with them quarterly and we have had plenty of one-to-one conversations already with clients to help members minimize the requirements.”

The push for a buffer is coming from regulators at the Federal Reserve and the Securities and Exchange Commission. Some people familiar with the discussions said regulators of Fixed Income Clearing Corp. previously had considered its resources insufficient to cover a large potential default. The Fed and SEC declined to comment on the proposal.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 17, 2017

Corzine: MF Global Relied on its Auditor
by: Michael Rapoport
Mar 10, 2017
Click here to view the full article on

TOPICS: Auditing, Bankruptcy

SUMMARY: On Thursday, March 9, Jon Corzine, former chief executive of MF Global Holdings, Ltd., testified as a witness for his former firm's bankruptcy administrator in a $3 billion malpractice lawsuit against PricewaterhouseCoopers. PwC was the auditor for MF Global when it failed in October 2011. At the time of its failure, the firm had a $1.6 billion shortfall in customer funds..." The shortfall was later recovered."

CLASSROOM APPLICATION: The article may be used in an auditing class to cover management versus auditor responsibility and the impact of bankruptcy court proceedings on that demarcation.

1. (Advanced) When conducting a financial statement audit, what is the responsibility of an auditor? What is the responsibility of the reporting entity?

2. (Introductory) Based on the information in main and related articles, what is the reason for the malpractice lawsuit against PwC?

3. (Advanced) In testimony, Mr. Corzine "said he believed having PwC audit MF Global's books gave the brokerage credibility." Is that the purpose of engaging an auditor? Explain.

4. (Introductory) According to the article, what does PwC contend was the reason for MF Global's downfall and bankruptcy?

5. (Advanced) Is it possible that "PwC's accounting advice" to MF Global was sound even if the firm subsequently faltered and went bankrupt? Explain.

6. (Advanced) "If the bankruptcy administrator prevails, MF Global's creditors stand to recover more their debt claims." Explain this statement. How does this fact drive litigation against auditors of any bankrupt entity?

Reviewed By: Judy Beckman, University of Rhode Island

Jon Corzine Says He Had No Reason to Doubt PwC's Accounting for MF Global
by Michael Rapoport
Mar 10, 2017
Online Exclusive

"Corzine: MF Global Relied on its Auditor," by Michael Rapoport, The Wall Street Journal, March 10, 2017 ---

MF Global’s lawsuit claims PwC was wrong to advise firm to treat European-debt transactions as sales

MF Global Holdings Ltd. relied on its auditor PricewaterhouseCoopers LLP’s judgment that the firm’s bets on European debt should be taken off its balance sheet, MF Global’s former chief executive Jon Corzine said Thursday—a move that the firm now says contributed to its collapse.

Testifying for MF Global’s bankruptcy administrator in its $3 billion malpractice lawsuit against PwC, Mr. Corzine said he and others at MF Global had “a full discussion with PwC” about the accounting, and PwC maintained it was proper to remove billions of dollars in MF Global’s European debt holdings from its books.

“We relied on our public accountants because they had a strong reputation and we believe they had the capability to make the judgments for strong financial reporting,” Mr. Corzine said at the trial in federal court in New York.

The testimony marked a brief return to the spotlight for Mr. Corzine, a former New Jersey governor and U.S. senator who ran Goldman Sachs Group Inc. in the 1990s. He has mostly kept a low profile in recent years and has rarely spoken publicly about MF Global since he was called in front of Congress in late 2011, just weeks after the brokerage’s bets on risky European sovereign debt triggered concerns by investors and ratings firms that helped push it into bankruptcy.

MF Global’s lawsuit claims PwC was wrong to advise it to treat the European-debt transactions as sales instead of financings, a move that allowed the firm to book immediate profits and take the securities off its balance sheet, lowering its reported leverage. MF Global said it wouldn’t have invested in the European debt as heavily as it did if not for PwC’s advice.

PwC contends its accounting advice was correct, and that MF Global’s own decisions and strategy, driven by Mr. Corzine, caused the brokerage’s bankruptcy.

Mr. Corzine said he and others at MF Global thought the sovereign-debt investments were “attractive” and highly rated by credit-ratings firms. “We would have had a hard time calling them risky securities,” he said.

When Stephen Sorensen, an attorney for the MF Global bankruptcy administrator, asked Mr. Corzine whether PwC had ever given him any reason to think that its accounting for the European debt might be wrong, Mr. Corzine answered, “No.”

Mr. Corzine, 70 years old, is a witness, not a defendant, in the current case, and he has reached a cooperation agreement with the bankruptcy administrator. If the administrator prevails, MF Global’s creditors stand to recover more on their debt claims.

When MF Global failed, the firm had a $1.6 billion shortfall in customer funds that was later recovered. Prosecutors investigated Mr. Corzine and other MF Global executives but ultimately didn’t bring any charges.

In January, Mr. Corzine agreed to pay $5 million to settle Commodity Futures Trading Commission allegations over MF Global’s collapse. He didn’t admit or deny any wrongdoing in agreeing to the settlement.​

Mr. Corzine completed his direct testimony at the end of the day Thursday. He is scheduled to be cross-examined Friday morning by a lawyer for PwC.

Mr. Corzine also provided a behind-the-scenes glimpse of MF Global’s final days, when ratings firms were expressing concerns, customers were pulling funds and the brokerage was scrambling to survive.

Continued in article

Repo Madness
From the CFO Journal's Morning Ledger on March 24, 2017

MF Global, PwC settle malpractice lawsuit
MF Global Holdings Ltd.
and PricewaterhouseCoopers LLP have settled their accounting malpractice lawsuit in which the brokerage alleged that poor advice from PwC contributed to its collapse in 2011. Terms of the settlement weren’t disclosed.

Bob Jensen's threads on repo accounting controversies --- 

Bob Jensen's threads on PwC litigations ---

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 17, 2017

Over 1.5 Million Take Tax Refund Loans
by: Bowdeya Tweh
Mar 13, 2017
Click here to view the full article on

TOPICS: Individual Tax, IRS

SUMMARY: Tax refunds are delayed this year particularly for those who rely on them for living expenses or to pay off debt. That is because the IRS is identifying returns for taxpayers claiming the earned-income credit or the additional-child credit as more likely to be fraudulently filed. The IRS is therefore scrutinizing such returns to battle the fraudulent filing issue, but leaving those taxpayers waiting longer for their refunds.

CLASSROOM APPLICATION: The article may be used in a class on personal income taxes, personal finance, or general financial reporting when used from the perspective of the businesses offering the loans.

1. (Advanced) Why do so many taxpayers take personal advances (loans) to be repaid upon receiving tax refunds from the U.S. government?

2. (Introductory) What entities are offering these loans? Why are they offering them?

3. (Introductory) What are the terms of the loans to the individual taxpayers?

4. (Advanced) What is the cost to the entities offering these loans?

Reviewed By: Judy Beckman, University of Rhode Island

"Over 1.5 Million Take Tax Refund Loans," by Bowdeya Tweh, The Wall Street Journal, March 13, 2017 ---

IRS changes designed to prevent fraud leave some filers searching for expected funds

More than 1.5 million U.S. taxpayers have taken out loans against their anticipated 2016 refunds, fueled in part by the federal government’s delay in disbursing money to certain filers.

Tax preparers are making unsecured loans that are free of interest and upfront fees in an effort to aggressively court customers. The emergence of these refund-advance loans marks a shift away from higher-margin products offered more than a decade ago that were derided by consumer groups, lawmakers and regulators for saddling consumers with excess fees.

This year, the Internal Revenue Service delayed refunds until late February for taxpayers claiming the earned-income tax credit or additional child tax credit, a tactic aimed at reducing fraudulent filings and incorrect refund distributions.

H&R Block  Inc.  said Wednesday that it has approved 840,000 refund-advance loan applications worth about $700 million this tax season, its first time offering the fee-free product. Meanwhile, Liberty Tax Inc., which runs Liberty Tax Service and SiempreTax+, said Wednesday it had a 40% increase in such refund advance loans from a year ago, rising to 175,000 loans approved as of Feb. 28.

Privately held Jackson Hewitt Tax Service Inc. provided 485,000 refund advance loans this tax season, double the volume from the previous year.

The IRS expects to process more than 153 million individual tax returns this year. Through March 3, the agency said it had processed about 39% of that total.

Estimates of how many people took advantage of these types of products industrywide this season aren’t yet available, but levels are likely to be higher than a year ago, bolstered by H&R Block’s entry into the market and the IRS refund disbursement delay.

Tax-prep companies have focused marketing efforts on customers who are early filers, many of whom are cash-strapped and rely on refunds for critical living expenses or to pay down debt.

“What we’re seeing is a change in consumer behavior,” said George Tong, a San Francisco-based senior research analyst at Piper Jaffray Cos. As a result, companies are willing to absorb loan program fees as part of customer acquisition costs, Mr. Tong said.

But not all tax-preparation companies are joining the fray.  Intuit  Inc.,  which owns TurboTax, doesn’t provide refund-anticipation loans. Chief Executive Brad D. Smith told analysts last month that after exiting that line of business a decade ago, the company wasn’t planning a return because “we didn’t feel that that was the right approach for families who were looking to get money in their pocket.”

Tax preparers hoped the refund advance promotions would lift traffic through the early part of the tax season. But through March 3, the number of returns filed was down 8.5%, and electronic returns filed using professional tax preparers dropped 10% from the comparable 2016 period, according to IRS data.

Consumer advocates say the current generation of loans are different than predatory products of years past, but they still require supervision.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 17, 2017

Stock Buybacks Are So Yesterday
by: Justin Lahart
Mar 10, 2017
Click here to view the full article on

TOPICS: Capital Expenditures, Debt, Treasury Stock

SUMMARY: The lofty level reached by the eight year long bull market has been accompanied by little corporate capital spending. This article reports on data showing reversal of that trend.

CLASSROOM APPLICATION: The article may be used in an introductory or intermediate financial reporting class. Questions ask students about accounting for stock buybacks (treasury stock), capital spending, and debt/equity ratio calculations.

1. (Advanced) What term do accountants used to refer to stock buybacks?

2. (Advanced) Summarize the accounting for stock buybacks. Specifically describe the impact on financial statements as well as the accounting entries.

3. (Introductory) Why do the authors of this article compare trends in stock buybacks to trends in spending for capital equipment?

4. (Advanced) What is a debt/equity ratio?

5. (Introductory) The author notes that "in many cases U.S. corporations borrowed money to do stock buybacks." How would these transactions affect the debt/equity ratio? Explain the impact.

Reviewed By: Judy Beckman, University of Rhode Island

"Stock Buybacks Are So Yesterday." by Justin Lahart, The Wall Street Journal, March 10, 2017 ---

Companies are acting like there are better things to do with their money than buy back their shares

For years, American companies’ loved nothing more than using their cash to buy their own stock. But tastes may be changing.

The bull market just turned eight years old, and one of its defining characteristics has been how little capital spending there was by companies. Where in the past companies have responded to a strong stock market and low interest rates by stepping up capital spending, over the past several years they have invested little in new equipment.

Instead, they bought their own stock, reducing the number of their shares outstanding and  helping to drive earnings per share higher. Data released by the Federal Reserve on Thursday show that nonfinancial corporations retired a net $2.2 trillion in equities over the five-year period ending in 2016. In many cases they borrowed money to do the buybacks, pushing up corporate debt levels.

But the data also suggest a shift is underway. In the fourth quarter, nonfinancial companies bought back a net $323 billion in equities, at a seasonally adjusted annual rate, half as much as in the previous quarter and the lowest amount since the second quarter of 2014.

And unlike the third quarter, companies’ capital spending surpassed their cash flows, which is a return to normal. Companies usually borrow to spend, betting the payoff from the investments more than pay off the debt.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on March 17, 2017

Big Tech Reshaping Auto Supply Chain with Latest Deals
by: Chester Dawson
Mar 14, 2017
Click here to view the full article on

TOPICS: business combinations, International Accounting, Supply Chains

SUMMARY: Intel is the latest in a long line of companies making acquisitions related to the automobile industry. Other recent transactions include Qualcomm's acquisition of automotive chip supplier NXP Semiconductors NV and Siemens AG's takeover of MentorGraphics Corp which is described as related to capabilities with software to produce chips for the automotive industry. All of these transactions are as well crossing international borders.

CLASSROOM APPLICATION: The article may be used in a variety of classes covering business combinations, international accounting, and supply chains. Questions ask students about business combination accounting, the notion of technology firms as part of the automotive supply chain, IFRS versus U.S. GAAP differences between acquirer and target firm, and definitions of joint ventures. NOTE: INSTRUCTORS WILL WANT TO REMOVE THE FOLLOWING STATEMENT BEFORE DISTRIBUTING TO STUDENTS. Accounting and disclosure differences between IFRS and U.S. GAAP related to Research & Development may impact the accounting analyses done in deciding on these business combinations.

1. (Introductory) Why has Intel acquired Israeli company Mobileye?

2. (Introductory) Refer to the related graphic entitled "Who's Driving This Thing?" Summarize the business activities identified. Why does it matter who's driving the transactions?

3. (Advanced) The graphic identifies some activities as involving joint ventures. Define the term joint venture. Explain why this type of organization is likely to be used in these business activities.

4. (Advanced) Many of the transactions described in this article cross international borders. What difficulties might arise because of differences in accounting practices? Specifically identify one example of a U.S. GAAP/IFRS accounting difference that may arise in these business combination transactions.

5. (Advanced) Define the term "supply chain." Are technology firms part of the automotive supply chain?

Reviewed By: Judy Beckman, University of Rhode Island

"Big Tech Reshaping Auto Supply Chain with Latest Deals," by Chester Dawson, The Wall Street Journal, March 14, 2017 ---

Intel is the latest tech company to buy specialized car components supplier in Mobileye

Intel  Corp.  sent a fresh shock wave through the automotive supply chain, becoming the latest tech company to gobble up a specialized car components supplier. The Silicon Valley company’s $15 billion acquisition of  Mobileye   NV could unsettle established auto makers, but it may be the type of big bet needed to populate roads with self-driving vehicles.

Mobileye—an Israeli company specializing in camera-based software—was attractive to Intel because of its head start in high-tech automotive applications, including advanced cruise control and braking systems designed to avoid crashes even if the driver is unaware. Companies that can better connect or automate vehicles are commanding large premiums not seen in the broader car business.

“It shows there’s an increasing belief that autonomous vehicles and assisted driving through the levels is real and needs to be industrialized,” said Mark Wakefield, co-leader of the automotive practice at consulting firm AlixPartners. Companies with deep pockets and broad business portfolios are pouring into the auto industry as a result.

For decades, auto makers treated suppliers as subordinate partners, and dollars that flow from purchasing decisions have kept parts makers afloat. Tech company investments may weaken auto maker influence over the supply chain amid a race to reinvent automobiles as smarter and safer.

The deal follows similar acquisitions in recent months such as  Samsung Electronic  Co. ’s $8 billion purchase of audio and telematics supplier Harman International Industries Inc. and  Siemens  AG ’s $4.5 billion takeover of  Mentor Graphics  Corp. , which producers design software for automotive and other applications. Intel rival  Qualcomm  Inc.  bought automotive chip supplier  NXP Semiconductors   NV for $39 billion.

Recent acquisitions of auto makers by  Nissan Motor  Co.  and  Peugeot  SA  resulted in much lower valuations for companies that sells millions of vehicles.  Mitsubishi Motor  Corp.  and Opel were both snapped up for under $3 billion apiece.

Unlike the capital-intensive business of building cars, supplying the guts of tomorrow’s automobiles is a growth target for spreading the Internet of Things. That involves embedding computing power and connectivity into everyday objects, and making money from cars that collect loads of data and become a platform for a suite of services, much like a smartphone.

“It just shows you the kind of companies that are considering this space interesting,” said Ford Chairman  Bill Ford,  speaking at the South by Southwest Interactive Conference in Austin after Intel’s deal was announced. “The question then for us at Ford is are they friend or foe? And if they are foe can they turn into a friend? There are great partnership opportunities out there.

Continued in article

Teaching Cases in the February 2017 Edition of Issues in Accounting Education ---

A Case Study of Fraud Concerns at a Homeowners' Association

Constance M. Lehmann and Cynthia D. Heagy
Abstract | Full Text | PDF (498 KB) 

No Access




Tempest in a K-Cup: Red Flags on Green Mountain

Dennis H. Caplan, Saurav K. Dutta and David J. Marcinko
Abstract | Full Text | PDF (441 KB) 

No Access




Diamond Foods, Inc.: A Comprehensive Case in Financial Auditing

Mahendra R. Gujarathi
Abstract | Full Text | PDF (2261 KB) | Supplemental Material 

No Access




Arson or Accident: A Forensic Accounting Case Requiring Critical Thinking and Expert Communication

Cindy Durtschi and Robert J. Rufus
Abstract | Full Text | PDF (125 KB) | Supplemental Material 

Continued in article

Humor for March 2017

There's no evidence that Rachel Maddow will leave MSNBC while aspiring to be a PwC auditor.
Bob Jensen

17  Terrible Jokes for Smart People ---

No. 1 Amazon bestseller: 266 blank pages on why to vote Democrat ---
Yale Professor Michael J. Knowles
For a laugh read the price and reviews on Amazon ---
I don't recommend buying this book for any reason other than as a conversation piece in your living room. Make a game out of filling in the pages among your guests.

Symptoms of Growing Old (the second video)

For Tax Nerds (forwarded by Amy Dunbar) ---  

Video:  Rubic's Cube Magic (watch to the end) ---
Thanks to Paula for the heads up.


Forwarded by Paula
Two robins were sitting in a tree. "I'm really hungry", complained the first one. "Me, too" consented the second. "Let's fly down and find some lunch." They flew to the ground and found a nice plot of plowed ground full of worms. They ate and ate and ate and ate 'til they could eat no more. "I'm so full I don't think I can fly back up to the tree," admitted the first one. "Me either. Let's just lay here and bask in the warm sun," suggested the second. "O.K." agreed the first. They plopped down, basking in the sun. No sooner than they had fallen asleep, when a big fat tomcat snuck up and gobbled them up! As he sat, washing his face after his meal, he thought to himself, "I just love baskin' robins."

Forwarded by Paula


Born 1903--Died 1942.

Looked up the elevator shaft to see if the

car was on the way down. It was.


In a Thurmont, Maryland, cemetery:

Here lies an Atheist, all dressed up and no

place to go.


East Dalhousie Cemetery , Nova Scotia :

Here lies Ezekial Aikle, Age 102. Only The

Good Die Young.


In a London, England cemetery:

Here lies Ann Mann, Who lived an old maid

but died an old Mann. Dec. 8, 1767


In a Ribbesford,  England, cemetery:

Anna Wallace

The children of Israel wanted bread, 
 And the Lord sent them manna. 
 Clark Wallace wanted a wife, 
 And the Devil sent him Anna.


In a Ruidoso, New Mexico, cemetery:

Here lies Johnny Yeast...    Pardon me

for not rising.


In a Uniontown, Pennsylvania, cemetery:

Here lies the body of Jonathan Blake.

Stepped on the gas instead of the brake.


In a Silver City, Nevada, cemetery:

Here lays The Kid.

We planted him raw.

He was quick on the trigger

But slow on the draw.


A lawyer's epitaph in England :

Sir John Strange.

Here lies an honest lawyer,

and that is Strange.


John Penny's epitaph in the Wimborne,

England, cemetery:

Reader, if cash thou art in want of any,

Dig 6 feet deep and thou wilt find a Penny.


In a cemetery in Hartscombe, England :

On the 22nd of June, Jonathan Fiddle went

out of tune.


Anna Hopewell's grave in Enosburg Falls ,


Here lies the body of our Anna,

Done to death by a banana.

It wasn't the fruit that laid her low,

But the skin of the thing that made her go.


On a grave from the 1880s in Nantucket , 


Under the sod and under the trees,

Lies the body of Jonathan Pease.

He is not here, there's only the pod.

Pease shelled out and went to God.


In a cemetery in England:

Remember man, as you walk by,

As you are now, so once was I

As I am now, so shall you be.

Remember this and follow me.

To which someone replied by writing

on the tombstone:

To follow you I'll not consent .

Until I know which way you went.


And finally, on a grave in tombstone, Arizona:

Here lies Lester Moore

Shot to death by a .44

No Les, No more


Forwarded by Paula

The following are called paraprosdokians, a derivative of a Greek word meaning beyond expectation.  

A paraprosdokian is a figure of speech in which the latter part

of a sentence is unexpected and oft times very humorous.




If I had a dollar for every girl who found me unattractive,

they'd eventually find me very attractive. 



I find it ironic that the colors red, white, and blue
stand for freedom, until they're flashing behind you.



Today a man knocked on my door and asked for a
small donation towards the local swimming pool,
so I gave him a glass of water.



Artificial intelligence is
no match for natural stupidity.



I'm great at multi-tasking:
I can waste time, be unproductive,
and procrastinate all at once.



If you can smile when things go wrong,
you have someone in mind to blame.



Take my advice,
I'm not using it.



Hospitality is the art of making guests feel
like they're at home when you wish they were.



Behind every great man
is a woman rolling her eyes.



Ever stop to think
and forget to start again?



Women spend more time wondering
what men are thinking than men spend thinking.



He who laughs last
thinks slowest.



Is it wrong that only one company
makes the game Monopoly?



Women sometimes make fools of men,
but most guys are the do-it-yourself type.



Men say women should come with an instruction manual;

but since when has any man stopped to read the instructions.


I was going to give him a nasty look,

but he already had one.


Change is inevitable,

except from a vending machine.


I was going to wear my camouflage shirt today,

but I couldn't find it.


If at first you don't succeed,
skydiving is not for you.


Humor March 2017 ---

Humor February 2017 ---

Humor January 2017 ---

Humor December 2016 --- 

Humor November 2016 --- 

Humor October 2016 ---

Humor September 2016 ---

Humor August  2016 ---

Humor July  2016 ---  

Humor June  2016 ---

Humor May  2016 ---

Humor April  2016 ---

Humor March  2016 ---

Humor February  2016 ---

Humor January  2016 ---

Tidbits Archives ---

And that's the way it was on March 31, 2017 with a little help from my friends.


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

Bob Jensen's Threads ---

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Accounting Historians Journal ---  and
Accounting Historians Journal
Accounting History Photographs ---









February 28, 2017

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
can be changed to corrected link

However in some cases files had to be removed to reduce the size of my Website
Contact me at if you really need to file that is missing


Bob Jensen's New Additions to Bookmarks

February 2017

Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to
For earlier editions of Tidbits go to
For earlier editions of New Bookmarks go to 
Bookmarks for the World's Library --- 

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

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


Bob Jensen's Pictures and Stories


All my online pictures ---

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:  

Google Scholar ---

Wikipedia ---

Bob Jensen's search helpers ---

Bob Jensen's World Library ---

375+ Episodes of William F. Buckley’s Firing Line Now Online: Features Talks with Chomsky, Borges, Kerouac, Ginsberg & More ---

The Crisis of Race in Higher Education ---

Artificial Intelligence Comes to Financial Statement Auditing ---

The Journal of Forensic Accounting Research (JFAR) is the latest journal to be added to AAA's Digital library ---
Issue No. 1 appeared in December 2016
This is not a free electronic publication
Faculty may want to have the campus library subscribe to this new journal.

Accounting professors can improve their knowledge, research skills, and resumes by taking a leave of absence to become Academic Fellows at the SEC ---
I suspect Tom Selling has no regrets for having done so.

Accounting professors with economics specialties can improve their knowledge, research skills, and resumes by taking a leave of absence to become Academic Fellows at the PCAOB ---

Three new plants in California show how lithium-ion storage is ready to power the grid --- 

Jensen Question
How long before a powerful Chinese-South American Lithium Cartel emerges to control the price of power in California and elsewhere?

One advantage of natural gas is that the USA produces much of its own gas and has enormous gas reserves.
The same can't be said for lithium.
This creates enormous problems in financial reporting regarding how to disclose this contingency.

Also I wonder how efficient these enormous batteries will be in colder climates like where I live?

Interest Rate Swap Valuation since the Financial Crisis: Theory and Practice
SSRN, February 7, 2017


Ira G. Kawaller Kawaller & Company, LLC

Donald J. Smith Boston University - Department of Finance & Economics


The financial crisis of 2007-09 revealed the importance of counterparty credit risk in the valuation of non-collateralized interest rate swaps. In theory, these valuations rest on assumed default probabilities and recovery rates. These assumptions, however, should be reflected in the risk-adjusted discount rates of the counterparties. Thus, in practice, swap valuations can be generated by discounting prospective swap settlements using risk-adjusted discount rates, cash flow by cash flow. This article demonstrates this method, discerning risk-adjusted discount rates from data that are readily available on the Bloomberg information system. Critically, if the inputs for the two methodologies are mutually consistent, theory and practice should yield identical valuations

"Larry Summers's Billion-Dollar Bad Bet at Harvard," by Matthew C. Klein, Bloomberg, July 18, 2013 --- 

President Obama has only a few months to pick a candidate to replace Ben Bernanke as chairman of the Federal Reserve, and while the betting website Paddy Power has Fed Vice Chair Janet Yellen leading the pack at 1:4 odds, Larry Summers remains a strong contender at 11:2.

