New Bookmarks
Year 2018 Quarter 2:  April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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June 2018

Bob Jensen's New Additions to Bookmarks

June 2018

Bob Jensen at Trinity University 

USA Debt Clock --- ubl

How Your Federal Tax Dollars are Spent ---

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
The US Debt Clock in Real Time --- 
Remember the Jane Fonda Movie called "Rollover" ---
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas to sustain those investments.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---

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Bookmarks for the World's Library --- 

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Bob Jensen's Blogs ---
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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 ---

Possibly the Number 1 Resource for CPA Exam Candidates
AICPA:  Uniform CPA Exam Blueprints ---

CPA exam will increase focus on higher-order skills
"What Higher Order Skills Will be Tested on the Next CPA Examination," by Ken Tysiac, Journal of Accountancy, April 4, 2016 ---

Bob Jensen's CPA Exam Helpers ---

Big Four:  The financial scandal no one is talking about ---

Bob Jensen's threads on large accounting firm scandals (not just the Big Four) ---

NPR's Very Tentative Conclusions After One Year of the Tennessee Promise Program
Five Free Semesters of Higher Education for Tennessee's High School Graduates --

Jensen Comment
This is not a benefit versus cost of the Tennessee Promise Program. In fairness it will take more years of evaluation in terms of costs and benefits, and even then human education is difficult to quantify for such an analysis. Also experiments should be run with regard to other alternatives. Studies need to be conducted regarding how well students in this program are performing later on in higher education, especially performance of lower achievers.  Are they really prepared to ultimately be admitted by a flagship university or are they finding jobs consistent with the level of their education?

No European or other nation to my knowledge comes anywhere close to providing universal free higher education to lower achievers. In fact, OCED nations like New Zealand, Finland, Norway, Denmark, France, Germany, etc. do not offer 50% of Tier 2 graduates free training and/or education. Those nations rely on the majority of Tier 2 graduates to get employer-funded training that is much more intensive than such funding my USA employers ---
Especially note the OECD nations listed at

Turkey and Argentina provide free college education but competition get such a free education "are fierce" ---
Russia offers more widespread free education, but the Russian higher education system is notoriously corrupt.

Tennessee and some other parts of the USA seem to be unique in providing universal college education free to low achievers. Some might argue that community college graduates from two-year programs are not really more advanced on average than Tier 2 graduates in other OCED nations. I'm not quite so cynical, but it would be interesting to know more about the competency level of community college graduates having lower than 3.0 gpa records in the Tennessee Promise Program after it is rolling well beyond the first year.

There are, of course, many free college credits (not usually degrees) available in the USA.

Are There Really Free College Credits Online From Over 2,900 Colleges and Universities? ---

Something important happened in the field of education . . .

For the first time ever, any student anywhere can take top-quality courses online in every major freshman college subject, taught by professors from the most prestigious universities, that lead to full academic credit at 2,900 traditional colleges, such as Purdue, Penn State, Colorado State and the University of Wisconsin-Madison, all absolutely free.

There is no tuition cost. No text book cost. No administrative or connection fees. No taxpayer subsidy or federal Title IV funding required. And this is not a plan for the future, but a working reality available to students now, already built, entirely as a private 501(c)(3) philanthropy, at an exceptionally efficient price.

The charity that built the courses, over 40 in all, is called the Modern States Education Alliance. It has a bipartisan set of allies that include the nation’s largest public college systems, such as the State University of New York system and Texas State, which themselves serve over one million students and want to improve college access. Modern States is a new type of “on-ramp to college” for any hardworking person anywhere, and a way to cut the cost of traditional four-year college by many thousands of dollars and up to 25 percent.

Now, anyone can go to, the way they go to Netflix, and choose a college course the way they pick a Netflix movie. There is no charge for the course and no charge for the online textbook that comes with it. The student can watch the lectures at any time of the day or night, repeating any part of it as often as needed. When the student feels ready, they can take the CLEP exam (a well-established, credit-bearing test from the College Board, described below) almost anywhere at any time at one of the thousands of already existing test sites.

Continued in article

Jensen Comment
Free learning from prestigious universities has been available at nearly all levels of academe for years, most notably via free MOOCs ---

The clinker is that if you want a certificate or transcript credit for what you learned those are not generally free because they require added resources to verify your competency in what you claim to have learned. There are various respected fee-based services to demonstrate this competency.

The above program is somewhat unique in that it tries to coordinate the CLEP testing services of respected universities for competency testing. The catch is that the CLEP-based courses are only a small part of a university degree.

In other parts of the world (think Germany, Finland, Norway, and Denmark) college degrees and training certificates are free. The catch is that college admissions are limited to the intellectually elite comprising less than 50% of high school graduates ---

Perhaps the USA is becoming more unique in providing universal free education and training beyond Tier 2. Programs (like the Promise Program in Tennessee) for getting two-year and four-year degrees are still unique, although nearly every college in the USA has selective (in some cases fiercely competitive) free degree programs for the poor, minorities, and exceptionally talented applicants. Exhibit A is the set of all schools in the IVY League. These degrees, however, are not available to low achievers. The Tennessee Promise Program is more unique in the world in that regard.

How tax reform — and Excel — are changing the CPA Exam ---

Tesla Sells $195 million In Transferable Tax Credits To Boost Its Bottom Line ---

Causal Inference ---

Causal Inference With Observational Data:  Econometrics Blog Post by David Giles --- 

Shout-Out for Marc Bellemare

If you don't follow Marc Bellemare's blog (shame on you - you should!), then you may not have caught up with his recent posts relating to his series of lectures on "Advanced Econometrics - Causal Inference With Observational Data" at the University of Copenhagen in May of this year.

Marc is keeping us all on tenterhooks by "releasing" the slides for these lectures progressively - smart move!

So far, the first four of the eight lectures in the series are available for downloading:

·                     Lecture 1: Introduction

·                     Lecture 2: Causality

·                     Lecture 3: Instrumental Variables

·                     Lecture 4: Panel Data & Differences-in-Differences

I'm looking forward to seeing the rest of these terrific lectures.

The (Open Source) Series of Unsurprising Results in Economics (SURE) ---

MAAW (with doubts):  IMA Management Accounting Competency Framework ---

Blockchain ---

Blockchain's Next Disruption: Business School Programs ---
Thank you Glen Gray for the heads up.

THE BLOCKCHAIN IN BANKING REPORT: The future of blockchain solutions and technologies ---

Public vs. Private Blockchains: What CPAs should know ---

Stanford University:  Can Blockchain Be Used for a Public Good ---
Click Here

SEC’s Big Cryptocurrency Decision: Winners And Losers ---

AICPA Certificates Programs ---

How a down-and-out broker (barred the SEC) got University of Michigan to invest $95M ---

A former pension manager barred by the Securities and Exchange Commission helped convince his former colleague — the man who oversees the University of Michigan's endowment — to pour nearly $100 million into funds he represented.

U-M's entanglement with the unregistered broker, which has not previously been reported, is seen by some critics as an example of what has long worried the university's watchdogs: a lack of sufficient oversight and robust due diligence to avoid conflicts of interest at one of the nation's largest college endowments.

Among the broker's problems: a high-profile, federal criminal trial in which he was acquitted and a banishment by the SEC on accusations of associating with a kickback scheme.

"This goes beyond the pale," said Richard Vedder, an economics professor emeritus at Ohio University who has studied the management of college endowments. "Why would a university even think of dealing with someone like that?"

Timothy Keating, the head of a Colorado-based investment firm who also writes about endowment performance, said the due diligence requirement for U-M "is absolute and complete, meaning they have total responsibility for completing due diligence on the fund or anyone representing the fund.”

“This is a tawdry area that has been ripe for misdeeds,” especially for kickbacks and quid pro quo arrangements, Keating added.

In this case, the SEC did not suggest those types of misdeeds happened at U-M and no criminal charges were brought. Instead, the civil case involved two former colleagues who had known each other for more than two decades.

More: University of Michigan pours billions into funds run by contributors’ firms

More: Auditors probed U-M's endowment years ago. Then delay, delay, delay.

More: How Stephen M. Ross' gift to the University of Michigan ended up in tax court

Longtime industry veteran William M. Stephens, who oversaw more than $20 billion in employee pension holdings at the telecommunications giant Ameritech Corp., was in the midst of trying to restore his reputation in the investment industry. One of Stephens' former employees, L. Erik Lundberg, had moved on to run his own office at U-M and its now-$11-billion endowment. Stephens in a recent interview claimed credit for getting Lundberg his U-M position. 

Starting in March 2008, Stephens was seeking investors on behalf of a real estate fund and reached out to Lundberg and his staff at the university, SEC documents show. U-M officially signed on to the private equity fund in June of that year, according to records. Another U-M investment shepherded by Stephens followed two years later with a related fund. In total, the university invested $95 million and, as a result, Stephens earned nearly $1 million in commissions.

Federal regulators, however, uncovered a substantial problem.

SEC investigators concluded that Stephens had been acting improperly as an unregistered broker. In addition, he had already been banished in 2002 by the SEC from working for any registered investment adviser on accusations of engaging — at least on the periphery — in a union kickback scheme.

After the U-M investments, in 2013, the commission sanctioned Stephens again, barring him from a much broader swath of the investment industry. Federal regulators also fined the firm Stephens represented hundreds of thousands of dollars, as well as the firm's partner, who oversaw Stephens. 

U-M's involvement may have been preventable because Stephens' checkered past could have been easily discovered, according to a person familiar with operations of the U-M investment office. "Erik had been meeting privately with Bill Stephens," said this person, who spoke anonymously for fear of professional repercussions. "It was as simple as doing a Google search. Other people in the office knew, but Erik didn’t want all the normal due diligence done. The regents were never told about Stephens.”

U-M officials said in a statement they acted appropriately and the SEC took no action against the university. Officials did not answer questions from the Free Press about whether Lundberg had disclosed to top U-M officials and the regents his prior relationship with Stephens and Stephens' history with the SEC.

Stephens, in an interview, maintained he did nothing improper in soliciting the U-M investments. He settled his case with the SEC, but in the agreement, he did not admit guilt.

Deep Learning and the Future of Auditing:   How an Evolving Technology Could Transform Analysis and Improve Judgment ---

Data Visualization Software for CPAs ---

Bob Jensen's threads on Visualization of Multivariate Data --- 


Financial, Legal, and Tax Concerns about Long-Term Care ---
Reminder that long-term care in the USA is not covered by Medicare and can now cost over $100,000 per year

Bob Jensen's personal finance helpers ---

Religious Groups Think New Tax On Churches Is Blasphemous ---

Report: Court Documents Name KPMG Audit Clients Caught Up in PCAOB Leak Fiasco ---

Francine:  The auditor of Citi, Credit Suisse and Deutsche Bank was tipped off before regulatory inspection ---

The auditor of some of the world’s largest banks including Citigroup, Credit Suisse and Deutsche Bank was tipped off before a regulator inspected them.

It’s been previously reported that KPMG executives were able to extract from the regulator, the Public Company Accounting Oversight Board, confidential information ahead of inspections, and use that information to correct their work and at least in one instance, withdrawn an opinion. But MarketWatch now has court documents that, for the first time, names the audit clients caught up in the scandal.

The Justice Department in January brought criminal charges against five former KPMG executives and one former regulator for allegedly taking advantage of advance notice of regulator inspections. Court filings made June 8 by lawyers for two of the KPMG partner defendants spells out the audit clients caught up in the scandal. They’re mostly financial companies: Citigroup C, +1.18%  , Credit Suisse CS, +0.69%  , Deutsche Bank DB, -0.49%  , Banc of California BANC, +0.64%  , BBVA BBVA, +0.72%  , Chemical Financial Corp., Ambac AMBC, -1.04%  , Phoenix Life, and NewStar Financial as well as C&J Energy Services CJ, -0.94%

Neither the Justice Department nor the Securities and Exchange Commission, who filed similar charges in a civil cases, have ever identified the KPMG clients.

It should be stressed that there’s no indication that any of these banks or companies were aware of the tip off, and typically, they would have little to no involvement in auditor inspections. None of the issuers have announced a restatement of financials since the Jan. 6. indictment. KPMG, the auditor, has not been accused of wrongdoing.

The SEC moreover said in January that the KPMG audits of these companies should continue to be relied upon.

After the charges were filed in January, SEC Chairman Jay Clayton issued a statement intended to assuage fears that KPMG audits may have to be withdrawn based on the illegal early warnings about inspections.

“Based on discussions with the SEC staff,” Clayton wrote on Jan. 22, “I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.”

A spokesman for KPMG provided the following statement to MarketWatch via email:

“It is important to note that the inexcusable actions of the individuals who were separated from KPMG over a year ago were designed to subvert the PCAOB’s inspection process, and had no effect whatsoever on any of the firm’s audit opinions or clients’ financial statements. Our commitment to audit quality and integrity remains unwavering. In addition, we have taken steps to reinforce our values and culture, and to enhance our governance.”

The firm has said it promptly notified authorities when it discovered the issue in 2017 and has been fully cooperating with the government.

The Department of Justice, the SEC and the PCAOB each declined comment.

Corporate governance expert Nell Minow, the vice chair of ValueEdge Advisors, said investors shouldn’t be satisfied with the SEC’s statement. “The breadth and seriousness of the charges and the importance to the financial markets of the companies affected should require a through internal investigation with results made public. If the SEC or KPMG do not insist on it, investors and clients should.”

Lynn Turner, a former chief accountant for the SEC, was even more emphatic. “I believe Chairman Clayton misled investors when he said they could rely on the audits report issued by KPMG,” Turner told MarketWatch. “In my opinion, the information that has come to light raises a serious question with respect to the integrity, objectivity and professionalism of the audits.”

Continued in article

New Features Coming to Excel ---

Why Are Millions Paying Online Tax Preparation Fees When They Don’t Need To?

Undergrads Replicating Research ---
Thanks to Denny Beresford for the heads up

AICPA report: Seniors increasingly targeted for investment fraud ---

IRS warns tax practitioners of new phishing scam ---

FASB clarifies accounting for grants and contributions ---

Tax Court Lessons for S-Corporations ---

Supreme Court rules against SEC method of appointing in-house judges ---

Accounting Doctoral Scholars Program ---

Jensen Comment
This program plays down how the accountancy portion of accounting doctoral programs shrank in favor of accountics science, thereby giving priority to applicants (often from outside the USA) with strong backgrounds in mathematics, statistics, and science ---

Academic Accountants Should Consider Applying for Assurance Services Research Funding
The Assurance Research Advisory Group (ARAG), comprised of representatives from academia and public practice, funds research projects addressing private company1 assurance topics that are of interest to practitioner

With ASC 842 (lease) slated to take effect in just a few months, accounting teams need a methodical approach to implementation. Here is a guide ---

Harley-Davidson's problems go much deeper than Trump's trade war ---

Terry School of Business at the University of Georgia Inspires a "Zombie" ---

Jensen Comment
The nephew of the wife of one of our sons was a football standout for Pitt, but he was not good enough for the NFL. Instead he started a cookie business in Sacramento that's been doing quite well for over ten years. Bakeries and restaurants are long-hour and hard work daily businesses that take an enduring dedication.

Harvard:  The Death of Supply Chain Management ---

Jensen Comment
Darn --- just when Walmart commenced to pay for college majors in this discipline

Walmart’s too-good-to-be-true “$1 a day” college tuition plan, explained ---

If headlines this week like “Walmart’s perk for workers: Go to college for $1 a day” (CNN) or “Walmart to offer employees a college education for $1 a day” (Washington Post) sound too good to be true, that’s because they largely are. The benefit is real, but it is much more restrictive than those headlines suggest. It’s essentially a bulk purchasing discount for a narrow range of online college courses.

It’s also a telling benefit on a number of levels. The labor market is getting stronger, and employers are needing to think harder about how to invest in recruiting and retaining employees. But the old-fashioned strategy of paying more continues to be something corporate America resists, in part out of habit and in part because offering higher wages is a little more complicated than it looks. Companies like Walmart are, in essence, trying to get creative with their compensation packages in hopes of narrowly targeting the money they expend on the core goal of recruiting and retaining desirable workers.

The question is whether policymakers will keep unemployment low long enough to break through the wall of resistance to across-the-board pay hikes and force big companies to finally just raise pay.

Walmart’s actual tuition plan, explained

The Walmart program is limited to online degree programs offered by three schools — the University of Florida, Brandman University, and Bellevue University — and specifically focused on bachelor’s or associate degrees in either business or supply chain management.

You won’t, in other words, be able to do part-time shifts at Walmart to “pay your way through college” in the traditional sense.

But qualifying Walmart employees (including both full-time and part-time workers who’ve been with the company for 90 days) will get discounted tuition, books, and access to a coach who will help them decide on an appropriate program and shepherd them through the application process

It’s a nice opportunity for Walmart employees to gain a chance at upward mobility off the retail floor, and that’s likely the point. Unlike higher cash wages (which of course can be used for online college tuition as well as rent, gasoline, movie tickets, medical expenses, etc.), the tuition benefit is likely to be disproportionately appealing to people who are on the more ambitious end of the distribution. It’s an effort, in other words, to make Walmart more attractive specifically to the most appealing set of potential workers, a strategy other companies have pursued in recent years.

Many large employers are trying tuition benefits

Modest tuition programs have long been a staple of large employer benefits packages largely because of favorable tax treatment. The IRS allows employers to give employees several thousand dollars’ worth of tuition benefits tax-free, which makes establishing a program something of a no-brainer for most companies big enough to be employing a large back-office staff anyway.

But four years ago, Starbucks blazed the trail of offering a much more ambitious reimbursement program that essentially offered taxable tuition subsidies rather than taxable wage increases.

The reason: Academic research shows that workers who are interested in tuition subsidies are different from workers who are not. While everyone likes money, Peter Cappelli’s 2002 research indicates that the workers who like tuition subsidies are more productive than those who don’t, and Colleen Manchester’s 2012 research shows that subsidy-using employees have longer time horizons and are less likely to switch jobs.

In March of this year, a consortium of big US hotels launched a generous tuition discount program, and later that month, McDonald’s substantially enhanced its tuition benefits. Kroger — another top five US employer — rolled out a new tuition program in April, and Chick-fil-A expanded its program in May.

These initiatives differ in detail, but the broad story is the same. The unemployment rate is now low, so recruiting new staff is getting harder. Companies are looking to enhance their compensation but would like to do so in targeted ways.

Continued in article

Las Vegas casinos prepare to hemorrhage $10 million a day as their workers, fearing their jobs will be replaced by robots, get ready to go on strike ---

What did Max Weber mean by the "spirit of capitalism?"

Aristotle’s ethics of virtue offers a flexible philosophy for the 21st century. Yet few people read him today ---

Theranos Founder Elizabeth Holmes Charged With Wire Fraud ---
Click Here

Theranos Inc. founder Elizabeth Holmes, who reigned briefly as the world’s youngest female self-made billionaire over her promise to revolutionize blood testing, was criminally charged with defrauding investors along with the company’s former president.

The indictment announced Friday by the U.S. Attorney in San Francisco alleging wire fraud follows claims by the U.S. Securities and Exchange Commission that Theranos, Holmes and the company’s ex-president, Ramesh “Sunny” Balwani, lied about their technology while raising more than $700 million to build the medical-testing startup.

The indictment came out moments after Theranos said Holmes would be stepping down from the blood-testing company that has unraveled amid revelations that her main product was a fraud.

After the testing device that Holmes claimed would be able run hundreds of medical tests on a single drop of blood was shown not to work, Holmes was barred from running a clinical company by U.S. regulators and was sued by investors, and the company let go many of its employees.

Continued in article

June 16, 2018 reply from Denny Beresford


The recent book, “Bad Blood,” details the Theranos story and is a fascinating read. Based solely on that book, the charges against Holmes and her colleague/lover Sunny seem well deserved. I highly recommend the book.



Bob Jensen's Fraud Updates ---

Bank of America Sued for Allowing $102 Million Ponzi Scheme ---

Bob Jensen's threads on Ponzi frauds ---

American Airlines to Pay $45 Million to End Consumer Antitrust Lawsuit ---

Trump Foundation ---
Also see

Colorado’s Taxpayer Bill Of Rights (TABOR) ---

Instagram ---

Facebook Paid $1 billion for Instagram; Now it could be worth $100 Billion ---

Anyone Interested in Participating in an Economics Replication Experiment?

Bob Jensen's threads on accounting research where virtually all (well 99.9%) of the empirical and analytical studies are accepted as truth as soon as referees clear them the first time for publication ---

Cryptocurrency ---

Universities are starting to invest in crypto, according to an industry lawyer ---

Total virtual currency sales jump in 2018 but monthly trend slows: report ---

CRYPTO INSIDER: London's stock exchange is getting its first mining company ---

Bitcoin ---

Bitcoin is slipping after a study found signs its 2017 bull run was driven by market manipulation ---

Guaranteed Income ---

Guaranteed Income Experiment in Canada
In a three-year pilot funded by the provincial government, about 4,000 people in Ontario are getting monthly stipends to boost them to at least 75 percent of the poverty line. That translates to a minimum annual income of $17,000 in Canadian dollars (about $13,000 US) for single people, $24,000 for married couples. Lindsay has about half the people in the pilot—some 10 percent of the town’s population ---

Jensen Comment
The lead illustration in this article suggests that for some this is just a safety net raise for the disabled. As such it's a good deed but does not lead to eventual recipient productivity for the long-term disabled. In contrast, Stockton, California has a guaranteed income program aimed more at unemployed workers in need of assistance while training for job skills. Finland dropped its experiment after finding that the guaranteed income was not marginally reducing unemployment any better than earlier safety nets for the poor.

My point here is that when there are other safety nets for the poor are in place guaranteed minimum income will not reduce unemployment for people who will not or cannot work.

Engels and Later Marx used the phrase "industrial reserve army" as a catchall for the unemployed even in a communist or socialist regime ---

Castro later discovered that supplying all citizens with egalitarian free housing, transportation, education, medical care, and food rations greatly destroyed incentives to work among many of the unemployed.

"Report: Castro says Cuban model doesn't work," by Paul Haven. Associated Press, Yahoo News, September 8, 2010 ---

Fidel Castro told a visiting American journalist that Cuba's communist economic model doesn't work, a rare comment on domestic affairs from a man who has conspicuously steered clear of local issues since stepping down four years ago.

The fact that things are not working efficiently on this cash-strapped Caribbean island is hardly news. Fidel's brother Raul, the country's president, has said the same thing repeatedly. But the blunt assessment by the father of Cuba's 1959 revolution is sure to raise eyebrows.

Jeffrey Goldberg, a national correspondent for The Atlantic magazine, asked if Cuba's economic system was still worth exporting to other countries, and Castro replied: "The Cuban model doesn't even work for us anymore" Goldberg wrote Wednesday in a post on his Atlantic blog.

He said Castro made the comment casually over lunch following a long talk about the Middle East, and did not elaborate. The Cuban government had no immediate comment on Goldberg's account.

Since stepping down from power in 2006, the ex-president has focused almost entirely on international affairs and said very little about Cuba and its politics, perhaps to limit the perception he is stepping on his brother's toes.

Goldberg, who traveled to Cuba at Castro's invitation last week to discuss a recent Atlantic article he wrote about Iran's nuclear program, also reported on Tuesday that Castro questioned his own actions during the 1962 Cuban Missile Crisis, including his recommendation to Soviet leaders that they use nuclear weapons against the United States.

Even after the fall of the Soviet Union, Cuba has clung to its communist system.

The state controls well over 90 percent of the economy, paying workers salaries of about $20 a month in return for free health care and education, and nearly free transportation and housing. At least a portion of every citizen's food needs are sold to them through ration books at heavily subsidized prices.

President Raul Castro and others have instituted a series of limited economic reforms, and have warned Cubans that they need to start working harder and expecting less from the government. But the president has also made it clear he has no desire to depart from Cuba's socialist system or embrace capitalism.

Fidel Castro stepped down temporarily in July 2006 due to a serious illness that nearly killed him.

He resigned permanently two years later, but remains head of the Communist Party. After staying almost entirely out of the spotlight for four years, he re-emerged in July and now speaks frequently about international affairs. He has been warning for weeks of the threat of a nuclear war over Iran.

Castro's interview with Goldberg is the only one he has given to an American journalist since he left office.

For-Profit Free Fall Continues, U.S. Data Show ---

Jensen Comment
Billionaire Mike Milken invested heavily in for-profit colleges and said to traditional universities:  "We'll eat your lunch!"
He was right. For profits are foraging in the traditional college dumpsters for students.

The only way colleges without admission standards can have academic respect is if they have high graduation standards. For-profit universities did not meet the test.

Should You Pay Off Your Mortgage? The New Tax Law Changes the Math ---

Tax-law changes will shut millions out of mortgage-interest deductions, especially if they are married couples

Now is the time to find out if you are one of the millions of Americans who won’t be able to deduct their monthly mortgage-interest payments.

For 2017, 32 million tax filers got a mortgage-interest deduction. For 2018, that number will drop to 14 million. Americans’ total savings from this break are also expected to fall sharply this year, from nearly $60 billion for 2017 to $25 billion for 2018, according to Congress’s Joint Committee on Taxation.

These landmark shifts are the result of the tax overhaul’s direct and indirect changes to the longstanding provision allowing filers to deduct home-mortgage interest on Schedule A. These changes are set to expire at the end of 2025.

As a result, current and future mortgage holders need to consider their options, which range from paying part or all of their debt to sitting tight.

“The changes to the mortgage deduction strengthen the arguments for paying down or off a mortgage,” says Allan Roth, a financial planner with Wealth Logic.

Some homeowners are already reducing their debt. Ken Walsh, an engineer who lives outside Baltimore with his family, says he used a windfall to pay off the remaining $500,000 mortgage on his home in January.

When the tax overhaul passed, Mr. Walsh knew that he and his wife would no longer get an interest deduction, even after their 2.6% adjustable-rate loan reset higher this year.

“It was a perfect storm, so we decided to pay off the loan,” he says.

Continued in article

Jensen Comment
Even if the Democrats win both the Senate and the House in 2018 the margin of victory will not likely be enough to make drastic changes in the 2018 Tax Act. Hence, many people will commence to make longer-term decisions such as paying off mortgages in 2018. On the other hand, having a relatively low mortgage fixed rate while interest rates rise should be considered. Much depends upon personal liquidity. If too much liquidity is used up when paying off the mortgage it is not a good idea to incur more short-term debt at higher interest rates. Many (most?) taxpayers will still be able to deduct home interest such that when combined with other deductions itemizing is still better than taking the standard deduction. For example, in my own case the mortgage interest, property tax, medical deductions, and other itemized deductions will be better than taking the new standard deduction. Also taxpayers can still benefit from non-taxable benefits of municipal bond and school district bonds.

Bob Jensen's personal finance helpers ---

Virtual Private Network ---

Protect Your Online Privacy with VPN ---

Understanding the value of intangible assets ---

Jensen Comment
A lot of accounting professors (think Baruch Lev) rant about the importance of valuing intangibles, but to my knowledge none have proposed practical, reliable, and objective accounting techniques for valuing intangibles like the value of the work force or corporate reputation of Apple or the value of a new patent that depends heavily on a myriad of other patents owned by other inventors. Of course many investors factor in their valuations of intangibles, but their widely varying valuations is what makes financial markets more interesting and volatile. We could try to start with stock market values to derive (backwards) consensus estimates of intangible asset values, but this defeats the purpose of financial accounting. The purpose of financial accounting is to assist investors whose bid and ask prices determine stock and bond prices in financial markets. And the marginal trading price of a security is affected by transitory factors and trading volume factors that make extrapolation to total company value highly dubious.

Bob Jensen's threads on intangibles and contingencies ---

Tesla to lay off around 9% of its employees as it 'restructures' (without changing Model 3 production goals)---

Jensen Comment
I wonder if any robots are being laid off as well.

Social Security Trust Fund ---

. . .

The Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability Insurance Trust Fund (collectively, the Social Security Trust Fund or Trust Funds) are trust funds that provide for payment of Social Security (Old-Age, Survivors, and Disability Insurance; OASDI) benefits administered by the United States Social Security Administration.[1][2][3]

The Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits by way of trust funds. When the program runs a surplus, the excess funds increase the value of the Trust Fund. At the end of 2014, the Trust Fund contained (or alternatively, was owed) $2.79 trillion, up $25 billion from 2013.[4] The Trust Fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest.[5]

Excess funds are used by the government for non-Social Security purposes, creating the obligations to the Social Security Administration and thus program recipients. However, Congress could cut these obligations by altering the law. Trust Fund obligations are considered "intra-governmental" debt, a component of the "public" or "national" debt. As of June 2015, the intragovernmental debt was $5.1 trillion of the $18.2 trillion national debt.[6]

Continued in article

From the CFO Journal's Morning Ledger on June 6, 2018

The U.S. Social Security program’s cost will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits.

Jensen Comment
The media never mentions that most of the assets of the $3 trillion SS trust fund are IOU notes from Congress. A naive public thinks that the $3 trillion SS trust fund is comprised of gold bars in Ft. Knox or some other valuable assets that can be sold off to meet annual deficits in spending versus revenue of the SS system. In fact, the deficit must be made up with additional government borrowing.

The analogy here is a setting where a loving husband and wife put away 10% of their mutual earnings for 20 years worth of gold coins in a bank's safe deposit box that's intended to fund their pensions when they retire. Then over the next 20 years the husband slyly commences to replace the gold coins with IOU notes promising to replace the coins before retirement. Then upon retirement the safe deposit box contains no gold coins. It only contains the husband's IOU notes, and the husband gambled away all the gold coins.

Of course every accountant knows that it violates GAAP accounting standards to list a note receivable IOU of $1 million from yourself as an asset on your balance sheet even if the offsetting $1 million note payable makes the balance sheet balance. This is a GAAP accounting violation for individual estates and business firms. But, gasp, it's not a violation in Federal governmental accounting that lives by its own deceitful accounting rules set by the U.S. Congress.

The only way the Federal government can meet most of those annual SS deficits after 2018 is by borrowing on top of the $21+ trillion amount of booked US debt as of June 2018.

To Whom Does the USA Federal Government Owe Money (the booked obligation of $21+ trillion) ---
The US Debt Clock in Real Time --- 
Remember the Jane Fonda Movie called "Rollover" ---
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas and other commodities to sustain those investments. Currently President Trump is playing chicken with trade policies with our national debt holders like China.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---
Social Security is of less worry than Medicare and Medicaid.

EY: From a June 29, 2018 newsletter

SEC approves rule requiring Inline XBRL


The SEC approved a rule that will require operating companies and mutual funds to use Inline XBRL and embed tags in their financial statements and their risk/return summaries, respectively. The rule requires Inline XBRL tagging of the same information operating companies and mutual funds currently include in separate XBRL exhibits. Like XBRL exhibits today, Inline XBRL data does not have to be certified by officers. Similarly, the rule does not require registrants to involve their auditors with the Inline XBRL information.


The Inline XBRL requirements apply to all operating companies, including emerging growth companies, smaller reporting companies and foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the International Accounting Standards Board.


The transition dates are phased in for operating companies based on their filing status and for mutual funds based on their net assets.


Operating companies filing as large accelerated, accelerated and non-accelerated filers are required to comply beginning with fiscal periods ending on or after 15 June 2019, 2020 and 2021, respectively. Filers are required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after their applicable date (e.g., a calendar-year large accelerated filer must use Inline XBRL tagging in its Form 10-Q filed for the quarter ending 30 June 2019).


Larger mutual funds (i.e., funds with net assets of $1 billion or more as of the end of the most recent fiscal year) have to comply with the requirement two years after the rule becomes effective upon its publication in the Federal Register. Smaller mutual funds have to comply with the requirement three years after the rule becomes effective.


The rule also eliminates the requirement for operating companies and mutual funds to post XBRL data on their websites and the 15-business day period for mutual funds to file their XBRL-tagged risk/return summaries.

EY:  Accounting pronouncements effective for the second quarter of 2018 ---$FILE/EffectiveDates_03674-181US_15June2018.pdf

TRG --- Transition Resource Group
EY:  FASB TRG for Credit Losses discusses five topics and reaches general agreement on most implementation issues ---$FILE/TothePoint_03624-181US_TRG_14June2018.pdf

EY:  EITF News




The EITF reached a final consensus on one issue and a consensus-for-exposure on another, both of which are subject to ratification by the FASB.


The Task Force reached a final consensus on the following issue:


·         Issue 17-A: Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That is Considered a Service Contract


The Task Force reached a consensus-for-exposure on the following issue:


·         Issue 18-A: Recognition under Topic 805 for an Assumed Liability in a Revenue Contract


The Task Force also discussed the following issue but did not reach a consensus:


·         Issue 18-B: Improvements to Accounting for Episodic Television Series


For further information on related topics, see our AccountingLink site.

Introduction to Blockchain With R

SSRN ---
26 Pages Posted: 18 Jun 2018  

Theophanis C. Stratopoulos

University of Waterloo - School of Accounting and Finance

Jesus Calderon


Date Written: June 2, 2018


Several studies have pointed to the transformative effects of blockchain on wide spectrum of industries, including banking and finance, as well as accounting/audit firms. The primary objective of this paper is to develop a hands-on tutorial for helping accounting and finance students understand blockchain technology and how it works. To achieve these learning objectives, we adopt the following scaffolding approach: We use a combination of blockchain definitions and narrative story-telling to introduce blockchain concepts and build a foundational knowledge that one should have to understand blockchain technology. We use R to introduce some of these building blocks (e.g., hash, proof-of-work, validation) and demonstrate how a blockchain works.

Keywords: Blockchain, R

JEL Classification: M15

Variable Pricing and the Cost of Renewable Energy

NBER Working Paper No. w24712

SSRN ---
49 Pages Posted: 18 Jun 2018  

Imelda -

University of Hawaii

Matthias Fripp

University of Hawaii

Michael Roberts

University of Hawaii - Department of Economics

Date Written: June 2018


On a levelized-cost basis, solar and wind power generation are now competitive with fossil fuels. But supply of these renewable resources is variable and intermittent, unlike traditional power plants. As a result, the cost of using flat retail pricing instead of dynamic, marginal-cost pricing—long advocated by economists—will grow. We evaluate the potential gains from dynamic pricing in high-renewable systems using a novel model of power supply and demand in Hawai’i. The model breaks new ground in integrating investment in generation and storage capacity with chronological operation of the system, including an account of reserves, a demand system with different interhour elasticities for different uses, and substitution between power and other goods and services. The model is open source and fully adaptable to other settings. Consistent with earlier studies, we find that dynamic pricing provides little social benefit in fossil-fuel-dominated power systems, only 2.6 to 4.6 percent of baseline annual expenditure. But dynamic pricing leads to a much greater social benefit of 8.5 to 23.4 percent in a 100 percent renewable power system with otherwise similar assumptions. High renewable systems, including 100 percent renewable, are remarkably affordable. The welfare maximizing (unconstrained) generation portfolio under the utility’s projected 2045 technology and pessimistic interhour demand flexibility uses 79 percent renewable energy, without even accounting for pollution externalities. If overall demand for electricity is more elastic than our baseline (0.1), renewable energy is even cheaper and variable pricing can improve welfare by as much as 47 percent of baseline expenditure.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at

Innovation and Trade Policy in a Globalized World

FRB International Finance Discussion Paper No. 1230

SSRN ---
80 Pages Posted: 17 Jun 2018  

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

Sina Ates

Board of Governors of the Federal Reserve System

Giammario Impullitti

University of Cambridge

Multiple version iconThere are 4 versions of this paper

Date Written: 2018-06-15


How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership, and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition.

Keywords: Economic growth, Short- and long-run gains from globalization, Foreign technological catching-up, Innovation policy, Trade policy, Competition

JEL Classification: F13, F43, F60, O40

The Accounting Profession's Engagement with Accounting Standards: Conceptualizing Accounting Complexity Through Big 4 Comment Letters

Auditing: A Journal of Practice & Theory, Vol. 37, No. 2, 2018

SSRN ---
Posted: 16 Jun 2018

Lisa Baudot

University of Central Florida - Kenneth G. Dixon School of Accounting

Kristina C Demek


Zhongwei Huang

Cass Business School, City, University of London

Date Written: May 31, 2018


Regulators, standard setters, and the accounting profession maintain that complexity in accounting standards is a significant issue. However, it is unclear what complexity means in the context of accounting standards. This study examines, via comment letter submissions, the accounting profession's engagement with complexity in accounting standards. We analyze comment letters submitted to the Financial Accounting Standards Board over a 12-year period and find the profession characterizes complexity through three dimensions - multiplicity, diversity, and interrelatedness. We examine the Big 4's discourse on these dimensions and observe consistency between audit firms in their discourse on several features. For instance, we find that firms primarily oppose proposed FASB changes when firms perceive those changes to increase rather than decrease complexity. Additionally, firms perceive proposed changes to affect financial statement preparers more often than other stakeholders. However, the Big 4 do not hold universal opinions as to the root causes of complexity. At the cross-firm level, we find inconsistencies that imply heterogeneity in the Big 4's discourse on root causes. Such inconsistency may, in and of itself, construct accounting complexity. Ultimately, we maintain that the Big 4's engagement with accounting standards has consequences for how complexity is thought and acted upon in accounting standards.



Keywords: accounting profession, discursive engagement, comment letters, accounting complexity, content analysis

JEL Classification: M42

Business Value of Information Technology - A Data Analytics Approach

SSRN ---
382 Pages Posted: 14 Jun 2018  

Theophanis C. Stratopoulos

University of Waterloo - School of Accounting and Finance

Date Written: April 21, 2018


The primary objective of these notes is to suggest a series of topics for teaching the introduction to information systems to an accounting and finance audience. It is intended to provide a foundation for understanding how firms leverage IT enabled strategies to achieve and sustain competitive advantage and superior financial performance.

Given the fact that worldwide companies and organizations spend trillions of dollars on IT, our focus will be on the following three topics/questions:

1) Strategic IT Analytics: Why firms invest in IT, i.e., what are the expected benefits, costs, and risks from investment in emerging or mature technologies.

2) Operational IT Analytics: What are some of the IT investments that firms undertake and what are some of the operational gains. For example, databases are the foundation of enterprise systems, and enterprise systems enable firms to compete with data analytics.

3) Tactical IT Analytics: How do companies justify, monitor, and control IT spending (e.g., IT budgets), and how they evaluate the expected payoffs from these investments (e.g., capital budgeting analysis, real options).

The approach that we use to address these topics/questions is based on business analytics. This means that, when possible, we will justify our answers/decision based on data supported evidence.

Keywords: IT business value, IT strategy, data analytics, databases, ERP, IT budgets, IT governance, capital budgeting analysis

JEL Classification: M15, L1, L21, L25, M41

German Business Students’ Career Aspirations in Accounting, Taxation & Finance and Their Relation to Personality Traits

SSRN ---
53 Pages Posted: 14 Jun 2018  

Marcus Bravidor

Heinrich Heine University Düsseldorf

Thomas R. Loy

University of Bayreuth - Business Administration

Jan Krüger

University of Bayreuth

Christina Scharf

University of Bayreuth

Date Written: May 1, 2018


We analyze the interrelation between personality traits and German business students’ propensity to select financial accounting, management accounting, tax accounting, or corporate finance as their major field of study, to seek a first job in one of these areas as well as their intention to pursue a professional examination in audit or tax. The study is based on a survey of 428 students from a German university. Personality traits are measured using the Big Five Inventory, commonly used in psychology and human resources. In contrast to prior studies, we differentiate between students in management, financial and tax accounting as well as finance. Our results indicate different personality traits for students interested in management accounting and corporate finance compared to those interested in financial and tax accounting. Particularly the latter exhibit higher scores in consciousness (i.e., ethical and responsible behavior) as well as lower scores in openness to experience (i.e., conservative values and judging in conventional terms) and neuroticism. However, effects are weaker for financial accounting students. With regard to the intention of a first job, financial accountants are closer to business students in general. Students interested in professional examinations display distinctive personality traits as well.

Keywords: accounting education, career paths, business administration, human resources, Big five inventory, Germany

JEL Classification: A29, G30, H20, M41, M42


Hegel on Crime and Punishment

Brooks, Thom (2017). "Hegel on Crime and Punishment" in Brooks and Sebastian Stein (eds), Hegel's Political Philosophy: On the Normative Significance of Method and System. Oxford: Oxford University Press, pp. 202-221.

SSRN ---
19 Pages Posted: 13 Jun 2018  

Thom Brooks

Durham University

Date Written: May 28, 2018


Perhaps the least controversial issue for most commentators on Hegel’s political and legal philosophy concerns his theory of punishment. The orthodox consensus is that Hegel was a retributivist who justified punishing deserving criminals in order to ‘annul’ their crimes. Broadly speaking, the classic ‘positive’ view of retribution is that punishment can only be justified where deserved and to the degree it is deserved. In that light, some commentators have claimed Hegel is ‘one of the most famous and important retributivists’.

While they are often deeply divided on so many other issues in his philosophy, the orthodox consensus among Hegel scholars is no accident. Hegel offers us comments about punishment that support this interpretation. Hegel is clear that punishment is only justified where it is deserved by an offender for committing a crime. Punishment aspires to be a ‘cancellation’ of a crime and its ill-effects in a ‘restoration of right’ – restoring rights violated by a crime (PR, §99). Hegel says: ‘the cancellation [Aufheben] of crime is retribution’ (PR, §101). For most scholars, these well-known and widely cited passages make clear that Hegel understood his own theory of punishment as retributivist and it is such a theory. Allen Wood calls Hegel ‘a genuine retributivist’.

The orthodox consensus rests on a mistake. It fails to take sufficient account of Hegel’s distinctive form of argumentation that runs deep throughout his philosophical system, including his comments about punishment. Hegel did not present his system and its unique argumentative structure in the standard form we find with most modern philosophers – and it is easy to downplay or overlook this fact not least since Hegel’s dialectical form of argument is deeply controversial and seen as more of a problem for understanding Hegel’s views than enlightening us as to what his views are.

In the following sections, I offer a systematic reading of Hegel’s comments about punishment in his philosophical system with careful attention to his Philosophy of Right. I argue that the conventional reading which claims his theory of punishment is mostly confined to the section Abstract Right raises interpretive difficulties. One problem is the inadequacy of punishment as described in Abstract Right to be a complete theory of punishment so often overlooked. A second problem is accounting for apparent inconsistencies between what Hegel says in Abstract Right versus comments stated elsewhere in the Philosophy of Right and larger system. I argue that later sections like Ethical Life matter for our understanding Hegel’s penal theory and a systematic reading of his texts – where we consider his arguments in light of their systematic structure – can help make best sense of this. I conclude by reflecting on the implications this reading has for our understanding Hegel’s philosophy and its contemporary appeal.

Keywords: Hegel, crime, punishment, legal philosophy

JEL Classification: K00, K49

The Impact of CEO Narcissism on Earnings Management

Abacus, Vol. 54, Issue 2, pp. 210-226, 2018

SSRN ---
17 Pages Posted: 13 Jun 2018  

Francesco Capalbo

Second University of Naples - Department of Economics; Seconda Universita degli Studi di Napoli

Alex Frino

University of Wollongong

Ming Ying Lim

Capital Markets CRC Limited; Macquarie Graduate School of Management

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Faculty of Business and Economics

Riccardo Palumbo

University of Chieti-Pescara; European Capital Markets CRC

Date Written: June 2018


We provide the first empirical test of the relation between CEO narcissism and earnings manipulation. We test the hypothesis that narcissistic leaders over‐identify themselves with the organizations they lead and expend considerable effort to achieve their goals, including by engaging in unethical behaviour. Earnings announcements are highly anticipated information releases by organizations. They are a key performance indicator used to evaluate the performance of CEOs. This study examines the use of first person singular pronouns by CEOs in response to questions at analyst conferences to measure narcissism. We provide evidence that firms with narcissistic CEOs engage in accruals management to manage earnings positively, highlighting the important effect of CEO personality on accounting choices.

Keywords: Personality, Earnings management, Narcissism, Chief executive officer, Earnings announcements

Discretionary Accruals: Earnings Management ... Or Not?

Abacus, Vol. 54, Issue 2, pp. 136-153, 2018

SSRN ---
18 Pages
Posted: 13 Jun 2018  

Andrew B. Jackson

UNSW Australia Business School, School of Accounting

There are 2 versions of this paper

Date Written: June 2018


This paper discusses some limitations of discretionary accruals measures. While discretionary accruals are acknowledged to be noisy proxies for earnings management, they are still widely used in the literature. This paper attempts to explain from basic econometrics how discretionary accruals are estimated, and in doing so why they are inappropriate measures for earnings management. It is shown that decisions of peer firms will influence the regression coefficients, and hence residuals, in accruals models, which may lead to false conclusions about earnings management in other firms. This point is emphasized using an artificially constructed firm with no changes in its fundamental performance, and hence no discretion in its accruals. I also note concerns about the inferences, which are commonly not acknowledged in research. Finally, using Accounting and Auditing Enforcement Releases and Enron as examples, I demonstrate how discretionary accruals do not capture what literature often claims.



Keywords: Discretionary accruals, Earnings management

Accounting Comparability and Relative Performance Evaluation in CEO Compensation

Review of Accounting Studies, Forthcoming

SSRN ---
Posted: 12 Jun 2018  

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Michael J. Neel

University of Houston - Bauer College of Business

Adrienne Rhodes

Texas A&M University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2018


We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex-ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.

Keywords: Accounting Comparability, Relative Performance Evaluation, RPE, Peer Selection

JEL Classification: M12, M41

Accounting and Finance Applications for Introduction to Statistics with R

SSRN ---
132 Pages Posted: 11 Jun 2018  

Theophanis C. Stratopoulos

University of Waterloo - School of Accounting and Finance

Duane B. Kennedy

University of Waterloo - School of Accounting and Finance

Date Written: March 20, 2018


Instructors need materials such as instructions, cases, data, and software code in order to understand the basics of data analytics so that they can introduce the topic in their courses. We developed these materials to help instructors teach data analytics in their classes. These notes deliver the following learning outcomes: 1) Understand and use statistical concepts and techniques, and interpret statistical results. 2) Identify accounting and finance (A&F) specific applications of statistical concepts and techniques. 3) Identify practical sources of A&F data (e.g., stock market data, financial statement data, actual company specific sales and inventory data) and understand how data is structured. 4) Use the R statistical package to load/understand data, generate new variables (transform data), and perform appropriate statistical analysis on A&F data. 5) Interpret statistical results leveraging A&F knowledge.

Keywords: Data Analytics, Financial Accounting, Managerial Accounting, Finance, Statistics, R

The Law and Finance of Initial Coin Offerings

Ibero-American Institute for Law and Finance Working Paper No. 4/2018

SSRN ---
49 Pages
Posted: 11 Jun 2018  

Aurelio Gurrea-Martínez

Harvard Law School; Ibero-American Institute for Law and Finance (IIDF)

Nydia Remolina

Javeriana University; Ibero-American Institute for Law and Finance (IIDF)

Date Written: May 21, 2018


The rise of new technologies is changing the way companies raise funds. Along with the recent increase of crowdfunding in the past years, a new form of funding has emerged more recently: the use of Initial Coin Offerings (ICOs). In 2017, companies raised more than $4 billion through ICOs in the United States, and more than $11billion has been raised during the first semester of 2018. In a typical ICO, a company raises cryptocurrencies giving some rights in return. The different nature and features of these rights, known as “tokens”, are generating many controversies among securities regulators around the world. Namely, it is not clear whether and, if so, when these tokens should comply with securities law. Securities regulators are addressing this issue in a very different manner across jurisdictions: while countries like the United States, Switzerland and Singapore are requiring companies to comply with existing securities rules only when a company issues “security tokens”, other jurisdictions, such as China and South Korea, have prohibited ICOs, and Mexico subject any issuance of tokens to a system of full control ex ante. Nevertheless, ICOs not only generate these challenges for securities regulators. They also arise many other issues from an accounting, finance, corporate governance, data protection, anti-money laundry and insolvency law perspective. By providing a comparative and interdisciplinary analysis of ICO, our paper seeks to provide regulators and policy-makers with a set of recommendations to deal with ICOs in a way that may promote innovation and firms´ access to finance without harming investor protection, market integrity and the stability of the financial system.



Keywords: initial coin offerings, blockchain, tokens, cryptocurrencies, securities, commodities, digital assets, fintech, debt, equity, corporate governance, accounting, finance, insolvency, data protection, financial regulation  

PCAOB Inspections: Public Accounting Firms on 'Trial'

Contemporary Accounting Research, Forthcoming

SSRN ---
Posted: 7 Jun 2018  

Kim Westermann

Cal Poly San Luis Obispo

Jeffrey R. Cohen

Boston College - Department of Accounting

Greg Trompeter

University of Central Florida

Date Written: April 18, 2018


The objective of our paper is to obtain a better understanding of how auditors anticipate the potential for PCAOB inspection, experience the inspection, cope with the consequences of the inspection, and understand the PCAOB’s influence within the context of professionalism. We use a qualitative approach that employs both surveys (55) and interviews (20) of auditors (of varying rank and firm) across a five-year period (2012-2017). Respondents suggest that PCAOB inspectors are powerful, representing the ‘prosecution’, ‘judge’, and ‘jury’ of the auditing profession. We therefore employ a structural metaphor of the PCAOB inspection as a judicial ‘trial’. By controlling the criteria for which to evaluate performance, inspectors have the power to repeatedly ‘subpoena’, ‘interrogate’, and return a ‘verdict’ on the firm (auditor); those judged as ‘guilty’ require supervised ‘probation’. This process is perceived as having improved audit quality, but at a cost. Passing an inspection is so important, that auditors (firms) have resorted to impression management strategies and “functionally stupid” work practices (e.g., excessive documentation, a decrease in critical thinking as a result of a “box ticking” approach to auditing). Further, some respondents believe that being a good auditor has come at the expense of being a good accountant; the emphasis on audit process and concurrent de-emphasis on technical accounting could ultimately lead to audits themselves falling short. In addition, it is evident that inspectors and auditors differ in their perceptions of risk; likely manifesting because inspectors are standards focused while auditors (firms) are methodology focused. Finally, the inspection process has created excessive stress and tension, beyond budget and fee pressures, which some auditors perceive as affecting the pool of talented auditors that firms may be able to attract and retain in the future.

Keywords: Auditing, Inspections, Metaphor, PCAOB, Professionalism, Qualitative

JEL Classification: M42

The Effectiveness of Setting Governmental Accounting Standards: The Case of Michigan Governments in Fiscal Distress


SSRN ---
99 Pages Posted: 7 Jun 2018  

Sue Convery

Michigan State University

Date Written: 11/05/2015


The purpose of setting accounting standards is to improve the quality of the financial statements on which users base their decisions. The financial reporting model set up by the Governmental Accounting Standards Board (GASB) is comprehensive and complex, as are the governments on which these statements report. We provide a framework for evaluating whether financial statements are used and understood by decision makers and explain the components of the GASB Statement No. 34 financial reporting model introduced in 1999. We present financial indicators from the Comprehensive Annual Financial Reports for 12 Michigan governments over three points in a 10-year period, along with an indication of whether trends are favorable or unfavorable. We suggest that governing bodies assess to what extent their members use financial statements in making decisions. If officials are trained to monitor financial performance on a regular basis, then decision-making may improve and fiscal crises may be averted.

A Rationale for Imperfect Reporting Standards

SSRN ---
58 Pages Posted: 6 Jun 2018  

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

John S. Hughes

University of California at Los Angeles

Beatrice Michaeli

University of California, Los Angeles (UCLA)

Date Written: June 15, 2018


We examine the interplay between a regulator's design of a public reporting system and a firm's decisions regarding the gathering and disclosure of private information. The context is one in which the firm seeks to meet a threshold on its market price possibly to avoid delisting on an exchange, exclusion from a market index, downgrading by a credit rating agency, or violation of debt covenants. The regulator, who might be a body that determines accounting standards, seeks to maximize the total information provided by both public reports governed by those standards and voluntary disclosures of information gathered by the firm. Notably, we identify conditions under which the regulator prefers less than fully informative reports as a means of inducing the firm to gather and potentially disclose more information. We obtain further results in cases where: the firm's choice with respect to gathering information is or is not observable by investors; the firm's information acquisition decision is made after (rather than before) financial reports are released; the regulator chooses the threshold rather than the properties of the reporting system; the regulator's choice is guided by the firm's preferences.

Keywords: Information Acquisition, Reporting System, Mandatory Disclosure, Discretionary Disclosure

JEL Classification: D82, G38, M41, M48

Jensen Comment
Like virtually all mathematical derivations in analytics the conclusions rely on highly restrictive and somewhat realistic assumptions such as firm value being a random state of nature.
Probabilities of growth in this value are known for each set of regulations. What happened to the idea that regulations and information flows affect unknown probabilities? These papers are scholarly and interesting to accountics scientists while at the same time illustrating why practitioners have little or no interest in such derivations.

Accounting for Cross‐Country Differences in Wealth Inequality

Review of Income and Wealth, Vol. 64, Issue 2, pp. 332-356, 2018

SSRN ---
25 Pages Posted: 5 Jun 2018  

Frank Cowell

London School of Economics & Political Science (LSE) - London School of Economics

Eleni Karagiannaki

London School of Economics

Abigail McKnight

CASE, London School of Economics

Date Written: June 2018


There is considerable cross‐country variation in levels of household wealth and in wealth inequality. This paper assesses the extent to which these differences can be accounted for by differences in the distributions of households' demographic and economic characteristics. A counterfactual decomposition analysis of micro data from five countries (Italy, U.K., U.S., Sweden and Finland) is used to identify the effects of characteristics on component wealth holdings, their value and their distribution. The findings of the paper suggest that the biggest share of cross‐country differences is not attributable to the distribution of household demographic and economic characteristics but rather reflect strong unexplained country effects.

Keywords: household wealth, wealth inequality, debt, housing assets, decomposition

JEL Classification: C81, D31, D63

SFAS 133 and Income Smoothing Via Discretionary Accruals: The Role of Hedge Effectiveness and Market Volatility

Journal of International Financial Management & Accounting, Vol. 29, Issue 2, pp. 105-130, 2018

SSRN ---
26 Pages Posted: 5 Jun 2018  

Abiot Tessema

Zayed University - College of Business

Rogier Deumes

Maastricht University - Department of Accounting & Information Management, MARC (Maastricht Accounting, Auditing & Information Management Research Center)

Date Written: June 2018


This study investigates whether the Statement of Financial Accounting Standard No. 133 (SFAS 133) influences firms’ income smoothing via discretionary accruals decisions. Moreover, we investigate whether the level of hedge effectiveness and market volatility affects the impact of SFAS 133 on firms’ income smoothing via discretionary accruals decisions. Consistent with our predictions, we find a significant increase in income smoothing via discretionary accruals activity after the adoption of SFAS 133. We also find that income smoothing via discretionary accruals after the adoption of SFAS 133 increases with the level of hedge ineffectiveness. By contrast, we find that perfect hedgers do not engage in more income smoothing via discretionary accruals after the adoption of SFAS 133. Finally, we find that the higher the market volatility is the larger the income smoothing is via discretionary accruals after the adoption of SFAS 133. This implies that higher market volatility makes it more difficult for firms to meet hedge accounting requirements, thereby increasing unmanaged earnings volatility and income smoothing. Prior studies suggest that regulators are expressing concern about the effect of earnings management on the quality of reported earnings and the functioning of capital markets (e.g., Barton, [Barton, J., 2001]). In this regard, our findings imply that accounting standard setters should take into account the trade‐off between transparency and income smoothing.

Keywords: derivatives and hedging, hedge effectiveness, income smoothing, market volatility, SFAS 133

Sweat the Small Stuff: Strategic Selection of Pension Policies Used to Defer Required Contributions

Contemporary Economic Policy, Vol. 36, Issue 3, pp. 505-525, 2018

SSRN ---
21 Pages Posted: 5 Jun 2018  

Jeffrey Diebold

North Carolina State University, College of Humanities and Social Sciences, Department of Political Science & Public Administration, Students

Vincent Reitano

North Carolina State University, College of Humanities and Social Sciences, Department of Political Science & Public Administration, Students

Bruce McDonald

North Carolina State University

Date Written: July 2018


The administrators of state‐sponsored defined benefit public pension plans have considerable discretion to determine the accounting and actuarial parameters used to calculate the normal cost contributions and amortization payments that, together, comprise the sponsoring state's annual required contribution amount. Using longitudinal data from the Public Pension Database and a fixed effects approach, we find evidence that suggests plan administrators decisions about cost and amortization methods are influenced by the normal cost and amortization payments, respectively. When these costs increase, administrators tend to use less prudent methods that defer, or keep low, the pension contributions required from the state while, simultaneously, and perversely, improving the appearance of the plan's funded status and the state's funding discipline.