Despite an impressive resume that includes stints as Treasury Secretary and chief economist of the World Bank, there is a very good reason Summers shouldn't be in charge of monetary policy: He seems to have trouble with interest rates.

During the financial crisis, Harvard lost nearly $1 billion because of some unusual and ill-judged interest rate swaps that Summers implemented in the early 2000s during his troubled tenure as the university's president.

Interest rate swaps allow borrowers to lock in a fixed interest rate on floating-rate debt, which can be good to hedge against short-term uncertainty. The problem with Harvard was that Summers wanted to lock in interest rates for money that the university hadn't actually borrowed and wasn't planning on borrowing for a very long time.

There aren't a lot of ways to interpret this exotic instrument except as a bet that the future level of interest rates would be higher than the market pricing implied at the time. That bet was wrong, and Harvard lost a billion dollars. Anonymous finance blogger Epicurean Dealmaker puts it well:

"I have rarely encountered a corporate client who feels confident enough about both their absolute funding needs and current and impending market conditions to enter into a forward swap starting more than nine months into the future. Entering into a forward start swap for debt you do not intend to issue up to 20 years in the future sounds like either rank hubris or free money for Wall Street swap desks."

Why, back in 2004, did Summers feel so confident that interest rates were going to be much higher than they actually were? Reuters blogger Felix Salmon found one clue in a speech Summers gave in October of that year. Among other he things, Summers warned of the dangers created by the U.S. current account deficit and highlighted the seemingly absurd fact that short-term borrowing costs were lower than the rate of inflation. Perhaps Summers's experience with foreign-exchange crises in Asia and Latin America convinced him that something similar could happen in a country that borrowed in its own currency.

Not only was Summers wrong in 2004 about where interest rates would be -- he was willing to bet a lot of other people's money that he knew better than everyone else. The damage at Harvard was bad enough. Imagine what that sort of thing could do to the U.S. economy.

In December 2016 Tom Selling announced that he'd have started to write a book that would propose a very different basis for financial accounting by public companies.  I’m calling it ‘Shareholder-Oriented Financial Accounting’ (S-OFA), and this is the opening paragraph I

This of course initially begs the question about how "Shareholder-Oriented Accounting" might differ from "Creditor-Oriented Accounting?"

It also begs the question of whether there's a difference between existing shareholder-oriented accounting and accounting for potential equity investors?

It also begs the question about accounting for investors in mezzanine debt or other complicated contracts involving both debt and equity.

There's a long-standing debate on the trade-offs between balance sheet oriented standards (perhaps aimed more at creditors) versus income statement oriented standards (perhaps aimed more at equity investors). It may be less important to distinguish unrealized versus realized revenue for balance sheets than it is for income statements. By way of example, since the 1980s financial analysts consistently stress that it's important to distinguish hedge accounting from speculation accounting with derivative financial instruments in terms of income reporting. The essential problem is that hedged items such a forecasted purchases of jet fuel by airline companies are not booked whereas hedges of future purchases of jet fuel by airline companies must be booked under FAS 133 and IFRS 9.

Tom has previously suggested that his proposed system may make a radical departure from double-entry accounting. I hope that if he does so that he was cite prior literature on such departures along with a summary of the reasons for the Darwinian popularity of double-entry accounting (survival of the fittest).

There's also the systemic problem of putting relevant numbers on things that have troubled accountants throughout time, particularly putting numbers on values of intangibles and continent liabilities and risks. For example now that Tesla's lithium batteries will become major components of the USA's power grid, home and business solar panels, and electric vehicles, what is the risk that Tesla will become almost totally dependent upon a lithium cartel that is virtually operated by foreign nations that supply almost all the lithium in the world. How do you put a number on that type of long-term risk?

It's unfair to ask that Tom come up with miracle solutions to problems that greatly troubled accountants throughout history.

But it is fair to ask how his "shareholder-oriented accounting" will differ from accounting as we know it today in the USA GAAP, IFRS, and common low traditions often relied upon in courts around the world.

I also commend Tom for undertaking such a huge writing effort late in his professional career.

The Decline of Interest in Current (Replacement) Cost Accounting in the 1980s

In the 1980s the FASB introduced FAS 33 as an experiment in the value added to investors of supplemental current (replacement) cost accounting. The FASB concluded that financial analysts and investors found little value in the supplemental disclosures, and the FASB a few years later rescinded FAS 33.

The Accounting Standards Committee in England also ran a similar  experiment that was rescinded ---

The Withdrawal of Current Cost Accounting in the United Kingdom: A Study of the Accounting Standards Committee

. . .

Evidence from the archives of the U.K. Accounting Standards Committee (ASC) is used to trace the events leading to the withdrawal of the current cost accounting standard, SSAP 16, from 1980 to 1988. Three central issues are addressed. First, the ASC's role as a regulatory body is considered in the light of the failure to obtain compliance with SSAP 16 and to find an acceptable replacement. Second, the decline in support for SSAP 16 is explained in terms of changes in the economic environment. Third, the roles of different interest groups in the process are analysed.

Market Value Accounting: Entry Value (Current Cost, Replacement Cost) Accounting

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, PLA-Adjusted historical cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies are no longer required to generate FAS 33-type comparisons. The primary basis of accounting in the U.S. is unadjusted historical cost with numerous exceptions in particular instances. For example, price-level adjustments may be required for operations in hyperinflation nations. Exit value accounting is required for firms deemed highly likely to become non-going concerns. Exit value accounting is required for personal financial statements (whether an individual or a personal partnership such as two married people). Economic (discounted cash flow) valuations are required for certain types of assets and liabilities such as pension liabilities. Hence in the United States and virtually every other nation, accounting standards do not require or even allow one single basis of accounting. Beginning in January 2005, all nations in the European Union adopted the IASB's international standards that have moved closer and closer each year to the FASB/SEC standards of the United States.

Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

·     Conforms to capital maintenance theory that argues in favor of matching current revenues with what the current costs are of generating those revenues. For example, if historical cost depreciation is $100 and current cost depreciation is $120, current cost theory argues that an excess of $20 may be wrongly classified as profit and distributed as a dividend. When it comes time to replace the asset, the firm may have mistakenly eaten its seed corn.

·     If the accurate replacement cost is known and can be matched with current selling prices, the problems of finding indices for price level adjustments are avoided.

·     Avoids to some extent booking the spread between selling price and the wholesale "cost" of an item. Recording a securities “inventory” or any other inventory at exit values rather than entry values tends to book unrealized sales profits before they’re actually earned. There may also be considerably variability in exit values vis-à-vis replacement costs.

Disadvantages of Entry Value (Current Cost, Replacement Cost) Accounting

·     Discovery of accurate replacement costs is virtually impossible in times of changing technologies and newer production alternatives.  For example, some companies are using data processing hardware and software that no longer can be purchased or would never be purchased even if it was available due to changes in technology. Some companies are using buildings that may not be necessary as production becomes more outsourced and sales move to the Internet. It is possible to replace used assets with used assets rather than new assets. Must current costs rely only upon prices of new assets?

·     Discovering current costs is prohibitively costly if firms have to repeatedly find current replacement prices on thousands or millions of items.

·     Accurate derivation of replacement cost is very difficult for items having high variations in quality. For example, some ten-year old trucks have much higher used prices than other used trucks of the same type and vintage. Comparisons with new trucks is very difficult since new trucks have new features, different expected economic lives, warranties, financing options, and other differences that make comparisons extremely complex and tedious. In many cases, items are bought in basket purchases that cover warranties, insurance, buy-back options, maintenance agreements, etc. Allocating the "cost" to particular components may be quite arbitrary.

·     Use of "sector" price indices as surrogates compounds the price-index problem of general price-level adjustments. For example, if a "transportation" price index is used to estimate replacement cost, what constitutes a "transportation" price index? Are such indices available and are they meaningful for the purpose at hand? When FAS 33 was rescinded in 1986, one of the major reasons was the error and confusion of using sector indices as surrogates for actual replacement costs.

·     Current costs tend to give rise to recognition of holding gains and losses not yet realized.

Jensen Comment

MAAW's Replacement Cost Bibliography ---

In the 1980s academic accounting research did more to undermine FAS 33 than to save it. Examples of research that found no significant value added (relative to cost added) to current (replacement) cost supplements included the following:

Watts, R. L. and J. L. Zimmerman. 1980. On the irrelevance of replacement cost disclosures for security prices. Journal of Accounting and Economics (August): 95-106.

Beaver, W. H., P. A. Griffin and W. R. Landsman. 1982.The incremental information content of replacement cost earnings. Journal of Accounting and Economics (July): 15-39.

Schaefer, T. F. 1984. The information content of current cost income relative to dividends and historical cost income. Journal of Accounting Research (Autumn): 647-656

Sutton, T. G. 1988. The proposed introduction of current cost accounting in the U.K.: Determinants of corporate preference. Journal of Accounting and Economics (April): 127-149.

Swanson, E. P. 1990. Relative measurement errors in valuing plant and equipment under current cost and replacement cost. The Accounting Review (October): 911-924.

Accounting History Blast from the Past
Demski, J. S. 1973. The general impossibility of normative accounting standards. The Accounting Review (October): 718-723. (JSTOR link).

Cushing, B. E. 1977. On the possibility of optimal accounting principles. The Accounting Review (April): 308-321. (JSTOR link).

Several authors have examined the issue of choice among financial reporting standards and principles using the framework of rational choice theory. Their results have been almost uniformly pessimistic in terms of the possibilities for favorable resolution of this issue. Upon further analysis, these results are revealed to be an artifact of the way in which the issue is initially formulated. Several possible methods of reformulating of this issue within the rational choice framework are proposed and explored in this paper. The results here support a much more optimistic conclusion and suggest numerous avenues of further research which could provide considerable insight into the conditions under which optimal accounting principles are possible.


Purpose of Theory:  Prediction Versus Explanation

"Higgs ahoy! The elusive boson has probably been found. That is a triumph for the predictive power of physics," The Economist, February 17, 2012 ---

IN PHYSICS, the trick is often to ask a question so obvious no one else would have thought of posing it. Apples have fallen to the ground since time immemorial. It took the genius of Sir Isaac Newton to ask why. Of course, it helps if you have the mental clout to work out the answer. Fortunately, Newton did.

It was in this spirit, almost 50 years ago, that a few insightful physicists asked themselves where mass comes from. Like the tendency of apples to fall to the ground, the existence of mass is so quotidian that the idea it needs a formal explanation would never occur to most people. But it did occur to Peter Higgs, then a young researcher at Edinburgh University, and to five other scientists whom the quirks of celebrity have not treated so kindly. They, too, had the necessary mental clout. They got out their pencils and papers and scribbled down equations whose upshot was a prediction.

The reason that fundamental particles have mass, the researchers calculated, is their interaction with a previously unknown field that permeates space. This field came to be named (with no disrespect to the losers in the celebrity race) the Higgs field. Technically, it is needed to explain a phenomenon called electroweak symmetry breaking, which divides two of the fundamental forces of nature, electromagnetism and the weak nuclear force. When that division happens, a bit of leftover mathematics manifests itself as a particle. This putative particle has become known as the Higgs boson, whose possible discovery was announced to the world on December 13th (see article).

Physicists demand a level of proof that would in any other human activity (including other scientific ones) be seen as ludicrously high—that a result has only one chance in 3.5m of being wrong. The new results—from experiments done at CERN, the world’s premier particle-physics laboratory, using its multi-billion-dollar Large Hadron Collider, the LHC—do not individually come close to that threshold. What has excited physicists, though, is that they have got essentially identical results from two experiments attached to the LHC, which work in completely different ways. This coincidence makes it much more likely that they have discovered the real deal.

If they have, it would be a wonderful thing, and not just for science. Though nations no longer tremble at the feet of particle physicists—the men, and a few women, who once delivered the destructive power of the atom bomb—physics still has the power to produce awe in another way, by revealing the basic truths that underpin reality.

Model behaviour

Finding the Higgs would mark the closing of one chapter in this story. The elusive boson rounds off what has become known as the Standard Model of physics—an explanation that relies on 17 fundamental particles and three physical forces (though it stubbornly refuses to accommodate a fourth force, gravity, which is separately explained by Albert Einstein’s general theory of relativity). Much more intriguingly, the Higgs also opens another chapter of physics.

The physicists’ plan is to use the Standard Model as the foundation of a larger and more beautiful edifice called Supersymmetry. This predicts a further set of particles, the heavier partners of those already found. How much heavier, though, depends on how heavy the Higgs itself is. The results just announced suggest it is light enough for some of the predicted supersymmetric particles to be made in the LHC too.

That is a great relief to those at CERN. If the Higgs had proved much heavier than this week’s announcement implies they might have found themselves with a lot of redundant kit on their hands. Now they can start looking for the bricks of Supersymmetry, to see if it, too, resembles the physicists’ predictions. In particular, in a crossover between particle physics and cosmology, they will be trying to find out if (as the maths suggest) the lightest of the supersymmetric partner particles are the stuff of the hitherto mysterious “dark matter” whose gravity holds galaxies together.

A critique of pure reason

One of the most extraordinary things about the universe is this predictability—that it is possible to write down equations which describe what is seen, and extrapolate from them to the unseen. Newton was able to go from the behaviour of bodies falling to Earth to the mechanism that holds planets in orbit. James Clerk Maxwell’s equations of electromagnetism, derived in the mid-19th century, predicted the existence of radio waves. The atom bomb began with Einstein’s famous equation, E=mc{+2}, which was a result derived by asking how objects would behave when travelling near the speed of light. The search for antimatter, that staple of science fiction, was the consequence of an equation about electrons which has two sets of solutions, one positive and one negative.

Eugene Wigner, one of the physicists responsible for showing, in the 1920s, the importance of symmetry to the universe (and who was thus a progenitor of Supersymmetry), described this as the “unreasonable effectiveness of mathematics”. Not all such predictions come true, of course. But the predictive power of mathematical physics—as opposed to the after-the-fact explanatory power of maths in other fields—is still extraordinary.

Continued in article

Bob Jensen's threads on theory ---


Jensen Comment
Last week I had an examination by my new and relatively young ophthalmologist. His older associate (a woman) was my former ophthalmologist who elected to no longer accept Medicare patients even when they have premium Medicare supplements.

What I found interesting in conversation with my new ophthalmologist is that he's now working part time toward an MBA  in an Auburn University online program that is available only to physicians. Although the degree will be from Auburn his online courses come from various universities such as the University of Virginia. I suspect this type of specialized program targeting students from a profession may become a trend such as MBA degrees for physicians, AI degrees for auditors, big data degrees for accountants, advanced tax degrees for attorneys,  Spanish degrees for nurses, etc.

My point is that as degree programs become more generalized for undergraduates there will be more specialized advanced degrees for professionals in areas outside of their professions. Much of this is enabled by advances in the technology and popularity of distance education and asynchronous learning.

I told my ophthalmologist that he probably would not make it through the entire Auburn program because he did not talk with a proper accent for a degree from Auburn University. He replied that this was no longer a prerequisite for an online degree from Auburn.

A Blackjack Pro Explains How Ignoring the Odds Cost the Falcons the Super Bowl ---

Efficient-Market Hypothesis ---

Arbitrage --- 

The First Mathematician Banned from Playing in Las Vegas Casinos
The Math Whiz and the Money After Thorp beat the blackjack dealers in Las Vegas, he took his gambling savvy to an even bigger casino—Wall Street ---

It is said that investing in the stock market can resemble betting at a casino. For Edward Thorp, the comparison has a certain resonance. In “A Man for All Markets,” he delightfully recounts his progress (if that is the word) from college teacher to gambler to hedge-fund manager. Along the way we learn important lessons about the functioning of markets and the logic of investment.

Born in the depths of the Depression, Mr. Thorp grew up poor but infused with a love of numbers and an uncanny ability to retain information. At age 6, he would amaze strangers by naming the kings and queens of England in order and reciting the dates they reigned. Later he amused himself by creating a ham-radio station and setting up a personal chemistry lab. He once turned a Long Beach swimming pool red with chemicals from his lab. He attended Berkeley by earning a scholarship after excelling in a physics exam, never having formally studied the subject but having taught himself by reading a textbook. At UCLA he earned a Ph.D. in math and embarked on an academic career.

We learn that, for the 26-year-old mathematics instructor and his young wife, Las Vegas was the perfect vacation destination, with its cheap rooms and food. It also proved to be the perfect testing ground for Mr. Thorp’s method of turning the game of blackjack in the player’s favor. Using a mathematician’s logic, he developed a set of rules that minimized the casino’s advantage. He then realized that the odds of the player winning would shift as play proceeded, with certain combinations becoming more or less likely as the deck reveals the undealt cards remaining. The trick to winning money depended on betting less when the casino had the advantage and more when the player did. The casino would win most of the small bets, but the player would win most of the big ones.

Two New York millionaires, learning of Mr. Thorp’s experiments, offered to bankroll a test of his system. The test succeeded, and Mr. Thorp began a prosperous career as a Nevada gambler. Soon enough he invented a wearable computer to make the job of card counting easier. He published his method in a best-selling book, “Beat the Dealer” (1962), and unleashed an army of card counters. The casinos fought back by using multiple decks and shuffling the cards more often, not to mention more nefarious techniques. In one case, Mr. Thorp claims, the accelerator pedal of his car was sabotaged, leading to a hair-raising highway episode from which he emerged, luckily, unscathed.

Eventually Mr. Thorp took his mathematical expertise and gambling savvy to an even bigger casino—Wall Street. Giving up his academic appointment, he teamed up with securities traders in 1969 to form a hedge fund called Princeton Newport Partners. The technique he employed there is called statistical arbitrage.

Arbitrage in its pure form involves exploiting differences in the price of the same good in separate markets. If an ounce of gold sells for $1,210 in London and $1,200 in New York, an arbitrageur can short gold in London while buying it in New York, earning the $10 discrepancy in price (minus expenses). The stock market offers similar opportunities. If an exchange-traded fund representing the S&P 500 trades at $2,200 while the prices of the individual 500 stocks convert to a value of $2,150, a profitable arbitrage trade is possible. Building his own option pricing model, Mr. Thorp would pounce on any discrepancy revealed by his mathematical formulas. The arbitrages he used included exploiting the value of options traded in Chicago on individual stocks and the prices of the underlying stock in New York.

Princeton Newport was very successful until some of its traders got caught up in the prosecution of Michael Milken in the 1980s. The five top people in New York and Princeton, N.J. (who refused to help convict Milken) were indicted by New York’s U.S. Attorney Rudy Giuliani on various charges, including stock manipulation and tax fraud. Though most of the charges were later dropped, the prosecution spelled the end of Princeton Newport.

The rest of “A Man for All Markets” covers a variety of topics, all associated with investing and life. There is a chapter on swindles and hazards, including the Madoff Ponzi scheme and how it worked. We learn lessons from financial crises: e.g., the need to price mortgages more reliably by including catastrophic “black swan” events in their predicted default rates. In a section on asset allocation Mr. Thorp notes that “investors who chase returns, buying asset classes on the way up and selling on the way down, have had poor historical results.” Throughout, he emphasizes the importance of containing risk and avoiding excessive leverage. Perhaps his best advice is a maxim that has nothing to do with material wealth: “Whatever you do, enjoy your life and the people who share it with you, and leave something good of yourself for the generations to follow.”

Mr. Thorp goes out of his way to criticize the academic view that our securities markets are reasonably efficient. He cites the story of the finance professor admonishing his students not to pick up a $100 bill on the ground because if it was really a $100 bill it wouldn’t be there. Of course markets aren’t perfectly efficient, any more than a well-built mechanical engine is perfectly efficient. Arbitrage opportunities do appear from time to time and can be exploited.

But one implicit lesson of Mr. Thorp’s memoir is that, as arbitrage opportunities are exploited, they tend to disappear and pricing becomes more efficient. Casinos changed their rules when the card counters invaded. When option traders entered the market with hand-held computers, the option trades that Mr. Thorp made became less profitable. Over time, hedge funds lose their edge as opportunities for arbitrage are exploited with more money and returns diminish. Perhaps the finance professor’s story should be restated: “Pick up the $100 bill right away because if it is really a $100 bill it will not be there for long.”

Jensen Comment
Arbitrage is not a sure thing even for the pros. Years ago two Nobel Prize winning mathematical economists (Professor Merton at MIT and Professor Scholes at Stanford) and some of their prized doctoral students plus a Wall Street pro (John W. Meriwether) in the bond markets formed an arbitrage hedge fund called Long-Term Capital Management (LTCM) that performed spectacularly for selected rich folks allowed to invest in the fund. It appeared these whiz mathematicians would really beat the market when they placed a "Trillion Dollar Bet" (the title of a subsequent Nova video on PBS). The bet lost due to unforeseen and highly unlikely circumstances (most notably a crash in the Asian financial markets). The resulting LTCM implosion nearly brought Wall Street in its entirety down. The big Wall Street investment banks dug deep into their own pockets to bail out LTCM and then quietly folded up this arbitrage hedge fund forever.


Concept of Zero ---

The History of Zero: How Ancient Mesopotamia Invented the Mathematical Concept of Nought and Ancient India Gave It Symbolic Form ---

. . .

This cumbersome system lasted for thousands of years, until someone at some point between the sixth and third centuries BCE came up with a way to wedge accounting columns apart, effectively symbolizing “nothing in this column” — and so the concept of, if not the symbol for, zero was born. Kaplan writes:

In a tablet unearthed at Kish (dating from perhaps as far back as 700 BC), the scribe wrote his zeroes with three hooks, rather than two slanted wedges, as if they were thirties; and another scribe at about the same time made his with only one, so that they are indistinguishable from his tens. Carelessness? Or does this variety tell us that we are very near the earliest uses of the separation sign as zero, its meaning and form having yet to settle in?

But zero almost perished with the civilization that first imagined it. The story follows history’s arrow from Mesopotamia to ancient Greece, where the necessity of zero awakens anew. Kaplan turns to Archimedes and his system for naming large numbers, “myriad” being the largest of the Greek names for numbers, connoting 10,000. With his notion of orders of large numbers, the great Greek polymath came within inches of inventing the concept of powers, but he gave us something even more important — as Kaplan puts it, he showed us “how to think as concretely as we can about the very large, giving us a way of building up to it in stages rather than letting our thoughts diffuse in the face of immensity, so that we will be able to distinguish even such magnitudes as these from the infinite.”

Continued in article

By 1740 BC, the Egyptians had a symbol for zero in accounting texts ---

Quipu, a knotted cord device, used in the Inca Empire and its predecessor societies in the Andean region to record accounting and other digital data, is encoded in a base ten positional system. Zero is represented by the absence of a knot in the appropriate position.---

IRS Audit Rate Of Individuals (0.7%), Businesses (0.5%) Falls To 10+ Year Lows Due To Budget Cuts ---

Jensen Comment
Much depends upon how the term "audit" is defined. I don't think this low "audit rate" includes those computer notices to taxpayers that they made computation errors and partial audits that are not audits of a full return. Taxpayers are not advised to cheat by thinking the IRS won't seek back taxes and penalties. The IRS has many ways of investigating tax returns that are fall short of being full audits.

In my personal opinion the IRS appropriations would have been somewhat higher if Lois Lerner had not refused to testify under oath that the White House under Obama did not abuse IRS power to reduce GOP campaign funding. But there's no way of proving "what might have been" if Lerner testified to what really happened.

Bib Jensen's tax helpers are at

Teaneck Woman Embezzled More Than $160K: Prosecutor ---

TEANECK, N.J. — A township woman accused of embezzling more than $160,000 from her employer was arrested Tuesday, authorities announced.

Jennifer A. Smith, 32, has been charged with computer related theft and theft by deception, said Bergen County Prosecutor Gurbir S. Grewal.

Smith, a controller and accountant, was charged after Smith's Harrington Park employer contacted the police department there after it determined that Smith had diverted and stolen funds in excess of $160,000, Grewal said.

Harrington Park police officers and members of the Bergen County Prosecutor's Office Financial Crimes Unit investigated and determined that from Sept. 1, 2016 and Jan. 31, 2017, Smith accessed the company's computer payroll system and distributed more than $40,000 to herself, the prosecutor said.

The investigation further revealed that Smith distributed used the banking system in January to divert about $120,000 in payments to her bank account, Grewal said.

Continued in article

5 small business scams to look for in 2017 ---

Credit-Card Fraud Keeps Rising, Despite New Security Chips—Study ---

Increase in identity fraud driven by rise in fraudulent online purchases

More consumers became victims of identity fraud last year than at any point in more than a decade despite new security protections implemented by the credit-card industry, a report released Wednesday said.

Some 15.4 million U.S. consumers were victims of identity fraud in 2016, resulting in $16 billion in total losses, according to the report by consulting firm Javelin Strategy & Research and identity-theft-protection firm LifeLock Inc. The number of victims rose 18% from 2015 and was the highest since Javelin, a unit of Greenwich Associates LLC, started tracking the phenomenon in 2003.

The increase in identity fraud, the bulk of which comes from card activity, was driven in part by a 15% rise in cases of fraudulent online purchases, the study noted. That activity led to “existing-card” fraud, which involves criminals counterfeiting debit and credit cards already held by customers, reaching a new peak.