JEL Classification: H75

Zorba:  Digital Transformation - Change Management on Steroids ---

Zorba:  How Analytics can be Used to Fact Check News Items ---

Zorba:  Digital Transformation Driving Companies Back to the Basics ---

Zorba:  Blockchain and the Accounting Revolution ---


From the CFO Journal's Morning Ledger on June 29, 2018

Good morning. Large U.S. companies are increasingly putting caps on director pay, but at levels that are often significantly above existing compensation levels, reports the WSJ's Theo Francis.

About half of the 100 largest U.S. firms have limited pay to between $500,000 and $1 million, according to a new study by pay consultancy Compensation Advisory Partners. Most set limits at least triple what they currently pay in equity grants, CAP found. 

Median pay for non-management directors rose 3.4% to $300,000 or more last year, up from $290,000 in 2016, according to the study. Median director pay for a similar group of companies was $257,000 in 2012 and $225,000 in 2008.

The change comes in response to challenges from shareholders, said Dan Laddin, founding partner of CAP. “The view was that directors had paid themselves too much, and because directors get to decide their own pay, there’s an inherent conflict of interest.”

The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.(today theirself is more politically correct)
John Kenneth Galbraith --- Click Here

If you aren’t (cynical) now, you will by the time you finish the new Bebchuk and Fried paper on executive compensation.  They paint a fairly gloomy picture of managers exerting their power to “extract rents and to camouflage the extent of their rent extraction.”  Rather than designed to solve agency cost problems, the paper makes the case that executive pay can by an agency cost in and of itself.  Let’s hope things aren’t this bad.

They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss.
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Damian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 ---
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.
Bob Jensen's "Rotten to the Core" threads are at

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

Bob Jensen's threads on outrageous executive compensation ---

From the CFO Journal's Morning Ledger on June 28, 2018

The International Accounting Standards Board, the organization behind International Financial Reporting Standards, on Thursday launched a consultation on IAS 32, a regulation that governs the accounting for issuers of financial instruments. The consultation aims to address concerns about the consistency of the standard in light of new financial instruments, said Sue Lloyd, vice-chair of the IASB.

Since the inception of IAS 32 two decades ago, the range of financial instruments used by companies has grown which is why the standard needs rearticulating, she said. “We want to get more consistency in what is considered as debt and as equity,” Ms. Lloyd told Ms. Trentmann.

Certain financial instruments, for example contingent convertible bonds, did not exist when the standard was written, she added. “There is uncertainty around how to classify coco-bonds under IAS 32,” said Ms. Lloyd. Depending on the outcome of the consultation, the IASB could decide to alter the standard or replace it, she said. The consultation ends in January 2019.

From the CFO Journal's Morning Ledger on June 28, 2018

Good morning. U.S. companies are increasingly delaying payments to suppliers in an effort to free up working capital and redirect it to other areas, such as capital expenditures or acquisitions, write CFO Journal’s Tatyana Shumsky and Nina Trentmann.

The 1,000 largest U.S. public companies increased payment delays to 56.7 days in 2017, up from 53.3 in 2016, according to a study to be released next month by consulting firm The Hackett Group Inc. The research estimates that these companies have nearly $1.1 trillion tied up in inventories, payments to suppliers and payments not yet received from customers.


Stanley Black & Decker Inc. is among the companies taking longer to pay its vendors. The industrial and household tools maker paid its outstanding bills after 83 days on average last year, and has averaged above two months since 2005, when the company began to employ this tactic.

“It was a partnership,” said Chief Financial Officer Donald Allan Jr. about his efforts to convince vendors to give him more time. “We were saying we’re going to help you be more efficient and effective so you can generate more profit and drive more volume through your system,” he said.

From the CFO Journal's Morning Ledger on June 26, 2018

A federal judge on Monday dismissed lawsuits by the cities of San Francisco and Oakland alleging that five of the world’s largest oil companies should pay to protect the cities’ residents from the impacts of climate change.

Jensen Comment
Such a lawsuit might have put all oil companies out of business in the USA leaving all gasoline and diesel vehicles in junk yards to say nothing of hundreds millions of people freezing in the winter. City leaders sometimes get grandeur ideas about their powers to change the world.

From the CFO Journal's Morning Ledger on June 26, 2018

The U.S. Supreme Court in a 5-4 opinion backed American Express Co.’s policy of preventing retailers from offering customers incentives to pay with cheaper cards, a major victory for the company that puts its business model on solid legal ground.

Jensen Comment
When I lived in San Antonio a wily liquor store owner would take 5% of off the charge for customers who paid cash rather than used credit cards (for which stores pay a fee). At the time this was a violation of credit card contracts with stores, and I don't know how this guy managed to keep his credit card payment option.

As I read the latest Supreme Court ruling Home Depot, for example, cannot give a price discount on Home Depot cards if they also allow American Express cards for payments. Of course Home Depot can refuse American Express cards, but Home Depot might run into troubles with other credit card companies like Master Card and Discover that have the same contract provisions as American Express.

I will also tell you another story about this wily liquor store owner. The Seven Eleven stores advertised that they would sell Budweiser beer at any advertised price of the same beer in San Antonio. The wily liquor store owner then advertised to sell Budweiser well below wholesale cost. Of course he quickly ran out of his small inventory of Budweiser. But Seven Eleven stores all over San Antonio got stuck with selling their much larger inventory of Budweiser at well below cost.


A Half Penny Rounded is a Half Penny Earned
From the CFO Journal's Morning Ledger on June 25, 2018

Good morning. The U.S. Securities and Exchange Commission is investigating whether companies have improperly rounded up their earnings per share to the next highest cent, people familiar with the matter told the WSJ’s Dave Michaels.

SEC enforcement officials have queried at least 10 companies, asking them to provide information about accounting adjustments after academic research found the number “4” appeared at an abnormally low rate in the tenths place of companies’ earnings per share. Reporting that figure as “5” or higher allows a firm to round up its earnings per share another cent.

A company with earnings of 55.4 cents a share, for example, would round to 55 cents a share, while a company with earnings of 55.5 cents a share would round to 56 cents.

Public companies have strong incentives to report higher earnings per share, particularly those followed by Wall Street analysts whose quarterly forecasts are used to benchmark corporate performance. Investors often snap up shares of companies that beat expectations, even by a cent, and, likewise, sell shares of companies that miss their forecasts.

Jensen Comment
The way to teach this in class is to point out that if the maximum round up error is a $0.001 tenth of a penny then the maximum rounding error in dollars is $.001 times the denominator number of shares. If x is the number of shares then $.001x is the maximum round up error.  Suppose eps is e/x truncated to the nearest tenth of a penny before rounding. The maximum rounding error is then.001x/e = [0.001/(eps)]. Thus if 55.5 cent eps is rounded to 56.0 cents eps on earnings before rounding the maximum rounding error is .001/.555 of e = .001801802 of earnings before rounding.

If eps of $5.555 is rounded up to $5.556 the maximum rounding error is .001/5.555 of e = .000180018 of earnings before rounding.

If eps of $6.555 is rounded up to $6.556 the maximum rounding error is .001/6.555 of e = .000152555 of earnings before rounding.

Since these maximum round up errors are relatively small, I think the SEC is making a mountain out of a mole hill as long as net losses are not wiped out.

Wharton School of Business:  Why the Wayfair Ruling Won’t Hurt Online Sales ---
Jensen Comment
I agree that having to collect online sales tax will not significantly impact the rise of online shopping. There are just too many advantages to online shopping relative to physically going to stores. The first of these is time savings. If I want a new dress shirt it's just faster to do so online and avoid the time required to shop at a store to say nothing of having to get into a hot car that's been sitting in the sun. Secondly, the selection of available shirts is massive compared to what's in any store. Thirdly, online I can find a shirt in my somewhat unique body.--- a 19-inch neck-size that most stores don't stock. Fourthly, relative to a store purchase it's just too easy to return the shirt if I'm unhappy with it for any reason.

Stores have some advantages such as being able to try on clothing before a purchase and greater likelihood of impulse buy when walking past a display. But when I think of all the time I used to waste walking up and down Walmart aisles I brief a sigh of relief on how fast I can find a large or small item when shopping online at Amazon.

I have a friend three miles down the road who owns a historic hardware store in the village of Franconia (about the only store left in town other than food outlets). It's one of those stores where you can buy a single bolt or a single screw. And Mike will find what you want for you --- unlike shopping at Walmart where you almost never find an employee in the department where you're looking for something. Mike tells me the decline in his business is not really due to the big box stores like Walmart and Home Depot ten miles up the road. But Amazon is killing his business, because Amazon does what Walmart does not do --- save you the time and trouble of having to walk all over the store looking for something. I can find a bolt on Amazon faster than I can find that bolt in Mike's hardware store, and in many instances I can purchase just one or a few such bolts in small quantities from Amazon. And there will other items I want that Mike just does not carry in inventory.

The other day in Walmart I was looking for a cosmetic that Erika asked me to buy. I lucked out by finding a nearby sales clerk who then informed me that she worked in pet foods and could not help me at all in cosmetics. I also could not shop for a cosmetic item in Mike's Franconia hardware store. So I came home and did what I should've done in the first place --- order the cosmetic item on Amazon. It took me less than two minutes to find the item on Amazon and place the order (with free Prime shipping).

From the CFO Journal's Morning Ledger on June 22, 2018

Good Morning. The Supreme Court (in the Wayfair Ruling) ruled that states have the authority to make online retailers collect sales taxes as the digital transformation of the U.S. economy took a historic step, write the WSJ's Brent Kendall, Jess Bravin and Laura Stevens. The decision opens a new chapter when e-commerce is treated as a mature player in a market place that is no longer defined by trips to the corner store or the shopping mall.

By a 5-to-4 vote, the court closed a loophole that helped fuel the early growth of internet sales, overruling its own 1992 precedent that forbid states from requiring merchants to collect sales tax unless those sellers maintained a “physical presence” within the state’s borders.

Justice Anthony Kennedy said the “physical presence” rule, always doubtful, had become untenable in the digital age. The court cited studies suggesting that the current rule costs states up to $33.9 billion annually in uncollected sales taxes.

Jensen Comment
This leaves increased advantage between the five states that do not levy sales taxes on in-state purchases versus the 45 states that have general sales taxes. There's also advantage to living near the border of a state that levels zero general sales taxes. For example, it's common to see that over half the cars have green license plates at the closest Walmarts from our cottage --- in Littleton or Woodsville, NH. One has to think that those folks from Vermont are shopping in New Hampshire at least in part to avoid sales taxes. We have a 105 year-old man in our Sugar Hill church who lives along the Connecticut River in Woodsville, NH. That river separates Vermont from NH. His 95 year old woman friend lives on her farm in Peachum, NH. Guess where her Amazon purchases are delivered?

My guess is that, as a result of this Supreme Court decision, a whole lot new of platonic friendships will form between border residents of NH with border residents of Vermont, Massachusetts, and Maine to say nothing about those many Canadian border friendships that have existed for decades.

This ruling will greatly affect retailers that, until now, relied mainly on tax-free sales across the nation (think LL Bean in Maine and Garnet Hill in New Hampshire). With both the new sales taxes and the increased pressures for free shipping those mail-order businesses are bound to be less profitable.

I might add that NH does impose sales taxes on restaurant and hotel customers. However, it's great to be a New Hampshire resident when I buy a new car, a new tractor, and expensive appliances. And my online purchases from Amazon and  LL Bean will still be tax free.

From the CFO Journal's Morning Ledger on June 21, 2018

 New York’s financial-services regulator said it fined Deutsche Bank AG $205 million over allegations it sought to manipulate currency prices and mislead clients while failing to protect confidential customer information

From the CFO Journal's Morning Ledger on June 20, 2018

Starbucks Corp. said it will close more coffee shops in the increasingly crowded U.S. market where it was a pioneer. The coffee giant said Tuesday that it will close 150 U.S. stores in its 2019 fiscal year, triple the number it has closed on average in recent years.

From the CFO Journal's Morning Ledger on June 20, 20158

General Electric loses place in Dow, expected to be replaced by Walgreens

From the CFO Journal's Morning Ledger on June 19, 2018

Fujifilm Holdings Corp. is suing Xerox Corp. for breach of contract and estimated damages of more than $1 billion after the printer and copier company walked away from a planned merger earlier this year.

From the CFO Journal's Morning Ledger on June 19, 2018

Exactly how well is the tax cut working?
Both critics and supporters say it will take months or years to draw conclusions on the law’s effect,
write the WSJs Theo Francis and Ben Leubsdorf. Meanwhile, here are some key indicators that help reveal how well the changes are aiding businesses, workers and the broader economy.

U.S. economic activity is on a solid trajectory this year, and overall growth is on track for a strong second quarter after a modest slowdown in the early months of 2018. Large publicly traded companies have funneled much of their tax savings into increased share repurchases. Analysts and economists caution that increased investment and hiring from expansion take more time to implement.

Companies have stepped up capital spending in recent quarters, an improvement that could reflect new tax-law provisions intended to encourage business investment, including quicker deductions for some purchases, as well as lower tax rates and other changes that make lower-margin investments more attractive.

Overall, however, profits have largely been growing along with the rest of the economy. Profits as a proportion of overall economic output—the nation’s gross domestic product—haven’t changed much so far.


Ether is a cryptocurrency whose blockchain is generated by the Ethereum platform ---

From the CFO Journal's Morning Ledger on June 15, 2018

The world’s second-most valuable cryptocurrency, ether, isn’t an investment that should be regulated as stocks and bonds are, said U.S. Securities and Exchange Commission Corporation Finance Director William Hinman.

From the CFO Journal's Morning Ledger on June 12, 2018

New accounting rules are prompting some corporate finance chiefs to change how they do business.

More than half of the S&P 500 companies disclosed some impact on their accounting policies since December, when new rules unified how companies account for revenues from sales and services. The change, which was in the works for more than a decade, replaces previously disparate, industry-specific rules and aligns U.S. standards closer to international guidelines, reports CFO Journal's Tatyana Shumsky.

For finance chiefs of some companies, including Red Hat Inc., Ciena Corp. and Mosaic Co., adopting the new revenue recognition standard from the Financial Accounting Standards Board means adjusting their business operations to be in line with the new accounting framework, which is more focused on contracts and when goods and services are delivered to customers.

From the CFO Journal's Morning Ledger on June 11, 2018

Good morning. President Donald Trump escalated trade tensions with some of America’s closest allies over the weekend when he refused to sign the final communiqué of the Group of Seven industrial nations summit and threatened to impose auto tariffs in a statement on Twitter.

The dust-up comes as Washington enters an important stretch of negotiations on several fronts, from China to the North American Free Trade Agreement. The U.S. is also due to attend a North Atlantic Treaty Organization summit mid-July in Brussels.

Meanwhile, Europe will implement counter-measures against U.S. tariffs on steel and aluminum just like Canada, German Chancellor Angela Merkel said, according to Reuters. The World Trade Organization will be informed of these on July 1, Ms. Merkel said, adding that it was “sobering and somewhat depressing” to find out via Twitter that Mr. Trump wouldn’t endorse final communiqué of the summit.

President Trump continued to criticize the Group of Seven alies in a series of tweets from Singapore, stating that "Fair Trade is now to be called Fool Trade if it is not Reciprocal," CNN reported.

Finance chiefs across the U.S. are wrangling with a lingering uncertainty: state taxes. The tax debate that gripped Washington last year is rippling across 50 state capitols and could extend in some statehouses beyond this year, writes CFO Journal’s Ezequiel Minaya.

Businesses are paying more attention to state taxes, which have become a larger share of their total tax liability. While the federal corporate-tax rate fell to 21% from 35% previously, state tax rates remained unchanged while some breaks shrank.

Many states are expected to lower their corporate tax rate, in line with the federal reduction, as a way to project a business-friendly environment. Whether states decide to lower or raise taxes, most states still need to adjust its tax laws to incorporate the rewritten U.S. tax code.

In California, one state assemblyman proposed a 10% surcharge on top of the existing state corporate tax rate to capture some of the savings companies expected following the reduction of the federal tax rate. Governor Jerry Brown’s latest budget revisions in May raised projected corporation tax revenue up 8.9% to $11.02 billion, in part because of new federal tax rules on repatriation of foreign earnings.

The Beginning of the End for Quarterly Reporting?
From the CFO Journal's Morning Ledger on June 8, 2018

James Dimon and Warren Buffett are urging companies to consider ending the practice of providing quarterly earnings guidance, arguing that it encourages an “unhealthy focus” on short-term profits at the expense of long-term growth and economic strength, reports the WSJ’s Michael Rapoport.

Extreme Gender Bias to Combat Extreme Gender Bias
From the CFO Journal's Morning Ledger on June 5, 2018

Accounting firm PricewaterhouseCoopers LLP has banned all-male shortlists for jobs in the U.K. in an attempt to increase the number of women in senior roles at the company, reports the BBC.

Jensen Comment
I'm not in favor of this form of extreme form of affirmative action. Firstly, does the ban apply to minority males as well? Secondly, if this discrimination were to be adopted by other accountancy firms what's the incentive for males to study accountancy in universities? Thirdly, either PwC will have to bend to rule for certain types of specialties when female applicants are not qualified or PwC will deprive themselves of a fully rounded workforce.

From the CFO Journal's Morning Ledger on June 5, 2018

Accounting firm KPMG LLP’s South African affiliate said Monday it would cut up to 400 jobs and bring in leadership help from KPMG’s world-wide network, as the firm tries to recover from a series of scandals in connection to its ties to the Gupta family.

From the CFO Journal's Morning Ledger on June 1, 2018

Sears Holdings Corp. said Thursday it plans to close more than 60 stores it has deemed unprofitable, as the retailer continues to struggle with falling sales.

Teaching Case from the the University of Virginia

SSRN ---

May 10, 2018

Overheard at the Office

Laura Cooper, an African-American woman in her twenties and a recent graduate of an elite MBA program, worked in the league office for the team owners in one of the four major US professional sports. Her role was accounting-focused—for example, she helped to comprehend the financial position of each team, and of the association as a whole, in order to do things like establish team salary caps (as a percentage of total revenue). In this role, she traveled around the United States to the different team headquarters with the players' association auditor, Noah Jarrold (who was also African-American), while he checked the accounting books of each team. Thus, while Cooper and Jarrold visited teams' headquarters together, they were employed by different parties representing different interests in the audit.

The players' association functioned as a union for all players, collectively bargaining for pay and benefits. Its staff was predominantly African-American, as were most of the players, in contrast to the majority white team owners and their staffs. Jarrold worked to ensure that the team owners were not hiding revenue or otherwise manipulating the calculations in ways that would hold down the players' salary caps. Cooper's role, on the other hand, was to make sure both sides adhered to the collective bargaining agreement and to protect the integrity of the business as a whole. As an observer of the audit, she ensured, for example, that Jarrold was not counting inappropriate revenue toward the salary cap. She was also there to raise any red flags back at headquarters, if necessary, about the audits.

. . .

Keywords: Defining moments, leadership, ethics, organizational behavior, difficult conversations, decision-making, human resources, implicit bias

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 1, 2018

Why It Is Harder to Diagnose Hospital Stocks

By Charley Grant | May 29, 2018

TOPICS: Revenue Recognition

SUMMARY: An accounting change by the Financial Accounting Standards Board being implemented this year has resulted in healthcare companies no longer including an estimate of uncollectible debt on their income statements as a deduction from gross revenue as well as a reduction to accounts receivable on the balance sheet. Instead, this information is disclosed in the financial statement notes. This accounting change results from the new revenue recognition requirements under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), implemented for the first time this year by publicly traded companies. Private companies will implement the standard in 2019. The article highlights the change as reported by Envision Healthcare. Students are directed to the company's EDGAR filings via links to examine the changes first-hand.

CLASSROOM APPLICATION: The article may be used when discussing accounts receivable or revenue recognition in a financial accounting class.



1. (Advanced) What new accounting standard has driven the changes discussed in this article?


2. (Advanced) Compare the results for the 3 months ended March 31, 2018 for Envision Healthcare as shown in the article to the reporting for the comparable period in 2017, available from the U.S. Securities and Exchange Commission (SEC) Electronic Data Gathering and Retrieval (EDGAR) system at What is similar between the two statements? What is different?


3. (Advanced) Proceed to the online filing on which this article is based, available at Click on Financial Statements, then Consolidated Statements of Operations. Note the reference to note 3 next to "Provision for uncollectibles" and proceed to that note by clicking on "Revenue Recognition and Accounts Receivable" the third listing under Notes to Financial Statements. Read the first paragraph. How does the company explain the change in treatment of the allowance for uncollectible accounts?


4. (Introductory) Refer again to the online filing for the 3 months ended March 31, 2018. Proceed to the balance sheet by clicking on "Consolidated Balance Sheets." How does the line for accounts receivable reflect the change discussed in the article?


5. (Advanced) In Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), the FASB writes (p. 8), "the guidance [under this Update] requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized." Do you think the author of this article agrees? Explain your reasoning.


6. (Introductory) "A valuation allowance that grows more quickly than gross revenue might mean that a company's underlying sales are stronger than net revenue suggests...a valuation allowance that grows more slowly than gross sales might mean that a company is using more aggressive estimates to meet earnings projections." Explain your understanding of this interpretation of financial results.



Reviewed By: Judy Beckman, University of Rhode Island


"Why It Is Harder to Diagnose Hospital Stocks," by Charley Grant, The Wall Street Journal, May 29, 2018 ---

New accounting rules make assessing financial health more difficult for hospitals and companies that work with them

Assessing the financial health of some publicly traded health-care stocks is getting trickier.

A new rule enacted by the Financial Accounting Standards Board this year means that companies no longer need to include an estimate of uncollectible debt on their income statements as a deduction from gross revenue as well as a reduction to accounts receivable on the balance sheet.

The numbers can be substantial. For instance, physician-staffing firm Envision Healthcare EVHC 2.52% reported net revenue of $2.1 billion in the first quarter. A year ago, the group reported gross sales of about $2.9 billion, less a provision of $977 million for uncollectible debt, for net sales of about $1.9 billion.

Other companies, such as hospital operator HCA Healthcare, now report their valuation allowance in financial statement footnotes instead of on the actual statements.

The new accounting rule applies to all publicly traded companies in the U.S., but it is of particular importance to hospitals and companies that contract with them. That is because uncollectible debt is a fact of life for the industry. Uninsured or underinsured hospital or emergency room patients can face large bills for their services.

That business reality isn’t likely to change soon. Nearly 44% of people under 65 with private insurance had a high-deductible health plan in 2017, according to data from the Centers for Disease Control and Prevention. At the start of the decade, that figure was closer to 25%.

And while the change to accounting rules doesn’t impact what companies ultimately report as sales or cash flow, these valuation reserves have provided investors with useful information.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 1, 2018

China Set to Approve Qualcomm-NXP Deal, a Sign of Easing Trade Tensions

By Yoko Kubota and Lingling Wei | May 29, 2018

TOPICS: Antitrust, business combinations

SUMMARY: "Chinese authorities are set to approve Qualcomm's planned $44 billion acquisition of NXP Semiconductors in the next few days, in what would be a significant step toward easing U.S.-China trade relations." China's State Administration for Market Regulation has been conducting the antitrust review; this review follows approval by eight other major worldwide antitrust regulators. Two related articles previously have been covered in this review. They address the initial announcement of this business combination and the international tax strategy used by Qualcomm for the acquisition.

CLASSROOM APPLICATION: The article may be used to discuss regulation of business combinations in an international setting.



1. (Advanced) What is the strategic reason for Qualcomm's acquisition of Netherlands-based NXP Semiconductors NV?


2. (Introductory) How many international market regulators have reviewed the planned Qualcomm-NXP business combination?


3. (Advanced) Why must these companies submit to these international reviews? Glean the answer you can from the main and related articles.



Qualcomm Makes $39 Billion Bet on Car
by Don Clark and Tim Higgins
Oct 28, 2016
Page: B1

Qualcomm Creating Subsidiary to Avoid NXP Tax Hit
by Vipal Monga
Oct 27, 2016
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island


"China Set to Approve Qualcomm-NXP Deal, a Sign of Easing Trade Tensions," by Yoko Kubota and Lingling Wei, The Wall Street Journal, May 29, 2018 ---

Chinese regulators have expressed concerns that the merged company would crowd out domestic businesses in areas such as mobile payments

Chinese authorities are set to approve Qualcomm Inc.’s QCOM 0.84% planned $44 billion acquisition of Netherlands-based NXP Semiconductors NV in the next few days, according to people familiar with the matter, in what would be another significant step toward easing frayed U.S.-China trade relations.

China’s State Administration for Market Regulation, which has been conducting the antitrust review, will hold a meeting on the matter Monday, according to the people. They said a contingent of Qualcomm’s legal team arrived in Beijing this weekend to hammer out final details.

Approval would remove the last hurdle for a deal that has been stuck for months amid U.S.-China trade tensions, but one of the people said it could come with conditions. Chinese regulators have expressed concerns that the merged company would crowd out domestic businesses in areas such as mobile payments. NXP offers technology and services used for mobile payments.

The likely approval comes as the Trump administration is battling Congress to roll back penalties on Chinese telecommunications giant ZTE Corp., and as U.S. Commerce Secretary Wilbur Ross prepares to lead an interagency delegation to Beijing starting June 2, where he is set to meet China’s chief economic envoy, Liu He.

The acquisition of NXP is considered critical for San Diego-based Qualcomm, which is dominant in smartphone chips but is looking for growth in other areas. Among NXP’s products are chips for automobiles, a rapidly expanding sector as more technology is packed into cars.

Qualcomm had been waiting for Beijing’s approval to proceed with the purchase of the Dutch company, having secured permission from the eight other major antitrust regulators around the world.

A spokesman for China’s Commerce Ministry said last month that the agency had conducted a preliminary review of the Qualcomm deal’s impact on competitors and the market, and had found “issues that are hard to resolve, making it difficult to eliminate the negative impact.”

The State Administration for Market Regulation couldn’t be reached immediately for comment.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 1, 2018

Juries Weigh Cases Over Alleged Harms of Johnson & Johnson Baby Powder

By Sara Randazzo | May 29, 2018

TOPICS: Contingent Liabilities, Litigation

SUMMARY: The article describes the myriad personal injury lawsuits against Johnson & Johnson and their divergent outcomes in different court systems. Questions link to Johnson & Johnson's disclosures about their legal proceedings in the first quarter 2018 10-Q report. The Johnson & Johnson disclosure related to the lawsuits for damages from use of baby powder is available from the SEC EDGAR filing at Click on Legal Proceedings and scroll down the page. NOTE TO INSTRUCTORS: DELETE THE FOLLOWING STATEMENTS BEFORE DISTRIBUTION TO STUDENTS. The disclosures demonstrate that defense costs are apparently estimable and therefore constitute at least a minimum accrual that must be made. The disclosure states, "Claims for personal injury have been made against Johnson & Johnson Consumer Inc. and Johnson & Johnson arising out of the use of body powders containing talc, primarily JOHNSONS® Baby Powder. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Lawsuits have been primarily filed in state courts in Missouri, New Jersey and California. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the District of New Jersey. The Company has established an accrual for defense costs only in connection with product liability litigation associated with body powders containing talc."

CLASSROOM APPLICATION: The article may be used to discuss accrual of contingent legal liability in a financial reporting class.



1. (Introductory) What have been the results of court litigation against Johnson & Johnson regarding "alleged dangers in its signature baby powder"?


2. (Advanced) What is the accounting implication of these numerous cases? Specifically describe the accounting required for contingent liabilities.


3. (Advanced) Access the Johnson & Johnson filing for the quarter ended April 1, 2018, on the SEC EDGAR database at Click on Notes to Financial Statements, then Legal Proceedings. Scroll down under Product Liability to find the discussion of "claims for personal injury...arising out of the use of body powders containing talc, primarily JOHNSONS® Baby Powder." What estimate has been used to comply with accounting requirements for this litigation?


4. (Advanced) Refer to your answer to question 3 above. Do you think this estimate is sufficient? Explain.



Reviewed By: Judy Beckman, University of Rhode Island


"Juries Weigh Cases Over Alleged Harms of Johnson & Johnson Baby Powder," by Sara Randazzo, The Wall Street Journal, May 29, 2018 ---

Mesothelioma cases represent a growing share of the more than 9,000 claims Johnson & Johnson faces over its talcum powder

In the battle between Johnson & Johnson JNJ 1.37% and plaintiffs’ lawyers over alleged dangers in its signature baby powder, juries cut both ways last week.