Big increases also occurred in rarer frauds that have been steadily rising in recent years and that are harder for consumers and lenders to detect. The incidence of new-account fraud, for example, in which new accounts are opened in consumers’ names without their knowledge or knowledge by the lender, rose 40% to 1.8 million, while the number of cases of consumers having a bank account, credit card or other account taken over improperly increased by over one-fifth to 1.4 million.

The increases happened despite the rollout of tougher security measures around debit and credit cards over the past couple of years. Most major card issuers in the U.S. have replaced consumers’ magnetic stripe cards with chip cards, and merchants have increasingly shifted to more secure payment terminals, which combined are supposed to make it harder for consumers’ card information to be stolen.

But the findings of the report suggest that swindlers are finding ways around the new measures. “Fraud is kind of like squeezing Jell-O,” said Stephen Coggeshall, chief analytics and science officer at LifeLock. “Stop it one place, and it migrates to somewhere else.”

With online shopping, there is no way to use the chips on cards. Most of those merchants still rely on the basic card numbers, expiration dates and security codes on the cards. That is largely why “card-not-present” fraud, in which criminals use card information to make transactions online without needing to present the actual card, affected 3.4% of consumers, up from 2.4% in 2015, according to the study.

Continued in article

List of FASB Pronoucements ---

How Does the FASB Make Decisions? Agenda Setting, Individual Board Members, and Fair Value Accounting
SSRN, January 26, 2017

John (Xuefeng) Jiang Michigan State University

Isabel Yanyan Wang Michigan State University

Daniel Wangerin Michigan State University


We provide rich descriptive statistics on how the Financial Accounting Standard Board (FASB) sets Generally Accepted Accounting Standards (GAAP) over the past 40 years. Based on 211 financial accounting standards issued between 1973 and 2014, we report the reasons that the FASB adds a project to its agenda, the parties that bring the issue to the FASB’s attention, and the themes across different standards. We find that reducing diverse practice and inconsistent guidance is the most frequently cited reason for the FASB to take on a project. More than half of the standards are aimed to enhance comparability. Parties that bring an issue to the FASB’s attention also likely possess relevant first-hand information, highlighting the importance of information and expertise in the standard-setting process. Accounting for financial instruments is the most frequent theme across accounting standards, which potentially explains the growth in fair value measurement in U.S GAAP. We analyze the dissenting opinions written by individual board members and find some evidence that board members’ reasons for disagreements are associated with their professional backgrounds. However, our analyses indicate board members’ attitude toward fair value accounting is context-specific and cannot be fully explained by their professional backgrounds.

Supreme Court decision creates liability risk for CPA profession regulators ---

Members of state boards of accountancy may be vulnerable to lawsuits following a 2015 Supreme Court decision that state regulators could be held personally liable for potential antitrust actions taken on behalf of the regulatory body.

The ruling applies to all state regulatory boards that are made up of active market participants, such as CPAs serving on state boards of accountancy. In North Carolina State Board of Dental Examiners v. FTC, 574 U.S. ___ (2015), the Court held that, whether intentional or not, an anti-competitive act undertaken by a member of a state regulatory body would invalidate state personal antitrust immunity protections unless certain conditions are met.

The ruling’s goal is to discourage antitrust behavior by individuals entrusted by states with self-regulation in their fields of practice. This could cause problems for individual CPAs and the accounting profession, as fewer CPAs may be willing to accept the personal liability that would be associated with serving on a state board. 

Forbes:  Senior Specials: 14 States With Retirement Income Tax Breaks (the breaks themselves differ) ---

New York
South Carolina

To this should be added the states with even better specials because they have no income tax on any wages and qualifying retirement retirement income.

Seven U.S. states currently don't have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And residents of New Hampshire and Tennessee are also spared from handing over an extra chunk of their paycheck on April 15, though they do pay tax on dividends and income from investments that are not part of retirement plans. Some of these states, particularly those dependent upon oil revenue, are contemplating new taxes.

Non-GAAP Financial Reporting --- 

Could Non-GAAP Measures Help Improve GAAP?

Jensen Comment
Presumably an audit firm's clients invent non-GAAP metrics and other disclosures to lower cost of capital. When alerted to such new inventions standard setters might be inspired to change the accounting rules for IFRS and USA GAAP.

For example, if companies start reporting non-GAAP replacement costs because there seems to be an interest in such reporting by financial analysts, creditors, and equity investors then standard setters may once again consider reviving FAS 33 that was killed because seeming excess of costs of generating replacement costs over their benefits in lowering cost of capital. I think Advocates of replacement cost reporting. like Tom Selling, might lood for evidence of voluntary non-GAAP reporting of replacement costs.

Audit Failure of New Zealand Finance Companies – An Exploratory Investigation
SSRN, August 19, 2016


Humayun Kabir Faculty of Business & Law, Auckland University of Technology

Li Su Auckland University of Technology

Asheq R. Rahman Auckland University of Technology - Faculty of Business & Law


Purpose – The setting of private finance companies failing in New Zealand during 2006-12 was characterised by weaker corporate governance and enforcement of securities law. This paper explores audit failure in this setting and examines whether auditors erred in their audits of the failed finance companies and whether the audit failure rate of Big N auditors was different from that of non-Big N auditors.

Design/methodology/approach – This paper adopts the archival research method, and utilises three sets of evidence to assess audit failure – the frequency of going-concern opinion (GCO) prior to failure, misstatements in the last audited financial statements, and the violation of the Code of Ethics.

Findings – The study found that only 41% of the sample companies received the GCO in their last audit prior to failure, and provides evidence of material misstatements in the financial statements of a number of failed finance companies that received clean audit opinions prior to failure, and breaches of the Code of Ethics by a number of auditors. These results strongly indicate audit failure for a number of failed finance companies. The audit failure rate, however, appears less for Big N auditors than for non-Big N auditors.

Practical implications – The study draws the attention of the stock market regulator and the accounting profession to an area, the audit of private finance companies, that needs better quality audits.

Originality/value – This paper provides systematic evidence of audit failure in failed finance companies in New Zealand. It also furnishes preliminary evidence of Big N auditors compensating for weaker corporate governance.

The Value Relevance of Financial and Non-Financial Information: Evidence from Recent Academic Literature
SSRN, January 12, 2017


Amitav Saha The University of Notre Dame Australia

Sudipta Bose Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle Australia


Value-relevance research is an important domain of modern capital market research. Accounting researchers have used the value-relevance research framework in many ways with the aim of measuring whether accounting information has a predicted association with equity market values. One of the most widely used models in value-relevance research is a modification of the Ohlson (1995) market valuation model in which the market value of a firm’s equity is presumed to be a function of its book value of equity and abnormal earnings. Furthermore, using the Ohlson (1995) model, accounting researchers have documented the value relevance of different types of financial and non-financial information. Drawing on a selected number of recently published studies that have documented the value relevance of different types of financial and non-financial information, this chapter reviews and integrates recent findings, highlighting challenges and providing future directions for further research in this area.

Loan Fair Value Approaches Revisited
SSRN, January 28, 2017


Jimmy Skoglund SAS Institute Inc.


In this paper we discuss practices for fair value estimation of banking book items. While fair value principles are not new they have gained in importance recently with new accounting regulations (e.g., IFRS 9) and banks are also considering market best practices to disclose banking book valuations focusing on market implied views rather than potentially biased internal views. A core part of the fair value estimation is the extraction of the risk-neutral market implied view on risk spreads using either directly observable or approximate market spreads. Such extraction can be based on the available credit markets and one can either extract a spread or premia directly from the market or start with a real-world model of credit risk as the basis and add a market induced risk premia. In the latter case there is the benefit of relating real-world expected loss models to risk-neutral. Regardless of approach - using the actual spread or risk premium extracted from the market in discounting of cash flows is of course central in fair value and the foundation of the market valuation principle. As for the bulk of the banking book items there are no active quote markets the fair value estimation often uses the discounted cash flow principle similar to bonds. Loans may however have rating or credit state dependent cash flow features that require a valuation using a state transition matrix setting. Similarly, loans may be exposed to statistical prepayment models that require adjustments to simple bond valuation schemes. In our valuation scheme we strip the cash flows of financial engineering valued embedded options and value such embedded optionality separately. This definition of the valuation cash flows is consistent with the new regulation for interest rate risk in the banking book which is an advantage as such banking book cash flows should already be available in banks.

The Role of Ethics on Accounting
SSRN, January 18, 2017


Yaghoub Aghdam Mazraeh Islamic Azad University (IAU) - Soofian Branch

Haniyeh Karimzadeh Islamic Azad University (IAU) - Accounting Department


This examination investigated the accounting and its ability in attracting the public self-esteem directly is depended on accepting the professional disciplines on several important topics related to ethics and the accounting profession. The defrauding accounting activities state the ethical values’ weakness govern the accounting working and education. Therefore, accounting training system for training the ethical accountant has been being instituted among the accountants since this issue will leads to increase the public trust, efficiency toward the accountants. Through the current research, the role of ethic on solving the accounting training system and professional rules of accounting which is in base of mind and metallization were explained by libraries method and by exploring the websites. The mentioned issue will cause to solve the complicated accounting problems among the companies’ accountants.

How Will the New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?
SSRN, January 17, 2017


KC Lin Oregon State University

Roger C. Graham Jr. Oregon State University


We extend Williamson’s (1973, 1987) transaction economics research to leased assets to help explain why some assets are acquired by capital lease and the use of other assets is acquired by operating lease. We look for evidence that capital leases are used for higher asset specificity assets and operating leases are used for lower asset specificity assets. Specifically, we find that returns on capital lease assets exceed the returns on operating lease assets. That the nature of capital lease assets differs from operating lease assets suggests that the lease standard SFAS 13 better categorizes assets under lease. The new lease standard ASU 2016-02 allows only one category for lease assets. From this we conclude that ASU 2016-02 will potentially have an adverse effect on the relevance of lease asset accounting.

IBM's Watson became the world's master at playing chess. Now H&R Block wants Watson to become the world's master tax expert ---
The tax preparer's workers will use IBM’s Watson data crunching service to answer customer questions, find obscure deductibles, and presumably help clients score bigger tax refunds.

Explaining Complicated Mathematics of Pension Obligations With Baseball
California Teachers' Pension System Lowers Projection, Potentially Tripling What Taxpayers Will Owe ---

Golden Years' Divorces Show Couples' Need for Financial Literacy ---

Jensen Comment
Attorneys who take on divorce cases are not necessarily experts on accounting and finance. The road to misery for one spouse is often paved with an attorney's financial ignorance and the financial concealments of the other spouse in a divorce.

The History of the Cross Section of Stock Returns
SSRN, November 24, 2016


Juhani T. Linnainmaa USC Marshall School of Business; National Bureau of Economic Research (NBER)

Michael R. Roberts The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)


Using data spanning the 20th century, we show that most accounting-based return anomalies are spurious. When examined out-of-sample by moving either backward or forward in time, anomalies' average returns decrease, and volatilities and correlations with other anomalies increase. The data-snooping problem is so severe that even the true asset pricing model is expected to be rejected when tested using in-sample data. Our results suggest that asset pricing models should be tested using out-of-sample data or, when not feasible, by whether a model is able to explain half of the in-sample alpha.

Investor Reaction to IFRS for Financial Instruments in Europe: The Role of Firm-Specific Factors
SSRN, January 7, 2017 


Enrico Onali Aston University - Aston Business School; University of Wales System - Bangor University, Bangor Business School

Gianluca Ginesti Department of Economics, Management, Institutions - University of Naples

Luca Vincenzo Ballestra University of Bologna

January 9, 2017

We examine the market reaction to events related to the standard-setting process of International Financial Reporting Standard (IFRS) 9 for over 3,000 European firms that have adopted IFRS. We find that the market reaction to IFRS 9 is largely affected by firm-specific factors associated with information quality and information asymmetry. In particular, lower information asymmetry and higher information quality have a positive effect on market-adjusted returns. This is in conflict with the common view that IFRS 9 will improve accounting quality for those firms that need it most (namely, small firms with low liquidity and concentrated ownership structure).

Jensen Comment
This may only be available as a free download for a short while.

Goodbye IFRS: Determinants and Consequences of Dropping International Financial Reporting Standards
SSRN, November 30, 2016


Justin Chircop Lancaster University Management School

Christian Stadler Lancaster University - Department of Accounting and Finance


In this study we analyse the determinants and consequences of dropping IFRS. Most Swiss firms listed on the SIX Swiss Exchange and most Chinese firms listed in Hong Kong (H Share companies) use IFRS, but a significant number of these firms have recently opted to drop IFRS. We first analyse the determinants for dropping IFRS and find that less capital market-oriented firms are more likely to drop IFRS. Second, we analyse the effects of dropping IFRS on commonly used accounting quality measures and find some evidence for reduced quality after dropping IFRS. As Swiss GAAP differs more from IFRS than Chinese GAAP, we expect that accounting quality reduces more in Switzerland than in China, but we do not find evidence for this. Third, we analyse the capital market effects of dropping IFRS and find evidence that information asymmetry decreases in China, but there is no significant effect in Switzerland. Additionally, we find that the difference in information asymmetry between Swiss and Chinese firms increases after dropping IFRS. We do not find negative market reactions to dropping IFRS, suggesting that the decision to drop IFRS does not harm investors.

Accounting for Intangibles, the Issue of Memory and the Philosophy of Bergson
SSRN, January 9, 2017


Martin Mullins University of Limerick - Kemmy Business School

Philip O'Regan University of Limerick - Kemmy Business School

Stephen Kinsella University of Limerick

Kathleen Regan University of Limerick


Value is increasingly found in human subjects and in particular within their minds. This places the individual at the centre of economic life and therefore the inner life of individual merits more attention. A key element of humanity is memory and it drives such phenomena as trust and goodwill, essential in modern business. Bergson’s philosophy examines the interaction of mind and matter and in this reflects the dualism of the knowledge economy. His work on memory offers important insights for those seeking to account for and manage intangible assets. Our paper examines, through the prism of Bergsonian philosophy, the implications for accounting practice of the increased importance of intangible assets in modern corporations

The Value in Fundamental Accounting Information
SSRN, January 8, 2017
Forthcoming in The Journal of Financial Research


Harry J. Turtle Colorado State University, Fort Collins - Department of Finance & Real Estate

Kainan Wang University of Toledo


We examine the role of fundamental accounting information in shaping portfolio performance. Using a conditional performance approach, we address the concern that the positive relationship between Piotroski’s F Score and ex post returns is due to risk compensation. Our results show that portfolios of firms with strong fundamental underpinnings generate significant positive and time-varying performance. One potential source of these performance gains is an under-reaction to public information (such as momentum and F Score) when information uncertainty (proxied by size, illiquidity, and idiosyncratic volatility) is high. In addition, conditional performance benefits seem prevalent in periods of high investor sentiment

Jensen Comment
This probably will only be available a short time for a free download.

Flint Residents are Seeking $700 Million in Damages from the EPA ---

Navajo Nation Seeks $160 Million from the EPA ---

Conflict Minerals ---

SEC Reconsideration:   The Commission’s Conflict Minerals Rule ---

In April 2014, the Court of Appeals for the D.C. Circuit held that a portion of the disclosure required by the Commission’s Conflict Minerals Rule violated the First Amendment. Shortly thereafter, the then-Director of the Division of Corporation Finance issued guidance regarding compliance with the Rule in light of the court’s decision and the Commission issued an order staying the effect of the compliance date for those portions of the rule found to be unconstitutional. The case was subsequently remanded to the district court for further consideration. The litigation remains ongoing and the staff’s guidance remains in effect.

In the interim, the temporary transition period provided for in the Rule has expired. And the reporting period beginning January 1, 2017, is the first reporting period for which no issuer falls within the terms of that transition period. In light of this, as well as the unexpected duration of the litigation, I am directing the staff to consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.

I welcome and encourage interested parties to submit detailed comments, and request that they be submitted within the next 45 days.

Rare Earth Minerals ---

Jensen Comment
In addition to conflict minerals (that are not necessarily rare earth minerals) there's the added consideration of financial risk caused by dependence upon limited sources of supply of rare earth minerals and those that are close to being rare earth minerals due to the cost and environmental hazards of mining such as in the case of lithium ---
In other words lithium is neither a conflict mineral nor a rare earth mineral, but a company like Tesla is totally dependent upon supply of lithium from limited sources.

What makes lithium scary is how dependent the world is becoming upon this mineral in a frightening way. For example, California is now making lithium batteries a part of the power grid. Home electricity generation (mostly solar) is becoming increasingly dependent upon lithium batteries. If this trend continues leading to more and more shutdown of gas-powered power plants think of how dependent the USA is becoming on the availability and cost of lithium supplied by China and a few sources in South America. The majority of our energy for industry, homes, telephones, and other appliances might become a captive of a foreign lithium cartel. It's been troublesome dealing with the OPEC cartel even though the production of oil is not nearly so limited to a few nations around the world. Oil is plentiful in so many parts of the world that this has limited to monopoly powers of the OPEC cartel. This may not be the case for a future lithium cartel.

In my opinion the rise of a lithium cartel is still being held back only by the relatively small dependence we have upon lithium batteries to date. But that is changing in record time around the globe such as the use of lithium batteries for solar power generation across Africa.

Dependence upon lithium is increasingly scary for nations as well as for long-term financial risks of Tesla and power companies.

I think rules of disclosure of financial risks of dependence upon lithium and rare-earth minerals should be re-evaluated by accounting standard setting bodies.

Down Round Pre-Money Valuation ---

EY:  Comment letter on the FASB’s proposal on accounting for instruments with down round features ---$FILE/CommentLetter_00580-171US_DownRound_7February2017.pdf

EY:  FASB Simplifies the Accounting for Goodwill Impairment ---$FILE/TothePoint_00381-171US_GoodwillImpairment_27January2017.pdf

What you need to know

The FASB issued new guidance that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge.

Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1).

The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after 1 January 2017.


 The Financial Accounting Standards Board (FASB or Board) issued final guidance1 that simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under Accounting Standards Codification (ASC) 350.2 The FASB added this project to its agenda in response to feedback it received in 2014, when it issued an accounting alternative developed by the Private Company Council (PCC) that allows private companies to amortize goodwill and use a simpler one-step impairment test.3 At the time, the FASB asked whether it should allow other entities to apply the guidance in the alternative, and stakeholders expressed concerns about the cost and complexity of subsequently measuring goodwill for all entities.

FASB clarifies scope of asset derecognition guidance ---

Insider Trading ---

"Outwitting the FBI and the SEC," by David McClintick, The Wall Street Journal, February 7, 2017 ---

The story of Steven A. Cohen and his hedge fund, SAC Capital Advisors, will be familiar to anyone who reads this newspaper. For more than two decades, Mr. Cohen’s fund was the most successful on Wall Street, with average annual returns of nearly 30%. But in 2013, SAC pled guilty to insider trading and paid a $1.8 billion fine—the biggest insider trading penalty in history. The hedge fund was forced to shut down. And Mr. Cohen went off to enjoy his $1 billion art collection.

What can Sheelah Kolhatkar add to this well-known story?

An astonishing amount, it turns out. Ms. Kolhatkar, a staff writer for the New Yorker, has interviewed more than 200 people and mobilized countless new details to craft her propulsive narrative. She takes the reader into one of the most complex fraud investigations in history—the most important since the Michael Milken-Ivan Boesky saga of the 1980s, which James B. Stewart chronicled in “Den of Thieves” (1991)—to show how contemporary Wall Street tries to outwit the FBI and the SEC by exploiting an ambiguous area of law.

“Black edge” is Wall Street lingo for “inside information”—things that should be known only to officers, directors or other “insiders” of a corporation. Undisclosed trading on such information is illegal if the trader has a fiduciary duty not to exploit the information for personal gain. It’s also illegal to pass it along if the tippee knows that the disclosure breaches the tipper’s duty.

Seems clear enough. But it isn’t. Just two months ago, the Supreme Court seemed to harden the standard for insider trading in Salman v. United States. But it commented in its unanimous decision that “in some factual circumstances, assessing liability for gift-giving will be difficult” and, quoting from another of its rulings, “determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” Congress has long needed to clarify the law, whose ambiguity invites the unscrupulous to try to subvert it.

Steve Cohen had always wanted to be rich. He grew up in a financially distressed middle-class family on Long Island and was an avid poker player in high school. After graduating from Wharton he quickly established a reputation as a phenomenal day trader. In 1992 he founded SAC with $23 million and nine employees. At its height in 2008, the firm managed assets of $17 billion and employed 1,200 people. The culture was intense: The company employed three masseuses to keep the highly competitive traders relaxed and a psychiatrist to keep everyone “ruthless,” Ms. Kolhatkar writes.

Mr. Cohen paid his traders multi-million-dollar bonuses but just as quickly fired them if they didn’t perform to his standards. According to Richard Choo-Beng Lee, a trader Ms. Kolhatkar paraphrases, “the only way to satisfy them was to get inside information.” But the fund was structured to keep Mr. Cohen insulated: “All of the ideas for trades were filtered through layers of portfolio managers and assigned codes for how strong they were before they reached him—a ‘high conviction’ idea might be given to the boss without explaining why the analyst was so sure about it,” the author writes.

Anyone who knew Wall Street knew that SAC’s returns were suspiciously excellent. And Mr. Cohen didn’t exactly hide his wealth: His 36,000-square-foot home in Greenwich, Conn., had an ice-skating rink. But when the FBI went digging into the world of hedge funds in 2006, it wasn’t after SAC but the Galleon Group, a smaller fund run by a flamboyant trader named Raj Rajaratnam. A relentless FBI special agent, B.J. Kang, secretly listened to Rajaratnam on a wiretap for months. Those conversations tipped Mr. Kang off about SAC, where some Galleon traders had previously worked.

The agent was keen to flip Galleon suspects who might give evidence against Mr. Cohen. So on April 1, 2009, he drove to the California home of Ali Far, a former Galleon trader familiar with SAC. In front of Mr. Far’s wife, mother, daughters and mother-in-law, Mr. Kang confronted him with accusations of insider trading and a threat of prison. After a sleepless night, Mr. Far flipped and went on to record 244 calls for the FBI, many with Rajaratnam. Over the coming months, as Ms. Kolhatkar shows, Mr. Kang continued to flip traders at Galleon and other firms associated with SAC. Eventually he got to an SAC trader named Mathew Martoma.

Martoma was a Stanford MBA who specialized in health-care stocks; he had joined SAC in June 2006 and Mr. Cohen had given him hundreds of millions of dollars to invest. Martoma focused on two companies, Elan and Wyeth, which were developing a drug to treat Alzheimer’s. In doing so, he relied on insight from an eminent medical school professor: Sidney Gilman of the University of Michigan. Dr. Gilman, who was laden with confidential information from the companies, the government and other scientists, had at first insisted to Martoma that he could discuss only information in the public domain. But it didn’t take long for Martoma to push Dr. Gilman, who, according to the author, was being paid hundreds of thousands of dollars in consulting fees by SAC and other Wall Street clients, over the edge. After Dr. Gilman confided that Bapineuzumab, the new Alzheimer’s drug co-developed by Wyeth and Elan, was flawed, Martoma spent 20 minutes on the phone with Mr. Cohen. Little is known about their conversation, but SAC quietly liquidated stock and shorted more in the companies, netting more than $250 million, according to federal prosecutors, before the bad news was made public and the stocks collapsed.

Continued in article

Jensen Comment
The biggest fear of the SEC is that insider trading will scare investors out of the stock market. Stories like this don't help in the least. The smartest inside traders don't get greedy.

University of Chicago:  When Shareholders Aren't Watching, Managers Misbehave ---

Shooting Yourself in the Foot with Socially Responsible Investing ---
Jensen Comment
Many university endowments only invest in socially responsible firms, partly due to pressures from students, alumni, and faculty.

3.7 Years = 1363/365

TaxProf Paul Caron:  "The IRS Scandal, Day 1363: The Final Chapter On The End Of My Daily Coverage" ---

Jensen Comment
To think that all this time (for never-ending Congressional hearings) , money (think bloated attorney fees), and mud slinging could've been avoided if Lois Lerner was willing to testify under oath (with immunity from prosecution)  that her confessed IRS illegal targeting of conservative fund raising groups had been requested by the White House. Probably worse was the excuse this gave Republicans to annually underfund the IRS as punishment. The IRS has been badly crippled by underfunding. Of course Republicans probably would've invented other excuses, but the Lois Lerner Scandal was such an easy target.

Enterprise resource planning (ERP) ---

Enterprise Risk Management (ERM) ---

MAAW:  Summaries to catch up on Enterprise Risk Management ---

Bloomberg:  A Robot Tax is a Bad Idea

The ideas of France's Benoit Hamon, the surprise front-runner in the presidential primaries of the Socialist Party, are far to the left of U.S. Senator Bernie Sanders and even the U.K. Labour Party's Jeremy Corbyn. This, of course, is the era of the expanding Overton Window, with radical ideas bursting into the mainstream. One Hamon proposal in particular, however, should never make it: A tax on robots, based on the premise that their proliferation is bad for human employment.

Hamon's most discussed proposal is a 750 euro ($805) monthly universal basic income for the French. It doesn't make much sense, primarily because 750 euros is well below the poverty line in France. But it's also expensive, so Hamon proposes new taxes to fund it. The robot tax is one of them.

It's not Hamon's original idea. In May, 2016, Mady Delvaux, a Luxembourg politician, suggested the link between universal income and a tax on automation in a draft report to a European Parliament committee. Delvaux's report recommended making companies report the effects of artificial intelligence and robotics on their economic results "for the purpose of taxation and social security contributions." It added that "in the light of the possible effects on the labor market of robotics and AI a general basic income should be seriously considered."

The logic is clear: Machines are getting smarter and better at tasks that previously could only be performed by humans, so why not tax the owners of smart machines and pass on the money directly to society?  

Funding a universal basic income with more taxes on the wealthy is not necessarily a bad idea; a majority of Finns, for example, support it, and Finland is currently testing the idea in a limited experiment. But linking basic income to the destructive influence of automation is not supported by data.

Guido Matias Cortes of Manchester University in the U.K., Nir Jaimovich of the University of Southern California and Henry Siu of the University of British Columbia have long studied the decline of routine jobs, which involve a narrow set of specific activities performed by following well-defined instructions. Th can be both manual -- operating a forklift or repairing home appliances -- and cognitive: secretarial work, bookkeeping, serving clients in a bank branch. In 1979, 40.5 percent of the working age population in the U.S. held such jobs; that share stayed constant for another decade, but then, by 2014, it dropped to 31.2 percent. 

It's mostly people, both men and women, with a high-school education or less who accounted for the decline, Cortes, Jaimovich and Siu point out in a just-published paper; some of them ended up out of work, others took non-routine manual jobs -- became waiters and other service workers or, say security guards. That kind of employment has gone up

Continued in article

Before filing an income tax return it's best to start with the great IRS Website at
Don't confuse this with the site

First check to see if you qualify for free filing directly with the IRS at
You cannot have over $64,000 in taxable income for free filing.

TurboTax versus H&R Block: How two of the most popular tax-filing programs stack up for your 2016 tax returns ---

Both programs offer a free federal edition for simple tax returns.

The other editions — from "basic" to "home and business" — vary in price, depending on your needs.

Filing for your business is the most expensive option in both cases.

Jensen Comment
H&R Block has thousands of offices across the USA for that personal touch (generally for a modest fee). However, I advise paying a higher fee (for complicated tax situations) to professional CPA firms or law firms who specialize in more complicated tax situations. Law firms often outsource tax return preparation to CPA firms. However. law firms can combine legal advice and tax planning advice in situations involving legal contracts as well as tax planning issues. CPA firms can combine accounting and tax services software.

Before buying TurboTax or H&R Block software in a store check on Amazon specials on H&R Block versus TurboTax software.

I don't think Amazon offers the free basic versions of tax software.
For free H&R Block filing go to|CAMPSitelink|ADGPSitelink|KWRDwww hrblock com&KeywordID=20145
I think H&R Block is a better place to go than TurboTax or the IRS for free filing when taxpayers have itemized deductions and mortgages
You cannot have over $64,000 in taxable income for free filing.

For free TurboTax online filing go to
I think H&R Block is a better place to go than TurboTax or the IRS for free filing when taxpayers have itemized deductions and mortgages.
You cannot have over $64,000 in taxable income for free filing.

In addition to local CPA firm and law firm offices there are also "enrolled agent" tax firms in many towns and cities that specialize in tax return preparation, often for lower fees than CPA firms and law firms. I don't advise using these firms unless they are currently licensed to practice before the IRS as enrolled agents ---
Enrolled agent firms, however, are not usually as qualified as CPA firms and law firms that specialize in taxes. Nor do they usually have deep pockets when sued for negligence relative to large law firms and large CPA firms.

Sometimes accounting professors and students offer free services to poor people in need of tax help.

IRS:  Tax Changes That May Affect the 2016 Return That You File ---

IRS:  Taxpayer Guide to Identity Theft ---

CPA's Contend With Tax ID Theft ---





















David Giles:  Hypothesis Testing Using (Non-) Overlapping Confidence Intervals ---

February 2017 Econometrics Readings Suggested by David Giles

Aastveit, A., C. Foroni, and F. Ravazzolo, 2016. Density forecasts with midas models. Journal of Applied Econometrics, online.

Chang, C-L. and M. McAleer, 2016.  The fiction of full BEKK. Tinbergen Institute Discussion Paper TI 2017-015/III.

Chudik, A., G. Kapetanios, and M.H. Pesaran, 2016.  A one-covariate at a time, multiple testing approach to variable selection in high-dimensional linear regression models. Cambridge Working Paper Economics: 1667.
Jensen Comment
Years ago a spent (wasted?) quite a lot of my time in a think tank studying this sort of thing. My studies tended to reveal that models derived from this type of multi-variate sequential analysis were not robust in the sense that they outcomes were highly dependent upon order in which variates were analyzed.

Kleiber, C.. Structural change in (economic) time series WWZ Working Paper 2016/06, University of Basel.

Romano, J. P. and M. Wolf, 2017. Resurrecting weighted least squares. Journal of Econometrics, 197, 1-19.

Yamada, H., 2017. Several least squares problems related to the Hodrick-Prescott filtering. Communications in Statistics - Theory and Methods, online.


No Fees or Memberships:  Walmart now offers free two-day shipping on more than two million items for all orders over $35 ---

Jensen Comment
Presumably this is intended to be an Amazon Prime killer. However, it may well be an onsite shopping killer, including shopping in Walmart stores.
'Why burn gasoline and take an hour to find items on shelves when the two-day shipping is totally free.

Walmart even lets you compare online deals with your local Walmart store deals ---
Chances are that it's no longer much of a deal to shop in a local store.

Jensen Comment
The biggest advantage of Amazon, in my opinion, is the vast selection of types of goods, including used products and used books. Walmart just does not compete at this level of shopping.

Also my Amazon Rewards (applied to future purchase)  really add up since I do so much shopping on Amazon.

From the CFO Journal's Morning Ledger on February 27, 2017

SEC says rules on conflict minerals, pay ratio remain in force
Companies must continue to comply with the Securities and Exchange Commission’s rules on disclosing “conflict minerals” and the ratio comparing executive pay to the median employee, said Shelley Parratt, acting director of the SEC’s division of corporation finance, on Friday. Both rules remained in effect, Tatyana Shumsky reports.

The Complicated New Revenue Recognition Standard Update
From the CFO Journal's Morning Ledger on February 18, 2017

FASB updates accounting standard
The Financial Accounting Standards Board has released a new accounting standards update clarifying some aspects of its revenue recognition standard, Accounting Today reports.


From the CFO Journal's Morning Ledger on February 18, 2017

PwC faces lawsuit over MF Global bankruptcy
MF Global Holdings Ltd.
collapsed more than five years ago after its risky bets on European sovereign debt came to light. Now, its auditor PricewaterhouseCoopers LLP is facing a professional malpractice lawsuit, amid claims that bad accounting helped bring down MF Global.

From the CFO Journal's Morning Ledger on February 13, 2017

Switzerland rejects corporate tax overhaul
Swiss voters have rejected a proposal to unify the country’s tax code. The country faces pressure from the Organization for Economic Co-Operation and Development to make changes to its current model which allows for lower tax-rates for multinationals.

From the CFO Journal's Morning Ledger on February 13, 2017

BT Europe head resigns amid accounting scandal
BT Group PLC is struggling to recover from its accounting scandal that has seen the British telecoms firm book a heavier than expected impairment charge in January. On Friday, Europe chief Corrado Sciolla resigned, Bloomberg reports.

From the CFO Journal's Morning Ledger on February 8, 2017

Republicans have waited for this for a very long time. Now, with President Donald Trump in the White House, they see a once-in-a-generation opportunity to drastically reform the U.S. tax code. But, just weeks into the presidency of Mr. Trump, they find that not everyone is fond of their plans to introduce a “border adjustment,” Richard Rubin writes. The suggested change has split the party and the business world before a bill has even been drafted.

A border-adjusted tax would impose a levy on imports, including components, and exempt exports. It is opposed by firms such as Koch Industries Inc., by retailers, car dealers, toy producers, oil refiners and others that say it would drive up import costs and lead to price increases for businesses and consumers.

The proposal’s inventors are supported by House Republicans as well as export-oriented companies such as General Electric Co. Advocates for the plan say it would foster domestic investment and benefit companies that manufacture in the U.S. According to economists, border adjustment could raise short-term government revenue, by functioning like a levy on the roughly $500 billion trade deficit that the country has with the rest of the world.

From the CFO Journal's Morning Ledger on February 7, 2017

EBay said it improperly accounted for tax
EBay Inc. said on Monday
it had found that it improperly accounted for tax on certain transactions completed in December, which constituted a material weakness in its internal control over financial reporting, Reuters reports

Since the SEC is an independent regulatory commission, it technically isn’t obligated to follow the president’s orders.

From the CFO Journal's Morning Ledger on February7, 2017

The Securities and Exchange Commission may find it difficult to comply with President Trump’s rollback of the 2010 Dodd Frank financial-overhaul act, Tatyana Shumsky reports. The SEC can amend Dodd-Frank rules or make exceptions, but does not have the authority to revoke these financial regulations. That power lies with Congress. Any decisions the SEC does make is open to judicial review which can be a lengthy, expensive process—and one that could limit the regulator from doing anything on its own. Companies, investors or others that can demonstrate a change to the law will hurt them can file a suit, Ms. Shumsky reports.

The frustration over Dodd-Frank rules is usually focused on restrictions to the banking sector, but there are some aspects of the law that nonfinancial companies are eager to scrap. These include disclosure rules regarding executive pay and conflict minerals, according to experts.

Since the SEC is an independent regulatory commission, it technically isn’t obligated to follow the president’s orders. But it has a record of complying with executive actions, including during the Reagan, George W. Bush and Obama administrations. Former SEC staffers said that an incoming agency head would be expected to comply with the philosophy of the administration that appoints him or her.

From the CFO Journal's Morning Ledger on February1, 2017

Exxon Mobil Corp.’s annual profit at 20-year-low
Revenue increased 2% to $61 billion. However, the company reported a 40% decline in fourth-quarter profit. Its annual profit for last year was the lowest it has been in 20 years.

Exit of the In-House Tax Experts of Multinational Companies to CPA Firms and Other Tax Services Firms
From the CFO Journal's Morning Ledger on January 31, 2017

General Electric Co.’s unique tax deal could pave a path for other companies, Michael Rapoport and Vipal Monga write in today’s Business & Finance section. The company has worked out a type of tax outsourcing arrangement with PricewaterhouseCoopers LLP, The Wall Street Journal reported earlier this month. Around 600 GE employees will move to PwC to undertake tax work for clients of both the companies. GE will also receive a share of the revenue that the tax unit generates for PwC.

The deal comes on the heels of concerns that big companies may face several tax hurdles under the new Trump administration. GE expects cost savings through this arrangement, a step that might propel other companies to make similar adjustments. Mark Mendola, PwC’s vice chairman and U.S. managing partner, said that more than a dozen Fortune 100 companies have already reached out to PwC requesting more information on this.

Among companies, “there’s a lot of interest in outsourcing that function to someone who’ll take it over,” said Ellen MacNeil, a managing director at Andersen Tax LLC, a global tax-advisory firm

From the CFO Journal's Morning Ledger on January 31, 2017

U.S. firms lobby against ‘border tax.’
Toyota, Target Corp.
, Best Buy Co. Inc. and Toyota Motor Corp. are among the firms lobbying against a proposal by House Republicans to reform the U.S. corporate tax code, possibly resulting in the introduction of a so-called border tax, Reuters reports.

From the CFO Journal's Morning Ledger on January 30, 2017

A proposed overhaul of the U.S. tax code favored by Republicans in the House of Representatives is drawing fire from small-business owners who sell everything from toys to materials used in kitchen cabinets, Ruth Simon and Richard Rubin write.

Some business owners say they worry that a part of the proposal, known as border adjustment, could force them to raise prices and lay off workers. Others fear it could even put them out of business. The proposal could, however, benefit firms that are exporters or don’t import raw materials or finished products.

Under the plan, imports couldn’t be deducted as a cost of doing business, while exports would be exempted. That could lead to higher tax bills for firms that rely heavily on imports. The proposal is part of a broader tax overhaul that would cut corporate and individual tax rates.

The tax plan could also increase the taxable income of the Trump Organization, the conglomerate of companies controlled by the president’s family.

Not only small companies anticipate changes to their revenue growth, Reuters reports. The number of U.S. companies using a budgeting tool called zero-based budgeting is rising, leading to more executives having to justify each line item of spending in their budgets.

Jensen Comment
Trump's temporary immigration ban on seven nations is, in my opinion, far less serious than the huge border tax that's not proposed as "temporary" and will presumably affect all USA consumers and perhaps over 100 million jobs globally.

I vote no to a border tax and the trade wars that will follow.

























Accounting Teaching Cases
IMA Instructional Cases ---

Teaching Case from The Wall Street Journal Accounting Weekly Review on January 27, 2017

Yahoo Faces SEC Probe Over Hack Disclosure
by: Aruna Viswanatha and Robert McMillan
Jan 23, 2017
Click here to view the full article on

TOPICS: Contingent Liabilities, Disclosure Requirements, Securities and Exchange Commission

SUMMARY: "The Securities and Exchange Commission has opened an investigation, and in December issued requests for documents, as it looks into whether [Yahoo's] disclosures about the cyberattacks complied with...securities laws." The article states that the investigation into why the company took two years to disclose the 2014 data breach is in the early stages. As well, "experts say the SEC has been looking for a case to clarify" corporate behavior that would violate 2011 guidance on cyberattack disclosures. That guidance was issued by the Division of Corporation Finance and is available on the SEC web site at

CLASSROOM APPLICATION: The article may be used when covering contingent liabilities in general, cyberattack risk, or disclosure requirements in either an auditing or financial reporting class.

1. (Introductory) Why is it important to determine whether Yahoo disclosed data breaches from 2013 and 2014 to investors in a timely fashion? Comment on the timing of the disclosures made by Yahoo about the data breaches relative to when they were discovered and investors' information needs.

2. (Introductory) How did the WSJ learn that the SEC is mak, ing this investigation? Specifically comment on Yahoo's quarterly filing made in November 2016 as described in the article and on what you think happened after that.

3. (Advanced) What is the difference between a civil and a criminal legal case? What is the importance of the statement by John Reed Stark quoted in the article that he never saw a disclosure case forwarded to a prosecutor in 20 years of working at the SEC?

4. (Advanced) Access Yahoo's 3rd quarter 2016 filing made in November 2016 available on the SEC's EDGAR system at Proceed to Note 12, Commitments and Contingencies, and consider the section entitled Security Incident Contingencies. How do the statements made in this note address the accounting requirements for contingent liabilities? In your answer, summarize those requirements.

Reviewed By: Judy Beckman, University of Rhode Island


"Yahoo Faces SEC Probe Over Hack Disclosure," by Aruna Viswanatha and Robert McMillan, The Wall Street Journal, January 23, 2016 ---

Investigation focuses on whether two massive hacks should have been reported sooner to investors

U.S. authorities are investigating whether Yahoo Inc.’s two massive data breaches should have been reported sooner to investors, according to people familiar with the matter, in what could prove to be a major test in defining when a company is required to disclose a hack.

The Securities and Exchange Commission has opened an investigation, and in December issued requests for documents, as it looks into whether the tech company’s disclosures about the cyberattacks complied with civil securities laws, the people said. The SEC requires companies to disclose cybersecurity risks as soon as they are determined to have an effect on investors.

The investigation is likely to center on a 2014 data breach at Yahoo that compromised the data of at least 500 million users, according to the people familiar with the matter. Yahoo disclosed that breach in September 2016, despite having linked the incident to state-sponsored hackers two years earlier.

To date, Yahoo hasn’t explained why the company took two years to disclose the 2014 incident publicly or who made the decision not to go public sooner with this information. In mid-December Yahoo also said it had recently discovered an August 2013 data breach that had exposed the private information of more than 1 billion Yahoo users.

The SEC investigation into the disclosures is in its early stages, and it’s too early to say whether it will result in any public action, some of the people familiar with the matter said.

Legal experts say the SEC has been looking for a case to clarify what type of conduct would run afoul of guidance the agency issued in 2011. That guidance required companies to disclose material information about cybersecurity risks and cyber incidents if they determine it could affect investors.

The SEC has investigated multiple companies over whether they properly disclosed hacks, particularly in the wake of the Target Corp. breach in 2013 that compromised up to 70 million credit and debit-card accounts. Target disclosed the incident weeks after the breach began. The SEC investigated and didn’t recommend an enforcement action, Target said in an SEC filing.

Former SEC lawyers said the Yahoo scenario appears to provide a clearer set of circumstances than past scenarios provided. If the SEC brought a case, it could make clearer to other companies what type of disclosures it views as potentially violating the law in this area. Experts also say such a case could help clarify rules over timing because the guidance doesn’t lay out detailed requirements.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on January 27, 2017

The Big Number: 64%--Trump on Their Minds
by: Chris Dieterich
Jan 23, 2017
Click here to view the full article on

TOPICS: Earning Announcements, Earnings Forecasts

SUMMARY: "This week's "big number" is 64%, the proportion of companies whose executives made mention of President Donald Trump or his administration in conference calls with investors so far during fourth-quarter earnings season."

CLASSROOM APPLICATION: The article may be used in any level of financial reporting class to cover earnings conference calls.

1. (Advanced) What are corporate earnings conference calls?

2. (Introductory) Why are senior executives in these calls frequently referring to the changes expected to stem from policies in President Donald Trump's administration?

3. (Introductory) What is the overall tone of companies' expectations under the new administration?

4. (Advanced) Refer to the related article. Are companies offering specific guidance on how they are expecting to be affected by the new administration?

Reviewed By: Judy Beckman, University of Rhode Island

Executives Stay Mum on Trump Profit Rise
by Justin Lahart
Jan 25, 2017
Page: B1


"The Big Number: 64%--Trump on Their Minds,: by Chris Dieterich, The Wall Street Journal, January23 , 2016 ---

Not surprisingly, the Trump administration’s tax plans keep coming up on corporate earnings calls

Investors aren’t the only ones trying to determine what impact the new administration will have. Corporate America is as well.

Through Wednesday, 42 S&P 500 companies have reported fourth-quarter results, and executives at 27 of those firms, or 64%, have addressed questions about what the new administration might mean for their business, according to John Butters, senior earnings analyst at FactSet.

Not surprisingly, the Trump administration’s tax plans have come up the most with 11 mentions, and the comments have been optimistic.

“Changes in tax policy can be a huge catalyst for how all of our clients think about deploying their capital, strategic decisions,” said Goldman Sachs Group Chief Financial Officer Harvey Schwartz. He also pointed out that Goldman is likely to benefit from lower taxes.

At Cintas, a Cincinnati-based maker of uniforms, CFO J. Michael Hansen, put the matter of taxes more bluntly: “Look, if we see lower corporate income tax rates that will be certainly beneficial for us because we’re mostly a U.S-based company.”

After taxes, regulation and trade drew the most attention. Of the 42 earnings calls, those topics have come up on eight and six of them, respectively.

Stuart Miller, chief executive officer for builder Lennar, said that increased regulation of banks has “certainly shifted the landscape for the mortgage industry,” and that lightening such regulations could offer “greater access to the mortgage market by the lower middle class, which I think would be healthy not only for the housing industry, but also for the economy in general.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on January 27, 2017

Executives Stay Mum on Trump Profit Rise
by: Justin Lahart
Jan 25, 2017
Click here to view the full article on

TOPICS: Income Taxes

SUMMARY: "Although investors are optimistic about growth under President Donald Trump, uncertainty surrounding his policies is leading executives to think twice before predicting an upswing." The article provides detail about executives' discussion in earnings conference calls and other venues, analysts expectations, and investor sentiment regarding the economic impact of President Donald Trump's administration and policies. The related article also is covered separately in this week's review.

CLASSROOM APPLICATION: This article is related to another covered in this weekly review but focuses at a higher level. Questions specifically relate to a detailed example strongly related to accounting for expected future income tax rate changes.

1. (Introductory) What is the evidence for the opening statement in the article that "investors are betting that President Donald Trump will make earnings great again in 2017"?

2. (Introductory) Why can't chief executives deliver earnings forecasts specifically addressing the positive expectations about the U.S. economy under President Donald Trump?

3. (Advanced) Dover Corp.'s CEO Robert Livingston gives a specific example related to income taxes of why details about the impact of the new administration cannot yet be determined. Summarize the accounting requirements in this area. How do tax rate changes, even for future periods, improve current earnings?

4. (Advanced) Specifically describe the requirements in accounting for income taxes and expected tax rate changes. Even if Dover Corp. might analyze expected income taxes in budgeting for future operations, why would they not do so in reporting earnings? Cite your source for this accounting requirement.

Reviewed By: Judy Beckman, University of Rhode Island

The Big Number: 64%--Trump on Their Minds
by Chris Dieterich
Jan 23, 2017
Page: B10

"Executives Stay Mum on Trump Profit Rise," by Justin Lahart, The Wall Street Journal, January 25, 2016 ---

Investors and analysts are predicting strong profit growth under the new presidential administration, but company executives are more cautious

Investors are betting that President Donald Trump will make earnings great again in 2017. The companies themselves won’t go there.

It isn’t because they don’t think they will benefit from Mr. Trump’s agenda, but because so much is uncertain and there are so many moving parts that few company executives will venture a guess as to how they will benefit.

Regions Financial Corp. Chief Executive Grayson Hall last week said that there has been “a great turn of emotions in our marketplace,” but then added that “from a forecast standpoint, we still have to forecast what we can deliver.”

H.O. Woltz III, chief executive of construction-steel manufacturer Insteel Industries, last week said that he thought the infrastructure-spending environment would improve under Mr. Trump, “but I don’t have a good feel for exactly what form that’s going to take and how it’s going to play out.”

Earlier in the month Dover Corp. Chief Executive Robert Livingston said that a lower U.S. corporate tax rate “would obviously be very beneficial,” but that the manufacturer wasn’t changing the tax assumptions in its earnings guidance.

Companies’ reticence makes sense. Mr. Trump hasn’t proposed anything and it is unclear what he can actually get passed by Congress. Even if his policies do go into effect, the unintended side effects could swamp any earnings gains.

Investors and analysts aren’t that humble. The market is hovering near record territory and earnings estimates are going up. Analysts say overall S&P earnings will rise 6.7% in the fourth quarter from a year earlier, according to Thomson Reuters—the best growth in two years—actual results will likely be higher. Analysts think earnings will pick up through 2017, and by the fourth quarter will be up 14.4% on the year. An oil-price-related jump in energy-sector earnings accounts for some of that, but analysts say earnings apart from energy companies will also be up smartly.

To judge from valuations, investors, too, are feeling optimistic about growth: The S&P trades at 17.1 times expected earnings, according to FactSet, versus the price/earnings ratio of 16.3 it carried at the end of 2015. Some of the optimism is based on hope that Mr. Trump will deliver on the tax cuts, infrastructure spending and the regulatory rollback he is promising. All that good news would likely rekindle businesses’ spirits and get them spending again.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on January 27, 2017

Wells Branches Alerted to Monitors
by: Emily Glazer
Jan 25, 2017
Click here to view the full article on

TOPICS: Auditing

SUMMARY: The article describes internal audit control procedures conducted by Wells Fargo risk executives. These risk executives are referred to as auditors by some branch employees. The weakness in the banks' system was to allow at least 24 hour advance notice of impending annual review visits during which time many branch managers brought "all hands on deck" to clean up records in compliance with bank control policies.

CLASSROOM APPLICATION: The article may be used in an auditing class to discuss internal audit procedures, the benefit of surprise procedures, internal control weaknesses, and tone at the top.

1. (Introductory) Describe the recent scandal at Wells Fargo. You may refer to the related article.

2. (Advanced) What is the purpose of an internal audit function?

3. (Introductory) How do the annual reviews by retail bank risk executive compare to the role of internal auditors? In your answer, comment on what bank branch employees sometimes call these risk executives.

4. (Introductory) How far in advance were Wells Fargo bank branch managers alerted to annual review visits?

5. (Introductory) According to the article, what are the business reasons for giving advance notice to branches of "branch control reviews." Is advance notice still being given to branches of impending reviews

6. (Advanced) Consider the comments by Ivan Rodriguez, a former bank branch employee. How did his ethical sense of the practices at Wells Fargo change over time?

7. (Advanced) Define "tone at the top" of an organization. How did such a tone branches influence employees' perception of the ethics of violating control practices? You may also reference the related article in answering this question.

Reviewed By: Judy Beckman, University of Rhode Island

How Wells Fargo's High-Pressure Sales Culture Spiraled Out of Control
by Emily Glazer
Sep 16, 2016
Online Exclusive

"Wells Branches Alerted to Monitors," Emily Glazer, The Wall Street Journal, January 25, 2016 ---

As Wells Fargo & Co.’s sales-tactics scandal unfolded, investors, regulators and politicians asked how improper practices could have persisted for so long. One possible reason: Bank branches were given a heads up before Wells Fargo’s internal monitors landed for inspections.

Managers and employees at the bank’s roughly 6,000 branches across the U.S. typically had at least 24 hours’ warning about annual reviews conducted by risk employees, current and former Wells Fargo employees and executives said. That gave many employees time to cover up improper practices, such as opening accounts or signing customers up for products without their knowledge.

More than a dozen current and former employees of the bank across California, Arizona and New Jersey, for instance, said they forged or saw colleagues forge signatures on documents or shred papers that could have indicated accounts were opened without authorization.