A trial in South Carolina over whether Johnson’s Baby Powder caused a young woman’s mesothelioma ended in a hung jury Friday, days after a California jury awarded a woman $25.75 million in a similar case.

Johnson & Johnson has lost two of four trials since November claiming inhalation of its talcum-based baby powder is to blame for plaintiffs’ mesothelioma, the deadly cancer tied to asbestos exposure.

The mesothelioma cases represent a growing share of the more than 9,000 claims Johnson & Johnson faces over its talcum powder. Most allege the powder caused ovarian cancer in women who regularly used the product for feminine hygiene.

The new trials come months after Johnson & Johnson notched a few wins in ovarian-cancer cases, including persuading judges to toss a $72 million verdict in Missouri and $417 million verdict in California.

In the mesothelioma cases, plaintiffs claim the talcum used in Johnson & Johnson’s powder is intermingled with asbestos, a known carcinogen, and that the company has known about the danger for decades. Johnson & Johnson asserts its powder has always been safe and asbestos-free.

A jury in Los Angeles Superior Court returned a $25.75 million verdict last week in a case brought on behalf of Joanne Anderson, a 66-year-old Oregon woman who has been fighting pleural mesothelioma, a cancer in the lining of the lungs. Of the $21.7 million in compensatory damages, the jury assigned 67% of the blame to Johnson & Johnson.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 1, 2018

Companies Look to Libor for Debt Savings as Rates Rise

By Ben Eisen and Matt Wirz | May 30, 2018

TOPICS: Collateralized Debt Obligations, Debt

SUMMARY: The article discusses trends in the LIBOR benchmark rates for one month versus three months. Companies are saving interest costs by contracting to tie variable-rate debt to the one-month rate that has been rising much more slowly than has the rate on three-month U.S. dollar LIBOR. "The shift among benchmarks may hold clues for how companies adjust to another change coming to the short-term rates market: Regulators are encouraging Wall Street to reduce its reliance on Libor altogether, and instead peg loans and derivatives to a new rate that the Federal Reserve Bank of New York began publishing earlier this year. 'The experience we're having with one-month and three-month Libor today is something we're trying to take lessons from to apply in the future," said Meredith Coffey, head of regulatory matters and collateralized loans for the Loan Syndications and Trading Association, a trade group for the corporate-loan market."

CLASSROOM APPLICATION: The article may be used when discussing short-term liabilities, including commercial paper and lines of credit, or long-term debt.



1. (Advanced) Define the terms commercial paper and lines of credit. State your source for these definitions.


2. (Advanced) Define the terms fixed-rate debt and variable-rate debt. Which type of debt is discussed in this article?


3. (Introductory) What does LIBOR stand for? What is the reason for differing LIBOR rates discussed in the article?


4. (Introductory) Consider the case of U.S. Silica Holdings, Inc. How much interest savings will the company generate by choosing one of these two LIBOR rates to determine its interest rate?


5. (Advanced) Is U.S. Silica issuing commercial paper, a line of credit, or some other type of liability? Explain your answer.


6. (Advanced) Refer to the graphic depicting the "share of loans held in collateralized loan obligations that are tied to each Libor benchmark." What are collateralized loan obligations? How does examining the interest rates on loans in these portfolios provide information for this article?



Reviewed By: Judy Beckman, University of Rhode Island

"Companies Look to Libor for Debt Savings as Rates Rise," by Ben Eisen and Matt Wirz, The Wall Street Journal, May 30, 2018 ---

Some companies are tying floating-rate debt payments to slower-rising benchmarks

Companies are making a mad dash to save money in the debt markets as rising short-term interest rates increase their borrowing costs.

One place that’s increasingly apparent is the market for corporate loans, where companies that can are tying their floating-rate debt payments to benchmarks that are rising at a slower pace.

The rejiggering among companies comes as rates have climbed this year, spurred by increases from the Federal Reserve, expectations for a pickup in inflation and an increase in government debt sales to fund last year’s tax-cut package.

The rate at which banks lend to each other for three months has been rising much faster than the rate at which they lend for one month, pushing the gap in April between the two to its widest since 2009. The three-month U.S. dollar London interbank offered rate has climbed 0.62 percentage point this year to 2.32%, while the one-month counterpart has climbed a comparably meager 0.41 point to 1.98%.

Accordingly, more than half of junk-rated corporate loans recently had interest payments tied to one-month Libor, up from less than a quarter at the beginning of 2016, according to data tracked by Wells Fargo on about $500 billion of loans. The share of loans tied to three-month Libor has been dwindling.

Among those to tie their debt to one-month Libor is U.S. Silica Holdings Inc., a specialized minerals firm. The company recently completed a $1.3 billion loan to finance an acquisition and expects to link it to one-month Libor when it picks the benchmark at the end of the month. Doing that rather than linking to three-month Libor would save the company $4.7 million in interest expenses over the 12 months that begin in June, assuming rates don’t change over that stretch.

“The finance group is always looking to save money wherever we can and this is a great opportunity to do that,” said Don Merrill, chief financial officer at U.S. Silica.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 1, 2018

Accounting Watchdog's Enforcement Chief, Claudius Modesti, to Leave

By Michael Rapoport | May 30, 2018


SUMMARY: "The enforcement director of the board that oversees U.S. audit firms is stepping down, the latest in a string of longtime senior staff members to leave the regulator as a new chairman and board members mull potential changes in its direction."

CLASSROOM APPLICATION: The article may be used when discussing the role of the PCAOB in an auditing class.



1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? When was the PCAOB created?


2. (Introductory) How long has its departing enforcement director, Claudiu Modesti, been with the PCAOB?


3. (Introductory) What other key staff members have left the organization?


4. (Advanced) What do these changes signal for the PCAOB organization? What do they signal for practicing auditors?



Reviewed By: Judy Beckman, University of Rhode Island


"Accounting Watchdog's Enforcement Chief, Claudius Modesti, to Leave," by Michael Rapoport, The Wall Street Journal, May 30, 2018 ---

Several senior PCAOB officials are exiting as new chairman, board weigh changes

The enforcement director of the board that oversees U.S. audit firms is stepping down, the latest in a string of longtime senior staff members to leave the regulator as a new chairman and board members mull potential changes in its direction.

The Public Company Accounting Oversight Board said Tuesday that Claudius Modesti, its director of enforcement and investigations, will exit this month after 14 years.

Mr. Modesti’s announced departure follows those from other staff, including the board’s chief auditor and its head of inspections. Last month, the PCAOB said it would take a fresh look at its organization and direction. Chairman William Duhnke and the other four board members are all new to the PCAOB, which was founded 15 years ago to make sure auditors conduct rigorous, impartial audits of public companies.

In a speech earlier this month, Mr. Duhnke said the board would look at whether the design of its programs still meets its needs, and that “substantial opportunities exist for us to improve our policy making and our external engagement.”

In particular, he signaled the board was discussing possible changes to its process for inspecting audit firms to gauge the quality of their audits. Among the ideas being considered, he said: tailoring inspections more to the circumstances of individual audit firms, and focusing inspections more on broad issues across audit firms.

In addition to Mr. Modesti, other departures from the PCAOB announced recently include Martin Baumann, the board’s chief auditor, who heads its development of the standards that audit firms must follow; Helen Munter,  its director of registration and inspections; Gordon Seymour, its general counsel; and Nirav Kapadia, its information technology director.

Mr. Modesti said in a statement that it had been “the greatest honor and privilege of my professional career to be a part of the PCAOB.”

A PCAOB spokeswoman said the board is “evaluating its accomplishments, operations and future strategic direction.” The board “appreciates the many contributions of our dedicated staff and their support of the current and prior boards.” Acting directors are running the departing staff members’ divisions until new permanent directors are appointed.

Accounting-industry observers have been watching to see whether Mr. Duhnke, who took office in January, will follow a different direction from his predecessor, James Doty, who had chaired the PCAOB since 2011. During his tenure, Mr. Doty emphasized efforts to require auditors to disclose more information to investors, and he sometimes faced pushback from the Big Four audit firms and from staff members at the Securities and Exchange Commission, which oversees the PCAOB.

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 8, 2018

Treasury Works to Address Concerns Over Taxes on Overseas Earnings

By Richard Rubin | Jun 04, 2018

TOPICS: Corporate Taxation, International Taxation

SUMMARY: The Treasury Department has held over 200 meetings with corporations as it develops regulations to implement the 2017 tax law. "The U.S. Treasury Department will give multinational corporations some but not all of what they want in closely watched international-tax regulations needed to implement the 2017 tax law, a senior Treasury official said Monday."

CLASSROOM APPLICATION: The article may be used in a corporate tax class, either domestic or international.



1. (Introductory) What is the GILTI tax provision?


2. (Advanced) Describe how the Treasury Department is impacting the way that the 2017 tax law affects U.S. multi-national corporations. (Hint: comment on the implementation of regulations by U.S. Federal agencies.)


3. (Advanced) The 2017 tax law change reduced corporate tax rates from 35% to 21% "and, at least superficially, removed taxes on U.S. companies' foreign profits." Then why have Treasury Department officials met with companies over 200 times "to iron out wrinkles" caused by the law?



Reviewed By: Judy Beckman, University of Rhode Island



"Treasury Works to Address Concerns Over Taxes on Overseas Earnings," by Richard Rubin, The Wall Street Journal, June 4, 2018

Proposed rules meant to prevent corporate disadvantages while also avoiding the opening up of new tax-reduction strategies

WASHINGTON—The U.S. Treasury Department will give multinational corporations some but not all of what they want in closely watched international-tax regulations needed to implement the 2017 tax law, a senior Treasury official said Monday.

The proposed rules, expected by year’s end, will attempt to balance concerns that U.S.-based companies operating overseas subsidiaries will be at a tax disadvantage, with the need to avoid opening up new tax-reduction strategies.

“It will not be a thing of conceptual beauty,” said Chip Harter, deputy assistant secretary for international tax affairs. “We will not make anyone completely happy.”

Treasury officials have been meeting with companies to iron out wrinkles caused by the 2017 law, Mr. Harter told a conference sponsored by the Organization for Economic Cooperation and Development and the U.S. Council for International Business. He said that he has attended at least 200 of those meetings and that they are getting repetitive, which he described as a sign that government officials have identified the main concerns.

They have also turned up arcane questions, he said, including whether live chickens in Peru are equivalent to cash because liquid markets exist for them. Foreign cash and cash equivalents are subject to a higher one-time tax rate than illiquid assets are.

The 2017 tax law cut the U.S. corporate tax rate to 21% from 35% and, at least superficially, removed taxes on U.S. companies’ foreign profits. But the law also created new rules to prevent companies from putting profits abroad. Those include a minimum tax of 10.5% known as GILTI, or Global Intangible Low-Taxed Income. Lawmakers described that tax as having a ceiling of 13.125%.

Some companies, including Kansas City Southern and Euronet Worldwide Inc., have warned that their actual tax rates could be much higher because of a quirk in the provision that hits companies with operations in high-tax countries like Mexico, Germany and Japan.

When companies calculate the credits they receive for paying taxes overseas, the law typically requires them to assign some domestic expenses to foreign jurisdictions. The result for some companies is that, for U.S. tax purposes, their foreign income and foreign taxes look smaller than they actually are, shrinking their credits. That, in turn, could force them to pay the new minimum tax on top of foreign tax bills that already exceed 13.125%.

Because the GILTI provision was layered on top of older tax laws, it operates like “a truck built on a car chassis,” said Michael Graetz, a Columbia Law School professor and former Treasury official who also spoke at the conference.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 8, 2018

Food Companies Can't Figure Out What Americans Want to Eat

By Aaron Back | Jun 06, 2018

TOPICS: Segment Reporting

SUMMARY: The classic consumer foods companies ConAgra Foods, Kellogg, J.M. Smucker, General Mills, Kraft Heinz, and Campbell Soup are facing flat or declining sales. Their share prices have fallen 10% to 30% over the past year while the S&P 500 has grown 10%. Patterns of sales in food stores reflect these trends: their fresh foods and meats departments exhibit unit sales growth while the "center of the store" packaged product sales are declining "according to research firm Nielsen."

CLASSROOM APPLICATION: Questions focus on segment disclosures by grocery stores and how the analysis in this article relies on such disclosures. NOTE TO INSTRUCTORS: DELETE THE FOLLOWING INFORMATION BEFORE DISTRIBUTING TO STUDENTS. Disclosures by The Kroger Co. and Whole Foods Market, Inc., prior to its acquisition by Amazon, indicate that they operate with only one reportable segment. Disclosures of packaged food versus fresh food sales, however, are made to comply with disclosure requirements for information by product line and geographic area in accordance with ASC 280-50-38, Entity-Wide Information, which states "Paragraphs 280-10-50-40 through 50-42 apply to all public entities... including those public entities that have a single reportable segment." The following Kroger Co. Segment Disclosures have been obtained from their 2017 Annual Report (p. A-43) available on the company's website at SEGMENTS We operate supermarkets, multi-department stores, jewelry stores, and convenience stores throughout the United States. Our retail operations, which represent over 97% of our consolidated sales, is our only reportable segment. We aggregate our operating divisions into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, our operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Our operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in their operating division. This geographical separation is the primary differentiation between these retail operating divisions. The geographical basis of organization reflects how the business is managed and how our Chief Executive Officer, who acts as our chief operating decision maker, assesses performance internally. All of our operations are domestic. Revenues, profits and losses and total assets are shown in our Consolidated Financial Statements set forth in Item 8 below. The following table presents sales revenue by type of product for 2017, 2016 and 2015. Whole Foods last annual report filing on Form 10-K as an independent company, for the year ended September 24, 2017, occurred on November 17, 2017. The 10-K filing is available on the Securities and Exchange Commission web page at Click on Notes to Financial Statements, then Description of Business to find disclosures of sales by product line, perishable versus non-perishable foods.



1. (Introductory) Describe the trends in sales of pre-packaged foods versus fresh foods.


2. (Advanced) Who is interested in understanding these trends? Name all possible users of this information that you can identify.


3. (Advanced) What area of financial reporting requirements leads companies to provide information discussed in this article? Specifically, cite the reporting requirements in the FASB Accounting Standards Codification related to this topic.


4. (Advanced) Consider the publicly traded grocery stores The Kroger Company and Whole Foods Markets, Inc. (prior to its acquisition by Amazon). Do the accounting standards you cite apply to these companies? Could disclosures by these two companies help in making the analysis in this article? Explain.


5. (Advanced) Access the Whole Foods Markets, Inc. last annual report filing on Form 10-K as an independent company, for the year ended September 24, 2017, which occurred on November 17, 2017. The filing is available on the Securities and Exchange Commission web page at Click on Notes to Financial Statements, then Description of Business. What information in the disclosure is useful for the analysis in this article?


6. (Advanced) Do the accounting standards you cite above require this disclosure by Whole Foods Markets? Explain.



Reviewed By: Judy Beckman, University of Rhode Island


"Food Companies Can't Figure Out What Americans Want to Eat," by Aaron Back, The Wall Street Journal, June 69, 2018

Industry struggles to keep up with consumers who are shifting to fresh from packaged products while new competitors beat them on price and quality

Food shoppers and investors looking at the packaged food aisles of big grocery stores have reached the same conclusion: There is nothing to buy.

The classic consumer food companies—makers of cereals, snacks, soups and condiments—are no longer the staples of pantries or portfolios. Shares of some are down by a third or more over the past year as strategies to boost sales fail, and consumers embrace fresh food and new brands.

Supermarkets are feeling the same pressure. Last year, unit volume of the packaged products sold in the middle aisles fell by 1.7%, according to research firm Nielsen. The only places where there was unit sales growth of groceries were in the outer aisles: fresh meat, produce, and bakery, according to Nielsen.

That is of little consolation to investors, who can’t easily profit from raising grass-fed beef or growing kale. Comparable sales for 10 big, publicly traded food companies have been flat or declined in three of the last four years, according to analysts at Credit Suisse.

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 8, 2018

Connecticut Wants to Borrow $500 Million. In Return, It Promises Thrift

By Heather Gillers | Jun 06, 2018


TOPICS: Debt, Debt Covenants

SUMMARY: Cash-strapped Connecticut "is preparing to issue new debt that requires...[the state to] limit spending, cap future borrowing and funnel excess revenues into a reserve fund." These covenants are unprecedented in a state bond offering according to S&P Global Ratings analysts.

CLASSROOM APPLICATION: The article may be used in a governmental accounting to discuss bond issuance, budget deficits, or the current costs facing governmental entities.



1. (Introductory) Refer to the related graphic entitled "Mind the Gap." Where does the information come from?


2. (Advanced) Does Connecticut operate at a deficit? Explain your answer and include the definition of the term "budget deficit" and "fund balance."


3. (Introductory) What unprecedented covenants has the state of Connecticut included in its upcoming bond offering?


4. (Advanced) What benefit does Connecticut expect to obtain by including these covenants in the bond issuance?


5. (Advanced) What are the long-term risks of including these covenants in the bond issuance?



Reviewed By: Judy Beckman, University of Rhode Island


"Connecticut Wants to Borrow $500 Million. In Return, It Promises Thrift," by Heather Gillers, The Wall Street Journal, June 6, 2018

In rare move in municipal debt world, state pledges to curb spending, cap future borrowing and funnel excess revenues into reserve fund

Connecticut is making a new promise to bondholders in exchange for $500 million: self-discipline.

The cash-strapped U.S. state is preparing to issue new debt that requires Connecticut to limit its spending, cap future borrowing and funnel excess revenues into a reserve fund. The $500 million bond issue priced Tuesday and will be delivered to investors June 20.

It is a rare step in the world of municipal debt. No other state has attached such fiscal austerity measures to an outstanding bond issue, according to analysts at S&P Global Ratings. The restrictions will stay in place for the next five years.

The unusual offer has the potential to lower borrowing costs for Connecticut in the near term and enforce fiscal discipline following a bitter state budget battle in 2017. The covenants helped win enough support to end the stalemate.

But the restrictions could also hamstring the state in the event of a future crisis. The only way to suspend certain covenants is with a three-fifths vote of the legislature and a declaration of fiscal emergency from the governor. The current governor, Dannel Malloy, is scheduled to leave office in January.

“If it goes badly the cost might be really high,” said Kim Rueben, senior fellow at the Urban Institute

Connecticut’s idea reinforces the predicament facing many U.S. states as they struggle to pay for core services like education and infrastructure at a time of soaring costs for debt, retirements and health care.

Pensions, retiree health insurance and Medicaid together consume about one out of every five tax dollars collected by state and local governments. Estimates of how much money they still need to pay for all future pension obligations vary from $1.6 trillion to $4 trillion. In Connecticut that shortfall is $34.8 billion, according to S&P.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 8, 2018

Airlines Raise Ticket Prices as Fuel Costs Surge

By Doug Cameron and Alison Sider | Jun 07, 2018

TOPICS: Cost Management

SUMMARY: "Average domestic airline fares have fallen in each of the past four years, according to trade group Airlines For America, as carriers handed back most of the fall in fuel prices back to passengers. Now, higher fuel costs have forced carriers to decide how much can be passed on directly to domestic fliers through higher fares or via surcharges on international flights, without deterring too many travelers....Some savvy travelers are looking to circumvent surcharges when paying for tickets with frequent-flier points. Airline policies on adding taxes and surcharges to reward flights vary widely."

CLASSROOM APPLICATION: The article may be used in a managerial accounting class discussing pricing, profitability, and cost-management.



1. (Introductory) What has happened to jet fuel prices in the past year? How are those jet fuel prices impacting airline profits?


2. (Advanced) Why will it require a lag period for airlines to pass the cost of jet fuel onto its customers and thereby maintain profits?


3. (Advanced) What trade-off faces airline managements in deciding how to price airline tickets?


4. (Advanced) What other strategies do airlines use to offset the impact of rising fuel prices besides increasing base ticket fares?



Reviewed By: Judy Beckman, University of Rhode Island


"Airlines Raise Ticket Prices as Fuel Costs Surge," by Doug Cameron and Alison Sider, The Wall Street Journal, June 7, 2018

Oil is again the largest expense for most airlines prompting higher domestic fares, surcharges on international flights

Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines Inc. DAL 1.18% to cut its profit expectations.

Delta, the nation’s No. 2 carrier, said Wednesday it could take six to 12 months to recoup the extra fuel costs via pricier tickets.

Fuel is again the single-largest expense for most airlines, accounting for about a quarter of operating costs. The recent run-up in prices echoes the jump seen from 2009 to 2011, which first spawned stand-alone surcharges on many international flights.

Average domestic airline fares have fallen in each of the past four years, according to trade group Airlines for America, as carriers handed most of the fall in fuel prices back to passengers. Now, higher fuel costs have forced carriers to decide how much can be passed on directly to domestic fliers through higher fares or via surcharges on international flights, without deterring too many travelers.

Investors are edgy about the impact of fuel prices on airline profits. Shares of U.S. carriers are down this year on concerns there were too many aircraft being added to fleets chasing too few extra passengers.

Airline shares were mixed Wednesday, with those of Delta, which bought an oil refinery in 2012 to make its fuel costs less volatile, down 1.5%.

“Ultimately we have to be a business that gets paid for the cost of our product,” said Paul Jacobson, Delta’s chief financial officer. “As you get through that lag period, and as we make the adjustments that we need to, we feel confident that we’ll be able to recapture this.”

Other carriers shared the sentiment. “We feel good about our ability to pass through the increase in fuel price,” United Continental Holdings Inc. President Scott Kirby said at an investor event last month. He said strong summer demand is bolstering industry pricing power—with carriers pushing through a succession of small increases of between $2 and $5 per flight on domestic routes—and that will help United recoup about 75% of the higher fuel prices.


Airlines have cut their use of fuel hedging to smooth prices compared with the last price spike, though they differ widely in their approach. American Airlines Group Inc. executives have long avoided hedges, while Southwest Airlines Co. , the largest domestic carrier, continues to make wide use of them, which it said offers protection when prices are above $80 a barrel.

That still leaves airlines to absorb some of the higher prices through accepting lower profits or trying to make up the difference by cutting costs.

How airlines will recoup higher fuel costs is the main question being asked by investors, JPMorgan airline analyst Jamie Baker said. Adding surcharges is better for profits than higher base fares, as airlines can more quickly recoup higher fuel prices. “One benefit of fuel surcharges is it’s transparent and highly precise,” he said.

Continued in article

Dodd-Frank Wall Street Reform and Consumer Protection Act ---–Frank_Wall_Street_Reform_and_Consumer_Protection_Act

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 15, 2018

SEC Chairman: Most of Dodd-Frank Is Here to Stay

By Gabriel T. Rubin | Jun 11, 2018

TOPICS: Dodd-Frank

SUMMARY: "...[T]he vast majority of the 2010 Dodd-Frank Act isn't going anywhere, Securities and Exchange Commission Chairman Jay Clayton said Monday [, June 11, 2018, while] speaking at The Wall Street Journal's CFO Network annual meeting in Washington...."

CLASSROOM APPLICATION: The article may be used in an accounting or auditing class discussing regulation in general or the Dodd-Frank Act specifically.



1. (Introductory) What is the Dodd-Frank Act?


2. (Advanced) What has been the impact of the Dodd-Frank Act on the accounting and auditing profession?


3. (Advanced) Refer to the related article. Who is soon to leave the SEC? How could that departure impact the actions that Chairman Jay Clayton plans for the SEC?



Republican Piwowar Is Set to Leave SEC
by Dave Michaels
May 08, 2018
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island


"SEC Chairman: Most of Dodd-Frank Is Here to Stay," by Gabriel T. Rubin, The Wall Street Journal, June 11, 2018

Rule changes will be around the edges, Jay Clayton says, singling out clearinghouses as one area of concern

WASHINGTON—Postcrisis rules have created new challenges for Trump-appointed regulators as they look at recalibrating the financial rule book, but the vast majority of the 2010 Dodd-Frank Act isn’t going anywhere, Securities and Exchange Commission Chairman Jay Clayton said Monday.

Speaking at The Wall Street Journal’s CFO Network annual meeting in Washington, Mr. Clayton said that regulators are evaluating how postcrisis rules have performed in practice, and that he had concerns about some of the unintended side effects from some regulations. But any changes will be around the edges, keeping the core of postcrisis overhauls in place, he added.

“I don’t think Dodd-Frank is changing a great deal, just to put a pin in it,” he said.

One area Mr. Clayton singled out for rule changes are clearinghouses, which act as middlemen between the buyers and sellers of financial instruments such as commodities and derivatives. Clearinghouses are seen as a possible threat to financial stability, given how rapidly they have grown since Dodd-Frank mandated the routing of more transactions through them.

He didn’t offer any potential suggestions as to how to deal with supersized clearinghouses, also known as central counterparties, but said they are a common topic of discussion when international regulators list potential risks to financial stability.

“A problem at a CCP is something that keeps them up at night,” Mr. Clayton said.

Senior Trump administration officials have previously voiced concerns about the size of clearinghouses. In October, then-National Economic Council Director Gary Cohn said he worried the entities could be a “new systemic risk” to financial stability.

Still, stress tests have shown that major, systemically important clearinghouses can withstand certain crisis-like situations. Just a day after Mr. Cohn’s comments, a government regulator said its stress tests showed big U.S. clearinghouses could withstand a crisis-triggered liquidity crunch even if two of their major clearing member banks defaulted.

If regulators were to take action on the issue, they would likely follow the lead of Federal Reserve Chairman Jerome Powell, who has encouraged more robust stress tests to make sure clearinghouses can withstand the default of multiple clearing members.

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 15, 2018

Short-Termism is Harming the Economy

By Jamie Dimon and Warren E. Buffett | Jun 07, 2018

TOPICS: Earnings Forecasts, Earnings Management

SUMMARY: In this WSJ Opinion Page piece, Messrs. Dimon and Buffet, "...together with Business Roundtable ...are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance." The authors make this recommendation because short-term guidance "often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability." The authors go on to discuss the status of publicly traded companies in the U.S. as accounting for "only about 4,300 of America's 28 million businesses," but "responsible for a third of all private-sector employment and half of all business capital spending."

CLASSROOM APPLICATION: The article may be used in any financial accounting class to discuss periodic reporting.



1. (Advanced) Who are Jamie Dimon and Warren E. Buffet?


2. (Introductory) What are these two men recommending? For whom are they speaking in making this recommendation?


3. (Advanced) What reason(s) do these authors cite for this recommendation?


4. (Advanced) What expenditure type(s) do the authors say companies hold back in order to meet quarterly earnings forecasts, results that may be influenced by factors beyond managers' control?



Buffett, Dimon Team Up to Curb 'Unhealthy Focus' on Quarterly Earnings
by Michael Rapoport
Jun 07, 2018
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island


"Short-Termism is Harming the Economy," by Jamie Dimon and Warren E. Buffett , The Wall Street Journal, June 7, 2018

Public companies should reduce or eliminate the practice of estimating quarterly earnings.

Every generation of Americans has a responsibility to leave behind a stronger, more prosperous society than the one it found. The nation’s greatest achievements have always derived from long-term investments. In both national policy and business, effective long-term strategy drives economic growth and job creation.

For public companies, these same principles are true. That’s why today, together with Business Roundtable, an association of nearly 200 chief executive officers from major U.S. companies, we are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance. In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.

Because well-managed and well-governed businesses are the engine of the U.S. economy, good corporate governance is imperative. Though publicly owned companies account for only about 4,300 of America’s 28 million businesses, they are responsible for a third of all private-sector employment and half of all business capital spending. America’s public companies drive job creation, opportunity and economic growth.

This announcement today builds on the Commonsense Corporate Governance Principles that business leaders developed in 2016. These principles acknowledge that the financial markets have become too focused on the short term. Quarterly earnings-per-share guidance is a major driver of this trend and contributes to a shift away from long-term investments. Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.

The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Short-term-oriented capital markets have discouraged companies with a longer term view from going public at all, depriving the economy of innovation and opportunity. Fewer public companies has also meant fewer opportunities for retail investors to create wealth through their 401ks and individual retirement accounts.

Even as the overall number of public companies declines, more than 100 million Americans invest in them directly or through mutual funds. Millions more do so through their participation in corporate, public and union pension plans. Many of these people are veterans, retirees, teachers, nurses, firefighters, and city, state and federal workers. Public companies owe it to all of them to get this right.