Often, managers would call for all hands on deck at a branch to stay late into the evening—or sometimes all night—to shred documents or forge signatures if they weren’t there, some current and former managers said.

For instance, they would go through desks to find signature cards that hadn’t been approved, make sure wire forms had been filled out properly and that documents in a “control binder” like cash or teller audits were filled out, said Ivan Rodriguez, a former branch banker at Wells Fargo for about six years until 2013.

Some branches that opened accounts for customers without the customer present would cut and paste a signature the bank had on file for the customer and add it to the required signature card, Mr. Rodriguez said.

“You became numb to it,” he added. “It became pretty normal.”

A Wells Fargo spokeswoman said the bank has boosted oversight, monitoring and accountability so unethical practices don’t happen again. That includes investing millions in staffing, mystery shops by a third party, unannounced branch inspections on employee sales behavior and an increase in branch visits by its internal auditors.

The bank has been under fire since September when it entered a $185 million settlement and enforcement action with regulators and a city official over opening as many as 2.1 million accounts using fictitious or unauthorized information. Wells Fargo still faces a spate of state and federal investigations, including from the Justice Department and the Securities and Exchange Commission.

In the scandal’s wake, Wells Fargo has been changing procedures and trying to tighten internal checks, said Vic Albrecht, who has led risk management for the retail bank since September. Last fall, it piloted a surprise sales-practices inspection that previously didn’t exist to ensure there isn’t undue sales pressure and customers get appropriate products, among other checks, he said.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on January 27, 2017

IBM Revenue Declines Again as Strategy Shifts
by: Ted Greenwald
Jan 20, 2017
Click here to view the full article on

TOPICS: Sales Mix

SUMMARY: "International Business Machines Corp. [IBM] recorded its 19th consecutive quarter of declining revenue....Fourth-quarter revenue...slid 1% from the year-earlier period to $21.8 billion. Net profit edged up nearly 1% to $4.5 billion, though that still left profit 1% lower for the full year...." The company has shifted strategy from selling hardware products to providing services and selling software cloud computing applications.

CLASSROOM APPLICATION: The article asks students to describe trends reported in the article and is suitable for introductory financial statement analysis discussion. It also could be used to discuss sales mix in a managerial accounting class.

1. (Advanced) How is IBM changing its business and thus its sources of revenue? Specifically describe its older businesses and the recent strategic shift at the company. For a chronological history of the company, you may access its web page at

2. (Introductory) How much revenue did IBM report in the fourth quarter of 2016? How did that compare to the fourth quarter of 2015? Make the same comparison for net income.

3. (Introductory) What did CFO Martin Schroeter emphasize in an interview about the fourth quarter 2016 results?

4. (Advanced) How is it possible that IBM produced fewer revenues and lower profits in 2016 that in comparable previous periods yet its stock price increased over that time period?

Reviewed By: Judy Beckman, University of Rhode Island


"IBM Revenue Declines Again as Strategy Shifts," by Ted Greenwald, The Wall Street Journal, January 20, 2016 ---

Company’s faster-growing businesses haven’t outpaced a decline in legacy ones

International Business Machines Corp. recorded its 19th consecutive quarter of declining revenue, as it continued to try to offset declines in older businesses with sales in newer ones that are growing rapidly.

Fourth-quarter revenue at the Armonk, N.Y., computing giant slid 1% from the year-earlier period to $21.8 billion. Net profit edged up nearly 1% to $4.5 billion, though that still left profit 11% lower for the full year, at $11.9 billion.

Chief Financial Officer Martin Schroeter emphasized that annual revenue in IBM’s newer, faster-growing businesses rose 14% and now makes up 41% of total sales—ahead of the company’s earlier forecast that nascent businesses would contribute 40% by 2018.

“We feel pretty good about how we’re entering 2017 stronger than we entered 2016,” he said in an interview.

Like other older companies that sell information technology to corporate buyers, IBM is struggling to cope with the move to cloud computing. That trend shifts customer spending from vendors who equip private corporate facilities to those who offer subscriptions to services delivered through the internet, such as Inc.’s Amazon Web Services for computing power and Inc. for business apps.

Big Blue’s chief executive, Ginni Rometty, has responded by jettisoning low-growth, low-margin businesses and revamping its remaining core assets to emphasize ones that she calls strategic imperatives. Foremost among these are IBM’s own cloud-computing operations and Watson, its artificial-intelligence platform.

The transition has yet to rekindle growth for the company overall, however. IBM’s full-year revenue has declined for five years, its pretax income has fallen for four, and its non-adjusted earnings per share has slid for three.

IBM has said its strategic-imperative businesses have been growing at double-digit percentages, while older, slower businesses have been declining annually by percentages in the low teens, according to analysts.

Investors recently have shown optimism that IBM’s transition is on track. The share price suffered in the years between 2013 and 2016, but during the past year rebounded more than 20%. Its share price rose to 11.8 times expected earnings per share from 9.1 during the period, exceeding that of Hewlett Packard Enterprise Co. and approaching that of Oracle Corp., two other big, mature IT companies

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 3, 2017

As Dow Industrials Pass 20000, CFOs Will Reassess Buybacks
by: Richard Teitelbaum
Jan 25, 2017
Click here to view the full article on

TOPICS: Dividends, Treasury Stock

SUMMARY: U.S. CFOs are reflecting on their share buyback programs given the lofty heights reached by U.S. equity markets. Some are considering making dividend payments to distribute funds to shareholders rather than make treasury stock purchases. Factors considered in deciding on treasury stock purchases and dividend payments are discussed in the article.

CLASSROOM APPLICATION: The article may be used in a financial reporting class covering stockholders' equity subjects of treasury stock and dividends.

1. (Advanced) What is Treasury Stock? In general, why do companies repurchase shares and hold them in treasury?

2. (Introductory) What factors are corporate CFOs currently considering in assessing their share buyback programs?

3. (Advanced) Why would CFOs choose to issue dividends instead of making share buyback purchases? Aren't these two transactions completely independent of one another?

4. (Advanced) Define a price-earnings ratio. How are CFOs and the WSJ considering this financial statement ratio in the context of share buybacks versus dividend distribution decision-making?

Reviewed By: Judy Beckman, University of Rhode Island

"As Dow Industrials Pass 20000, CFOs Will Reassess Buybacks," by Richard Teitelbaum, The Wall Street Journal, January 25, 2016 ---

Capital allocators must decide whether a buyback makes sense at today's prices

Now that the Dow Jones Industrial Average has pierced 20000, U.S. finance chiefs will take the opportunity to reassess their capital allocation policies—and decide whether it’s wise to be buying back shares at today’s elevated prices.

“Twenty thousand is a point to think and reflect,” said Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices. He says CFOs will be looking not only at the cash on their balance sheets and their share prices, but also at what competitors are doing.

“You’re going to do what your peers do,” Mr. Silverblatt said. “There’s some peer pressure here.”

While some companies take advantage of share price swings to buy back more or less stock, for example, others are loathe to attempt to time the market, and argue that shareholders prefer steady, predictable buyback programs.

One question facing CFOs  is whether they should favor increasing or instituting dividends as a way to return capital to avoid overpaying for shares given the S&P 500’s high price-earnings multiple, which yesterday was 19.2 for the trailing 12 months, according to FactSet, compared to an average of 14.8 for the past 10 years.

The problem is that an increased dividend implies that the company will continue to pay it — while toggling back on buybacks tends not to stir investor concern.

“You increase a dividend you have to keep paying the higher rate,” said Mr. Silverblatt. “Buybacks can be turned on and off via the phone.”

Nevertheless, companies have been increasing their dividend payments even as cash has mounted on their balance sheets. S&P 500 companies paid out $292.2 billion in the first three quarters of 2016, according to research firm Birinyi Associates Inc., up 3.3% from $282.9 billion for the comparable nine months in 2015.

That said, U.S. companies continue to buy back stock, although at a reduced pace. In 2016, they repurchased $495.2 billion worth of stock, according to Birinyi, compared to $696.4 billion the year before. The total for 2015 was the highest since 2007.

Counterbalancing the increased U.S. share prices, which theoretically should cool buyback fever, are sharply mounting amounts of corporate cash, which at least some CFOs presumably want to put to work.

Companies in the S&P 500 Industrials held  a record $1.49 trillion in cash and cash equivalents at the end of the third quarter, up 8.8% from $1.37 trillion from the second quarter, according to S&P Dow Jones Indices. The S&P 500 Industrials exclude financials, utilities, and transportation stocks, which hold high cash reserves as part of their normal operations.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 3, 2017

Wal-Mart Stuck in Probe Limbo
by: Joann S. Lublin, Aruna Viswanatha and Sarah Nassauer
Jan 28, 2017
Click here to view the full article on

TOPICS: Foreign Corrupt Practices Act

SUMMARY: The Justice Department and the Securities and Exchange Commission have been investigating for over 5 years allegations that Wal-Mart violated the Foreign Corrupt Practices Act (FCPA). The investigation into the company's operations in Mexico, Brazil, India, and China began after a New York Times article described details of possible misconduct in Mexico. One sticking point in the retailer's efforts to end the federal investigation into foreign bribes is its future eligibility to accept food stamps in the U.S.-this right could be lost because a company pleading guilty to a federal crime loses the right to federal government contracts. Another concern is that Wal-Mart executives refuse to allow the government to assign a monitor because the "retailer believes it has already toughened its compliance efforts." One possible compromise would require Wal-Mart's audit committee to report potential compliance issues to the government.

CLASSROOM APPLICATION: The article may be used to cover the FCPA, audit committee responsibilities, and internal controls over foreign payments in an auditing or managerial accounting class.

1. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)?

2. (Introductory) Who is investigating Wal-Mart's conduct ofpotentially paying bribes in business transactions, in Mexico, Brazil, India, and China? How did these investigators find out about possible violations of the FCPA?

3. (Introductory) Based on comments in the article, how might penalties against Wal-Mart be determined? Hint: refer to the discussion about limits of time for calculating penalties.

4. (Advanced) What is an audit committee? In what part of a corporation's governance structure is this committee found?

5. (Advanced) Is reporting directly to the government about potential concerns with a company's compliance activities a typical role of an audit committee? Explain.

6. (Introductory) Who do you think might serve the role of a "monitor" of Wal-Mart's compliance with a government settlement over these charges? Identify one step a monitor might take in conducting his/her work.

Reviewed By: Judy Beckman, University of Rhode Island

"Wal-Mart Stuck in Probe Limbo," by Joann S. Lublin, Aruna Viswanatha and Sarah Nassauer, The Wall Street Journal, January 28, 2016 ---

One sticking point in the retailer’s efforts to end the federal investigation into foreign bribes is its future eligibility to accept food stamps in the U.S.

Wal-Mart Stores Inc. tried and failed to settle a foreign-bribery probe that has stretched for five years and cost the company more than $820 million, according to people familiar with the federal investigation.

In the final weeks of the Obama administration, the world’s largest retailer and U.S. officials weren’t able to agree on a deal before Donald Trump’s inauguration, these people said. “Wal-Mart and the government are very far apart in terms of a settlement,’’ one of the people said Thursday.

The Justice Department and Securities and Exchange Commission have been investigating allegations that Wal-Mart violated the Foreign Corrupt Practices Act by paying bribes to foreign government officials as it expanded around the word. The talks are intended to settle any charges that would arise from the probe. Wal-Mart has acknowledged the government probes and said it is cooperating with them.

Discussions stalled over several issues beyond the size of potential penalties Wal-Mart would have to pay. The people familiar with the probe said one major sticking point has been Wal-Mart’s eligibility to continue accepting food stamps in its 5,300 Wal-Mart and Sam’s Club stores in the U.S. after a settlement is reached.

A company that pleads guilty to a federal crime can lose its right to win government contracts—a penalty that could block Wal-Mart from the $71 billion food-stamp program, which gives low-income Americans a monthly stipend to purchase food. The retailer, one of the largest sellers of groceries, is also one of the biggest beneficiaries of food-stamp spending.

Another sticking point in the talks was a government demand to assign an independent monitor to watch the retailer’s behavior, a request typical in large settlements for violations of the Foreign Corrupt Practices Act, or FCPA. Wal-Mart has rejected the demand: Wal-Mart executives “won’t take a monitor,” one of the people said, because the retailer believes it has already toughened its compliance efforts

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 3, 2017

Merck's Pricing Candor Is Good
by: Charley Grant
Jan 29, 2017
Click here to view the full article on

TOPICS: Revenue Recognition

SUMMARY: "Drug companies have long argued that gross prices don't reflect the revenue that actually accrues to the manufacturer. That statement has always been accurate." Merck has published a list of average price increases across its drug portfolio, showing a 9.6% increase, but then adjusted for rebates, discounts and returns, showing an increase of only 5.5% on a net basis. Questions ask students to define gross and net revenue and explain the impact of discounts, rebates and returns on reported revenue as well as per item prices.

CLASSROOM APPLICATION: The article may be used in a financial reporting class covering gross and net sales.

1. (Advanced) Define the terms sales discounts, sales rebates, and sales returns.

2. (Advanced) Why is it true that gross retail prices of goods do not represent the net sales revenue received by companies and shown at the top of an income statement? In your answer, explain how each of the three terms defined in question 1 above impacts the determination of net sales.

3. (Introductory) How does Merck define its weighted average discount rate on gross sales? How has that metric been trending since 2010?

4. (Advanced) Does the trend in the average discount on gross sales mean that net sales in pharmaceutical companies has been decreasing since 2010? Explain your answer and indicate how to verify the answer to that question.

Reviewed By: Judy Beckman, University of Rhode Island

"Merck's Pricing Candor Is Good," by Charley Grant, The Wall Street Journal 29, January , 2016 ---

More transparency should help pharmaceuticals make its drug-pricing case

In the battle over high drug prices, big pharma is starting to strike the right note.

Merck & Co. published a list of average price increases across its drug portfolio on Friday. Merck raised its gross price an average of 9.6%. After rebates, discounts, and product returns, however, Merck realized an increase of just 5.5% on a net basis.

Other drugmakers plan to follow suit. Johnson & Johnson said it would publish a similar list next month. Executives at AbbVie and Allergan meanwhile, have pledged to limit both the number and the magnitude of gross price increases going forward this year.

Merck’s report isn’t likely to satisfy all industry critics, of course. That 5.5% net price increase is well above the annual rise in the Consumer Price Index, for instance. And for competitive reasons, drug companies aren’t likely to disclose gross and net pricing dynamics on individual products soon.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 3, 2017

Tax Proposal Vexes Some Small Firms
by: Ruth Simon and Richard Rubin
Jan 30, 2017
Click here to view the full article on

TOPICS: Income Taxes

SUMMARY: The article describes the Republican proposal to reduce the overall tax rate but change deductibility of imported items to make them more costly. This feature is name a "border adjustment." The impact on small firms with less resources to bear the brunt of tax prior to increasing prices or finding other offsets to the tax impact is the focus of the article.

CLASSROOM APPLICATION: The article may be used in a corporate tax class or in a class focusing on smaller businesses.

1. (Advanced) What are the major components of the Republicans' proposed tax code overhaul? You may refer to the related article to assist in this description.

2. (Introductory) What is the proposed border adjustment to the U.S. tax code?

3. (Advanced) What factors indicate that the border adjustment might disproportionately affect smaller businesses?

4. (Introductory) What factors may make it more difficult for smaller entities to absorb the impact of this tax change--even if eventually they may pass price increases on to customers or the value of the dollar changes in a way that is helpful to importers?

Reviewed By: Judy Beckman, University of Rhode Island

Retailers Face Hit Under Tax Plan
by Susan Pulliam,Sarah Nassauer and Richard Rubin
Jan 07, 2017
Page: B3

"Tax Proposal Vexes Some Small Firms," by Ruth Simon and Richard Rubin, The Wall Street Journal, January 30, 2016 ---

Owners say they may have to raise prices, lay off workers; exporters expect to benefit

A proposed overhaul of the U.S. tax code favored by Republicans in the House of Representatives is drawing fire from small-business owners who sell everything from toys to materials used in kitchen cabinets.

Some business owners say they worry that a part of the proposal, known as border adjustment, could force them to raise prices and lay off workers. Others fear it could even put them out of business. The proposal could, however, benefit firms that are exporters or don’t import raw materials or finished products.

Under the plan, imports couldn’t be deducted as a cost of doing business, while exports would be exempted. That could lead to higher tax bills for firms that rely heavily on imports. The proposal is part of a broader tax overhaul that would cut corporate and individual tax rates.

Before his inauguration, then President-elect Donald Trump in a Jan. 13 interview with The Wall Street Journal, criticized the border tax plan as “too complicated,” though he later said the idea was still being discussed. The administration has since moved toward accepting the plan in part by tying it to Mr. Trump’s proposed wall on the U.S.-Mexico border.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 3, 2017

Exxon Profit Tumbles on Charge
by: Bradley Olson
Feb 01, 2017
Click here to view the full article on

TOPICS: Impairment, Oil and Gas Accounting

SUMMARY: Following an investigation by the U.S. Securities and Exchange Commission (SEC) (previously covered in this review-see the related article), "Exxon Mobil Corp. said Tuesday it wrote down the value of more than $2 billion in U.S. assets... [and reported] its lowest yearly earnings in 20 years. " Questions ask students to understand the concept of impairment charges in the context of oil and gas accounting. Note: the FASB codification section related to this topic is ASC 932-360 which is given to the students in question 3.

CLASSROOM APPLICATION: The article may be used in a course covering oil & gas accounting or impairment charges in general.

1. (Introductory) What is an impairment charge? For what assets has Exxon taken an impairment charge?

2. (Introductory) How has this impairment charge impacted Exxon's reported profitability in the fourth quarter of 2016 and in the entire year of 2016?

3. (Advanced) What are proved oil reserves? Summarize the accounting for these assets. Hint: the relevant FASB Accounting Standards Codification is in the area of ASC 932-360.

4. (Introductory) What are oil sands? How will Exxon change its reporting for assets in this category based on the SEC's requirements?

5. (Advanced) "Exxon was alone among major energy companies in not having recognized on its books any reduction in the value of its prices crashed in recent years." Why does the plunge in worldwide oil prices affect not only oil companies' revenues line item but also impact potential impairment of recorded assets?

6. (Advanced) Refer again to the related article. How has Exxon's taking this impairment charge represented a reversal of its previous positions? In contrast, how does the author describe Exxon's write-down in comparison to other oil companies?

7. (Introductory) How did the current SEC investigation into Exxon get started? Was it based only on review of Exxon filings with the SEC or from other sources?

8. (Advanced) As stated in the article, Exxon has said its financial reporting meets all legal and accounting standards. With regard to the accounting standards, do you think it is possible for Exxon to hold this position but for the SEC to disagree and find against the company? Explain, including specific reference to authoritative accounting guidance in this area.

9. (Advanced) How does Exxon's upper level management tie the required financial reporting for impairments to their management approach? Explain how you think this management approach could be effective in reducing the need for impairments.

Reviewed By: Judy Beckman, University of Rhode Island

SEC Probes Exxon Over Accounting for Climate Change
by Bradley Olson and Aruna Viswanatha
Sep 21, 2016
Page: A1

"Exxon Profit Tumbles on Charge," by Bradley Olson, The Wall Street Journal, February 1, 2017 ---

Oil giant posts first increase in revenue after nine quarters of declines; accounting probe looms

Exxon Mobil Corp. said Tuesday it wrote down the value of more than $2 billion in U.S. assets, departing from decades-long practice amid an investigation by securities regulators, as the world’s largest publicly traded oil company posted its lowest yearly earnings in 20 years.

The move follows an investigation begun by the U.S. Securities and Exchange Commission in August over Exxon’s accounting practices and how the company values its future oil and gas wells, or reserves. The probe also sought information about how Exxon weighs the potential impact that climate-change regulations could have on its business, The Wall Street Journal reported in October.

An SEC spokesman declined to comment on Tuesday. Exxon has said it is cooperating with the probe and that its financial reporting meets all legal and accounting standards.

Irving, Texas-based Exxon reported a 40% drop in fourth-quarter earnings, and annual 2016 profit of $7.8 billion—the company’s lowest since 1996, three years before it grew immensely with an $82 billion deal to buy rival Mobil Corp.

Irving, Texas-based Exxon reported a 40% drop in fourth-quarter earnings, as low oil and natural-gas prices also took a toll on the company. Annual 2016 profit totaled $7.8 billion—Exxon’s lowest since 1996, three years before the company grew immensely with an $82 billion deal to buy rival Mobil Corp.

Exxon was alone among major energy companies in not having recognized on its books any reduction in the value of its reserves, a development that had become fairly routine for peers as prices crashed in recent years. Since 2014, other U.S. companies have slashed the value of their assets by more than $200 billion, according to S&P Global Market Intelligence.

“The impairment appears a bit light given the company’s resources,” said Brian Youngberg, an energy analyst with Edward Jones in St. Louis. Exxon shares fell 1.1% to $83.89 on Tuesday, while peers such as Royal Dutch Shell PLC either rose or held roughly flat.

Exxon wrote down natural-gas assets in the Rocky Mountains. The company purchased shale producer XTO Energy for $31 billion in 2010 during the heart of a drilling boom that would send natural-gas prices careening downward within a few years. The price, which averaged $5.35 per million British thermal units when the deal was announced late in 2009, is now about $3.23.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Pay Rule in the SEC's Cross Hairs
by: Andrew Ackerman
Feb 07, 2017
Click here to view the full article on

TOPICS: Securities and Exchange Commission

SUMMARY: There are two commissioners at the Securities and Exchange Commission now, Republican Michael Piwowar and Democrat Kara Stein. Republican Michael Piwowar is the interim chair until President Trump's choice is confirmed by the Senate; the president's nominee is Jay Clayton. Under a Republican presidential appointee, the SEC may seek to undo much of the regulation implemented under the Dodd-Frank law, but "undoing a regulation often lengthy process that is similar to creating one." Interim Chair Piwowar, who opposed the pay disclosure rule when it was implemented under Chair Mary Jo White, has proposed altering how this rule is enforced. He cannot expect to do any more than that because the remaining two-person Commission leaves the organization stagnating under the political divide.

CLASSROOM APPLICATION: This article follows on others discussing the impact of the administration change on regulation of the financial industry

1. (Introductory) What is the pay-ratio disclosure rule?

2. (Advanced) How does the pay-ratio rule differ from the "Say on Pay" rule? (You may refer to the related article to assist with this answer.)

3. (Introductory) According to the article, why do Republicans view the pay-ratio disclosure rule as one of the Dodd-Frank rules that ought to be repealed?

4. (Advanced) According to the article, why does Commissioner Kara Stein's oppose Interim Chair Piwowar's proposed revision to implementation of the pay disclosure rule?

Reviewed By: Judy Beckman, University of Rhode Island

Dodd-Frank Rules: Up for a Rethink
by Richard Teitelbaum and Kimberly S. Johnson
Nov 29, 2016
Page: B5

Trump Signs Executive Order to Cut, Restrict Regulations
by Damian Paletta and Michael C. Bender
Jan 30, 2017
Page: ##

"Pay Rule in the SEC's Cross Hairs," by Andrew Ackerman, The Wall Street Journal, February 7, 2017 ---

In unusual move, Michael Piwowar reopens comment on pay-ratio disclosures

The acting head of the Securities and Exchange Commission is quickly targeting rules long-loathed by the business community, moving for the second time since Inauguration Day to ease some Dodd-Frank financial-overhaul requirements.

Republican Michael Piwowar, who took over shortly after the inauguration, signaled Monday that the commission would take a fresh look at new requirements that companies disclose the pay gap between chief executives and their employees. The move shows the extent to which officials under the Trump administration could press at the agency level to ease Obama-era initiatives they oppose without waiting on Congress to act.

Mr. Piwowar, who opposed the rule in 2015 when it was approved, said some companies “have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” and that he had asked SEC staff to “reconsider the implementation of the rule.” In 2015, he called it “a provision of the highly partisan Dodd-Frank Act that pandered to politically connected special interest groups.”

Required by the Required by the 2010 Dodd-Frank law, the pay-ratio rule mandates companies to disclose median worker pay—the point on the income scale at which half their employees earn more and half earn less—and compare it with CEO compensation. The rule could put pressure on corporate boards to slow pay increases for chief executives at companies with significant or widening gaps, proponents have said. It has been a flashpoint over the years because it tied corporate disclosure policy to divisive political debates about income inequality and executive pay. Companies complain the metric, which firms are set to begin reporting in 2018 for this year’s pay, is expensive to calculate and isn’t informative to shareholders. Congressional Republicans also oppose the ratio and are expected to try to kill it legislatively, though those efforts could run into roadblocks in the Senate, where Democrats have more leverage than in the Hous2010 Dodd-Frank law, the pay-ratio rule mandates companies to disclose median worker pay—the point on the income scale at which half their employees earn more and half earn less—and compare it with CEO compensation. The rule could put pressure on corporate boards to slow pay increases for chief executives at companies with significant or widening gaps, proponents have said.

It has been a flashpoint over the years because it tied corporate disclosure policy to divisive political debates about income inequality and executive pay. Companies complain the metric, which firms are set to begin reporting in 2018 for this year’s pay, is expensive to calculate and isn’t informative to shareholders.