Our views on quarterly earnings forecasts should not be misconstrued as opposition to quarterly and annual reporting. Transparency about financial and operating results is an essential aspect of U.S. public markets, and we support being open with shareholders about actual financial and operational metrics. U.S. public companies will continue to provide annual and quarterly reporting that offers a retrospective look at actual performance so that the public, including shareholders and other stakeholders, can reliably assess real progress.

Clear communication of a company’s strategic goals—along with metrics that can be evaluated over time—will always be critical to shareholders. But this information, which may include nonfinancial operational performance, should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise.

Ken Bertsch, executive director of the Council of Institutional Investors, the leading voice for strong shareholder rights, supports this premise: “America’s current and future retirees deserve to know that their savings are being invested based on reliable metrics and accurate reporting. Practices that encourage long-term thinking and investment create value for millions of Americans without sacrificing the transparency and accountability that investors deserve.”

Reducing or even eliminating quarterly earnings guidance won’t, by itself, eliminate all short-term performance pressures that U.S. public companies currently face, but it would be a step in the right direction. Anything America—and America’s public markets—can do to focus on the future and build long-term wealth and opportunity will make the country stronger, more resilient and more competitive. Over the long run this will strengthen the U.S. economy, benefit America’s workers, shareholders and investors, and leave a generational legacy we can be proud of.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 15, 2018

Cost-Benefit Reform at the EPA

By WSJ Opinion Page Editors | Jun 07, 2018

TOPICS: Cost Analysis

SUMMARY: Cost-benefit analyses are required of every federal regulation. This opinion-page piece asserts that Obama-era analyses by the Environmental Protection Agency (EPA) included social cost and benefit estimates clearly considered suspect by the WSJ Opinion Page editors. They also state that the EPA thus ignored best practice recommendations by the Office of Management and Budget (OMB).

CLASSROOM APPLICATION: The article may be used whenever discussing cost-benefit analysis to demonstrate the subjective nature of the information required.



1. (Advanced) What is a cost-benefit analysis?


2. (Introductory) How is a cost-benefit analysis included as a part of U.S. federal regulations, particularly those set by the Environmental Protection Agency (EPA)?


3. (Introductory) What costs were introduced to the EPA's analysis under the Obama Administration?


4. (Advanced) Can you imagine a reason for including how domestic EPA regulations could have a global impact? Do you think such analysis could be warranted?


5. (Advanced) What is the Office of Management and Budget (OMB)? Hint: you may find their web page at


6. (Advanced) What recommendations does the OMB offer for these cost-benefit analyses?



Reviewed By: Judy Beckman, University of Rhode Island


"Cost-Benefit Reform at the EPA," by WSJ Opinion Page Editors, The Wall Street Journal, June 7, 2018

Under Obama, the EPA juked the numbers to justify costly regulation.

Barack Obama’s Environmental Protection Agency jammed through an average of 565 new rules each year during the Obama Presidency, imposing the highest regulatory costs of any agency. It pulled off this regulatory spree in part by gaming cost-benefit analysis to downplay the consequences of its major environmental rules. The Trump Administration has already rolled back some of this overregulation, and now Administrator Scott Pruitt wants to stop the EPA’s numerical shenanigans, too.

On Thursday the EPA will take the first step toward a comprehensive cost-benefit reform by issuing an advance notice of proposed rule-making. After weighing public input, EPA will propose a rule establishing an agency-wide standard for how regulations are assessed. The reform would make it easier for Americans and their elected representatives to see whether more regulation is truly justifiable.

The EPA has a statutory obligation to look at the costs and benefits of many proposed rules. That responsibility has been reinforced by executive orders and court rulings. But while all three branches of government have supported such assessments, they leave the EPA broad discretion. Enter the Obama Administration, which saw the chance to add additional considerations to the cost-benefit equation.

By introducing “social costs” and “social benefits,” the EPA began factoring in speculation about how regulatory inaction would affect everything from rising sea levels to pediatric asthma. EPA optimists even included their guesses about how domestic regulations could have a global impact. Meanwhile, the agency ignored best practices from the Office of Management and Budget, juking the numbers to raise the cost of carbon emissions.

This proved as politically useful as it was scientifically imprecise. Months before introducing the Clean Power Plan, the EPA suddenly raised the social cost of a ton of carbon emissions to an average of $36 from $21. Before it embarked on new oil and gas regulations, the EPA put the social cost of methane at an average of $1,100 per ton.

At White House direction, the Trump EPA recalculated those figures last year to include only demonstrable domestic benefits. The social cost estimates dropped to an average of $5 per ton of carbon and $150 per ton of methane. That made a big difference in the cost-benefit analysis. While the Obama Administration claimed the Clean Power Plan would yield up to $43 billion in net benefits by 2030, the Trump EPA concluded it would carry a $13 billion net cost.

Another statistical sleight of hand involves the Mercury and Air Toxics Standards. The regulation’s stated purpose was to reduce mercury pollution, but the EPA added the rule’s potential to decrease dust. That was irrelevant to the central question of whether it was worthwhile to regulate mercury as proposed. But without the erroneous co-benefits, EPA would find such regulations tougher to justify.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 15, 2018

U.K. Regulator Adopts Rules That May Help Woo Aramco

By Ben Dummett | Jun 09, 2018

TOPICS: Initial Public Offerings

SUMMARY: This very short article discusses the fact that the U.K. regulator "formally adopted rules Friday [June 8, 2018,] that could strengthen the Lonodon Stock Exchange's efforts to woo the listing of energy giant Saudi Arabian Oil Co....The LSE is competing with exchanges in New York and Hong Kong, among others, to secure Aramco's international listing." The related discusses Aramco's plans in more depth and was covered in this review.

CLASSROOM APPLICATION: The article may be used in any course discussing public offerings of shares, particularly internationally, and/or minority shareholders.



1. (Advanced) What is Aramco?


2. (Introductory) What action has the U.K. securities regulator taken? Why has the regulator taken this step?


3. (Advanced) Define the terms "initial public offering" and "listing" as used in this article.


4. (Advanced) How might listing of Aramco on the London Stock Exchange help the U.K. "following its decision to leave the European Union?"


5. (Advanced) What are minority shareholders? How are minority shareholders' interests at risk in any entity?


6. (Advanced) How are minority shareholder at risk when dealing with a sovereign-owned entity such as Aramco? You may refer to the related article to find out about the size of the minority (noncontrolling) interest being sold by Aramco.



Aramco IPO is Still on Track for 2018, Saudi Official Says
by Benoit Faucon
Oct 18, 2017
Page: B16

Reviewed By: Judy Beckman, University of Rhode Island


"U.K. Regulator Adopts Rules That May Help Woo Aramco," by Ben Dummett, The Wall Street Journal, June 9, 2018

‘No change’ in plans to publicly list company in 2018, he says

Saudi Arabia still plans to publicly list a portion of its state oil company in 2018, the kingdom’s oil minister said Tuesday, after reports that the effort may be abandoned.

“We are on track,” Saudi oil minister Khalid al-Falih said on Tuesday outside the Oil and Money energy conference in London.

Doubts about the IPO of Saudi Arabian Oil Co., better known as Aramco, have grown in recent days as news organizations including The Wall Street Journal have reported that the kingdom may not go forward with the plan. The Journal reported last week that Aramco was interested in selling a stake to a private investor and that a Chinese company had made an offer.


Asked if Saudi Arabia still planned a local listing for Aramco in Riyadh and an international listing, Mr. Falih said, “No change.”

“You will know the venue and the exact date in due course,” said Mr. Falih, who also is Aramco’s chairman.

Prince Mohammad bin Salman, the kingdom’s heir apparent, announced the IPO of up to 5% of Aramco in January 2016 and estimated the company’s value at between $2 trillion and $3 trillion. If that valuation held true, the IPO could fetch over $100 billion—by far the largest ever.

The Journal has reported that the IPO has been delayed by questions over the valuation and difficulty untangling the vast state company from the government.

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 15, 2018

What to Consider Before You Change Your Residence Because of the New Tax Law

By Tom Herman | Jun 11, 2018

TOPICS: Individual Taxation, Tax Audits, Tax Law

SUMMARY: "Among the biggest changes [in the 2017 tax law] is a provision limiting deductions for state and local taxes [SALT]...the changes have created a greater incentive for many taxpayers living in high-tax areas, including New York City, California, New Jersey and Connecticut to consider..." moving to another location. Some individuals, for example, have homes in two locations and are considering spending greater time in another home. Other implications generating tax concerns are that individuals are "thinking about selling a business, or large amounts of securities, in the not-too-distant future." The author cautions that many people think only time spent in each of two locations, for example, determines which serves as a taxpayer's primary domicile. Many factors could be considered; "residency audits-some of the most intrusive audits imaginable-are becoming more and more common...."

CLASSROOM APPLICATION: The article may be used in an individual income tax class discussing itemized deductions, the new tax law, or determination of taxpayer domicile.



1. (Introductory) What is a taxpayer's "domicile"?


2. (Advanced) How is this status of taxpayer domicile determined? Why is this determination important?


3. (Advanced) What is the state and local tax deduction (also known as SALT)? What are the terms of this deduction in 2017 and prior?


4. (Introductory) What about this deduction changed with implementation of the new tax law in 2017?


5. (Advanced) How does this tax law change interact with issues related to determining a taxpayers' domicile? In your answer, comment on auditing a taxpayer for domicile.



Reviewed By: Judy Beckman, University of Rhode Island


"What to Consider Before You Change Your Residence Because of the New Tax Law," by Tom Herman, The Wall Street Journal, June 11, 2018

Limits on deductions for state and local taxes have created a greater incentive for taxpayers living in high-tax states

For some people, saving taxes under the new law could be a moving experience.

Among the biggest changes is a provision limiting deductions for state and local taxes to $10,000 a year ($5,000 for a married person filing a separate return), starting this year and scheduled to expire at the end of 2025. Also, the standard deduction amounts rose sharply.

These changes have created a greater incentive for many taxpayers living in high-tax areas, including New York City, California, New Jersey and Connecticut, to consider becoming tax refugees. This includes upper-income taxpayers who have more than one home and want to claim a home in a lower-tax area as the one that counts for tax purposes. It also includes some taxpayers who are considering fleeing entirely from a high-tax area.

Moving for tax reasons isn’t new. But the new law “has unquestionably led increasing numbers of people to consider moving,” says Kerry O’Rourke Perri, a partner in the private-clients group at the law firm White & Case LLP. That’s especially so among taxpayers in high-tax areas thinking about selling a business, or large amounts of securities, in the not-too-distant future.

“There’s a real interest in this topic because of the new federal legislation. We have clients where the tax savings run in the millions,” says Mark S. Klein, chairman of Hodgson Russ LLP, and a co-author of the 2018 edition of “New York Residency and Allocation Audit Handbook.”

Warning: This isn’t as simple as it may sound. What may seem like a clear-cut change in your home for tax purposes may strike state tax auditors as a tax dodge. Rules and audit policies can vary by state, and many misconceptions have sprung up, says Sidney Kess, senior consultant at Citrin Cooperman and of counsel to Kostelanetz & Fink.

Here are a few thoughts and recommendations from lawyers and other tax professionals:

New limits: Some people assume the new $10,000 limit applies to each taxpayer, which would be $20,000 for married couples filing jointly. Wrong. The cap is $10,000 whether you’re single or if you’re filing a joint return ($5,000 if married and filing separately), says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.


IRS pushback: Some states have taken legislative action, or are considering steps, designed to combat the impact of the new limits. But the Treasury Department and Internal Revenue Service plan to propose regulations likely to be a powerful counterattack. “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the IRS said recently.

Key factors in New York: Lawyers say clients often assume the only thing that matters is how much time they spend in a high-tax state. That’s typically very important but not the only factor in at least several states, such as New York and California.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 22, 2018

Executives Fear Trade Conflicts Could Dent Economic Growth

By Ezequiel Minaya, Tatyana Shumsky, and Nina Trentmann | Jun 17, 2018

TOPICS: CFO, Chief Financial Officer, Managerial Accounting

SUMMARY: "Corporate finance leaders...[say they see] an increasingly cloudy long-term economic outlook play[ing] out against the backdrop of trade spats and geopolitical risk." Global growth this year is expected to come out at 3.9% but "the IMF warns that the boost from the U.S. tax cuts will fade beginning in 2019 [and]...economists surveyed by The Wall Street Journal worry that a recession could begin in 2020.... Some CFOs say a downturn appears overdue, amid signs of tightening credit and labor markets." The article quotes one CFO, Donald Allen of Stanley Black & Decker that he spends at least 40% of his time on contingency planning, consulting a a variety of external experts.

CLASSROOM APPLICATION: The article may be used to discuss the variety of issues address by CFOs and, as a consequence, their corporate finance staffs, particularly in a managerial accounting class.



1. (Introductory) What proportion of his time does the CFO for toolmaker Stanley Black &Decker spend on contingency planning?


2. (Advanced) What activities make up the task of "contingency planning"?


3. (Advanced) Consider your learning in the academic disciplines comprising an accounting and/or business degree. From which disciplines are you learning to understand the contingency planning issues discussed in this article?


4. (Advanced) What is free cash flow? How does the uncertainty describe in this article relate to the need for a company to have available free cash flow?



Reviewed By: Judy Beckman, University of Rhode Island


"Executives Fear Trade Conflicts Could Dent Economic Growth By Ezequiel Minaya, Tatyana Shumsky, and Nina Trentmann, The Wall Street Journal, June 17, 2018

Uncertainty over tariffs and tightening credit and labor markets could offset boosts from the U.S. tax overhaul

Corporate finance leaders are worried that the good times won’t last as an increasingly cloudy long-term economic outlook plays out against the backdrop of trade spats and geopolitical risk.

The passage of the U.S. tax overhaul eliminated significant uncertainty and strengthened earnings for many companies. Economic data from Washington to Beijing has been strong as global growth is estimated to climb to 3.9% this year, according to the International Monetary Fund. Capital spending by companies in the S&P 500 rose about 24% to $166 billion during the first three months of the year compared with 2017, according to Credit Suisse Group AG data.

“That’s a very business friendly environment to be operating in, better than in the recent past,” said John Shrewsberry, Wells Fargo WFC -0.79% & Co.’s finance chief.

Longer-term forecasts are less optimistic. The IMF warns that the boost from the U.S. tax cuts will fade beginning in 2019. Economists surveyed by The Wall Street Journal worry that a recession could begin in 2020 as the Federal Reserve raises interest rates.


Some CFOs say a downturn appears overdue, amid signs of tightening credit and labor markets. And the specters of trade tensions and political turmoil from Mexico to London to Washington are haunting even the rosiest of company outlooks.

The widely cited Global Economic Policy Uncertainty Index surged 64% between January and May, reaching its highest level in a year even as the capital spending boom got under way.

Nick Bloom, an economics professor at Stanford University and an author of the index, attributed the surge to U.S. President Donald Trump’s tougher stance on trade, saying the leader “means business in introducing tariffs and pulling away” from the Group of Seven industrialized nations.

The White House is levying tariffs on tens of billions of dollars of Chinese goods starting in July, a move that is likely to spark retaliation from China. The Trump administration also is seeking to rewrite the North American Free Trade Agreement with Canada and Mexico.

The trade conflicts have given businesses pause, said Mark Zandi, chief economist at Moody’s Analytics. He said companies are clearly increasing capital outlays, but he believes the investment growth would be greater without the trade tensions.

“I think that it is having an impact on investment decisions and hiring decisions,” Mr. Zandi said. “Businesses are not pulling back. But they are not fully engaging. Investment spending growth is good. But I think it would be even stronger if not for this cloud created by these trade tensions.”

The uncertainty surrounding tariffs and trade both in the U.S. and globally has forced Donald Allan, chief financial officer at tool maker Stanley Black & Decker Inc., SWK 1.05% to double the amount of time he spends on contingency planning.

“I’m spending at least 40% of my time on that type of stuff, if not more,” Mr. Allan said, adding that he frequently consults a variety of external experts from investment bankers to lobbyists to industry associations to get a range of perspectives.

The goal is to make sure “that we’re effectively managing all of the risks but also making sure that we’re not overreacting,” Mr. Allan said.

For Verizon Communications Inc., VZ 2.32% the concern tied to trade friction was any possible impact it could have on the company’s supply chain, said CFO Matthew Ellis. The scope of any disruption is likely to be limited as the telecommunications giant is focused on the U.S., though the company imports some networking equipment from overseas.

“You do your best to make sure you have contingency plans,” he said. “You think through, ‘Am I solely reliant on one particular supplier, one outcome?’”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 22, 2018

The Bull Market's Next Test: Slower Earnings Growth

By Akane Otani | Jun 18, 2018

TOPICS: Analysts' Forecasts, Financial Statement Analysis, Profitability

SUMMARY: "...[M]any analysts say the first quarter [of 2018] could represent a peak in [U.S. corporate] profit growth ["when U.S. corporations increased their earnings at 25%, the fastest pace since the second half of 2010"]. Earnings growth is expected at 19% in the second quarter, 21% in the third and 17% in the fourth...Earnings are expected to grow only in the single- to low-double-digit range next year." Historical trends indicate that stock market rallies fizzle after earnings growth peaks and growth turns negative; but in cases in which earnings growth peaks and then continues positive at a slower pace, stock markets have continued to grow.

CLASSROOM APPLICATION: The article may be used to discuss price-earnings ratios or the relationship between corporate earnings and stock prices.



1. (Advanced) What does the author mean when writing that accelerating earnings growth has kept "share valuations from getting too stretched as [stock] prices rose"? Hint: in your answer, define the price-earnings ratio and explain how it is used to assess corporate stock valuations.


2. (Introductory) What factors have led to the rising earnings growth in recent quarters?


3. (Introductory) What is the expected future rate of growth in corporate earnings?


4. (Advanced) Who is making these projections about corporate earnings-the companies themselves or someone else? Explain your answer.



Reviewed By: Judy Beckman, University of Rhode Island


"The Bull Market's Next Test: Slower Earnings Growth," by Akane Otani, The Wall Street Journal, June 18, 2018

Corporate earnings expanded 25% in the first quarter, a new high and a possible peak for growth

U.S. corporate earnings growth looks poised to slow from a blistering pace, posing a potential new challenge to a long bull market that is already contending with slower global-growth momentum and rising interest rates.

Earnings growth has accelerated in recent quarters, helping drive major U.S. stock indexes to new highs and keeping share valuations from getting too stretched as prices rose. That expansion reached a new high in the first quarter, when U.S. corporations grew their earnings at 25%, the fastest pace since the second half of 2010, according to FactSet.

Now, many analysts say the first quarter could represent a peak in profit growth. Earnings growth is expected at 19% in the second quarter, 21% in the third and 17% in the fourth, according to FactSet. Earnings are expected to grow only in the single- to low-double-digit range next year.

A peak in earnings growth doesn’t always signal that rallies are about to fizzle, and analysts recognize that earnings growth would inevitably slow following a one-time boost from the federal tax overhaul. Moreover, not all analysts are convinced that profit growth has to slide. With the U.S. economy showing renewed signs of strength and consumer and small-business confidence riding high, some analysts say earnings growth can remain near the current lofty levels.

But a steep drop off in earnings growth in the months ahead would come at an inopportune time. After a nine-year bull run, stock prices reflect a rosy outlook that is already showing signs of fading on a number of fronts. The global growth momentum that powered stocks higher at the end of last year is slowing in Europe and other major economies. The Federal Reserve indicated on Wednesday it expects to raise interest rates at least four times this year, and the threat of a trade war looms after the U.S. and China announced new tariffs against each other on Friday.

Those and other concerns have deflated the stock market after a big year in 2017. The S&P 500 has risen just 4% this year and has been essentially flat since January. The index has gone 97 trading days since its last all-time high—the longest record drought since the period from May 2015 to July 2016, according to the WSJ Market Data Group. On Friday, the S&P 500 fell 0.1%, while the Dow Jones Industrial Average lost 0.3% and posted its biggest one-week decline since March.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 22, 2018

Your Home-Equity Loan May Now Be a Lot More Expensive

By Laura Saunders | Jun 16, 2018

TOPICS: Individual Income Taxation, Tax Law

SUMMARY: Home equity loans and lines of credit (HELOCs) totaled approximately 1.5 million loans (750,000 LOCs) for a total value of approximately $30 billion loans ($160 billion LOCs) in both 2016 and 2017. Many Americans use such loans for any purpose and deduct the interest payments. The 2017 tax law makes several changes affecting the use of such loans. The most significant change is that the law limits the interest deduction to only that amount related to funds used to "buy, build, or substantially improve" the home against which the loan is taken.

CLASSROOM APPLICATION: The article may be used in an individual income tax class.



1. (Advanced) What is a home equity loan? A home equity line of credit?


2. (Introductory) For what purposes might a home equity loan or credit line be used? Ignore tax deductibility in this answer.


3. (Advanced) Summarize the status of tax deductibility of interest on home equity loans and credit lines prior to the 2017 tax law change.


4. (Introductory) How did the 2017 tax law change deductibility of interest on home equity loans and lines of credit?


5. (Advanced) Explain your understanding of the phrase "your home as ATM" in the (paper version) title of this article.



Reviewed By: Judy Beckman, University of Rhode Island


"Your Home-Equity Loan May Now Be a Lot More Expensive," by Laura Saunders, The Wall Street Journal, June 16, 2018

Media giants could carry a combined $350 billion of bonds and loans

A wave of expected big media mergers would transform AT&T Inc. and Comcast Corp. into the two most indebted companies in the world, a standing that carries uncharted risks for investors in the firms’ bonds.

AT&T has bought Time Warner Inc., and Comcast hopes to purchase most of 21st Century Fox Inc. The companies would carry a combined $350 billion of bonds and loans, according to data from Dealogic and Moody’s Investors Service. The purchases are meant to provide additional income to help the acquirers weather turmoil sweeping their industries. But if the mergers falter, the record debt loads will give AT&T and Comcast little margin for error, fund managers and credit ratings analysts say.


“It’s a very big number,” said Mike Collins, a bond fund manager at PGIM Fixed Income, which manages $329 billion of corporate debt investments. “It has fixed-income investors a little nervous and rightfully so.”

The debt-fueled buyouts by AT&T and Comcast are extreme examples of a decadelong surge in corporate borrowing that is stoking investor anxieties about what will happen as the economy slows and global interest rates rise. The ratio of debt to corporate earnings, commonly called leverage, has also risen, giving companies less financial cushion to absorb market shocks.

Global corporate debt excluding financial institutions now stands at $11 trillion, and the median leverage for such companies rated investment grade has jumped 30% since the eve of the financial crisis in 2007, according to Moody’s research. Most companies issue new loans and bonds to repay debt, and investors are concerned about how companies will refinance their record-breaking debt loads when capital markets experience their next significant downturn.

Officials at AT&T and Comcast say the refinancing risk from their postdeal debt would be minimal because they plan to quickly repay much of the debt with cash generated from the combined businesses. AT&T, for example, is expected to produce $8 billion to $10 billion of free cash flow—or cash from operations minus capital spending—that could be applied to debt reduction, analysts say. It is also common for telecom companies to carry high debt because they invest heavily in their networks and their customers provide them with reliable revenue.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 22, 2018

21st Century Fox Agrees to Higher Offer From Disney

By Keach Hagey and Erich Schwartzel | Jun 20, 2018

TOPICS: Antitrust, business combinations, Strategy

SUMMARY: The article describes the Disney offer for 21st Century Fox. Disney's offer totals a combined $71.3 billion in cash and stock, a significant increase over Disney's orginal $52.4 billion all stock offer. The related article describes the deal as a horizontal merger if either Comcast or Disney is successful because both potential acquirers, "like Fox, produce television shows and movies...." The related video describes strategic reasons for the significant recent merger and acquisition activity in the media and entertainment industries.

CLASSROOM APPLICATION: The article may be used to discuss strategies behind mergers and acquisitions and regulatory review of such transactions in a class on business combinations.



1. (Introductory) What factor(s) is (are) driving change in the media and entertainment industry?


2. (Advanced) Why does the change you describe in answer to question 1 lead to merger and acquisition activity?


3. (Introductory) What factor(s) is (are) described in the article as favoring Disney's chances of acquiring Fox over Comcast's chances?


4. (Advanced) Define the terms horizontal merger and vertical integration.


5. (Advanced) Refer to the related article. Into which category of business combinations does the proposed acquisition of 21st Century Fox-by either Disney or Comcast--fit?





Comcast, Disney Battles Loom
by Erich Schwartzel and Joe Flint
Jun 15, 2018
Page: B1

Reviewed By: Judy Beckman, University of Rhode Island


"21st Century Fox Agrees to Higher Offer From Disney," by Keach Hagey and Erich Schwartzel, The Wall Street Journal, June 20, 2018

Disney to pay more and add a cash component; Fox calls pact superior to Comcast’s bid

Walt Disney Co. raised its offer to purchase most of 21st Century Fox FOX 0.65% to more than $71.3 billion in cash and stock, topping an unsolicited offer from rival Comcast Corp. and escalating the bidding war for the coveted media properties.

Disney ’s DIS 0.42% new offer is far higher than its original deal, $52.4 billion in stock, and surpasses Comcast’s all-cash offer of roughly $65 billion. In addition to having the higher offer, Disney DIS 0.42% said it also has a regulatory advantage over Comcast in winning a company to help it fight back against new-media competitors like Netflix Inc.

Fox, in a news release, said the new Disney DIS 0.42% deal “is superior to the proposal” made by Comcast earlier this month. A Comcast spokeswoman had no immediate comment.

Disney and Comcast are battling for prized media assets including the Twentieth Century Fox film and TV studio; U.S. cable networks FX and regional sports channels; international assets such as Sky PLC and Star India; and Fox’s one-third stake in the streaming service Hulu.

Fox and Disney were negotiating terms of an amended agreement over the weekend and had the outlines of a deal by Tuesday, though they were nailing down details like the mix of cash and stock, a person close to the situation said.

Disney submitted its bid Wednesday ahead of a Fox board meeting in London, another person familiar with the situation said. Fox Executive Chairman Rupert Murdoch and Disney Chief Executive Bob Iger met to discuss the new pact.

Disney agreed to pay Fox shareholders roughly 50% in cash and 50% in stock. If the current deal closes, Fox shareholders would own 19% of the combined company, compared with 25% under the old deal.

Some observers have said it might make sense for Disney and Comcast to divide the Fox assets between themselves rather than go through a bidding war, but Mr. Iger said the idea of splitting the businesses is a nonstarter. “We have an agreement in place with [Fox] that precludes that,” he said on a conference call Wednesday.

Disney also has time on its side, Mr. Iger said, because its deal with Fox has been through several months of regulatory review. “We believe that we have a much better opportunity, both in terms of approval and the timing of that approval, than Comcast does,” he said.

The CEO also highlighted how Fox’s programming would boost his company’s efforts to launch a Disney-branded streaming service next year and compete directly with Netflix. “Direct-to-consumer distribution has become an even more compelling proposition in the six months since we announced the deal. The consumer is voting—loudly,” he said.

Content Creation

As tech firms have increasingly plowed money into original content, Hollywood has been scrambling to keep up

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 22, 2018


", The Wall Street Journal, June


Continued in article


Humor for June 2018

Accountant Goalie Scott Foster Attends NHL Awards Show, Is Funnier Than Jim Belushi ---
Thank you Barbara Scofield for the heads up

Police say at least one rat slipped through a hole in the back of an ATM in northeastern India and ate more than $19,000 in currency ---

The New Red Hen Menu ---

Watch a gutsy squirrel steal a doughnut from cop ---


Steve Martin & Robin Williams Riff on Math, Physics, Einstein & Picasso in a Smart Comedy Routine ---


Forwarded by Paula

 An Elementary School Teacher had twenty-six students in her class. She presented each child in her classroom the 1st half of a well-known proverb and asked them to come up with the remainder of the proverb. It's hard to believe these were actually done by first graders.


Their insight may surprise you.

While reading, keep in mind that these are first-graders, 6-year-olds, because the last one is a classic.



Don't change horses

until they stop running.


Strike while the

bug is close.


It's always darkest before

Daylight Saving Time.


Never underestimate the power of



You can lead a horse to water but



Don't bite the hand that

looks dirty.


No news is



A miss is as good as a



You can't teach an old dog new



If you lie down with dogs, you'll

stink in the morning.


Love all, trust



The pen is mightier than the



An idle mind is

the best way to relax.


Where there's smoke there's



Happy the bride who

gets all the presents.


A penny saved is

not much.


Two's company, three's

the Musketeers.


Don't put off till tomorrow what

you put on to go to bed.


Laugh - whole world laughs with you, cry and

you have to blow your nose.


There are none so blind as

Stevie Wonder.


Children should be seen and not

spanked or grounded.


If at first you don't succeed

get new batteries.


You get out of something only what you

see in the picture on the box.


When the blind lead the blind

get out of the way.


A bird in the hand

is going to poop on you.

And the WINNER and last one!


Better late than


Life on the Front Porch Forwarded by Paula

On the first day, God created the dog and said, “Sit all day by the door of your house and bark at anyone who comes in or walks past. For this I will give you a life span of twenty years.”


The dog said, “That’s a long time to be barking.  How about only ten years and I’ll give you back the other ten?”


And God said that it was good.


On the second day, God created the monkey and said, “Entertain people, do tricks, and make them laugh.. For this, I’ll give you a twenty-year life span.”


The monkey said, “Monkey tricks for twenty years? That’s a pretty long time to perform. How about I give you back ten like the dog did?”


And God again said that it was good.


On the third day, God created the cow and said, “You must go into the field with the farmer all day long and suffer under the sun, have calves and give milk to support the farmer’s family. For this, I will give you a life span of sixty years.”


The cow said, “That’s kind of a tough life you want me to live for sixty years. How about twenty and I’ll give back the other forty?”


And God agreed it was good.


On the fourth day, God created humans and said, “Eat, sleep, play, marry and enjoy your life. For this, I’ll give you twenty years.”


But the human said, “Only twenty years? Could you possibly give me my twenty, the forty the cow gave back, the ten the monkey gave back, and the ten the dog gave back; that makes eighty, okay?


“Okay,” said God, “You asked for it.”


So that is why for our first twenty years, we eat, sleep, play and enjoy ourselves. For the next forty years, we slave in the sun to support our family. For the next ten years, we do monkey tricks to entertain the grandchildren. And for the last ten years, we sit on the front porch and bark at everyone.


Life has now been explained to you.


There is no need to thank me for this valuable information. I’m doing it as a public service. If you are looking for me, I will be on the front porch.

Forwarded by Paula

An Irish priest was transferred to Texas.

Father O'Malley rose from his bed one morning. It was a fine spring day in his new west Texas mission parish. He walked to the window of his bedroom to get a deep breath of the beautiful day outside.

He then noticed there was a jackass lying dead in the middle of his front lawn. He promptly called the local police station.

The conversation went like this:

"Good morning. This is Sergeant Jones. How might I help you?"

"And the best of the day te yerself. This is Father O'Malley at St. Ann's Catholic Church. There's a jackass lying dead in me front lawn and would ye be so kind as to send a couple o'yer lads to take care of the matter?"

Sergeant Jones, considering himself to be quite a wit and recognizing the foreign accent, thought he would have a little fun with the good father, replied, "Well now Father, it was always my impression that you people took care of the last rites!"

There was dead silence on the line for a long moment.

Father O'Malley then replied: "Aye, 'tis certainly true; but we are also obliged to notify the next of kin first, which is the reason for me call."

Forwarded by Paula
How to pour 15 jagermeister shots at once.


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And that's the way it was on June 30, 2018 with a little help from my friends.


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May 2018

F        Bob Jensen's New Additions to Bookmarks

May 2018

Bob Jensen at Trinity University 

USA Debt Clock --- ubl

How Your Federal Tax Dollars are Spent ---

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
The US Debt Clock in Real Time --- 
Remember the Jane Fonda Movie called "Rollover" ---
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas to sustain those investments.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---

For earlier editions of Fraud Updates go to
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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:  

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Possibly the Number 1 Resource for CPA Exam Candidates
AICPA:  Uniform CPA Exam Blueprints ---

CPA exam will increase focus on higher-order skills
"What Higher Order Skills Will be Tested on the Next CPA Examination," by Ken Tysiac, Journal of Accountancy, April 4, 2016 ---

Bob Jensen's CPA Exam Helpers ---

Scott Edward Bonacker, 63, Rogersville, Missouri departed this life Monday, May 7, 2018 after a short but courageous battle with cancer ---

Jensen Comment
It was only a very short time ago that we ceased having Scott's valuable contributions to the AECM listserv ---

He was probably our all-time most active practitioner on the AECM. Whereas practitioners in large CPA firms are usually discouraged by their supervisors from becoming involved in academic debates on a listserv like the AECM, Scott worked for a very small firm and, I think, was pretty much his own boss. Since Scott was so interested in academics and academic debates he probably missed his calling in life by not becoming a professor. He really had a curious mind and spent a lot of time scanning the new media.

Scott had a liberal leaning and was never hesitant to challenge me in a polite way on the AECM. He probably disappointed some members of the AECM by not fitting the stereotype of a "conservative" practicing accountant. Scott also had a wide perspective regarding what he thought was on-topic for the AECM.

Scott was so unique on the AECM I doubt that any accounting practitioner will rise to take his place.

Special thanks to Gary Zeune for calling my attention to Scott's passing ---

Ph.D. Alumni of Major USA Accounting Doctoral Programs ---

Almost 40 years ago (academic year 1977-1978) the Accounting Faculty Directory included a third section that listed the Accounting doctorates granted by each school.

Included here is an updated replication of that former section.

James R. Hasselback 6-7-2016

Jensen Comment
It would be extremely helpful if this list was updated further with such designations as gender and race/ethnicity. Unfortunately, Jim probably did not collect these details.

Correactology® or How to Identify a Pseudoscience ----

Is accountics science a pseudoscience?
Bob Jensen's threads on real science versus pseudoscience -

How Economists Became So Timid The field used to be visionary. Now it’s just dull ---

Jensen Comment
Could we say the same thing about accounting research? In particular what academic accounting research discovery contributed in a known way by the practicing profession?
Why did the profession of accountancy lose interest in the research and publications of academic accountants?

Here's where to start looking among thousands of academic accounting articles:
MAAW's Table of Contents Service Update ---
What do you think is the best visionary article that the practicing profession overlooked?

Correactology® or How to Identify a Pseudoscience ----

Bob Jensen's threads on real science versus pseudoscience ---

New Compilation and Review Report Requirements Issued ---

Congress Sends Trump Bill With Senior Financial Abuse Reporting Section ---

Convert your Excel PivotTable to a formula-based report ---

New Features Coming to Excel ---

AICPA recommends IRS FAQs on virtual-currency taxation (bitcoin and crypto currency taxation) ---

The Atlantic:  As younger generations become more racially diverse, many states are allocating fewer tax dollars to public colleges and universities ---

Jensen Comment
The article misleadingly overlooks the major causes of reduced spending for higher education.
Soaring Medicaid expenses have become the biggest expenditure items in most state budgets, expenditures that cannot be as easily reduced as expenditures for higher education. Couple Medicaid with underfunded pensions for state workers and we see funding for higher education being left in political dust.

By way of illustration look at the Medi-Cal portion ($101.5 billion) of the 2018-19 pie chart for California at

For California the higher education budget for 2018-19 is proposed at $33.7 billion in comparison ---

Click on "States" in the upper left corner to see states grading as to fiscal responsibility and debt crises ---

In other words the "radical diversity" issue is not so much a cause of reduced support higher education as is a budgeting choice issue devoting the lion's share of state budgets to health and welfare, especially Medicaid. And a major cause of the increase in Medicaid spending is the way citizens are figuring out how to divert long-term assisted living and nursing home expenses to Medicaid. If families plan ahead more than five years in advance, they can funnel more of their parents and grandparents resources into their own pockets and shift the long-term nursing care expenses over to Medicaid. And then they complain that the states are paying less for their children's state-supported higher education.

Medicare and Medicaid were never intended by government to pay for so much long-term nursing care of the middle class, but by one means or another schemes have been devised to make long-term nursing care and the cost of dying for the middle class as well as the poor. Medicaid is picking up a larger share of long-term nursing costs and Medicare is picking up the cost of dying (hospital, medication, and doctor bills). The cost of dying became the largest budget item in Medicare and is exploding as the population of the USA ages. This is also the major cause, along with underfunded pensions, of funds being diverted by states from higher education to Medicaid.

The bottom line is that as the population ages we're seeing a massive shift in state (and Federal) spending from the young to the old as education money is massively being diverted to Medicaid (and Medicare).

Tesla Doesn’t Burn Fuel, It Burns Cash ---

When you come to a fork in the road, take it..
Yogi Berra

Are ebooks dying or thriving? The answer is yes ---

Bob Jensen's neglected threads on ebooks ---

How Seattle's Economic Illiteracy Kills Jobs (and creates homelessness) ---

Seattle Scales Back Tax in Face of Amazon’s Revolt, but Tensions Linger ---

SEATTLE — After intense lobbying by local businesses and a bold threat by Amazon to curtail development in its hometown, the Seattle City Council on Monday approved a smaller and more limited tax on big companies than originally envisioned.

The new tax — dubbed the “Amazon Tax” by locals — will fund affordable housing and homeless services in a city whose economic boom, driven in no small part by Amazon, has priced many residents out of the area and forced some onto the streets.

Amazon, which halted two major expansion projects in Seattle in protest over the larger tax increase, said it was disappointed even with the smaller tax package, although the company said it would restart the planning process for one of its new buildings. It was still exploring the possibility of subleasing a second building that a developer is currently building.


The council had originally considered an annual “head” tax of $500 per full-time employee for Amazon and other large employers, but the amended measure that passed reduced that figure to $275. Instead of the $75 million a year the tax was originally expected to raise, it will bring in less than $50 million. The council also included a sunset provision that would require the tax to be reauthorized in five years.

The compromise failed to defuse tensions between Amazon and the city it has called home for the last 24 years.

Even though the company decided to resume one of its building projects, Drew Herdener, an Amazon vice president, said in a statement, “We remain very apprehensive about the future created by the council’s hostile approach and rhetoric toward larger businesses, which forces us to question our growth here.”

But the company’s tactics in Seattle has also garnered concern among other cities bidding to bring Amazon’s second headquarters to town.

Twenty finalist locations across North America have been aggressively wooing Amazon to win up to 50,000 high-paying jobs that its second headquarters would bring. In some of those places, there is opposition growing over the tax incentives that some city and state governments have agreed to give Amazon in return for being selected. And Amazon’s hardball politics in Seattle has further soured some local leaders.

“I absolutely find it unacceptable to see politically threatening behavior as is occurring there,” said Robin Kniech, a member of the City Council in Denver, one of the finalists for Amazon’s second headquarters. “It certainly doesn’t send a message that you expect to be a part of the community.”

Continued in article

U of Akron Professor Wanted to Boost Women's Grades (to attract majors)

Jensen Comment
Of greater concern is grade inflation in general to attract majors. This is where academic professionalism is really put to the test. Fortunately, in some disciplines like engineering, nursing, medicine, law, education, and accounting there are licensing examinations that can embarrass colleges with severe grade inflation in some disciplines. The GRE and other admissions tests also serve to keep grading more professional.

Bid-Rigging Business as Usual in Detroit ---

May 18, 2018 message from Tom Golden

Thanks, Bob! Very interested in your opinion.

Thought you might be interested in this Detroit Free Press article of an investigation I am running looking into the City's stewardship of $258MM in TARP money for demoing blighted homes. Normally stuff like this is never seen by the public but was released by a FOIA. Reads like a movie script. The guy i interviewed resigned 3 weeks after and the FBI picked up the case. More to come.

Tom has a new book out (fiction) that I ordered ---

Berkshire Hathaway reported a $1.14 billion loss in the first quarter, its first net loss since 2009, due largely to an accounting rule chief executive Warren Buffett called a "nightmare" ---

Seven Female Denver Law Profs To Receive $2.7m In EEOC Settlement Of Equal Pay Claim ---

Pennsylvania’s looming pension crisis ---

May 18, 2018 reply from Tom Amlie

This has been a slow-motion train wreck in PA. For a number of years in the early 2000s, when the market was hot, they thought there was no need to fund the pension plan since returns were so high. At the same time they increased the benefits from 2% per year of service to 2.5% per year of service. When the chickens on the way back to the roost were finally on the horizon, they found themselves in a deep hole. I don't recall the exact numbers, but pension contributions in my local school district were slated to go from 5% of payroll to more than 30% of payroll over a window of about 8 years. Local school district budgets which were hard to balance in 2009, with pension contributions at 5% of payroll, are now facing huge program cuts.

Tom Amlie

The CPA Journal:  Accounting, Politics, and Public Pensions ---

Inverted Yield Curve: It’s Definitely Not Different This Time ---

Bob Jensen's tutorial on how yield curves are used by accountants to value the enormous number of interest rate swaps on balance sheets ---

Top universities now have Bloomberg terminals to teach accounting and finance students how yield curves are utilized in financial asset valuations. Trinity University obtained a Bloomberg terminal in 2010 and keep it for student use in the campus library. If your university does not have such a terminal it's high time you put in a request for such a terminal.

How Tax Code Changes Hurt Home Owners ---

Living on Intangibles With Negative Tangible Assets
 England's  First 2018 Billion Dollar Scandal:  Carillion KPMG auditors under fire ---

The Big Four Caught in a Scandalous Groupie
Key findings from the MPs' report into Carillion's collapse ---

. . .



One of the most eye-catching suggestions in the report is that the big four auditors – KPMG, PwC, EY and Deloitte – be referred to the Competition and Markets Authority, which should consider whether they ought to be broken up forcibly. The quartet earned £72m from the company in 10 years and were described as a “cosy club incapable of providing the degree of independent challenge needed”.


·         Received £29m in fees over 19 years as Carillion’s auditor.

·         Branded “complicit” in the company’s “questionable” accounting practices, the report said “complacently signing off its directors’ increasingly fantastical figures”.


·         Internal auditor was paid more than £10m but “failed in its risk management and financial controls role”.

·         Did not identify “terminal failings” in risk management and financial controls, or “too readily ignored them”.


·         Took £10.8m for “six months of failed turnaround advice”.

·         Advised on deferral of payments to pension scheme, HMRC and suppliers. “Their own fees, however, were not deferred”.


·         Hired to manage insolvency as the only auditor with no conflict of interest, meaning it could “name its price”.

·         Fees for first eight weeks’ work alone was £20.4m.

·         “PwC are continuing to gain from Carillion, effectively writing their own pay cheque, without adequate scrutiny”.

Continued in article

Bob Jensen's threads on the legal woes of the Big Four (and other biggies) ---

Metacognition:  This Amazingly Simple Flash Card Technique Lets You Learn Anything in 5 Minutes and Remember It Forever ---

Jensen Comment
This works well for a short stack of flash cards, but it hardly works for a 900 page biology textbook or a 1,200 page intermediate accounting textbook.

Bob Jensen's threads on metacognition are at

Jensen Comment
The flash card technique in my opinion works well in terms of a relatively small stack of flash cards such as for learning the basics of bidding in the game contract bridge. However, for wide ranging things such as becoming a Grand Master at contract bridge the best approach for metacognive memory is seeking out on your own to find answers (such as playing lots of games of tournament bridge).

The Business Activity Model (BAM) experiment for two sequential courses in intermediate accounting at the University of Virginia and Villanova provides a perfect example. Instructors replaced the textbook and lectures that provided correct answers with a complicated realistic case that contained all kinds of errors. Students were then turned loose to find answers on their own from any sources they chose for research. The key to better memory is to learn on your own rather than to memorize from textbooks and lectures. The BAM experiment is similar to working on the job as an accountant trying to unravel the mistakes of a lousy real-world bookkeeping system.

One of the hardest things for teachers is resisting urges to reveal answers to students. Of course after examinations teachers at last have to reveal correct answers.

 Another hard thing for teachers is the greater risk of low teaching evaluations. A typical BAM student comment was: "Everything I learned in this course I had to learn on my own."

One of the main outcomes of the experiment was that after graduation there was a marked improvement in passage rates on the CPA examination for these universities. The metacognitive benefit of learning on your own is long-term memory.

For a summary of the BAM experimental outcomes go to

PwC Whistleblower Alleges Fraud in Audits of Silicon Valley Companies ---

Bob Jensen's threads on PwC's legal woes ---
Scroll down to PwC

An Insincere Embezzler

From Caleb Newquist on May 16, 2018 ---

Judge orders restitution, apology letters for victims in Watford City embezzlement [BT]
Here’s a new one:

Hannah Lloyd, 39, pleaded guilty Thursday to three felony counts of theft. As part of her sentencing, Northwest District Judge Daniel El-Dweek ordered Lloyd to pay restitution in approximate amounts of $139,000 to the Watford City Park District, $50,000 to the Watford City Golf Course and $56,000 to Rink Construction, as well as write apology letters to the victims.

In my imagination, Ms. Lloyd phoned in the first apology. Something like:

Dear Watford City Golf Course,

I’m sorry.


Then the judge scolds her for an insincere letter and forces her to re-write it until he’s happy with it.

I’d like to see more judges require embezzling accountants to write apology letters. “You’re going to apologize for what you’ve done, and we’re going to sit here until you get it right!” This sounds like a decent sentence for most first-time embezzlers, frankly.


India's national railway prepares for switch to accrual accounting The switch from cash-based to accrual-based financial statements is the biggest accounting reform India Railways will go through in 70 years ---

Jensen Comment
Maybe the word "depreciation" was recently translated into Hindi.
The railway might even be shopping for a computer.

The year-old PCAOB mandate to disclose a company's audit-firm engagement partner has a surprising effect on investors, a research experiment suggests.---

Since the results of this study truly surprised me, I will quote the ending of the article where the authors themselves point out some limitations of the research.
Behavioral Research in Accounting
Article Volume 30, Issue 1 (Spring 2018)


We design and perform an experiment to examine investor reaction to audit partner disclosure and to determine whether it facilitates accounting information contagion above and beyond any that might occur due to a shared audit firm and industry. In so doing, we find that prospective investors are significantly less likely to invest in a peer firm linked to a contaminated firm via a shared audit partner than when the organizations are only linked via a shared audit firm. We also find support for the notion that the contagion effect works by causing investors to reassess the content and credibility of financial statements issued by linked firms. Finally, we find some evidence to suggest that knowledge of the partner's name increases the extent to which investors attribute blame to the partner for a negative financial statement/audit outcome (specifically, a restatement).

Inferences from our analyses should be made in light of certain limitations. First, for the sake of brevity, participants were only provided with limited information rather than a full set of financial information. While we did utilize key financial statement ratios, the possibility exists that other information within a complete set of financial statements could moderate our results. Second, the majority of our participants were recruited and participated in the study online via Qualtrics; while these participants were experienced investors, the extent to which such participants were invested in the decision is likely to be less than that of an actual investor making decisions with his or her own funds. Third, we used fictitious audit firm names in the study. Thus, it is unknown how previous firm reputation would moderate the results of audit partner disclosure; however, this limitation presents opportunities for future research (e.g., firm familiarity may minimize the partner contagion effect).

We offer other interesting avenues for future research. First, our findings indicate that investors' decisions were mediated by the credibility of the financial information provided (i.e., their assessment of the likelihood of a restatement). Subsequent studies can more fully explore other potential causes for the effect and whether the credibility of the financial information provided is a mediator for contagion effects driven by factors unrelated to the financial statement audit (e.g., shared industry, shared directors). In addition to potential additional mediators, future studies can investigate potential moderators of the effect we observe in our experiment (e.g., the reason for the restatement, the extent of auditor culpability, and the level of audit partner disclosure salience). Second, future research can explore the extent to which an audit partner-induced contagion effect may occur due to positive information (e.g., an audit partner uncovering a complicated fraud scheme at a new client). That is, based on the existing research, we define a contagion effect as relating to a negative event; however, it is possible that positive news can also result in information transfer, particularly with respect to the “track record” of a particular partner. The extent to which, and under what circumstances, partner disclosure affects investors' attribution of blame or credit to the engagement partner may impact outcomes that are important to audit firms (e.g., client retention, legal liability). Finally, the transfer of information from one client via an audit partner to another client suggests a fusing of the audit partner's and audit client's reputations. If audit partners are motivated to achieve many of the same goals as management, in order to protect their reputation and/or client portfolio, then APD may result in the audit partner's immediate, short-term incentives being more closely aligned with client management's. Thus, future studies can explore the impact of investor reaction to APD on audit partner independence and decision making.

 Jensen Comment
At least this study was not a cheap shot using students as surrogates for decision makers

Keep in mind, however, that millions of these people turn portfolio decision making over to fund managers (think pension funds and mutual funds) or rely heavily on financial analysts. The decision to turn portfolio decision over to experts is not random. My guess is that investors who choose to study financial statements and make their own portfolio decisions may be a unique subset of investors who can bias the outcomes of a study like this.

Behavioral Research in Accounting
Article Volume 30, Issue 1 (Spring 2018)

Main Articles



Field Evidence about Auditors' Experiences in Consulting with Forensic Specialists

Stephen Kwaku Asare and Arnold M. Wright
Abstract | Full Text | PDF (463 KB) 

Free Access




Audit Partner Disclosure: An Experimental Exploration of Accounting Information Contagion

Tamara A. Lambert, Benjamin L. Luippold and Chad M. Stefaniak
Abstract | Full Text | PDF (367 KB) 

No Access




The Effect of Multiple Auditors on Deception Detection in a Client Inquiry Setting

Holderness D. Kip Jr.
Abstract | Full Text | PDF (399 KB) 

No Access




Budgeting Audit Time: Effects of Audit Step Frame and Verifiability

Eldar M. Maksymov, Mark W. Nelson and William R Kinney Jr.
Abstract | Full Text | PDF (291 KB) 

Free Access




Tax Incentives and Target Demographics: Are Tax Incentives Effective in the Health Insurance Market?

Michaele Morrow, Shane R. Stinson and Marcus M. Doxey
Abstract | Full Text | PDF (347 KB) 

No Access

Research Notes



Researching Juror Judgment and Decision Making in Cases of Alleged Auditor Negligence: A Toolkit for New Scholars

Jonathan H. Grenier, Andrew Reffett, Chad A. Simon and Rick C. Warne
Abstract | Full Text | PDF (435 KB) 

No Access




A Technical Guide to Using Amazon's Mechanical Turk in Behavioral Accounting Research

Steve Buchheit, Marcus M. Doxey, Troy Pollard and Shane R. Stinson
Abstract | Full Text | PDF (169 KB) 


Toyota to invest $170 million in Mississippi plant, create 400 jobs ---

In Europe, the financial picture is getting darker. Economic growth on the continent has been lackluster this year, with Germany's pace of expansion cut in half ---

The U.S. is threatening sanctions against the European Union after the World Trade Organization ruled Airbus received illegal government funding, costing Boeing sales.---

GASB Rule Sheds Light on Tax Abatements (corporate tax breaks) ---

CPA Journal:  The Decision Relevance of Financial Reporting ---

The End of Accounting and the Path Forward
by Arthur J. Radin, CPA and Thomas Selling

CPA Journal
Editors’ Note: Published this past June, Baruch Lev and Fang Gu’s The End of Accounting and the Path Forward for Investors and Managers (Wiley) has generated a great deal of controversy within the profession. The CPA Journal presents two contrasting perspectives on this thought-provoking book: Arthur J. Radin questions whether the authors are right about the conclusions they draw from the data, and Thomas I. Selling agrees with some of their recommendations but disagrees about the linkages to value creation.

Jensen Comment 1
This is my Comment 1 since I want to reflect more on the Radin and Selling review of the Lev and Gu arguments. Let me say that I really like parts Radin and Selling review. I've always been disappointed in Baruch Lev's many writings on intangibles. Lev is great at finding fault but offers nothing (as far as I can tell it's zero) to find a better way to reliably measure or even disclose intangibles. Lev writes so much, and for me Lev's attempted positive contributions are always a huge disappointment.

If Lev's proposals (actually unrealistic dreams) really lowered cost of capital more firms would be routinely applying Lev's proposals.

Like Ijiri's "Force Accounting" Lev is reaching into the clouds to touch the angels.

The title "The End of Accounting" seems to be an attempt to attract attention with an absurd title just like political economist Francis Fukuyama tried to attract attention with his book "The End of History." Obviously neither accounting nor history will come to an "end." Accounting will come to an end when audited financial statements no longer impact portfolio decisions of investors and employment decisions of business firms such as the firing of a CEO who fails to meet "earnings" targets. Fukuyama later wrote that history did not end after all. I wish Lev and Gu would write an article that admits accounting did not end after all (no thanks to them).

Let me come back to Comment 2 on these matters once I have more time to think about Comment 2.

Comment 2
Added on December 19, 2017

Comment 2
Accountancy evolved over thousands of years to become what it is rather than what some academic theorists would like it to be. The best example is the most popular index used by financial analysts and investors, namely the accounting net income of a business or some variation thereof such as earnings-per-share (eps) or other comprehensive income (OCI). Economic theorists would prefer economic income defined as the amount of discounted net cash flows of a business over all future time. But neither economists nor accountants have ever been able to measure economic income reliably because only soothsayers estimate all future net cash flows, and those soothsayers never agree on the numbers appearing in their fortune-telling crystal balls.

Traditional for-profit (business) and not-for-profit (e.g., governmental) accountancy now guided by either national standard setters (e.g., the FASB and GASB  in the USA) or international accounting standard setters (e.g., the IASB) survived Darwinian-styled evolution over thousands of years because multiple stakeholders find it to have utility for predicting financial futures of an organization, stewardship and inputs into macroeconomic analyses. Today accounting traditions and rules are rooted in the past (e.g. historical cost book values), present (e.g., market values of derivatives and other marketable securities), and future (e.g., discounted values of pension obligations).

Baruch Lev's many writings suggest that the biggest controversy in accountancy is how intangibles are measured and disclosed. See the many books and papers cited at his home page at

Baruch writes very well when it comes to emphasizing the importance of intangibles in predicting a firm's financial future and laying out criticisms of the present accounting traditions and standards in measuring and otherwise disclosing such standards. But the world pretty much ignores his soothsayer suggestions for intangibles measurement and disclosure.

My best illustration of this is what Baruch has to say about Enron's intangibles as documented at***EnronIntangibles

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

 My answer is at***EnronIntangibles


Lev's answer essentially was that since he could not find Enron's intangibles there weren't any intangible assets. My answer is that there were highly significant intangible assets that could neither be measured in any meaningful way nor even disclosed without self-incrimination since many of them arose from illegal bribes and other crimes that gave Enron power around the world and most importantly inside USA government. Most of Enron's future revenues derived from the intangible asset of political power. To the extent this intangible asset arises from shady political activities Enron could not disclose, let alone measure, the massive value of its political power intangible asset.

Tom Selling leans toward replacement cost valuation of intangible and tangible assets. I would contend that only soothsayers can measure the replacement cost of political power.

However, as Radin and Selling suggest not being able to disclose and measure all important intangibles does not destroy the utility of accountancy or cause the "end of accountancy" as we know it today. Just because the medical profession cannot prevent cancer or even save the majority of Stage 4 cancer patients does not destroy the utility of what the medical profession can do for such patents. Accountancy is what it is and I do not think it will "end" because of things it cannot yet do and probably will never be able to do such as measure and disclose the intangible asset of political power of a multinational company.


Barclays hit by solar scandal (misleading sales pitch for loans)  ---

Warren Buffett's Berkshire Hathaway dumps its entire IBM stake (IBM) ---

The Changing Landscape of Business Risk ---

How to Mislead With Statistics
Who pays the most tax in Europe?

Jensen Comment
You've probably heard me warn repeatedly that when taxes are compared it can be misleading unless you also compare what those taxes are paying for in family living. Income tax rates in the USA are relatively low and highly progressive with nearly half of the taxpayers paying zero income taxes. But this is misleading since things like health care and public education are paid out of other taxes and/or personal savings. Even when comparing nations with national health care plans funded heavily out of income taxes, comparing tax rates can be misleading. Firstly there are taxes other than income taxes such as VAT taxes and sales taxes. Secondly, not all national health care programs are equivalent in terms of how certain coverages are paid for. In Germany, for example, the public health plan is rather minimal and most Germans that can afford it have private supplemental medical insurance. My neighbors from England at the moment are back in the U.K. arranging to sell a parent's home for nursing home care expenses. Nursing home care in the U.K. is covered in the national health plan but revenues from home sales must be applied to this care --- so I'm told by my neigbors.