Congressional Republicans also oppose the ratio and are expected to try to kill it legislatively, though those efforts could run into roadblocks in the Senate, where Democrats have more leverage than in the House

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Trump's Red-Tape Cuts Don't Mean a Free Pass
by: Ken Brown
Feb 09, 2017
Click here to view the full article on

TOPICS: Corporate Governance, Sustainability

SUMMARY: This Heard on the Street article focuses on investor demand for companies with good governance and continuing improvement in environmental impact. "Today businesses will rejoice at reduced red tape and might invest in areas they have avoided, but few will pollute more or risk damaging their reputations as good corporate citizens.... investors that incorporate businesses' records on the environment, social factors such as diversity and good governance characteristics into their decisions account for....about 20% of overall assets [and] these funds have grown 33% over the past two years." Questions ask students about the topic of corporate governance in general and about the financial reporting conceptual framework. The latter topic is important to meet investor needs as outlined in FASB Concepts statement 8 chapter 1, Objective of Financial Reporting.

CLASSROOM APPLICATION: The article may be use in a financial reporting class covering disclosure, a class covering corporate governance, or a class covering sustainability reporting as meeting investor information demand.

1. (Advanced) What is good corporate governance?

2. (Introductory) Why might companies with good corporate governance records both improve financial performance and improve (reduce) environmental impact of the business?

3. (Advanced) What is the objective of financial reporting? Cite your source for this answer.

4. (Advanced) Given investor concerns described in this article, do you think that traditional annual reports consisting of financial statements, related footnote disclosures, and management discussion and analysis are sufficient to meet the objective of financial reporting?

5. (Introductory) Refer to the related articles. What regulatory reductions has President Trump implemented by executive order? What difficulties might the U.S. Securities and Exchange Commission face in attempting to implement this executive order?

Reviewed By: Judy Beckman, University of Rhode Island

Trump Signs Executive Order to Cut, Restrict Regulations
by Damian Paletta and Michael C. Bender
Jan 30, 2017
Online Exclusive

Pay Rule in the SEC's Cross Hairs
by Andrew Ackerman
Feb 07, 2017
Page: B1

"Trump's Red-Tape Cuts Don't Mean a Free Pass," by Ken Brown, The Wall Street Journal, February 9, 2017 ---

A rapid increase in assets held by investors concerned with environmental and other issues could blunt the economic impact of the Trump administration’s deregulation push

The Trump administration has pledged to boost economic growth by cutting two regulations for every new one created. Investors have responded by bidding up stocks in the hope that profits will surge.

In the past companies would have been off to the races, building belching smokestacks and cutting back on worker safety, though, all in the name of profits. Today, businesses will rejoice at reduced red tape and might invest in areas they have avoided, but few will pollute more or risk damaging their reputations as good corporate citizens. The extent to which businesses will take advantage of the easier regulations will determine whether the economy gets the boost the administration is seeking.

Business that sell to consumers are especially sensitive to their reputations. But all U.S. companies are increasingly wary of how their shareholders might respond to their behavior. Investors that incorporate businesses’ records on the environment, social factors such as diversity and good governance characteristics into their decisions account for $9 trillion in investment assets in the U.S. While that is about 20% of overall assets, these funds have grown 33% a year over the past two years. The numbers in Europe are far higher.

“This was something nobody really cared about 20 years ago from a U.S. investment perspective,” said Savita Subramanian, an equity and quantitative strategist at Bank of America Merrill Lynch. New research by Ms. Subramanian shows they should. Her group analyzed corporate ratings of environmental, social and governance characteristics and found that since 2005, companies that scored in the top third relative to their peers outperformed stocks in the bottom third by 18 percentage points.

Ms. Subramanian’s data also show that companies that score well had smaller price declines on average, which she sees as a result of their efforts to control risk. Ms. Subramanian, a quantitative analyst for Merrill Lynch since 2001, was surprised that the scores had a measurable effect. “I’m so used to running these back tests and you get zero impact,” she said.

Corporate executives are nearly unanimous that cutting red tape and compliance costs will boost their performance. Banks in particular would benefit from reductions in compliance requirements that have mushroomed in recent years. But beyond that, they are cautious about loosening safeguards just when their shareholders are looking more closely. “You don’t want to wait until your investors are demanding it, you know which way the parade is going,” said David A. Golden, the chief legal and sustainability officer at Eastman Chemical.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

The Taxman Misses Kickoff
by: Sarah Nassauer
Feb 04, 2017
Click here to view the full article on

TOPICS: Tax Refunds

SUMMARY: Television, food and furniture sales typically spike around the SuperBowl. However, the Internal Revenue Service (IRS) is sending refunds weeks later than usual. The delay is caused by the IRS complying with a law designed to fight tax frauds who file for refunds under others' names in advance of filings by the real taxpayer. The delay is leading some retailers to hold off on refund-related advertising and/or to promote financing via credit cards until tax refunds arrive.

CLASSROOM APPLICATION: The article may be used in a class covering personal income taxes or a managerial accounting class covering sales budgeting and planning.

1. (Introductory) Knowing that some taxpayers receive early tax refunds, what sales tactics do some stores employ around the time of the SuperBowl?

2. (Introductory) How are these stores adjusting their marketing because of the change in timing of tax refunds?

3. (Advanced) Why has the IRS delayed sending out early tax refunds in comparison to prior years?

4. (Advanced) What two areas of the tax law are the subject of focus in the IRS effort to deter fraudulent filing for refunds? Why do you think these two areas are subjected to this greater scrutiny?

Reviewed By: Judy Beckman, University of Rhode Island

"The Taxman Misses Kickoff," by Sarah Nassauer, The Wall Street Journal, February 4, 2017 ---

Television sales often rise around game day, but delayed tax-refund checks this year could take toll on sales

Television, food and furniture sales typically spike around the Super Bowl as fans host game-day parties. Behind the scenes, there is an additional boost: Americans flush from early tax refunds.

This year that beneficial relationship could experience strains, however, as the Internal Revenue Service complies with a new law designed to cut down on tax fraud, resulting in tens of billions in early refunds going out weeks later than usual.

The shift is prompting some retailers and consumer-goods manufacturers to adjust their marketing, as they attempt to stay in shoppers’ minds for when they have money to spend.

Wal-Mart Stores Inc., which traditionally starts rolling out products and marketing for “Game Time” and “Tax Time” in late January, will delay some of its refund-related digital marketing for the season in line with the slower payment schedule, a spokeswoman said.

Hhgregg Inc., a consumer-electronics and home-appliance retailer based in Indianapolis, is promoting its credit card for financing as well as delaying some of its refund-related marketing at its 220 stores, said Chris Sutton, its senior vice president of marketing. “Tax season is an integral time period for sales of appliances, furniture and TVs,” he said.

Although early refunds go toward a variety of goods, as well as bills, rent and savings, TVs and other big-ticket items are big beneficiaries. Last year, the week before the Super Bowl brought in $395 million in U.S. TV sales and the following week $353 million, making the stretch one of the biggest sales periods after Black Friday, according to NPD Group Inc. data provided by a person familiar with the trends.

But this year, the delay could eat into impulse purchases tied to the Super Bowl or the need for a winter coat during the coldest months, said Marshal Cohen, chief retail analyst for NPD.

Tax refunds are often the biggest single check low-income families receive each year, say tax preparers. “Our wants become even bigger purchases when we have the money in hand,” Mr. Cohen said.

People often file early, tax preparers say, when they qualify for the two breaks affected by the delay. Those are the child tax credit and the earned income tax credit, a benefit that can provide a maximum payment of $5,572 for a low- or middle-income married couple with two children.

Early refunds typically arrive in late January and early February—in time for Super Bowl promotions. But this year, refunds may be as late as Feb. 27, the IRS says, at it spends more time reviewing applications for the tax credits to weed out identity-theft fraud, which is more common in early returns. It declined to comment on how this aspect of the filing season is going.

This year’s Super Bowl is Sunday, Feb. 5. By the same date last year, the IRS had sent out $58.6 billion in refunds.

When Carolyn Mae Brown, a 29-year-old stay-at-home mom in Maryville, Tenn., received an early refund last year, she and her husband used it to buy a $1,000 electric piano and put the rest toward their savings.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Even Donald Trump Can't Save Twitter
by: Steven Russolillo
Feb 08, 2017
Click here to view the full article on

TOPICS: Non-GAAP Reporting, Stock Options

SUMMARY: The author argues that Twitter's declining revenue growth rates mean the company is unlikely to turn around its financial health. The company reports net losses under U.S. GAAP but the article refers to adjusted earnings of 12 cents expected by analysts for the fourth quarter of 2016, after excluding stock-based compensation expense and other items. Questions ask students to access Twitter's filings on the SEC web site to examine GAAP profitability and the amount of stock-based compensation expense.

CLASSROOM APPLICATION: The article may be used in covering financial reporting in general, stock-based compensation expense, and/or non-GAAP reporting.

1. (Introductory) How has Twitter's stock price performed since the company's 2013 IPO?

2. (Advanced) Access Twitter's most recent quarter filing on form 10-Q for the 3rd quarter of 2016, filed on November 1, 2016, and its 10-K filing for the year ended December 31, 2015, available on the SEC's EDGAR database at Note also that the company is soon to report 4th quarter 2016 earnings. Has the company ever shown a profit? List the financial statement amounts that support your answer.

3. (Advanced) What are Twitter's major cost items? Approximately what portion of revenue does each cost item represent?

4. (Introductory) How does Twitter earn its revenues? Should prolific tweeting by our newly-elected president impact those revenues? Explain.

5. (Advanced) Refer to the related article. Why does it say that "analysts expect Twitter to earn 12 cents per share in the fourth quarter...down from 16 cents per share a year earlier" if the company shows a net loss in each of those periods? And how does that compare with the main article description of analyst forecasts on the stock. In your answer define the term non-GAAP reporting.

6. (Introductory) What is stock-based compensation expense? Access Note 12 to Twitter's annual report for the year ended December 31, 2015 obtained under #2 above. Scroll to the section labeled Stock-Based Compensation Expense. What is the total? What proportion of revenues does that total represent? In what income statement line item(s) is this compensation expense included?

Reviewed By: Judy Beckman, University of Rhode Island

Twitter Earnings: What to Watch
by Deepa Seetharaman
Feb 08, 2017
Page: ##


"Even Donald Trump Can't Save Twitter," by Steven Russolillo, The Wall Street Journal, February 8, 2017 ---

If Twitter can’t materially benefit from a phenomenon like Trump, it probably won’t from anything else either

If there ever was a time for Twitter Inc. to turn its business around, this should be it. Don’t hold your breath.

By blasting 140-character messages daily to his more than 24 million followers, President Donald Trump has effectively made the microblogging site his personal communication platform. This is exposure that money just can’t buy.

“The media has effectively become a giant marketing vehicle for Twitter,” says BTIG analyst Rich Greenfield, who upgraded its shares ahead of Thursday’s earnings report. As one of the few Wall Street analysts with a “buy” rating on the company, Mr. Greenfield says it is “undeniable that Twitter has been thrust into the global zeitgeist.”

But, as has been made clear by Twitter’s recent results and its battered stock price, there is a clear distinction between publicity and profitability. Monthly active-user growth continues to slow. Twitter is still losing money under generally accepted accounting principles. It has had constant churn in the C-suite and, in October, said that it would slash 9% of its workforce.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Jackson's Estate Faces Tax Demand
by: Hannah Karp
Feb 06, 2017
Click here to view the full article on

TOPICS: Estate Tax

SUMMARY: When pop star Michael Jackson died in 2009, estate executor attorneys valued his name and likeness as essentially worthless. The entertainer was in debt to a total of $500 million. Estate attorneys have turned that into a positive $500 million through "endeavors including the posthumous release of the documentary 'This Is It'" and other efforts. "The IRS argues that the pop star's name and likeness should have been valued at $162 million" and that the estate owes $500 million in taxes and $200 million in penalties. Estate attorneys argue that the IRS is "trying to take what Michael's estate created for his children after death and extract an unreasonable and excessive tax."

CLASSROOM APPLICATION: The article may be used in a tax course covering estate taxes or to cover valuation issues.

1. (Introductory) Why is it important to determine the value of Michael Jackson's likeness and name for his estate? In your answer, describe the objective of valuing an estate.

2. (Advanced) How could the IRS and the estate of Michael Jackson arrive at two such widely disparate estimates of the value of his likeness and name? Explain methods that can be used to determine values of intangibles such as a pop-star's name or a brand name.

3. (Introductory) According to the article, what was Michael Jackson's financial position upon his death?

4. (Advanced) How have the estate executors changed that financial position since Michael Jackson's death? Are these activities taxable as part of the original estate? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

"Jackson's Estate Faces Tax Demand," The Wall Street Journal, February 6, 2017 ---

Dispute with IRS centers on valuation of the singer’s name and likeness rights at time of his death

When pop star Michael Jackson died in 2009, weeks before a planned comeback tour, how much was the man in the mirror worth? The answer is far from black and white.

After coming to agreements on the value of some of the King of Pop’s more concrete assets in a legal fight that began four years ago, the estate’s executors are facing off with the Internal Revenue Service in U.S. Tax Court on Monday, primarily over the valuation of the singer’s name and likeness rights at the time of his death.

Depending on the outcome of the case, the estate could be on the hook for more than $500 million in taxes and $200 million in penalties, according to the IRS’s notice to the estate of its deficiency.

The estate said it considered his name and likeness essentially worthless, valuing it at $2,105, as Mr. Jackson’s reputation was then tainted by child-abuse allegations and his strange public behavior.

After releasing his last studio album in 2001, he was accused in 2003—and later acquitted—of molesting children at his Neverland ranch in Southern California. Numerous other incidents, including dangling his baby son from a hotel room window in 2002, also hurt his public image.

Even after Mr. Jackson had sold out the 50 shows at London’s O2 arena that he had planned for the “This Is It” tour in the summer of 2009, he was unable to find a tour sponsor, said Howard Weitzman, one of the attorneys representing the estate in the trial, along with tax specialists Avram Salkin and Steve Toscher. But the IRS argues that the pop star’s name and likeness should have been valued at $161 million; that would be down from 2013, when it valued those rights at $434 million.

But the IRS argues that the pop star’s name and likeness should have been valued at $161 million; that would be down from 2013, when it valued those rights at $434 million.

“No celebrity’s name and likeness rights have sold for anywhere near that much—not Elvis, not Marilyn, not Ali. And Michael did not make that much from his name and likeness—as opposed to his music—in his lifetime,” said Mr. Weitzman, noting that he only earned about $50 million from those rights while he was alive. “They are trying to take what Michael’s estate created for his children after death and extract an unreasonable and excessive tax.”

The IRS didn’t respond to a request for comment.

The gaping discrepancy highlights the difficulty of putting a price on a music star’s name and image, as distinct from what his or her music is worth. Doing so requires guessing what the celebrity would have earned in licensing deals. Future licensing opportunities can also be hard to predict as technology evolves, with holograms and virtual reality now presenting new revenue opportunities for dead stars, for example.

Running the estate since Mr. Jackson’s death have been entertainment attorney John Branca—who started representing Mr. Jackson in the 80s—and veteran music executive John McClain.

Since 2009, the two executors have helped the estate net about $1 billion, thanks to endeavors including music sales, a Cirque du Soleil tribute show and the posthumous release of the documentary “This Is It,” which followed Mr. Jackson as he prepared for his comeback tour.

The biggest payout came last year when they sold the estate’s approximately 50% stake in the world’s biggest music publishing company, Sony/ATV Music Publishing, to Sony Corp., netting about $750 million. As a result, the $500 million in debt Mr. Jackson died with has been transformed into about the same amount in cash for the performer’s mother and children.

The executors first brought the fight to U.S. Tax Court in 2013 when they filed a petition challenging a notice from IRS that had adjusted the estate’s total value to more than $1.3 billion, from $7 million. The right to Mr. Jackson’s image and likeness was among the IRS’s biggest adjustments.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Luxury Companies, Cash Rich, Ready to Splurge
by: Stephen Wilmot
Feb 10, 2017
Click here to view the full article on

TOPICS: Cash Flow, Cash Management

SUMMARY: The author speculates that luxury brands might increase cash payouts this year with free cash flow increasing. The companies are not expected to open as many stores as in the past-they actually closed more than they opened in the first half of 2016-but demand for their goods seems to be rebounding. And certainly these company's products are profitable.

CLASSROOM APPLICATION: The article focuses on the concept of free cash flow. It may be used in a financial reporting or managerial accounting class.

1. (Introductory) Why are luxury brands opening fewer stores than in past years?

2. (Advanced) Define the term free cash flow. How do changes in new store openings affect this metric?

3. (Advanced) Why are luxury brands expected to generate more free cash flow this year than in preceding periods?

4. (Introductory) What do companies do with cash balances they cannot invest for profit?

5. (Advanced) Why does concentrated ownership of luxury brand companies such as Richemont mean there is less likelihood of paying out idle cash balances?

6. (Advanced) How are Richemont's high cash balances-12% of the company's total market value-an inefficiency? Does a long-term perspective change this assessment?

Reviewed By: Judy Beckman, University of Rhode Island


"Luxury Companies, Cash Rich, Ready to Splurge," by Stephen Wilmot, The Wall Street Journal, February 10, 2017 ---

If acquisition targets don’t emerge this year, investors can expect a step-up in dividends

Whatever happens to demand for luxury goods this year, one thing is sure: Corporate cash will pile up.

Brands like Louis Vuitton, which anchors the portfolio of LVMH, and Gucci, owned by rival Kerin, invested vast sums in opening shops in recent years. Strategic fashion now favors retail—selling goods directly to customers from opulent city-centre shops—over less controllable wholesale and licensing business. And rampant demand from China and other emerging economies, particularly after the 2008 financial crisis, encouraged flag-planting.

The market eventually buckled as falling commodity prices hit Russia and Brazil and China clamped down on corrupt gifting. Brands slowed store-opening programs to the point where they actually closed more outlets than they opened in the first half of 2016, according to brokerage Bernstein. Now demand seems to be rebounding, but with retail networks already in place, new-store numbers aren’t expected to follow.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

No Growth, No Profits for Twitter
by: Miriam Gottfried
Feb 10, 2017
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Cost Management, Non-GAAP Reporting

SUMMARY: This week's article covers Twitter's announcement of fourth quarter 2016 earnings and follows on last weeks coverage of trends since the company's inception. The related video focuses on those long term trends and the current announcement. Students are asked to search for the filing of Form 8-K on February 9, 2017.

CLASSROOM APPLICATION: The article may be used in any financial reporting class; advanced levels are required to address the non-GAAP reporting questions. Rather than provide a link to filings, questions ask the students to search on the SEC EDGAR database; the date of the filing in question is given.

1. (Advanced) Explain the opening statement, "if Twitter can't grow, it needs to turn a profit." Don't all companies "need to turn a profit"?

2. (Introductory) What was Twitter's most recent financial reporting announcement? What trends are concerning in that announcement?

3. (Introductory) Consider the discussion of Twitter's costs. According to the article, what cost is Twitter focusing on reducing in the next year?

4. (Advanced) As of the date of this writing, Twitter's 4th quarter filing on Form 10-Q with the SEC has not been made. What form was filed on February 9 on which this article is based? Find Twitter's filings by proceeding to and inputting Twitter under Search for Company Filings.

5. (Advanced) What is contained in the February 9 filing? What goals for 2017 are listed?

6. (Advanced) Which of the four goals listed for 2017 will the company's cost-reduction efforts help to achieve? Use the costs you discussed in answer to #3 above.

7. (Advanced) How big is the difference between Twitter's GAAP results and its non-GAAP results? What are the major differences? Where do you find these amounts in the February 9 filing?

Reviewed By: Judy Beckman, University of Rhode Island


"No Growth, No Profits for Twitter," by Miriam Gottfried, The Wall Street Journal, February 10, 2017 ---

Twitter says it is trying to become profitable, but that will be difficult with ad revenue increasingly at risk

If Twitter can’t grow, it needs to turn a profit. The company has realized that much, but achieving it won’t be an easy task.

Twitter on Thursday reported a larger-than-expected net loss in the fourth quarter as year-over-year revenue growth slowed to less than 1%. Revenue from advertising fell slightly. User growth accelerated to 4.5% year over year from 3.3% in the third quarter, but Twitter’s monetization efforts fell short. Average revenue per user fell 4%—the first decline in that metric.

Twitter told investors it is trying to position itself for profitability in 2017, but that will be challenging as its advertising revenue looks increasingly at risk.

Twitter didn’t offer revenue guidance for the first quarter, but it warned that increased competition for digital ad spending and its own re-evaluation of the kinds of ads it sells could mean ad revenue growth continues to trail audience growth. With monthly active user growth already anemic and the initial public offering of the rapidly growing Snap on the horizon, that doesn’t bode well.

Meanwhile, Twitter is having only limited success with trimming expenses. It said expenses, excluding stock-based compensation, climbed 1% in the fourth quarter as reductions in sales and marketing costs were offset by a higher cost of revenue. Granted, the company has taken steps to lower stock-based compensation expense. This fell 13% in the fourth quarter, and Twitter expects it to fall between 15% and 20% in 2017.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Toshiba's Meltdown: Chairman Out, $6.3 Billion Write Down
by: Takashi Mochizuki
Feb 14, 2017
Click here to view the full article on

TOPICS: Ethics, Impairment

SUMMARY: Toshiba has just emerged from an accounting scandal in 2015 in which it restated earnings downward by $1.9 billion over the seven preceding years. Now the company projects a $6.3 billion write-down on its assets in nuclear reactor projects under Westinghouse Electric, a U.S. company Toshiba acquired in 2006. These results could pose the end of this historic company. The financial report is delayed because of "allegations of impropriety" related to pressure on accounting matters.

CLASSROOM APPLICATION: The article may be used to discuss timely reporting, ethics issues, impairment charges, and contingent liabilities stemming from an acquisition.

1. (Advanced) How may cost overruns and delays in nuclear power plant production lead to an accounting write down? You may refer to the first related article from December 2016 to help answer this question. In your answer, describe the accounting process for determining impairment charges.

2. (Introductory) What evidence has come to light regarding the possibility of inappropriate accounting at Toshiba in 2016?

3. (Advanced) How could management "exert inappropriate pressure" over accounting matters?

4. (Introductory) How have these possible accounting matters led to Toshiba failing to release its financial results on time?

5. (Advanced) Refer to the related article from 2015 entitled "5 Things: To Know About Toshiba's Accounting Scandal." From the descriptions in the article, does it seem possible that the issues leading to the current tardiness in Toshiba's reporting could stem from similar issues to those that led to its 2015 accounting scandal? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

Toshiba Expects Write-Down of as Much as Several Billion Dollars
by Takashi Mochizuki
Dec 29, 2016
Online Exclusive

Toshiba's Problems Go Beyond Nuclear Accounting Mess
by Jacky Wong
Feb 14, 2017
Online Exclusive

5 Things: To Know About Toshiba's Accounting Scandal
by Lisa Du
Jul 21, 2015
Online Exclusive


"Toshiba's Meltdown: Chairman Out, $6.3 Billion Write Down," by Takashi Mochizuki, The Wall Street Journal, February 14, 2017 ---

Company postpones issuing earnings results as it warns of large write-down on its nuclear business

TOKYO— Toshiba Corp.’s problems threatened to spiral out of control as the electronics giant projected a $6.3 billion write-down, postponed its earnings report because of allegations of impropriety and said its chairman was resigning—all in the space of a day.

The delay in the earnings report sent Toshiba shares down 8% in Tokyo trading Tuesday, and its president said he was willing to sell most or all of Toshiba’s profitable flash-memory business to help the company survive past the March 31 end of its fiscal year.

The latest troubles stem from Toshiba’s U.S. nuclear-plant business, Westinghouse Electric Co., which is battling cost overruns at reactor projects in Georgia and South Carolina.

The losses have gotten so big that they could topple a company whose roots go back to 1875, the dawn of Japan’s modern era. Known for its pioneering innovations in notebook computers and the flash-memory chips that are ubiquitous in today’s devices, Toshiba has struggled in recent years with the decline of its consumer business.

A 2015 accounting scandal, in which the company acknowledged fudging numbers to make its personal-computer business and other units look better, led to the resignations of top officials

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

GOP Health-Law Plans Draw Criticism
by: Anna Wilde Mathews
Feb 14, 2017
Click here to view the full article on

TOPICS: Health Care, Income Taxes

SUMMARY: Economists argue that unlimited deductibility of health care plan costs and excluding them from taxable income encourages excessive health spending. In response, the Affordable Care Act (ACA, or ObamaCare) included a tax on health care plans costing above a certain threshold. That provision of the ACA has been delayed until 2020 so has not yet taken effect. The Republican proposals instead would require a cap on the non-taxability of these benefits to worker recipients. Critics argue that that both the ACA and Republican proposals have the same ultimate effect. Employers, labor groups, and others are expressing opposition to the proposals.

CLASSROOM APPLICATION: The article may be used in individual or corporate tax class or when covering payroll taxes.

1. (Introductory) According to the article, what is the 'Cadillac Tax' under the Affordable Care Act, (otherwise known as Obama Care)?

2. (Introductory) What are Republican plans to change this provision of ObamaCare, but still help to curb high cost health care plans?

3. (Advanced) Why do you think that comments in the article say that the Republican plan would have the same impact as the Cadillac tax under ObamaCare?

4. (Advanced) What are the economic arguments in favor of some method of curbing "excessively generous health coverage?

5. (Advanced) What practical viewpoints push against those economic arguments? Who puts forth these ideas?

Reviewed By: Judy Beckman, University of Rhode Island

"GOP Health-Law Plans Draw Criticism," by  Anna Wilde Mathews, The Wall Street Journal, February 14, 2017 ---

The Affordable Care Act’s tax on high-cost employer health plans faced sharp opposition from employer and unions . Now,Republicans are drawing equal fire for proposals that those groups say would have some of the same effects as the tax. Th elaw’s so-called Cadillac tax is levied on the value of employer health plans above a certain threshold, in part to discourage what backers argue areoverly generous plans and high usage of costly care.It is one of the few aspects of the law that Congress has tweaked, delaying its impact until 2020 . Several Republic an plans for replacing the law include their own curb on generous health plans: a cap on how much of employer-provided health benefits could be shielded from taxes. Such a cap could force certain workers to start paying income tax onaportion of the cost of their coverage. “In the end, they both would have similar effects, ” including pushing companies toward skinnier health plans, said Steve Wojcik . . .

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 10, 2017

Corporate-Debt Drought Looms Under U.S. Tax Proposal
by: Justin Lahart
Feb 14, 2017
Click here to view the full article on

TOPICS: Bonds, Corporate Taxation, Debt, Deductibility

SUMMARY: Republican proposals to encourage repatriation of foreign earnings and change deductibility of interest expense may influence the bond market in both the short run and the long run.

CLASSROOM APPLICATION: The article may be used in a class covering debt issuance to introduce factors influencing debt versus equity issuance or may be used in a corporate tax class.

1. (Advanced) In general, what factors influence corporations' choices to issue debt rather than stock (equity)?

2. (Advanced) What factors influence investors to hold corporate debt versus stock (equity)?

3. (Introductory) What current tax policy issues may change the status of factors influencing companies' decisions to issue debt?

4. (Introductory) According to the article, what might be the short-run and long-run impacts of the changes discussed in answer to question 3 above?

Reviewed By: Judy Beckman, University of Rhode Island

"Corporate-Debt Drought Looms Under U.S. Tax Proposal," by ustin Lahart, The Wall Street Journal, February 14, 2017 ---

House Republicans’ plans to let companies repatriate foreign profits and deny deductions on interest could cut into bond issuance

If the Republican-led Congress has its way, the supply of new corporate bonds may soon dwindle.

The corporate-tax overhaul that House Republicans drew up last June has become a source of market enthusiasm and anxiety since the election of President Donald Trump. The focus has largely been on the possibility of lower corporate taxes and a tax on imports.

Bond investors should instead look at another part of the plan, which would let multinational firms repatriate foreign profits and deny most deductions for interest.

Years of rock-bottom interest rates made the corporate bond market one of the few places where income-oriented investors have been able to make money. Their demand for corporate debt helped fuel a flood of issuance: U.S. investment-grade corporate bond issuance was $1.3 trillion last year versus $900 billion a decade earlier, according to the Securities Industry and Financial Markets Association.

But companies’ willingness to feed that demand may be about to cool.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on February 24, 2017

BofA Misses Big Options Payday
by: Liz Hoffman and Tom McGinty
Feb 16, 2017
Click here to view the full article on

TOPICS: Executive Compensation, Stock Options

SUMMARY: Bank of America executive stock options issued in 2006 have expired worthless. The article and related graphics discuss trends in use of stock options versus stock award plans as well. Questions ask students to summarize the accounting for stock options issued in compensation plans as well as to understand the issues in the article.

CLASSROOM APPLICATION: The article may be used when covering accounting for executive stock option and stock award plans.

1. (Introductory) How long ago were the stock options described in this article issued by Bank of America (BofA) to its executives?

2. (Advanced) Summarize the accounting for executive stock options issued in compensation plans.

3. (Advanced) Define the terms "in-the-money" and "out-of-the-money" options. How far out-of-the-money were the Bank of America (BofA) executive stock options when they expired on Wednesday, February 15?

4. (Advanced) Did the stock options issued by BofA result in compensation expense in the income statement even though they expired worthless? Explain, referencing your answer to #2 above.

5. (Introductory) What is the purpose of issuing executive stock options? What are some concerns about them?

6. (Advanced) Do you think that what happened with the BofA stock options worked against their intended purpose?

7. (Advanced) Refer to the related article. What are the components of BofA Chief Executive Bryan Moynihan's compensation?

8. (Advanced) Refer to the graphc "Options and other stock-based CEO pay as a percentage of total, S&P 500 financial companies." Compare BofA CEO Brian Moynihan's pay components to the overall trends shown in the graphic.

Reviewed By: Judy Beckman, University of Rhode Island

Bank of America CEO Brian Moynihan Gets 25% Pay Bump
by Peter Rudegeair
Feb 21, 2017
Online Exclusive


"BofA Misses Big Options Payday," by Liz Hoffman and Tom McGinty, The Wall Street Journal, February 16, 2017 ---

Contrast shows gaps between banks that have fully recovered from financial crisis and those that haven’t

Bank of America Corp.’s top executives were sitting on the right to buy 400,000 shares of the bank’s stock at $53.85, a perk handed out by its board a decade ago.

The problem is, the stock trades at $24.58.

Those stock options expired worthless on Wednesday, a sign of the lingering effects of the financial crisis and the huge gap between banks that have recovered fully from that era and those still far from the targets set during Wall Street’s better times.

Unlike executives at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., whose options have by and large paid out, Bank of America Chief Executive Officer Brian Moynihan this week will forgo 200,000 options, which accounted for about one-fifth of his total pay in 2006. Banks, like other public companies, detail options grants and their terms in public filings with the Securities and Exchange Commission.

Stock options, which guarantee executives the right to buy shares at a fixed price in the future, have long driven tech-industry paydays and were once a large part of Wall Street bonus packages. The idea was to motivate officials to boost the stock price, thereby giving them the right to get stock at a discount years later.

Options have become less popular recently in response to shareholder pressure, accounting-rule changes and the financial crisis, which left employees at many companies holding the equivalent of worthless lottery tickets. The main concern: Options generated an obsession with the stock price that led to risky behavior.

But some old options doled out in the middle part of the last decade—some of the last large options grants that remain on Wall Street—are now expiring, an event that separates executives into winners and losers.

In the former camp are those at Goldman and J.P. Morgan, whose shares both hit closing highs Wednesday. The recent rally has pushed millions of dollars of options at those banks “into the money,” that is, exercisable for the executive at a gain.

Rivals at Bank of America, Citigroup Inc. andMorgan Stanley, meanwhile, have watched millions of options expire worthless as the firms’ share prices languish below targets set during peak years for bank profits.

Of 182 sets of options issued by the five largest Wall Street firms since 2003, more than half have expired worthless because the banks’ shares were trading below what executives would have had to pay to take hold of the shares.

The best options batting average belongs to Goldman. Out of seven options series the bank has granted since 2003, five have expired and all of them were in the money on their expiration dates, though about $200 million of options that expired in late November needed the stock-market rally that followed the 2016 presidential election to give them value.

The group laggard is Morgan Stanley. Just one of its 19 options grants since 2003 that have expired ended up in the money, though two set to expire next year are comfortably in the money. Over the same period, Bank of America executives saw about 90% of the 8.1 million shares underlying their option grants expire worthless.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 24, 2017

Whole Foods Wins Votes, but Not Without Grumbles
by: Heather Haddon and David Benoit
Feb 18, 2017
Click here to view the full article on

TOPICS: Board of Directors, Corporate Governance, Proxy Statement

SUMMARY: Whole Foods Market, Inc. is facing falling sales growth due to increasing competition from traditional retailers carrying similar offerings and other reasons. Its CEO pledged in the company's annual meeting to use data to bring back the market's core customers. The annual meeting activities described in the article include a shareholder protest vote and a vote on the former co-CEO's severance package.

CLASSROOM APPLICATION: Questions ask students to discuss the purpose of an annual meeting and a proxy statement. Students also are asked to specifically describe the events the recent Whole Foods Market, Inc. annual meeting. The article may be used in a class covering corporate governance.

1. (Introductory) What have been financial trends a Whole Foods Market Inc.?

2. (Introductory) What competitive, demographic, or other issues have led to these trends?

3. (Advanced) What is the purpose of an annual shareholder meeting? What is the role of a proxy statement in that process?

4. (Advanced) How are investors reacting to the discussion at the company's annual meeting on Friday, February 17, 2017?

5. (Advanced) As described in the article, what types of voting occurred at the shareholders' meeting? Did these votes change the composition of the company's Board of Directors?

Reviewed By: Judy Beckman, University of Rhode Island


"Whole Foods Wins Votes, but Not Without Grumbles," by Heather Haddon and David Benoit, The Wall Street Journal, February 18, 2017 ---

Whole Foods Market Inc.’s annual shareholders meeting convened Friday amid investor concern about the organic-food retailer’s ability to address decelerating sales growth and steep reductions in its share value.

Some investors are saying the Austin, Texas-based company is at an inflection point as it works to improve its performance in the increasingly competitive grocery industry. Absent improvement it could face a challenge to the board in about six months’ time, according to people familiar with the matter.

A Whole Foods spokeswoman declined to comment.

Protest votes against directors without a competing slate of nominees—as was the case Friday—are unlikely to unseat current board members but can embolden activists and critics to try to campaign in the following year, especially if performance hasn’t changed.

Shareholders approved the most closely watched proxy resolutions Friday, including ones pertaining to the former co-CEO’s severance package and two board members questioned by analysts over their record for attendance and independence.

The vote came just a week after Whole Foods delivered a downbeat financial outlook, with executives dropping plans to expand to 1,200 stores in the U.S. and announcing the largest number of stores closures at one crack in the company’s nearly 40-year history.

The entire grocery industry is sluggish as increased competition has eaten into margins and slowed growth. Food-retail stock prices are down an average of 2.17% year to date, according to FactSet data.

But mainstream grocers’ expansion into natural and organic products has particularly hurt Whole Foods in a sector it once dominated. The company’s stock has lost more than half its value since its most recent peak in 2013.

Whole Foods founder and CEO John Mackey pledged last week to use data and promotions to lure back core shoppers to its 469 stores in the U.S., Canada and the U.K.

Mr. Mackey on Friday faced investors alone for the first time in six years after the company recently ended its dual-CEO leadership structure.

Wall Street analysts last week were largely positive on the company’s shift to more fiscal discipline.

“A recovery seems likely,” said Laura L. McGonagle, senior vice president at Trillium Asset Management, a Boston investment firm that owns Whole Foods shares.

But others believe the company has a long way to go to turn around its bottom line and expect pressure on leadership to grow.

Neuberger Berman, a top-10 investor with about 2.4% of Whole Foods stock, has been privately pushing for faster change at the company, people familiar with the matter said. The firm believes Whole Foods resonates better with millennials and sells more prepared foods than rivals, but that management hasn’t kept up with the chain’s growth, the people said.

“Where are the next-generation kids who are talking about farm to table? They are trying to embrace that crowd in a groovy way but they’ve missed the boat. That’s a problem,” said Julie Goodridge, founder and chief executive for Boston-based NorthStar Asset Management, which decreased its stake in Whole Foods to 1% from 3% last fiscal quarter after owning the company’s stock since 1992.

Ahead of Friday’s vote, proxy advisers added to the pressure by raising concerns about Whole Foods’ board attendance, executive pay and the “coziness” of its board, according to Glass Lewis & Co

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 24, 2017

Nominee for SEC 'Gets Big Corporations'
by: Dave Michaels
Feb 21, 2017
Click here to view the full article on

TOPICS: 10-K, Disclosure Requirements, Securities and Exchange Commission

SUMMARY: Trump nominee for SEC Chair, Jay Clayton, has done legal work dealing with some of the biggest challenges agency has faced. For example, he advised on the public offering of Alibaba; at the time, the SEC pushed on the company's disclosures under its complex governance structure. Alibaba discloses that it now is being scrutinized by the SEC. If confirmed, Clayton is expected to lead efforts to reduce disclosure requirements and has expressed his position that important initiatives relate to resiliency and cybersecurity issues.

CLASSROOM APPLICATION: Questions focus on the SEC's impact on required disclosure, the attractiveness of raising capital in public markets, and a Clayton statement on 10-K type reporting by the federal government.

1. (Introductory) What is the background of President Trump's nominee for the SEC Chairman's job, Jay Clayton?

2. (Introductory) Why does that background change the expected focus in the work of the SEC?

3. (Advanced) In general, what types of disclosure requirements are set by the SEC?

4. (Advanced) What is the difference between raising funds in public debt and equity markets rather than private fundraising channels? In your answer, define each of these financing sources before explaining the difference.

5. (Advanced) How could easing disclosure requirements help to increase the attractiveness of raising funds in public markets versus private channels?

Reviewed By: Judy Beckman, University of Rhode Island

"Nominee for SEC 'Gets Big Corporations'," Dave Michaels, The Wall Street Journal, February 21, 2017 ---

Jay Clayton’s legal work has dealt with some of the biggest challenges agency has faced

In late November, Jay Clayton was called by a longtime client seeking advice for how the Trump administration should tackle scaling back rules on Wall Street.

Mr. Clayton, a partner at Sullivan & Cromwell LLP who has represented Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., dashed off an email explaining how government could promote growth by easing what he considered unnecessary regulations on raising capital, according to a person familiar with the matter. The correspondence was shared with Trump advisers, who were impressed and asked if there might be a position that would interest him. Mr. Clayton replied: “SEC chairman.”

Shortly after a late-December meeting with then-President-elect Donald Trump in Mar-a-Lago, Fla., he was offered the job.

Through his memo and subsequent meetings, the person said, Mr. Clayton assured the Trump team he shared their fear that public markets have become much less attractive than private fundraising channels, including mutual funds that pour millions into startups that are far from going public.

He “gets big corporations and the need for raising capital,” said Robert Evans III, a partner at Shearman & Sterling LLP who has known Mr. Clayton through legal circles. “It’s a welcome change from having somebody with an enforcement bent running the commission.”

Mr. Clayton would replace Mary Jo White, a former U.S. attorney chosen by President Barack Obama for her reputation as an aggressive prosecutor. By comparison, Mr. Clayton, a lawyer who has guided dozens of firms through stock sales and mergers, has written that federal foreign-bribery investigations unfairly shackle U.S. companies in their pursuit of growth overseas.

Mr. Clayton, 50, is expected to testify as soon as March 2 before the Senate Banking Committee, which must advance his nomination to the full Senate. Democrats, including Sen. Sherrod Brown, of Ohio, the panel’s ranking member, have said they are skeptical that a lawyer with career ties to Wall Street will share their desire for tough enforcement deals and strict rules intended to prevent another credit crisis.

Mr. Clayton’s wife, Gretchen Butler Clayton, has worked at Goldman Sachs since February 2000, though she plans to resign if the Senate confirms her husband, according to a person familiar with the matter. A financial adviser to wealthy households and high net-worth individuals, she also plans to sell stock she owns in the firm if Mr. Clayton is confirmed, the person said.

A big question facing Mr. Clayton is his stance on the 2010 Dodd-Frank financial overhaul law that aimed to rein in bank risk-taking after the financial crisis. Even if Republicans in Congress don’t succeed in their goal of repealing major sections of Dodd-Frank, the deliberations would provide Mr. Clayton with enough political cover to pursue other priorities such as easing corporate disclosure requirements. The agency’s acting chairman, Republican Michael Piwowar, already has frozen action on unfinished Dodd-Frank rules.

Mr. Clayton worries that certain rules, including some from the congressional response to the Enron Inc. accounting scandal, have become too burdensome for small companies trying to raise capital, according to a person familiar with his thinking.

“He’s very practical,” said Richard Truesdell, a partner at Davis Polk & Wardwell LLP, who joins Mr. Clayton at an exclusive monthly dinner club of top Wall Street lawyers to compare notes on legal issues. “The key insight that Jay can bring is, in the real world, what is the impact?”

Mr. Clayton has spoken with friends about what they call the “Tom Wolfe theory of contagion risk management,” a reference to “The Bonfire of the Vanities,” a novel in which a chain of tragic and life-altering events emanate from one character’s fateful decision. He also has discussed “Antifragile,” a book by Nassim Taleb that argues companies and individuals should learn to withstand volatility and unexpected shocks, said David Lawrence, a former Goldman Sachs executive who is a friend of Mr. Clayton’s.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 24, 2017

Snap's Roadshow Starts with a Grilling
by: Corrie Driebusch and Maureen Farrell
Feb 22, 2017
Click here to view the full article on

TOPICS: Initial Public Offerings, IPO, Valuations

SUMMARY: Snap, Inc., parent company of Snapchat, has held its initial roadshow meeting and luncheon for its IPO. The company has set a valuation of as much as $22 billion for the IPO. Potential investors are questioning the company's ability to generate revenues, profits and cash flows given that the growth of its active user base of 158 million is slowing.

CLASSROOM APPLICATION: Questions ask students to understand the place of this meeting in the IPO process, who answers attendees' questions, and the role of financial performance and valuation in the process. It may be used in a class covering stock issuance, public markets in general, or corporate governance.

1. (Advanced) What is an initial public offering of stock (IPO)?

2. (Introductory) Who attended this meeting in advance of Snap, Inc. issuing its IPO? Who answered the attendees' questions?

3. (Introductory) According to the article, what are the main concerns expressed at this meeting related to the company's financial performance? What was the answer given by company management?

4. (Advanced) Refer to the related article. What is the business valuation that Snap, Inc. has set for itself in planning this IPO? How is that valuation used in the IPO process?

Reviewed By: Judy Beckman, University of Rhode Island

Who Are Snap's Real Friends?
by Miriam Gottfried
Feb 17, 2017
Page: B12


"Snap's Roadshow Starts with a Grilling," by Corrie Driebusch and Maureen Farrell, The Wall Street Journal, February 22, 2017 ---

The social-media company’s task now is to sell investors on the valuation it has set for itself—of as much as $22 billion

Hundreds of potential investors crowded a ballroom of the Mandarin Oriental overlooking New York’s Central Park on Tuesday to grill Snap Inc. executives about how they’re going to turn their popular disappearing-message app into a moneymaking machine, according to people who attended.

In front of a projected image of its signature cartoon ghost, the Snapchat parent’s chief executive, finance chief and chief strategy officer answered questions from portfolio managers and analysts about the service’s decelerating user growth, threats posed by rival Facebook Inc. and their plans for generating more revenue per user, the people said.

The lunch event helped kick off the roadshow for Snap’s highly anticipated initial public offering, scheduled for the first week of March. The social-media company’s task now is to sell investors on the valuation it has set for itself—of as much as $22 billion.

The deal will be closely watched for signs of whether a largely stagnant IPO market will rebound in 2017. It is slated to be the largest U.S.-listed technology new issue since Alibaba Group Holding Ltd.’s IPO in 2014.

Riding the elevators to the 36th-floor ballroom, some investors said they were interested in the offering. But they also said they wanted to hear Evan Spiegel, Snap’s billionaire 26-year-old founder and CEO, assuage their fears about the extent to which the company can cash in on its average daily active user base of 158 million, when growth is slowing.

Mr. Spiegel, introduced by Morgan Stanley banker Michael Grimes as a “once-in-a-generation founder,” emphasized that the number of users matters less than how much time they spend on the app, the people said.

When asked about competition from Facebook’s Instagram, which in August launched a rival service, Stories, Mr. Spiegel said that Instagram is used more by brands and celebrities because of its reach, whereas Snapchat is used by people to communicate with friends.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 24, 2017

How 'Border Adjustment' Poisons Tax Reform
by: Phil Gramm
Feb 22, 2017
Click here to view the full article on

TOPICS: Tax Policy

SUMMARY: Former Senator Phil Gramm explains in this opinion page piece that the border tax is unlikely to serve its intended purpose. It is instead more likely to have significant unintended consequences.

CLASSROOM APPLICATION: The article may be used in a corporate tax class to discuss proposed tax reform by Republicans in Congress and the Trump Administration.

1. (Advanced) Who is Phil Gramm?

2. (Introductory) What does Mr. Gramm say is the purpose of tax reform?

3. (Introductory) What are the basic provisions of, and arguments behind, the Republican-proposed "border tax"?

4. (Advanced) Name at least one of the unintended consequences Mr. Gramm says could result from the proposed border tax. Do you think this is important to consider in deciding on tax reform by Congress? Explain.

5. (Introductory) What is Mr. Gramm's alternate proposal to the "border tax"? Explain how this proposal could alleviate the concern you discussed in answer to the question above.

Reviewed By: Judy Beckman, University of Rhode Island


"How 'Border Adjustment' Poisons Tax Reform," by Phil Gramm, The Wall Street Journal, February 22, 2017 ---

The House’s 20% import fee is political industrial policy that will convulse the economy. Better to follow the 1986 model.

The goal of tax reform is to collect revenues while reducing the distorting influence that taxes impose on economic efficiency and growth. The 1986 tax reform stripped out deductions and credits—which had distorted resource allocation and sapped economic efficiency—and collected roughly the same amount of taxes with a 28% top individual rate and a 34% corporate rate that had previously been collected with a 50% top individual rate and a 46% corporate rate.

The economy boomed not only because the lower individual and corporate rates increased incentives to work, save and invest, but because stripping out tax-favored provisions reduced the drag on economic efficiency that is caused by allocating resources politically. Today the lesson of 1986 has been almost completely lost in the fixation on lower rates. The House border-adjustment proposal, with its 20% corporate tax rate, is a prime example.

Under that plan, revenues from exports would be excluded when determining profits for tax purposes, while the cost of imports would not be deductible as a business expense. That’s the equivalent of heavily subsidizing exports and imposing the new 20% corporate tax on imports. By assuming that the plan would not change international capital transactions, and therefore trade balances, the House assumes it would ultimately push up the value of the dollar by 25%.

This would offset the cost that the proposal imposes on consumers, who would be buying imports with a more valuable dollar. In the same way, the tax preference for exporters would also disappear as the cost of buying U.S. exports abroad rises with the dollar. Thus all exchange-rate-adjusted prices would return to where they were before border adjustment—except that with imports accounting for $600 billion more than exports, the 20% tax would produce a $120 billion annual revenue windfall.

In this happy world of assumptions, foreign producers, not American consumers, would absorb the cost of the new tax. Yet what is missing is any analysis of how tax preferences for exports and penalties on imports would drive up the value of the dollar. The real-world adjustment process would involve painful dislocations of capital and labor.

If imports cannot be deducted as a business expense, retailers selling imports and manufacturers using imported parts would face an immediate explosion in costs, which they would try to pass on to customers. Higher retail prices would result in fewer purchases, lower profits, layoffs, and the failure of marginal businesses. As the demand for imports declines, fewer dollars would be exchanged for foreign currencies to buy imports, and the value of the dollar would start to rise.

Similarly, since revenues coming from exports would not be taxable under the House bill, profits, capital investment and employment would surge in exporting industries. Cheaper U.S. exports would cause foreigners to demand more dollars to purchase them, and the value of the dollar would rise.

If the value of the dollar actually appreciates over time by 25%, all of these business adjustments then would have to be reversed. The 12% of the economy that produces exports would experience first a boom and then a bust, while the 15% of the economy using imports would experience a bust and then a boom.

If everything eventually returns to where it started—an improbable event, given that the value of U.S. exports plus imports makes up only 0.3% of total dollars traded—border adjustment is simply a gimmick that convulses $5.2 trillion of the economy to collect $120 billion in new taxes. If the value of the dollar does not rise by 25%, border adjustment is a massive industrial policy that distorts a larger share of the economy than all the special-interest provisions in all the other U.S. tax laws combined.

Even if we imagine that the value of the dollar could instantly rise by 25%, circumventing the adjustment process, the list of unintended consequences would still be immense. Much of the world’s public and private debt is denominated in dollars, and a rapid increase in the value of the dollar would cause massive financial upheavals and bankruptcies. A 25% increase in the dollar’s value would imperil American investments abroad—including hundreds of billions of dollars in private and state pension funds and university endowments. The domestic tourism industry, which does not get a tax subsidy on its sales to foreigners visiting the U.S., would be devastated.

Border adjustment will be challenged under international trade agreements. Proponents tell us that not taxing exports is only treating our income tax like a value-added tax, which normally is not imposed on exports. But countries with VATs also have income taxes. Could the U.S. persuade the World Trade Organization that exempting exports from income taxes is the equivalent of doing so for a VAT or sales tax? That’s doubtful, but if the answer is yes, other countries could do it as well—dissipating any U.S. advantage from subsidizing exports.