In Europe taxes supposedly pay for college education and/or job training, but less than half the young people are admitted to programs funded by tax dollars ---
Other people depend upon companies to fund on-the-job training, and many people are not allowed into college unless they study in other countries or take distance education courses such as MOOCs..


One in Every Six Retirees in the USA is a Millionaire (on paper before taxes at least) ---

Jensen Comment
Having close to $1 million in total savings doesn't really go very far for people that retire at around age 65. With low interest rates it's virtually impossible to live to live on the after-tax income. For example, if part of that $1 million is your $250,000 house that you live in the house generates no cash; instead it drains cash for property taxes and maintenance. Your stock market portfolio may be doing pretty well, but liquidating that for living expenses may deplete most of your capital if you live a long life, especially if there are years of expensive assisted living/nursing care years.

Most of your $1 million is savings is probably pre-tax such that spending it for retirement entails paying those long-deferred taxes. And don't rely on Social Security benefits to pay for much more than your Medicare premiums and supplemental premiums.

If you own your own home and have an added $1 million in savings, a lifetime annuity for you and your partner used to be a pretty good deal when interest rates were above 6%. Now that interest rates are close to zero lifetime annuities lost their luster big time.

The bottom line is that being a millionaire when you retire is not such a good deal unless you are a multi-millionaire.

IRS Taxpayer Advocate Service ---
Go here before contacting a scam service advertised on television

What the IRS Isn’t Telling You or Your Clients ---

Bill Benter did the impossible: He wrote an algorithm that couldn’t lose at the track. Close to a billion dollars later, he tells his story for the first time ---

The U.S. Post Office saw a shipping and package income of $19.5 billion last year, which is up 11.8 percent compared to the previous year--- 

Jensen Comment
The USPS is heavily bogged down in joint costs and fixed costs. In light of this a great student assignment in accounting would be do investigate how the USPS operationally calculates product line "income." Stress should be placed on how misleading these "income" figures can be when making decisions like product line pricing and product line service investments.

Tax:  5,000 Pastors Rally To Defend Housing Tax Break Ruled Unconstitutional ---

Unemployment Claims Fall to 48-Year Low ---

Towns with unfilled jobs are handing out money, student-debt relief and home-purchase assistance to lure potential employees–one by one ---

Dealing With Excel's Ctrl Key Paradox ---

Adrienne:  Has Microsoft Excel Ruined the World?

Jensen Comment
It's nice to hear from Adrienne since she ended her "Junior Accountant" blog. Excel is an app, albeit a very complicated and wildly popular evolving app. Most any app or tool before we had "apps" can also lead to errors.

When I was a "Junior Accountant" in the Denver Office of E&E (now E&Y) I was sent each year to audit a local tire manufacturer. One year I detected a strange outcome that a gasoline station in Ogallala, Nebraska had 999,999 million tires on consignment. This was a computing error in the era punched-card computing, long before spreadsheet software was invented. The error turned out to be what techies called a "summary punch" error that significantly overstated the inventory of our client.

My point here is that Excel did not ruin the world due to its computing errors since computing tools before Excel also made errors. In fact, functions (think IF functions) in Excel can be built into the application to avoid such serious inventory overstatement errors.

Probably one of the best error checking tool ever invented for accounting is double-entry bookkeeping --- trial balances have to balance. However, trial balances that balance are no guarantees that errors were not made. It's probably safe to say that there's no computing tool that's error free even though the computing tools just keep getting better and better.

Blockchain ---

MIT:  How to get blockchains to talk to each other ---

MIT:  In Blockchain We Trust ---

Russian programmers have built up an outsize presence in the world of blockchain, crypto currencies, and other virtual assets ---

Blockchain could be your solution to spreadsheet fatigue ---

IBM told investors that it has over 400 blockchain clients — including Walmart, Visa, and Nestlé ---

Deloitte’s new blockchain lab in New York anticipating make-or-break year ---

Facebook is getting into blockchain — here's what it might be building ---

MIT Business of Blockchain 2018 Coverage ---

Zorba:  Blockchain ledgers are not accounting ledgers ---


New Kenyan law could make global corporate tax evasion easier ---
Student Question
How will this differ from Cayman Island tax evasion?

Automating in Excel: A worksheet display tip ---

Apple Posts Impressive Numbers:  Are They Creatively Managed?
Apple Inc. is currently rated as having Aggressive Accounting & Governance Risk (AGR). This places them in the 14th percentile among all companies in North America, indicating higher accounting and governance risk than 86% of companies ---


Budweiser brewer orders 800 Nikola hydrogen-powered semi-trucks ---
Also see

Budweiser maker Anheuser-Busch reserves 40 Tesla electric trucks ---

Jensen Comment
The point here is that the fuel-cell model is not dead, and things are not yet promising for electric semi-trucks according to engineers at Carnegie-Mellon University.

Carnegie Mellon Department of Engineering:  Performance Metrics Required of Next-Generation Batteries to Make a Practical Electric Semi Truck ---

Blockchain ---

Cryptocurrency ---

AICPA recommends IRS FAQs on virtual-currency taxation (bitcoin and crypto currency taxation) ---

Gilfoyle's entire PowerPoint presentation explaining cryptocurrency from HBO's 'Silicon Valley' --- it's both useful and hilarious ---

Crypto Crime Wave:  From stickups and drug deals to white-collar scams, cryptocurrency-related crime is soaring—and law enforcement is scrambling to keep up ---

Bitcoin ---

WARREN BUFFETT: Bitcoin is 'probably rat poison squared' ---

MIT:  Let's Destroy Bitcoin ---

What is Bitcoin, and How Does it Work?

What’s the Difference Between Bitcoin, Bitcoin Cash, Bitcoin Gold, and Others?

MIT:  A Canadian hydropower operation put out the welcome mat for bitcoin miners. Shortly thereafter, it was overrun ---

The Dumb Money: The definitive explanation of why Bitcoin is stupid ---

Blockchain is not only crappy technology but a bad vision for the future ---

MIT:  In Blockchain We Trust ---

Everything (well not really everything) You Wanted to Know About Blockchain (But Were Afraid to Ask) ---

The rise of blockchain and cryptocurrency uncertainties in the theory as well as the street profession of finance that still is unsure whether cryptocurrencies are really Ponzi schemes ---
Blockchain ---
Cryptocurrency ---

Bitcoin ---
Ethereum ---

This Interactive Simulation Will Teach You How Blockchain Works ---

IBM told investors that it has over 400 blockchain clients — including Walmart, Visa, and Nestlé ---

A good place to start reading
AICPA:  Blockchain was made to solve one problem and here's what it is ---

Blockchain Is Pumping New Life Into Old-School Companies Like IBM ---

Even Congress is jumping on the blockchain bandwagon --- and IBM is urging it on

All at once, it seems, corporate treasury departments are embracing the distributed-ledger technology to manage Foreign Exchange more efficiently, among other reasons ---

Scams & stupidities around 'blockchain stocks' ---

Knowledge @ Wharton
Blockchain, The Bard and Building More Inclusion in Blockchain ---

A soybean shipment to China became the first commodity deal to use blockchain tech ---

Blockchain ---

Deloitte’s new blockchain lab in New York anticipating make-or-break year ---

Zorba:  Blockchain ledgers are not accounting ledgers ---

Zorba:  Fully Integrated Corporate Reporting ---

Zorba:  How to Build a Smart Decision Making System ---

Zorba:  Plan Carefully in Moving to the Cloud ---

EY:  Updated FRD on Bankruptcies, liquidations and quasi-reorganizations ---

EY:  Foreign Currency Matters ---

EY:  SEC Updates

Piwowar to step down
SEC Commissioner Michael Piwowar announced that he will resign on the earlier of 7 July 2018 or the swearing in of his successor. If Mr. Piwowar leaves before a successor is sworn in, the Commission will have four members, which could adversely affect the timing of SEC rulemaking.


Bricker discusses the US financial reporting structure
Wes Bricker, chief accountant of the SEC, provides an overview of the Financial Reporting Structure for US public companies in a video posted on the SEC’s website. The SEC also posted three graphics that identify the participants in the US and international financial reporting process and show their roles and relationships.


Bricker speaks at the 2018 Baruch financial reporting conference
Wes Bricker, chief accountant of the SEC, highlighted various matters pertaining to new accounting standards, accounting for the effects of income tax reform and non-GAAP financial measures in a speech at the 2018 Baruch College financial reporting conference. 

He also discussed the importance of audit firms appointing independent directors or independent advisory council members with meaningful governance responsibilities. These outside perspectives can foster audit quality and safeguard against noncompliance threats and the resulting costs to the reputation of a firm, its network, and the audit profession generally, he said


Comparability and Predictive Ability of Loan Loss Allowances – the Role of Accounting Regulation versus Bank Supervision

CFS Working Paper, No. 591, 2018

70 Pages Posted: 19 May 2018  

Günther Gebhardt

Goethe Universität Frankfurt am Main

Zoltán Novotny-Farkas

Lancaster University - Management School

Date Written: May 5, 2018


We investigate whether and how the shift from discretionary forward-looking provisioning to the restrictive incurred loss approach under International Financial Reporting Standards (IFRS) in the European Union (EU) affects the cross-country comparability and predictive ability of loan loss allowances. Given bank supervisors’ keen interest in comparable and adequate loan loss allowances, we also examine the role of supervisors in determining financial statement effects around IFRS adoption. We find that the application of the incurred loss approach has led to more comparable loan loss allowances. However, some differences persist in countries where supervisors were reluctant to enforce the incurred loss approach. Our results also suggest that the predictive ability of loan loss allowances improved following IFRS adoption. Finally, in supplemental analyses we document that increased comparability of loan loss allowances is associated with the cross-country convergence of the risk sensitivity of bank leverage indicating an improvement in the effectiveness of market discipline in the EU.

Keywords: comparability, loan loss allowances, IFRS, bank accounting, supervisory intervention

JEL Classification: M41, M48, G21

Exploring the Scientific Landscape of Internal Audit Research: A Bibliometric Analysis

65 Pages Posted: 18 May 2018  

Joel Behrend

University of Duisburg-Essen, Mercator School of Management

Marc Eulerich

University of Duisburg-Essen, Mercator School of Management

Date Written: May 14, 2018


Addressing the heavily increased attention on internal auditing in the post-SOX era, this paper aims to unravel the scientific metamorphosis of the topic within current accounting research, including the different scientific sub-areas that define it. In an attempt to extent the scant body of literature reviews that has focused on the internal audit function (IAF), we pursue an empirical approach to analyze the scientific structures and provide a variety of directions for future internal audit research. In this context, citation patterns extracted from 170 research articles published in five major accounting journals are being studied by combining co-citation and social network analysis in order to investigate different existing research domains of internal auditing and to discover the core work that has been done in this area. The scientific landscape of internal auditing can be characterized as profoundly fragmented and deeply rooted into different adjacent domains of accounting research. Identified subcategories from which research on internal auditing is derived can be summarized as Corporate Governance, Auditor Independence, Auditing Professionalization, Audit Committee Effectiveness, Reliance on Internal Auditing, Internal Control over Financial Reporting, and finally the Regulatory Framework. Additionally, results reveal the existence of a pivotal nucleus of research that emphasizes the increasingly important construct of internal audit quality.

The focus of this study lies on the analysis of major accounting journals, namely The Accounting Review, Contemporary Accounting Research, Journal of Accounting Research, Journal of Accounting Economics and Accounting, Organizations and Society and is restricted onto the years from 1926 to 2016.

Keywords: Internal Audit, Internal Audit Function, Bibliometrics, Co-citation analysis

Analysis of Panasonic Group in Terms of Activity-Based-Costing, Just-in-Time Production, and Quality and Environment

20 Pages Posted: 17 May 2018  

Ibrahim Ouassini

University of the West of Scotland - Finance and Accounting, Students

Date Written: April 10, 2018


This paper illustrates how might Panasonic Group implements JIT, ABC, and environmental costing.

Keywords: Just In Time, Activity Based Costing, environmental costing, Panasonic Group, Accounting, Finance

Tilting the Evidence: The Role of Firm-Level Earnings Attributes in the Relation between Aggregated Earnings and Gross Domestic Product


33 Pages
Posted: 17 May 2018  

Ryan T. Ball

The Stephen M. Ross School of Business at the University of Michigan

Lindsey A. Gallo

University of Michigan, Stephen M. Ross School of Business

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: May 15, 2018


We examine whether the contribution of firm-level accounting earnings to the informativeness of the aggregate is tilted towards earnings with specific financial reporting characteristics. Specifically, we investigate whether considering the volatility of earnings relative to the volatility of cash flows at the firm level (smoothness) increases the informativeness of aggregate earnings for future nominal GDP, and if so, whether macroeconomic forecasters use this information efficiently. This study innovates on recently developed mixed data sampling methods in the construction of an aggregate earnings growth measure by allowing each firm's contribution to the aggregate to vary as a function of earnings smoothness. We find that the aggregate is tilted towards firms with smoother earnings and that this composition of aggregate earnings outperforms traditional weighting schemes in the association with future GDP growth. Further, this tilted aggregate has a stronger positive association with forecast revisions; in fact, analysts who utilize earnings the most in their forecasts appear to fully impound the informativeness of earnings smoothness. Our results synthesize and span parallel yet distinct streams of research on the role of accounting earnings in firm-level and macroeconomic outcomes and suggest an important role for financial reporting characteristics in the aggregate.

Prudential Supervisors’ Independence and Income Smoothing in European Banks

51 Pages Posted: 16 May 2018  

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Araceli Mora

University of Valencia - Department of Accounting

Luis Porcuna-Enguix

University of Valencia

Date Written: May 3, 2018


We investigate the role of prudential supervisors’ independence in affecting income smoothing behavior in European banks. Powerful national supervisors are predicted to influence the accounting practices of their supervised entities, shaping the properties of the accounting numbers they prepare. In particular, we study whether greater independence of powerful supervisors from the government and from the industry is associated with lower income smoothing. We use the mandatory adoption of a single set of accounting standards in Europe as an exogenous shock to the influence of prudential supervisors over national banks’ accounting practice. Our results confirm that political and industry independence of the supervisor are important determinants of income smoothing. This suggests that independence of prudential supervisors is a desirable governance characteristic, with positive impacts on financial transparency.

Keywords: Income Smoothing; Prudential Supervisors; Independent Supervisors; European Banking Industry; IAS 39; Single Supervisory Mechanism

JEL Classification: G21; G38; M40

The Association between Changes in Accounting Estimates and Accounting Restatements

43 Pages Posted: 16 May 2018  

Philip Beaulieu

University of Calgary

B. Louise Hayes

University of Guelph - Department of Management

Lev Timoshenko

University of Calgary - Haskayne School of Business

Date Written: November 27, 2017


This paper investigates the relationship between changes in accounting estimates and subsequent restatements. Theory suggests that depending on the underlying reason for an estimate change, this relationship can be either negative (for changes in estimates made in response to new developments or management having obtaining new information) or positive (for changes in accounting estimates made with an objective of managing earnings or changes that are not reliably estimated and are poorly audited). We hypothesize and find a positive relationship between changes in estimates and restatements. There is also support for the prediction that the presence of a change in accounting estimate(s) is associated with an increased likelihood of subsequent restatement to correct intentional misstatement. The findings of the study are of interest to accounting academics, regulators, and audit practitioners.

Keywords: changes in accounting estimates, financial restatements, financial reporting quality

JEL Classification: M40

Estimating Latent Asset-Pricing Factors

CEPR Discussion Paper No. DP12926

45 Pages Posted: 15 May 2018  

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Markus Pelger

Stanford University - Management Science & Engineering

Date Written: May 2018


We develop an estimator for latent factors in a large-dimensional panel of financial data that can explain expected excess returns. Statistical factor analysis based on Principal Component Analysis (PCA) has problems identifying factors with a small variance that are important for asset pricing. We generalize PCA with a penalty term accounting for the pricing error in expected returns. Our estimator searches for factors that can explain both the expected return and covariance structure. We derive the statistical properties of the new estimator and show that our estimator can find asset-pricing factors, which cannot be detected with PCA, even if a large amount of data is available. Applying the approach to portfolio data we find factors with Sharpe-ratios more than twice as large as those based on conventional PCA and with significantly smaller pricing errors.

Keywords: Anomalies, Cross Section of Returns, expected returns, high-dimensional data, Latent Factors, PCA, Weak Factors

JEL Classification: C14, C38, C52, C58, G12

The Early Years of the Financial Accounting Foundation and the Financial Accounting Standards Board, 1972 to 1980: The ‘Special Relationship’ with the AICPA

22 Pages Posted: 14 May 2018  

Stephen A. Zeff

Rice University - Jesse H. Jones Graduate School of Business

Date Written: April 28, 2018


In this paper, the author documents the American Institute of Certified Public Accountants’ “special relationship” with the Financial Accounting Foundation and the Financial Accounting Standards Board, such that questions could be raised about whether these latter two bodies were truly independent of the Institute and of the practicing profession during the years from 1972 to 1980.

Keywords: Independence, Standard Setting, AICPA, FAF, FASB

JEL Classification: M41

The 'Tax Cuts and Jobs Act' Impact on Deferred Taxes and the Valuation of an Entity

International Journal of Business and Applied Social Science (IJBASS), Vol. 4, Issue 4, April 2018

5 Pages Posted: 14 May 2018  

Paul Schauer

Bowling Green State University - Accounting & Management Information Systems

Date Written: May 1, 2018


Financial analysts generally view deferred taxes as an accounting aberration that has little impact on the valuation of an entity. The headlines in financial publications that focus on the recent decrease in federal corporate income tax rates impact on deferred tax assets and liabilities and the resulting effect on net income changed that. This article provides an explanation of the origination of deferred taxes and their impact on the valuation of an entity.

Keywords: deferred tax asset, deferred tax liability, valuation

Judging Banks' Risk by the Profits They Report

53 Pages Posted: 10 May 2018  

Ben S. Meiselman

Johns Hopkins University

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: April 26, 2018


In competitive capital markets, portfolios of risky debt claims have high systematic risk exposure in bad times if they offer a high "yield" in good times. We apply this idea to measurement of bank risk. Rather than trying to directly measure asset risks on the balance sheet — the typical (manipulation-prone) approach in model-based regulation — we explore high rates of profit in good times as an indicator of systematic tail risk exposure. We show empirically, for cross-sections of banks in the financial crisis of 2007–2008 as well as the savings and loan crisis of the 1980s, that high accounting profitability prior to the crisis predicts high systematic tail risk of equity market values during the crisis, and most strongly so if pre-crisis profits arise from non-interest income or are paid out as dividends and managerial compensation. Pre-crisis profit measures do a better job in predicting systematic tail risk than conventional measures based on risk-weighted assets.

Keywords: Risk of Financial Institutions, Systemic Risk, Risk Measurement

JEL Classification: G20, G30

Fair Value Accounting, Earnings Management, and the Case of Bargain Purchase Gain

46 Pages Posted: 9 May 2018  

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Yan Yan

Fairleigh Dickinson University

Date Written: April 6, 2018


The new accounting standard (FASB ASC 805) requires acquiring firms to estimate the fair value of net assets acquired and recognize the excess amount over purchase price as a bargain purchase gain, a component of current earnings. The flexibility in fair value measurement provides acquiring management with discretion to determine the amount of the bargain purchase gain, and thereby, inflate income. This paper investigates the association between bargain purchase gains booked by the acquirer and smoothing of acquirers’ earning performance across time. We find that bargain purchase gains, and in particular, the level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns.

Keywords: bargain purchase gain, ASC 805, fair value measurement, ASC 820, earnings management

JEL Classification: M40, M41

Audit Personnel Salaries and Audit Quality

Review of Accounting Studies, Forthcoming

Kelley School of Business Research Paper No. 18-42

60 Pages Posted: 8 May 2018  

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Kenneth J. Merkley

Cornell University - Samuel Curtis Johnson Graduate School of Management

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Joseph H. Schroeder

Indiana University - Kelley School of Business - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018


This study examines the relation between audit personnel salaries and office-level audit quality. We measure audit personnel salaries at the associate, senior and manager ranks for Big 4 audit offices from 2004 to 2013 using unique individual auditor level data obtained from the U.S. Department of Labor. We find that offices that pay lower salaries have a higher percentage of clients that experience restatements. In related analyses, we also find lower levels of audit quality when audit employees are paid less relative to other lines of service in accounting firms (tax, consulting, etc.). Finally, we document positive and significant associations between salary and fees, suggesting that audit offices pass some of the cost of higher labor onto their clients. Overall, our findings provide important initial evidence on the role of audit salary and its relation to audit quality and audit fees.

Keywords: Audit Personnel Salary, Audit Quality, Salary Determinants, Audit Fees

JEL Classification: M41, M42, M51, M52

The Effect of Large-Firm Audits on Municipal Bond Rating Decisions

Auditing: A Journal of Practice & Theory, Vol. 13, No. 1, 1994

Posted: 8 May 2018  

Arthur C. Allen

Univ. of Nebraska - Lincoln

Date Written: 1994


Municipal accounting information is widely believed to be useful to creditors in assessing bond default risk (e.g., Wallace 1985; Wilson and Howard 1985). Users of accounting information perceive that Big 8 auditors provide higher quality audits both for corporations (Shockley and Holt 1983; McKinley et al. 1985) and municipalities (Baskin 1986). Concern about the reliability of local government audits has been heightened by the U.S. General Accounting Office’s (GAO) (1986) recent findings that some audits do not comply with professional standards, especially audits by smaller auditors. Local government audits are relied on by the federal government, as well as the bond market, to discover material errors. Big 8 audits may signal higher “quality,” where quality is defined as a reduced probability that the financial statements contain a material misstatement. This study investigates the relationship between auditor type and the usefulness of municipal accounting information to predict bond ratings.

Raters’ perceptions of the usefulness of accounting information are assessed by examining the association between accounting information and bond ratings. Bond ratings are predicted for cities that employ Big 8 auditors, and a separate model is estimated for cities that employ non-Big 8 auditors. The observations for the two models are matched by size. The empirical analysis supports the hypothesis that Big 8 audits are associated with the ability of accounting information to accurately predict municipal bond rating decisions. By comparison, this study finds that accounting information associated with non-Big 8 audits is not able to predict municipal bond rating decisions better than random chance. This study provides insights as to the relationship between auditor type and the perceived usefulness of accounting information.

Keywords: local government, auditing, bond ratings

JEL Classification: M42,G24

Using a Hidden Markov Model to Measure Reporting Systems

56 Pages Posted: 8 May 2018  

Kai Du

Pennsylvania State University - Department of Accounting

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

Lingzhou Xue

Pennsylvania State University - Department of Statistics

Yifan Zhang

Pennsylvania State University - Department of Marketing

Date Written: April 20, 2018


We use a hidden Markov model (HMM) to develop a measure of earnings informativeness without relying on proxies of firms’ latent economic states. In the model, each firm’s underlying states follow a Markov process and are only imperfectly revealed by accounting signals. We estimate the model using a Markov chain Monte Carlo (MCMC) procedure with a Bayesian hierarchical framework that accommodates cross-sectional heterogeneity. We show that the informativeness measure is incrementally predictive of the external indicators of low-quality accounting (i.e., restatements, Accounting and Auditing Enforcement Releases (AAERs), SEC comment letters). It is positively associated with the forward earnings response coefficient. Our measure is particularly useful among smaller firms, for which traditional measures of accounting quality (e.g., accruals quality) are more susceptible to measurement noise. The framework also provides a measure of conservatism that is associated with asymmetric timeliness and the determinants of conservatism.

Keywords: Hidden Markov Model, Informativeness, Accounting Quality, Conservatism, MCMC Method

JEL Classification: C11, C13, M41

Replication and Robustness Analysis of 'Energy and Economic Growth in the USA: A Multivariate Approach'

CAMA Working Paper No. 18/2018

45 Pages Posted: 7 May 2018  

Stephan Bruns

Department of Economics, University of Göttingen

Johannes König

Department of Economics and INCHER, University of Kassel

David I. Stern

Australian National University (ANU) - Crawford School of Public Policy

Date Written: April 24, 2018


We replicate Stern (1993, Energy Economics), who argues and empirically demonstrates that it is necessary (i) to use quality-adjusted energy use and (ii) to include capital and labor as control variables in order to find Granger causality from energy use to GDP. Though we could not access the original dataset, we can verify the main original inferences using data that are as close as possible to the original. We analyze the robustness of the original findings to alternative definitions of variables, model specifications, and estimation approach for both the (almost) original time span (1949- 1990) and an extended time span (1949-2015). p-values tend to be substantially smaller if energy use is quality adjusted rather than measured by total joules and if capital is included. Including labor has mixed results. These findings tend to largely support Stern’s (1993) two main conclusions and emphasize the importance of accounting for changes in the energy mix in time series modeling of the energy-GDP relationship and controlling for other factors of production. We also discuss how the inclusion of the original author in designing the replication study using a pre-analysis plan can help to counterbalance the incentive of replicating authors to disconfirm major findings of the original article to increase the probability of getting published.

Keywords: Replication, robustness analysis, sensitivity analysis, energy, GDP, Divisia index, Granger causality

JEL Classification: Q43, C32, C52

The Ongoing Debate About the Impact of the 150-Hour Education Requirement on the Supply of Certified Public Accountants

Issues in Accounting Education, Vol. 27, No. 4, 2012

Posted: 6 May 2018  

Arthur C. Allen

Univ. of Nebraska - Lincoln

Angela M. Woodland

Montana State University - Bozeman

Date Written: Fall 2012


In an earlier paper in this journal, Allen and Woodland (2006; hereafter AW) provided evidence that the 150-hour education requirement for licensure significantly reduced the number of candidates taking and passing the CPA exam, but had little effect on pass rates. Gramling and Rosman (2009; hereafter GR) extended AW by examining the number of candidates based on whether the 150-hour requirement applies to the exam or for licensure, concluding that the 150-hour requirement does not reduce the number of candidates taking and passing the exam. In this paper, we reopen the discussion of whether the 150-hour education requirement affects entrants into the accounting profession by comparing the AW and GR research designs and conclusions. We conclude that the GR research design yields results about whether differences in 150-hour implementation methods affect the number of candidates taking and passing the exam, but does not directly provide evidence about whether the 150-hour education requirement itself affects the number of candidates.

Keywords: 150-Hour Requirement, Accounting Education

JEL Classification: M42, M48

A Model of Stock Prices Leading Earnings

Managerial Finance, Forthcoming

Posted: 5 May 2018  

Jay Junghun Lee

University of Massachusetts Boston

Date Written: April 8, 2018


Prior literature suggests that stock prices lead earnings in reflecting value-relevant information because accounting income incorporates information discretely to satisfy recognition principles while stock prices incorporate it continuously. Using the future earnings response coefficient (FERC) methodology, this study derives a model that relates the recognition lag of earnings to the incremental informativeness of future anticipated earnings in equity prices after controlling for current realized earnings. The analytical FERC model shows that the pricing coefficient on future earnings is positive in the presence of stock prices leading earnings. More importantly, the pricing coefficient on future earnings increases with the recognition lag but the pricing coefficient on current earnings decreases with the lag. The results suggest that recognition principles that intend to enhance the reliability of earnings inadvertently lower the timeliness of earnings and thus shift the investors’ demand for value-relevant information from current realized earnings to future anticipated earnings. In addition, this study confirms the FERC model as an empirical model that investigates the extent to which stock prices lead earnings.

Keywords: Stock Prices Leading Earnings, Return-Earnings Relation, Future Earnings Response Coefficient (FERC), Recognition Lag, Timeliness

Performance Auditing for Islamic Banks

Islamic Economic Studies, Vol. 5, No. 1 & 2, 1998

15 Pages Posted: 20 Apr 2018  

Muhammad Akram Khan

Auditor General of Pakistan

Date Written: April 01, 1998


Although the Islamic finance is making continuous progress, yet the Islamic banks still face criticism from keen observers that they have adopted such techniques of financing which closely resemble interest-based finance. The difficulty with Islamic banks is that they feel hesitant to adopt profit-loss sharing in the contemporary environment. They are afraid that their clients may misreport or mismanage their funds leading to large-scale losses. Being trustees of public funds they think the risk in profit-loss sharing is very high. In this situation, development of appropriate accounting and auditing standards is the need of the day. Performance auditing, being a recent expansion in the scope of auditing holds a promise. The paper introduces the concept of performance auditing and shows how the Islamic banks can use it to their advantage. The paper also proposes a set of strategic measures for the Islamic banks to put performance auditing in practice.