No other country in the world disallows the deductibility of imports, and here there is no parallel to a VAT. This policy is protectionism pure and simple, and the WTO would surely say so, opening America up to retaliation and possibly triggering a trade war.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on March 4, 2017


", The Wall Street Journal, February, 2017 ---


Continued in article

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January 2017

Bob Jensen's New Additions to Bookmarks

January 2017

Bob Jensen at Trinity University 

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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:  

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John Arnold Made a Fortune at Enron. Now He’s Declared War on Bad Science ---

Bob Jensen's war on bad science in accounting (accountics) research ---

280 MOOCs Getting Started in January 2017: Enroll Free Today ---

HarvardX and MITx: Four Years of Open Online Courses -- Fall 2012 - Summer 2016
SSRN, December 16, 2016


Isaac Chuang Massachusetts Institute of Technology (MIT) - Office of Digital Learning; MIT

Andrew Dean Ho Harvard University; Harvard University - HarvardX


In 2014 and 2015, a joint research team from Harvard University and MIT released summary reports describing the first two years of Harvard and MIT open online courses launched on the nonprofit learning platform, edX. These reports set expectations for the demographics and behavior of course participants and established an analytic framework for understanding the then-nascent online learning context known as the Massive Open Online Course (MOOC).

This “Year 4 Report” extends these earlier findings to four complete years of HarvardX and MITx courses on edX, resulting in one of the largest surveys of MOOCs to date: 290 courses, 245 thousand certificates, 4.5 million participants, 28 million participant-hours, and 2.3 billion events logged online. We present our findings in a series of nine exhibits that address questions about the evolution of the MOOC movement from its birth in 2012, through its current adolescence.


Jensen Comment
What surprised me is that only about a third of the MOOC users are teachers and professors. I would have thought the percentage would be higher since MOOCs are windows into how your most prestigious competitors are doing their jobs.

What surprised me even more is how important certificates of completion seem to be to the users of MOOCs. MOOC courses are free, but growth leveled somewhat when edX started charging for the certificates. Also about 60% of the users are willing to pay for those certificates. It would surprise me if those certificates mattered much in the job market. But then what do I know?

Bob Jensen's links to free courses (including mathematics) and tutorials ---

Journal of Accounting Education Call for Submissions to a Special Edition
The Journal of Accounting Education invites submissions for a special issue devoted to ethics as it relates to accounting and auditing education, in particular obtaining an understanding of the drivers and impediments for compliance with the fundamental principles and independence – integrity, objectivity, professional competence and due care, confidentiality, and professional behavior as described by international standards. For example, it has been suggested that the professional skepticism and “professional fortitude” or “moral courage” help professional accountants comply with the fundamental principles and independence --- for SI on Auditing and Ethics.pdf

Bob Jensen's threads on accounting and auditing professionalism ---

It would seem that, if the constraint of double-entry bookkeeping is removed as a basis of financial reporting, the operational definitions of the major performance indicator of "profit" for for-profit businesses will have to become much more precise and operational than "profit" is presently defined as a residual phenomenon in a double-entry bookkeeping system.

In recent communications Tom Selling suggested that accounting might be improved by deleting the historic constraint of double entry bookkeeping for financial reporting.

An earlier advocate of this was Cox Bonita in the following reference:

Accountability lost: the rise and fall of double entry
Volume 31, Issue 4, August 2003, Pages 303–310


This paper discusses the need for modern accounting systems to meet the criteria of both ‘accountability’ and ‘usefulness’ and argues that the traditional double entry book keeping system serves as a constraint on the achievement of system usefulness. We look at the problems associated with the double entry book keeping system and argue for its replacement with an events accounting system (EAS) model which is more appropriate to current business requirements. We also consider the need to extend the EAS model to more adequately meet the criterion of system usefulness. It is suggested that the integration of an EAS approach with that of a strategic information systems planning approach, facilitates the meeting of this objective.

Jensen Comment
Due to tradition, functional fixation  (and whatever else)  financial analysts and investors want a primary index for tracking performance a company's performance over time and to compare inter-company performances. Net profit throughout accounting history since the days before Pacioli serves this purpose. Net profit became the most-tracked index of business performance without ever being formally defined. Before Other Comprehensive Income (OCI) was invented in FAS 130 net profit was the change in equity that's left (a positive or negative residual) after changes in defined components of liabilities and equities other than retained earnings are eliminated under a double entry system.

In my opinion OCI was initially invented in anticipation of FAS 133 so that changes in value of derivative contracts serving as cash flow and FX hedges do not impact net profit to the extent that the hedges are effective. Of course some other items are also posted to OCI (or AOCI)  ---
Tom Selling is so critical of the OCI concept I suspect that he'd like to take this "quagmire" back out of accounting standards when defining net profit.

Tom Selling would like to define profit in terms of changes in values of assets and liabilities along Hicksian lines, but this is not an operational definition without more precise definitions of assets, liabilities, and values. The standard setters (IASB and FASB) define profit in terms of revenues minus expenses, but this is not an operational definition without precise definitions of revenues and expenses.

Accounting standard setters readily admit that they do not have an operational definition of profit and other important financial definitions. The IASB just undertook a five-year effort to define profit more operationally.

IASB Plans Overhaul of Financial Definitions 

The International Accounting Standards Board, or IASB, which sets reporting standards in more than 120 countries, said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit.

The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants.

The changes will not result in new standards but will require the board to overhaul existing ones.

At the moment, terms like operating profit are not defined by the IASB. The aim is to help market participants judge the suitability of a particular investment.

“We want to give investors the right handles to look at a balance sheet,” said IASB chairman Hans Hoogervorst.

Up until now, International Financial Reporting Standards, known as IFRS, leave companies too much flexibility in defining such terms, which often makes it difficult to compare financials, Mr. Hoogervorst said.

“Even within sectors, there is a lack of comparability,” Mr. Hoogervorst said. This affects both investors and companies, he added.

It is too early to tell what the changes will mean for companies reporting under IFRS, according to Mr. Hoogervorst. “They should be less revolutionary than the introduction of new standards but every change results in work”, he said.

Some firms might find that they have less latitude when reporting financial results, he said. That could mean more work.

Firms that decide against adopting the new IASB definition for ebit, for example, could be required to reconcile their own ebit calculation into one based on the IASB’s definition.

The IASB in 2017 also plans to finalize a single accounting model that would be applied to all forms of insurance contracts.

Besides that, the board will work on updating the system through which filers add disclosures to the electronic versions of their financial statements. The system is updated on a regular basis and the IASB produces an annual compilation of all changes each year.

Bob Jensen's threads on conceptual framework controversies ---

Jensen Comment
It would seem that, if the constraint of double-entry bookkeeping is removed as a basis of financial reporting, the operational definitions of the major performance indicator of "profit" for for-profit businesses will have to become much more precise and operational than "profit" is presently defined as a residual phenomenon in a double-entry bookkeeping system.

Harvard:  Midsize Cities Are Entrepreneurship’s Real Test
But the visibility of megacities masks the reality that billions do not live in these entrepreneurial epicenters. In fact, midsize cities and their associated regions are where most people live, work, and play, and will continue to do so into the future:
Forecasts tell us that even in 2050 megacities will still number just a few dozen, while thousands of midsize cities (.5 to 5 million people) will house
92% of the world’s urbanites.

Economist Magazine:  A cautionary tale about the promises of modern brain science ---

But a paper just published in PLOS Computational Biology questions whether more information is the same thing as more understanding. It does so by way of neuroscience’s favourite analogy: comparing the brain to a computer. Like brains, computers process information by shuffling electricity around complicated circuits. Unlike the workings of brains, though, those of computers are understood on every level. 

Continued in article

Jensen Comment
Something similar happens in accountancy where it's often assumed that more is better. For example, some academic accountants for years advocated more and more current value reporting of assets and liabilities combined with dubious "measures" of intangibles and contingencies without taking into account either the costs of such reporting nor the misleading outcomes and the dubious reliability of such data. Exhibit A is the ill-fated FAS 33 that required current cost data reporting for large companies. Academics salivated over the anticipated market reactions to this data. Financial analysts and investors meanwhile yawned and paid little attention to the costly requirement imposed by the FASB  Because financial analysts and investors found little value added in FAS 33 reporting the FASB rescinded the requirement not long afterwards.

The bottom line is that accountants are pretty good at bean counting but they're not so great at producing esoteric measures such as the "value" of a firm, the "value" of human resources, or expected losses from lawsuits that have not even been filed.

 Tom Selling's Third Module on Arguing Against Deferred Taxes
More Not to Like about Deferred Taxes: The Foreign Earnings Loophole ---

. . .

I reckon that I have written somewhere around 500K words in my blog posts over the years, yet only in these last three posts have I tackled the issues surrounding accounting for income taxes. As this will certainly be my last post on the topic for the foreseeable future (pun intended), I’ll conclude with a brief summing up.


I began by observing that there doesn’t seem (anymore) to be much of a conceptual difference between “income taxes” and other forms of taxation to justify making a distinction for accounting purposes. If all taxes were presented in one location on the income statement with appropriate note disclosure of the components, readers would have a clearer idea of pre-tax operating income and the dimensions of the burden imposed on the entity by taxing authorities.


The bulk of these three posts were devoted to explaining why I don’t think that there is any normative or adequate empirical justification for deferred taxes. It adds items to the balance sheet that don’t qualify as assets or liabilities, and it obscures information about the tax burden that a company will pay in the “foreseeable future.” Moreover, deferred tax accounting is extremely complex; the manuals published by the Big Four firms on this topic alone typically run to about 700 pages. Even if it were true that there is some informational benefit to deferred tax accounting, surely there is a less costly and more straightforward way to provide that information to users of financial statements.


Finally, as I conjectured in my previous post, deferred tax accounting may have survived for as long as it has because the effective rate strongly tends to indicate a higher tax rate than companies consistently pay. If you think I was being too cynical in that post, perhaps this latest post will moderate your views somewhat.

Jensen Comment
Tom tends to make fairly convincing arguments for changes in accounting standards based upon what I call bell-jar analysis. The arguments are convincing within a bell-jar world of not looking at or citing prior research on the topic outside his bell-jar analysis.

For example, Tom claims there is no "adequate empirical justification for deferred taxes" which is counter to some empirical evidence in published accounting research literature. I've discussed this previously and cited some of the contradictory evidence with tom on the AECM  listserv. I will not repeat my previous citations of this evidence in this tidbit.

However, I would like to point out that Tom's illustration in the above citation runs a common risk of a bell-jar analysis that sounds convincing inside the bell-jar but is not as convincing when looking at prior research findings outside the bell jar.

I cite the following example:

"Book-Tax Differences and Future Earnings Changes," by Mark Jackson, Journal of the American Taxation Association, Article Volume 37, Issue 2 (Fall 2015) ---


Prior studies suggest that large book-tax differences (BTDs) are associated with future earnings changes or earnings persistence. The literature has explored a number of potential explanations for this relation, without a clear answer emerging. To integrate the various assertions I divide total BTDs into temporary and permanent categories and hypothesize that temporary BTDs (reflected in deferred taxes) predict future changes in pretax earnings, whereas permanent BTDs predict future changes in tax expense. The results are consistent with these hypotheses. Prior studies also suggest that both types of BTDs are associated with earnings management and tax avoidance. I find evidence that tax avoidance firms have a more positive association between their BTDs and both pretax earnings changes and tax expense changes. However, I find only inconsistent evidence on the influence of earnings management on the association of the components of BTDs and future earnings changes, with results dependent on the research design. Overall, the evidence suggests that while tax avoidance and earnings management may contribute to the association between BTDs and future earnings changes, there are also more fundamental drivers of this association.


I don't challenge all of Tom's bell-jar conclusions per se in his third post.

What I do challenge is that his evidence may not be as convincing had he looked at "more fundamental drivers of association."


This is one of many illustrations of what econometrician David Giles recently referred to as Jagger's Theorem, although Professor Giles was not analyzing Jagger's theorem in the context deferred taxes tax accounting and inter-period allocation.

Measuring income tax accrual quality
by Preeti Choudhary, Allison Koester, and Terry Shevlin
Review of Accounting Studies September 2016 Volume 21, Issue 1, pp 89–139

We develop and validate a measure of tax accrual quality. Tax accrual quality captures variation in the extent to which the income tax accrual maps into income tax-related cash flows, with lower variation indicating a higher quality tax accrual. Low tax accrual quality arises from (1) management estimation error and (2) financial reporting standards that lead to differences between income tax expense and income tax cash flows not captured by deferred tax assets and liabilities. We validate our tax accrual quality measure by showing it is associated with firm characteristics that capture both constructs and by demonstrating it predicts future tax-related restatements and internal control material weaknesses. We illustrate the importance of our measure by showing that investors view tax expense as more informative in firms with better tax accrual quality. Future researchers can use tax accrual quality to address questions related to estimation error in the income tax account.

Ten Leading Books in Economic History ---

Ascertaining Intangible Factor Effects Upon Enterprise Value Utilizing a Firm Equation System
SSRN, December 1, 2016


Zane L. Swanson


The concept that accounting represents the economics of the firm is a premise for the allocation of scarce resources. In recent years, firm intangible assets seem to have become an increasingly important driver of firm economic value, and yet they are difficult to measure. This study develops an equation system in order to investigate both purchased (goodwill) and internally generated intangible factors impact upon firm enterprise value. The current study finds both goodwill and a measure of internally generated assets do affect firm value. Thus, this study provides/documents a useful valuation approach for intangibles analyses.

Readers of the above article are referred to the issue of clean surplus. In particular I recommend looking at the following history book:
Clean Surplus:  A Link Between Accounting and Finance, 1996
Edited by = Richard Brief and Ken Peasnell

Some Published XBRL Updates

Digitally unified reporting: how XBRL-based real-time transparency helps in combining integrated sustainability reporting and performance control
by Peter Seele
Journal of Cleaner Production
Volume 136, Part A, 10 November 2016, Pages 65–77

In this paper, I address the call for a “new approach to sustainability reporting” (Lubin and Esty, 2014) based on the present “sustainability gap” and propose the concept of “digitally unified reporting.” This is achieved by reviewing two major trends from distinct bodies of literature: “integrated reporting” from the sustainability field and unified data based “XBRL-integrated reports” as established in financial reporting making use of the digital standard XBRL (eXtensible Business Reporting Language). Based on a systematic literature review, eight trend statements are derived pointing at gaps and issues in the field of sustainability reporting and management. Following this review, I propose a new concept called “digitally unified reporting” that addresses these issues. The core contribution is an XBRL-based approach to sustainability reporting that combines digital data management of sustainability performance measurement with digitally standardized sustainability reporting. To advance theory, “digitally unified reporting” is defined and discussed and positioned as a “twin track approach” to sustainability reporting (Burritt and Schaltegger, 2010) that provides both an inside-out and an outside-in perspective on sustainability reporting and management. The major advancement and theoretical contribution of the proposed concept is a time-ontological shift due to 24/7/365 digital transparency. This proposed shift is from retrospective reporting on past performance to digitally enabled and interoperable real-time transparency of performance measurement and reporting for managers and external stakeholders. Finally, the concept is compared to current conventional reporting approaches.

From 12 Years ago
Financial Reporting in XBRL on the SEC's EDGAR System: A Critique and Evaluation
by RS Debreceny, A Chandra, AND JJ Cheh
Journal if Information Systems
Article Volume 19, Issue 2 (Fall 2005)

This paper evaluates the implications of the proposed Securities and Exchange Commission (SEC) Rule (33‐8496) which encourages companies to file reports in the eXtensible Business Reporting Language (XBRL) format. We examine the impact of the proposed rule in three domains: (1) the role of XBRL in financial reporting, (2) concerns with XBRL taxonomies, and (3) the impact of XBRL on the SEC's filing program. The paper adopts a descriptive approach to generate normative and prescriptive propositions with implications for research that will guide preparers, users, and regulators of XBRL‐tagged information.

Inline XBRL versus XBRL for SEC Reporting
by Kamile Asli Basoglu and Clinton E. (Skip) White Jr.
Journal of Emerging Technologies in Accounting
Volume 12, Issue 1 (December 2015)

As currently implemented by the SEC, financial statements in XBRL format are not as useful to analysts and investors or as transparent as they could be. In this paper, the authors discuss a number of issues contributing to this problem and compare current SEC XBRL filing to a new technique—Inline XBRL (XBRL 2013). Inline XBRL (iXBRL) is based on embedding the XBRL-tagged information within an XHTML document and has significant advantages to offer.

Irregularities in Accounting Numbers and Earnings Management—A Novel Approach Based on SEC XBRL Filings
by Klaus Henselmann, Dominik Ditter and Elisabeth Scherr
Journal of Emerging Technologies in Accounting
Volume 12, Issue 1 (December 2015)

The SEC XBRL mandate enables the gathering of accounting numbers to be fully automatic in a database-like manner that provides vast opportunities for financial analysis. Using this functionality, this study proposes a simple analytical prescreening measure that uses abnormal digit distributions at the firm-year level to identify firms suspected of having managed earnings. On average, we find that the constructed measure indicates a greater amount of irregularities in the reported accounting numbers of firms with higher incentives to engage in earnings management. The suggested XBRL-enhanced digit analysis approach may provide the SEC and investors a simple measure to flag financial reports carrying a higher probability of human interaction.

Computer-Assisted Functions for Auditing XBRL-Related Documents
by J. Efrim Boritz and Won Gyun No
Journal of Emerging Technologies in Accounting
Volume 13, Issue 1 (Spring 2016)

The increasing global adoption of XBRL and its potential to replace traditional formats for business reporting create a need for quality assurance for XBRL-tagged data. Although prior studies have addressed assurance issues on XBRL-related documents (i.e., instance documents and extension taxonomy) and related audit objectives, they primarily focus on the U.S. and, thus, may not be comprehensive enough for use in other countries. Furthermore, no prior literature discusses what and how computer-assisted audit functions can help auditors while they are performing assurance on XBRL-related documents. The main goal of this paper is to introduce computer-assisted audit functions that can be used by auditors to perform audit tasks to attain identified audit objectives. Based on professional guidelines and prior academic studies, this study introduces a set of audit objectives and related audit tasks that auditors might confront if they are asked to provide assurance on XBRL-related documents. The study then demonstrates a set of related computer-assisted audit functions for conducting the audit tasks and discuss how the identified audit objectives could be achieved using these functions.

Professional Role and Normative Pressure: The Case of Voluntary XBRL Adoption in Germany
by Robert E. Pinsker and Carsten Felden
Journal of Emerging Technologies in Accounting
Article Volume 13, Issue 1 (Spring 2016)

This paper examines voluntary eXtensible Business Reporting Language (XBRL) adoption intent in 2009 Germany. Our setting provides a unique opportunity to examine voluntary adoption behavior related to a global information technology (IT) in one of the largest non-U.S. economies. In conjunction with the organizing visions framework, we combine technology framing theory, institutional theory, and the professional role literature to serve as our theoretical guide. Results from 101 finance and IT managers indicate that professional role (finance managers more so than IT managers) and normative pressure (i.e., social networks) have positive relationships with XBRL adoption intent and explain approximately 66 percent of the variation when including top management leadership as a control variable. We also find weak evidence that finance managers' XBRL adoption intentions are more significantly influenced by normative pressure vis-à-vis IT managers; however, we find no evidence that the professional role affects the normative pressure felt by the manager in general. Our findings may be of interest to academics interested in IT adoption, as well as German regulators and other groups considering mandatory or voluntary XBRL adoption.

The Quality and Usability of XBRL Filings in the US
SSRN, June 21, 2016


Ariel J. Markelevich Suffolk University


In 2009, the US Securities and Exchange Commission (SEC) required all public companies and mutual funds to report their financial information to the SEC using a markup language called eXtensible Business Reporting Language (XBRL). The purpose of this requirement was to improve the accessibility to financial accounting data, increase the information flow between companies and investors, and make it easier and cheaper to collect and analyze data. Some controversy exists whether the benefits from using XBRL based data outweigh the costs associated with the creation of data and the use of the data. As part of that discussion, some claimed that the XBRL filings are of low quality and are difficult to use. The purpose of this paper is to examine the quality and usability of XBRL filings by examining different filing characteristics and mistakes over time. The focus of this paper is on the following characteristics: the use of extended tags, Document and Entity Information (DEI) errors, scale errors, and sign switches. Findings suggested that starting in 2012, there has been a steady improvement in the quality and usability of the XBRL filings in most aspects. Additionally, it seems that the lower quality and usability originates in data in the notes to the financial statements and in data filed by smaller companies. The results presented in the paper are consistent with the notion of companies moving along a learning curve and improving the quality and usability of the XBRL data as they gain more experience tagging. These improvements make it easier to use the XBRL filings and reap the benefits offered by this data. However, in spite of the efforts and improvements, it seems like more work is needed to continue improving the quality of the data.


Bob Jensen's threads on XBRL ---

Teaching Case:  Costs for Decision Making: An Instructional Case of Relevant Costs and Differential Analysis of Cost Reduction Alternatives
by Scott McGregor, Fairleigh Dickinson University
IMA Educational Case Journal, Volume 0, Issue 3, 2016

TEXTBOOK QUESTIONS AND CASES OFTEN ASK STUDENTS to use differential analysis to evaluate one independent cost reduction action. But businesses often have multiple cost reduction alternatives to evaluate simultaneously. Furthermore, companies may consider these options independently or through combinations of alternatives. The case is based on an actual project to evaluate alternative cost reduction actions at a large insurance company. For educational purposes, the scope of the project has been significantly reduced to one function, the accounting department, to provide students with a realistic situation in a manageable format. Students are presented with three alternative cost reduction approaches and must identify the relevant costs and calculate the estimated potential impacts of each alternative. The cost reduction actions evaluated are outsourcing (“offshoring”), greater automation, and an office relocation. Additionally, the students must identify the risks and other nonfinancial considerations associated with the potential cost reduction actions and make a recommendation. Keywords: relevant costs, differential analysis, cost reductions, outsourcing, relocation, automation.

Teaching Case:  Lack of Internal Controls: Beaumont Independent School District
by Russell Tietz, University of Mount Union;  Wendy Tietz, Kent State University; and  Linda Zucca, Kent State University
MA Educational Case Journal, Volume 7, Issue 4, 2016

THIS CASE, BASED ON A TRUE STORY, examines the misappropriation of funds by an administrator in the Beaumont Independent School District (BISD) in Beaumont, Texas. Patricia Adams Lambert diverted more than $500,000 of funds while she was a BISD employee. Students are asked to apply the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 Internal Control–Integrated Framework to evaluate internal controls; students will also evaluate an ethical dilemma. The case is particularly unique because it is designed to be used in introductory financial and managerial accounting classes as an example of internal controls. The case can also be used in upper-level accounting classes as appropriate.

Teaching Case:  The Student Housing Decision
Kathy Otero, Debra Kerby, and Keith Harrison --- all from Truman State University
IMA Educational Case Journal, Volume 0, Issue 3, 2016

THIS CASE PROVIDES A REALISTIC APPLICATION OF inflation-adjusted capital budgeting in a university setting. The case is designed for use in an upper-division cost accounting course or a graduate level cost/managerial accounting class. Students are required to analyze the costs of building and operating a student apartment complex, to determine a reasonable rental rate for three types of apartments, and to make a recommendation about the feasibility of the project. Critical thinking is emphasized in the development and interpretation of the present value (PV) model, identification and discussion of qualitative issues, and recognition and inclusion of uncertainty

What do accruals tell us about future cash flows?
by Barth, M. E., G. Clinch, and D. Israeli.
Review of Accounting Studies 201621(3): 768-807.

Our model, which is adapted from Feltham and Ohlson (Contemp Account Res 11:689–731, 1995) and Ohlson (Contemp Account Res 11:661–687, 1995) and extends Dechow and Dichev (Account Rev 77:35–59, 2002), characterizes the information about future cash flows reflected in accruals. It reveals investors can extract from accruals information about next period’s economic factor and the transitory part of one component of next period’s cash flow. The extent to which each accrual provides this information depends on whether the accrual aligns future or past cash flows and current period economics and whether it relates to the current or prior period. Thus each type of accrual has a different coefficient in valuation and forecasting cash flows or earnings. Each coefficient combines an information weight reflecting the information that accrual type provides and a multiple reflecting how that information is used in valuation and cash flow and earnings forecasting. The empirical evidence supports our main insight, namely that partitioning accruals based on their role in cash-flow alignment increases their ability to forecast future cash flows and earnings and explain firm value.

Special Problems in Accounting for Law Firms

"ABA urges federal lawmakers to NIX draft provision requiring law firms to adopt accrual accounting." by Martha Neil, ABA Journal, January 16, 2014 ---


The American Bar Association is urging federal lawmakers to rethink a possible plan to require businesses to use the accrual method instead of traditional cash accounting in the discussion draft Tax Reform Act of 2013.

Accrual accounting would be more complex and expensive, the ABA's president writes in letters to lawmakers, than the system currently used by many law firms, which recognizes income and expenses for tax purposes when money is actually received and paid out, respectively. A number of others also have objected to forcing businesses to adopt the accrual method, which could require companies and law firms to pay tax on income they not only haven't received but may never receive, according to the ABA and The Hill's On the Money blog.

"Although we commend you for your efforts to craft legislation aimed at simplifying the tax laws—an objective that the ABA and its Section of Taxation have long supported—we are concerned that Section 212 would have the opposite effect and cause other negative unintended consequences," President James R. Silkenat wrote in Jan. 13 letters to leaders of the Senate Finance Committee (PDF) and the House Ways and Means Committee (PDF).

"This far-reaching provision would create unnecessary complexity in the tax law by disallowing the use of the cash method; increase compliance costs and corresponding risk of manipulation; and cause substantial hardship to many law firms and other personal service businesses by requiring them to pay tax on income they have not yet received and may never receive," Silkenat continues. "Therefore, we urge you and your committee to remove this provision from the ov