From the CFO Journal's Morning Ledger on May 31, 2018

The Financial Reporting Council, the U.K. regulator for reporting, accounting and audit, has filed formal complaints against the auditors and two former finance executives of Autonomy Corp. PLC. This comes after Hewlett-Packard Co. bought the British software company for $11 billion in 2011 but afterwards wrote down the value of its acquisition as doubts about Autonomy's accounting practices emerged, reports Ms. Trentmann.

The conduct of auditors Deloitte LLP, Richard Knights and Nigel Mercer, as well as of former CFO Sushovan Hussain and former Vice President of Finance, Stephen Chamberlain, fell significantly short of standards expected of them, the FRC said in a statement.

From the CFO Journal's Morning Ledger on May 29, 2018

Good morning. Finance chiefs are increasingly tying their floating-rate debt payments to benchmarks that are rising at a slower pace than interest rates, in a bid to mitigate higher financing costs, report the WSJ's Ben Eisen and Matt Wirz.

The rejiggering among companies comes as rates have climbed this year, spurred by increases from the U.S. Federal Reserve, expectations for a pickup in inflation and an increase in government debt sales to fund last year’s tax-cut package.

The rate at which banks lend to each other for three months has been rising much faster than the rate at which they lend for one month, pushing the gap in April between the two to its widest since 2009. The three-month U.S. dollar London interbank offered rate has climbed 0.62 percentage point this year to 2.32%, while the one-month counterpart has climbed a comparably meager 0.41 point to 1.98%.

Accordingly, more than half of junk-rated corporate loans recently had interest payments tied to one-month Libor, up from less than a quarter at the beginning of 2016, according to data tracked by Wells Fargo & Co. on about $500 billion of loans. The share of loans tied to three-month Libor has been dwindling.

Jensen Comment
Most of the interest rate hedging illustrations in FAS 133 and 138 use LIBOR. Sadly, most of those outstanding illustrations were not carried into the Codification database. I had my students study the original FAS 133 and 138 illustrations.

FAS 138 explains the role of benchmarking in interest rate hedging.

From the CFO Journal's Morning Ledger on May 25, 2018

The U.S. Public Company Accounting Oversight Board censured Deloitte & Touche LLP and imposed a $500,000 penalty against the Big Four firm for overlooking material accounting errors during three consecutive audits of Jack Henry & Associates Inc., a Missouri-based IT provider for banks and credit unions, reports Accounting Today.

From the CFO Journal's Morning Ledger on May 23, 2018

Over 98% of companies listed in major large and mid-cap indices in the U.K., Germany, Italy, Spain and the Netherlands are audited by one of the Big Four accounting firms -- Ernst & Young LLP, Deloitte Touche Tohmatsu Ltd., KPMG LLP and PricewaterhouseCoopers LLP -- according to Audit Analytics review of 2017 fiscal year data. The remaining 1% of a total of more than 600 companies were audited either by BDO LLP or Grant Thornton LLP.

From the CFO Journal's Morning Ledger on May 18, 2018

Kroger Co. has struck a deal with a British grocer known for its use of warehouse robots, as the biggest U.S. grocery chain aims to supercharge its online delivery business in the face of competition from Inc. and Walmart Inc

From the CFO Journal's Morning Ledger on May 18, 2018

The American Institute of CPAs has asked the Internal Revenue Service to provide “maximum flexibility” in its rules for the new centralized partnership audit regime, according to a Wednesday letter the industry group sent to the regulator.

The proposed rules, issued in February, govern how partnership audits will be conducted and how tax is assessed and collected from taxpayers conducting business through partnerships, reports CFO Journal's Tatyana Shumsky.

The AICPA, in its letter, urged the IRS to offer a simplified procedure for adjusting the tax attributes of an audited partnership and its partners. The group also made recommendations for flexibility around how the IRS applies rules governing remittance by a former partner, and successor rules for mergers and divisions.

 U.S. corporations spent $23 billion on analytics in 2017, either through internal teams or external consulting firms, according to a report released Thursday by consulting industry researcher Source Global Research.

Companies ramped up analytics spending by 11% as they combed over large data sets to develop insights that guide the future and explain the past, the report said. Around $10 billion went to building in-house analytics teams, while roughly $13 billion was spent on external consultants.

The report analyzed the number of people working in analytics-related roles at 130 Fortune 500 companies and surveyed 199 senior executives at large U.S. companies, reports CFO Journal's Tatyana Shumsky

From the CFO Journal's Morning Ledger on May 15, 2018

Fiat Chrysler employees knew of emissions cheating, documents in shareholder suit claim
Fiat Chrysler Automobiles NV
employees believed the auto maker used illegal software in diesel-powered vehicles to cheat on U.S. emissions tests and concealed it from regulators, according to allegations by plaintiffs’ lawyers in federal court documents unsealed Monday.

From the CFO Journal's Morning Ledger on May 14, 2018

Tesla executives step away
Tesla Inc.
will be without two important executives just as the electric-car maker struggles to boost production of its first mass-market vehicle and faces doubts about its ability to raise cash. The company's fundraising options are fraught with complications, reports the WSJ's Sam Goldfarb.

Elon Musk reveals new details about how Tesla is restructuring ---

What is GDPR?
A look at the European data privacy rules that could change tech

From the CFO Journal's Morning Ledger on May 12, 2018

Good morning. Finance chiefs considering marketing budgets or decisions around user data should keep a close eye on Europe, where a new data privacy law is soon going into effect. The rule is set to trigger a battle over what information companies can collect and could have ramifications for digital advertising, writes the WSJ’s Sam Schechner.

The new law forbids companies from forcing users to turn over personal information as a condition of using their services. So while a pizza shop needs your address to deliver your pizza and a chat app service needs your selfie if you want to send it to friends, the reasons driving why some internet behemoths require user’s personal data are less clear cut.

“The crux of this argument is going to be the legitimacy of the behavioral advertising business model,” said Omer Tene, vice president of the International Association of Privacy Professionals. “Behavioral advertising” is the name for the business, worth tens of billions of dollars per year, that allows companies to show users targeted advertising based on their internet activity.

The debate could end up in the courts for years, with the potential to weaken either the European Union’s new data-privacy law or impact the business models of ad-reliant giants like Facebook Inc. and Alphabet Inc.'s Google.


From the CFO Journal's Morning Ledger on May 10, 2018

Sears stock roars on Amazon tie-up
Sears Holdings Corp.
shares jumped 16% after the company announced a tire service partnership with Inc., part of Chief Executive Edward Lampert's plan to turnaround the troubled retailer, reports Reuters.

Francine:  How new accounting rules boosted Tesla’s numbers ---

A new accounting rule helped electric car maker Tesla Inc. to post a first-quarter revenue beat, and the company also used the change to book a stealth adjustment to its running total of accumulated losses.

Tesla reported revenues of $3.4 billion compared with analyst expectations of revenues of $3.2 billion, up from $2.7 billion a year ago.

However, Tesla TSLA, +1.62%  also took advantage of the new rules to revise the estimate in its first-quarter filing of the impact of the new rules on its accumulated deficit for prior years.

Tesla has an accumulated deficit, instead of retained earnings, because it has booked losses for years. In its annual report released in February the company said it would be able to reduce its accumulated deficit by $520 million pretax at the beginning of 2018, as a result of the new revenue recognition accounting rules that allow the company to post revenue from leased cars much faster.

Continued in article

Read: New accounting rules trim Tesla deficit and promise faster future revenues

See also: Opinion: Elon Musk acted like a jerk, and Tesla stock paid the price

From the CFO Journal's Morning Ledger on May 9, 2018

Dish Network profit boosted by new accounting rules
New revenue accounting standards buoyed Dish Network Corp.’s net income by around 7% during its latest quarter, the company’s finance chief said Tuesday.

The new accounting rules require companies to recognize revenue from contracts at the time the promised goods and services are delivered to a customer, reports CFO Journal's Ezequiel Minaya. The uniform standard, which became effective for public companies this year, replaces a patchwork of industry-specific rules with the aim of making comparisons of revenue and fiscal performance easier.

The rules also affect how and when companies report the costs associated with delivering their products and services.

From the CFO Journal's Morning Ledger on May 8, 2018

Walmart bets $15 billion on e-commerce in India
Walmart Inc.
is set to spend $15 billion for a 75% stake in Flipkart Group, an Indian e-commernce startup which has burned through mountains of cash.

From the CFO Journal's Morning Ledger on May 4, 2018

Good morning. Executives at large U.S. companies reported the strongest earnings gains in more then seven years, fueled by the decline in the effective tax rate, report the WSJ's Theo Francis and Richard Rubin. 

More than half of the combined net-income growth reported by 200 large public companies for the first quarter stemmed from the drop in the tax rate to 21% from 35%, a Wall Street Journal analysis of quarterly financial data found.

At a third of the companies, tax expenses fell in dollar terms even as pretax income rose, boosted by strong revenue growth and the expanding economy. “It’s clearly not just the economy” driving corporate profits, said Joseph LaVorgna, chief economist for the Americas at Natixis, a corporate and investment bank. “Change in tax policy is part of it.”

Many companies are returning their tax savings to investors. The amount spent on share buybacks in the first quarter rose by more than 50% over the fourth quarter of 2017, and by two-thirds over the first quarter of 2017, according to S&P Dow Jones Indices. Companies have also set plans to invest in expansion and new technology, and some paid one-time bonuses to employees.

From the CFO Journal's Morning Ledger on May 2, 2018

Tesla under pressure to fulfill solar panel promises
Executives at Tesla Inc. are facing another financial challenge. Installations of the company's home solar panels are declining and the business is under pressure to fulfill promises it made to investors, just as the U.S. tax overhaul presents new risks to the industry.

From the CFO Journal's Morning Ledger on May 1, 2018

U.S. jury convicts former Autonomy CFO of fraud
A federal jury found Autonomy Corp.’s former financial chief guilty of falsifying financial statements and exaggerating the British software maker’s value before its sale to 
HP Inc. for $11 billion in 2011.

From the CFO Journal's Morning Ledger on May 1, 2018

AICPA offers guidance on achieving UN sustainability goals
The Association of International CPAs has released a guide to how management accountants can help their organizations fulfill the United Nations’ Sustainable Development Goals, Accounting Today reports.

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 27, 2018

Earnings Are Strong, but Rewards Are Scarce

By Michael Wursthorn and Akane Otani | Apr 23, 2018

TOPICS: Earning Announcements, Earnings Forecasts

SUMMARY: This article focuses on a plot of share price changes against earnings surprises for the S&P 500 firms which have so far reported first quarter 2018 results. Also included are plots of analysts' forecast revisions since December 2017 for the first quarter performance, quarterly earnings growth rates from 2014to 2018, and the timing status of first quarter 2018 expected reporting of results. The article may be used to explain the ways in which analysts inform the market of earnings expectations and markets react to announcements of actual results.

CLASSROOM APPLICATION: The article may be used in a financial reporting class discussing earnings forecasts.



1. (Introductory) How many of the S&P 500 companies have reported their first quarter 2018 results as of April 23, 2018?


2. (Introductory) Refer to the related graphic. When are most of the S&P 500 companies expected to report their earnings results?


3. (Advanced) What is an "earnings surprise"? How many companies have shown positive earnings surprises as opposed to negative surprises so far in reporting first quarter results?


4. (Advanced) Does the stock price of companies reporting negative earnings surprises always react negatively? What factors do you think influence these stock price reactions?



Reviewed By: Judy Beckman, University of Rhode Island


"Earnings Are Strong, but Rewards Are Scarce," by Michael Wursthorn and Akane Otan, The Wall Street Journal, April 23, 2018

Companies are expected to report 18% jump in earnings for the quarter, the highest growth rate since 2011

Earnings season is in full swing, with 17% of the companies in the S&P 500 having reported quarterly results through Friday and the majority of the firms in the index on deck over the next two weeks.

In all, the companies are expected to report an 18% jump in earnings for the quarter, according to FactSet, which would mark the highest growth rate since the first quarter of 2011. Analysts have been steadily raising that estimate in recent months as companies have touted the benefits of a lower tax rate, a healthy consumer and higher oil prices.

Of the companies that have reported so far, 80% have posted per-share earnings that beat expectations of Wall Street analysts, with the companies on average topping estimates by 5.9%. Both of those metrics are ahead of five-year averages. At the sector level, health-care, energy and real-estate companies in the index have delivered the highest percentage of better-than expected performances, while materials and consumer-discretionary firms have underperformed.

Market moves, meanwhile, have been muted. Companies that reported stronger-than-expected earnings have seen their shares on average rise by 0.1% two days before the earnings release through two days after, well below the five-year average increase of 1.1%. And the companies that disappointed by posting weaker-than-expected numbers have seen their shares slide 0.9% over the same period, much smaller than the five-year average decline of 2.4%.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 27, 2018

Volkswagen Plans First U.S. Bond Sale After Emissions Scandal

By Nina Trentmann | Apr 23, 2018


SUMMARY: The article describes Volkswagen's plans to issue bonds in the face of $1.8 billion of bonds maturing this year and another $1.75 billion in 2019. The company has not issued dollar-denominated debt since its diesel scandal broke in 2015 and "could issue between $1.5 to $2 billion in dollar-denominated debt this year, said a banker familiar with the company." The company has used short-term financing until now but "tested the waters" with an issuance of euro denominated debt in 2017. The article also specifically describes the company's cash levels, outstanding debt, and earnings in 2017.

CLASSROOM APPLICATION: The article may be used to discuss factors influencing a company's planned debt issuance. It also may be used when covering foreign currency transactions to emphasize that this Germany company issues dollar-denominated debt, though specific foreign exchange issues are not addressed.



1. (Introductory) Volkswagen was a "frequent debt issuer before the diesel scandal." What was the diesel scandal? You may refer to the link in the article to help with your answer.


2. (Advanced) How did Volkswagen obtain needed financing between the initial announcement of the diesel scandal and today? Define each of the types of debt described in the article.


3. (Advanced) What debt maturities is Volkswagen facing? Why are the types of debt defined in answer to the question above not appropriate for re-financing this maturing debt?


4. (Advanced) Where is Volkswagen headquartered? Why do you think the company issues dollar-denominated debt as well as debt denominated in other currencies?



Reviewed By: Judy Beckman, University of Rhode Island


"Volkswagen Plans First U.S. Bond Sale After Emissions Scandal," by Nina Trentman, The Wall Street Journal, April 23, 2018

German auto maker wants to affirm credibility with investors through its first U.S. debt offering since 2015

Volkswagen AG VLKAY -0.40% is looking to return to the U.S. bond market for the first time since its emissions scandal, a move that would seal a successful turnaround for the German auto maker.

A frequent debt issuer before the diesel scandal, Volkswagen has relied on a €20 billion ($24.7 billion) bridge loan, asset-backed securities and commercial paper to cover its financial needs.

The company already has tested the waters in Europe, where its €8 billion bond issued a little over a year ago was snapped up by investors. It isn’t clear when the U.S. deal would come to market or what the size of such an offering would be.

The auto maker’s Chief Financial Officer Frank Witter said reopening access to the bond market was a key focus of his job, which he took on less than a month after it was revealed in September 2015 that the German auto maker systematically cheated on emissions tests in the U.S.

The recent management shake-up at the German auto maker hasn’t altered it debt plans, the company said. Herbert Diess was appointed as chief executive of the auto maker earlier this month, abruptly replacing Matthias Müller. Mr. Witter also took on oversight of the company’s information technology unit as part of the changes. VW reports earnings on April 26.

Mr. Witter has been laying the groundwork for a comeback over the past 2½ years meeting with scores of investors, bankers and analysts. He said he was “bluntly open” about the company’s strengths and weaknesses with them.

“The communication we have seen from [Mr.] Witter has been a huge improvement compared with what we saw from Volkswagen in the past,” said Kristina Church, an analyst at Barclays PLC.

Still, there is more work ahead to rehabilitate the company’s reputation with investors. Default insurance on Volkswagen debt is more expensive than for other car makers, including Japanese competitor Toyota Motor Corp. , a sign that investors remain cautious.

Volkswagen, which last issued U.S. debt in May 2015, has $1.8 billion of bonds maturing this year, and another $1.75 billion in 2019. The auto maker could issue between $1.5 to $2 billion in dollar-denominated debt this year, said a banker familiar with the company.

“You always, particularly when you return [to the bond market], want to size the deal right,” said Mr. Witter.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 27, 2018

Google Parent Posts Surge in Profit, but Expenses Also Jump

By Douglas MacMillan | Apr 24, 2018

TOPICS: Capital Expenditures, Earnings, Investments

SUMMARY: Alphabet, Inc., parent of search engine Google and other entities, reported first quarter 2018 results showing soaring ad revenues. The results also reflect increasing operating costs and capital expenditures. The related article emphasizes the exposure Facebook faces for its ad revenue-based business model. "Alphabet's earnings also got a multibillion-dollar boost from the company's stakes in startups including Uber Technologies, Inc...." The related article also discusses how Google, through Waymo, acquired .34% of Uber's equity; that increase was in addition to Alphabet's 2013 investment of $258 million in Uber when the company had a $3.76 billion valuation.

CLASSROOM APPLICATION: The article may be used in any level of class covering financial reporting with questions 1 through 3; questions 4 through 6 cover investment accounting.



1. (Introductory) What is the main source of revenue for Google? How is this revenue source trending?


2. (Introductory) What are capital expenditures? How do Google's capital expenditures in the last three quarters of 2017 and the first of 2018 compare to periods before that?


3. (Advanced) Do capital expenditures impact the company's quarterly operating performance? Explain.


4. (Advanced) Describe the general accounting model for marketable securities including definitions of trading securities, available for sale securities and held to maturity securities.


5. (Advanced) "Alphabet's first-quarter earnings received a boost from a change in accounting rules that caused the company to begin reporting the current fair value of nonmarketable securities, including its valuable stake in ride-hailing giant Uber." How does this change for nonmarketable securities compare to reporting for marketable securities?


6. (Introductory) Based on the information given in the related article, how do you think the company determined the amount to report for its investments in Uber and other emerging technology companies?



Heard on the Street: Google's Ad Success Will Turn Heads
by Dan Gallagher
Apr 23, 2018
Page: B14

Reviewed By: Judy Beckman, University of Rhode Island


"Google Parent Posts Surge in Profit, but Expenses Also Jump," by Douglas MacMillan, The Wall Street Journal, April 24, 2018

Google parent Alphabet Inc. GOOGL 0.02% posted surging profits as advertisers kept swarming to the search giant amid a global debate about internet privacy that threatens to affect its main revenue generator.

Alphabet’s earnings also got a multibillion-dollar boost from the company’s stakes in startups including Uber Technologies Inc. but were tempered by the costliest spending spree in its 14-year history as a public company.

Net profit jumped 73% to $9.4 billion in the first quarter, up from $5.4 billion in the same period last year, a performance that highlights the firm’s huge lead in the global market for online ads. The earnings growth was Alphabet’s strongest since the fourth quarter of 2009.

Advertising revenue, which accounts for nearly all of the company’s top line, soared 24% to $26.6 billion. Revenue from “Other Bets,” a segment which includes Waymo self-driving cars, totaled $150 million, an increase of 14% from the same period last year.

The results landed while regulators in Washington are considering getting tougher on internet privacy. While most of the attention on the issue has focused on Facebook Inc., many observers believe Google’s dominant role online means the firm will also be subject to tougher scrutiny. The European Union is also moving forward with a sweeping set of rules called the General Data Protection Regulation, which goes into effect May 25. The new law could affect the revenue of Alphabet, which has already announced some changes to the way it collects consent from visitors of sites displaying its ads.


Companies found in violation of the sweeping regulation will face fines of up to 4% of their annual global revenue.

Asked about the impact of the European regulations on a call with analysts Monday, Chief Executive Sundar Pichai said Google has spent more than a year preparing to be compliant. Because Google derives most of its revenue from search ads, which rely less on personal targeting, much of its business won’t be affected by the changes, he said.

Alphabet’s first-quarter earnings received a boost from a change in accounting rules that caused the company to begin reporting the current fair value of nonmarketable securities, including its valuable stake in ride-hailing giant Uber.

Alphabet attributed about $3 billion of its net profit increase to the value of those securities, though the company didn’t break out individual holdings or disclose what portion of that increase was made up by Uber.

The fair value of Uber shares is something of a mystery. Last December, Uber backers and employees sold shares to a group of investors led by SoftBank Group Corp. at a $48 billion valuation—a roughly 30% discount to the last time it sold new shares to investors, at a $68 billion valuation.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 27, 2018

Hasbro's Sales Take a Hit From Collapse of Toys 'R' Us

By Paul Ziobro | Apr 23, 2018

TOPICS: Earning Announcements, Income Tax

SUMMARY: Hasbro, Inc., reported first quarter 2018 results that showed a 16% decline in sales; $15.7 million in severance costs related to transforming its sales group to more rapidly move to online sales focus; and a charge of $47.8 million, or 38 cents per diluted share, due to the federal tax law change. The company lost $112.5 million overall. The company's stock price gained 6.3% on Monday, April 22, 2018.

CLASSROOM APPLICATION: The article may be used in any level of class covering financial reporting with questions 1, 2, 3, 4, and 6. Question 5 is appropriate for classes covering income tax accounting.



1. (Introductory) What does Hasbro Inc. do?


2. (Introductory) How has the Toys 'R' Us bankruptcy impacted Hasbro? Specifically describe the impact on the first quarter of 2018 financial results.


3. (Introductory) What management changes has Hasbro impacted as a result of these events? How long does the company think it will take to see improvement in operating results from these management changes?


4. (Advanced) What were Hasbro's overall first quarter 2018 results? You may refer directly to the company's press release to help answer this question. It is available at


5. (Advanced) Explain your understanding of how the federal tax law change signed in 2017 which reduced corporate tax rates could result in a large expense of $47.8 million. Refer again to the press release, scrolling down to the third paragraph under "Non-GAAP Adjustments."


6. (Introductory) How did Hasbro's stock price react to the announcement of these results? Does this reaction surprise you?



Reviewed By: Judy Beckman, University of Rhode Island


"Hasbro's Sales Take a Hit From Collapse of Toys 'R' Us By Paul Ziobro, The Wall Street Journal, April 23, 2018

Toy maker laying off executives, accelerating overhaul of sales team to better adapt to online shift

Hasbro Inc. HAS -0.60% on Monday blamed a 16% decline in first-quarter sales on the liquidation of Toys “R” Us Inc. and said it has sped up an overhaul of its sales organization for a world where more toys are sold online.

Toys “R” Us is closing stores in the U.S. and other markets, causing big drops in sales for Hasbro toys like Transformer action figures and My Little Pony dolls. The retailer, which filed for bankruptcy in September, was done in by a lofty debt load and difficulty competing amid the rise of Inc. and online shopping.

To cope with the shift online, Hasbro is laying off executives in its commercial operations and bringing in people with more expertise in e-commerce. In doing so, the company scrapped plans for more gradual steps starting later this year, Hasbro Chief Executive Brian Goldner said Monday.

For the first quarter, Hasbro logged $15.7 million in severance costs tied to the “transformation” of its sales group.

“Consumers’ shopping and buying actions are moving in all directions, from brick-and-mortar to omnichannel while adding mobile,” Mr. Goldner said on an earnings call. About 20% of the Pawtucket, R.I., company’s sales occur online.

Hasbro rival Mattel Inc. last week announced an executive shakeup that will give the toy maker its fourth CEO in as many years as it struggles to end a sales slump.

Jefferies toy analyst Stephanie Wissink said Hasbro already was viewed as being ahead of its peers in adapting to the new marketplace, and the moves suggest the company sees bigger changes in store.

“This is a clear signal to us that the balance of power in toy retail is shifting toward Amazon and the dot-coms,” Ms. Wissink said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on April 27, 2018

KPMG Gets Cold Shoulder From GE Shareholders

By Michael Rapoport | Apr 26, 2018

TOPICS: Audit Committee, Auditing

SUMMARY: "Shareholders at General Electric Co. approved KPMG LLP on Wednesday [April 25, 2018] as the company's auditor for another year, ..." the 110th year for one of the longest running tenures of U.S. auditors. Issues leading up to only 64.9% of GE shareholders voting favorably have been covered in this weekly review of the related article. They include problems with GE's accounting that are now under investigation by the Securities and Exchange Commission (SEC) and concerns with internal issues in KPMG LLP's operations, both also described in the current article.

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



1. (Introductory) Did General Electric Co. (GE) shareholders ratify KPMG LLP as the company's auditor?


2. (Advanced) Why are the shareholder meeting and selection of auditor newsworthy in this case? Specifically focus on the factors related to GE itself.


3. (Introductory) What problems has KPMG LLP faced in its own operations?


4. (Advanced) What extraordinary step has KPMG LLP taken to address its own problems? Why is such a step so extraordinary?



GE Is Urged to Drop Auditor KPMG
by Thomas Gryta and Joann S. Lublin
Apr 05, 2018
Page: B3

Reviewed By: Judy Beckman, University of Rhode Island


"KPMG Gets Cold Shoulder From GE Shareholders," by Michael Rapoport, The Wall Street Journal, April 26, 2018

GE shareholders approved KPMG as company’s auditor, but only after a large level of opposition

Shareholders at General Electric Co. GE -1.76% approved KPMG LLP on Wednesday as the company’s auditor for another year, but only after a large level of opposition in the wake of GE’s accounting issues and criticism from proxy-advisory firms.

Only 64.9% of GE shareholders voted to ratify KPMG as GE’s auditor, according to preliminary figures released at GE’s annual meeting. That represents one of the highest levels of shareholder opposition to an auditor at any company in recent years, according to data from consulting firm Audit Analytics.

The vote at GE adds to KPMG’s woes, which also include a scandal in which former partners were indicted in January over allegations that people at the firm had access to secret information from a regulator. Separately Wednesday, KPMG announced it plans to take the unusual step of adding independent directors to its board, a move aimed at improving the firm’s corporate governance.

GE has said the Securities and Exchange Commission is investigating some of its accounting practices, including its need for increased reserves in its insurance operations and its accounting for long-term service agreements. KPMG, which has been GE’s auditor for 109 years, didn’t flag any of the problems.

Earlier this month, Institutional Shareholder Services and Glass Lewis & Co., the two biggest proxy-advisory firms, both recommended that GE shareholders vote against reappointing KPMG as GE’s auditor. ISS cited “the apparent extent of GE’s previously undisclosed liabilities and accounting issues.”

The level of opposition was “extraordinary,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “I think for the (GE) board it’s got to be a rather sobering vote.”

GE said in a statement that its audit committee, which reviews the appointment of the company’s outside auditor each year, “will certainly be taking this indication from our shareowners into account.” A KPMG spokesman couldn’t be reached for comment on the vote.

Shareholder votes on reappointing auditors are typically all but automatic, with only token opposition. Last year, 94.3% of GE shareholders voted in favor of KPMG.

The latest GE vote marks only the fifth time since 2015 that an auditor for an S&P 500 company has won less than 90% support from shareholders, according to ISS Analytics. According to the Audit Analytics data, in more than 15,000 shareholder votes to ratify auditors at public companies from 2013 to 2017, there were only 22 cases, less than 0.2%, in which more than 25% of shareholders were opposed.

In another possible sign of discontent, shareholders at Wells Fargo & Co. approved KPMG’s status as the bank’s auditor this week with 91.1% of votes after Glass Lewis recommended a “no” vote. Critics have questioned why KPMG failed to catch the bank’s sales-practice scandal and other problems it has experienced in the past few years.

KPMG’s move to appoint new outside directors, though, is more of a response to the firm’s information-leak scandal. That incident led to the firing of a handful of partners in 2017 and the indictment of five people in January. KPMG and prosecutors say the partners improperly got advance word of which of its audits were to be reviewed by regulators at the Public Company Accounting Oversight Board in their annual inspections of the firm. That could have made KPMG better able to prepare for the inspections, which are closely watched as a barometer of the firm’s audit quality.

“In 2017, certain events, and the actions of a few former colleagues, caused us to take a deeper dive into examining our culture and values, and to assess with fresh eyes how we could improve,” Lynne Doughtie, KPMG’s U.S. chairwoman and chief executive, wrote in an article published Wednesday in trade publication Accounting Today.

The new directors will “provide a valuable sounding board to management” and will “further diversify the boardroom dialogue,” Ms. Doughtie wrote.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on May 11, 2018

Dish Network Profit Boosted by New Accounting Rules

By Ezequiel Minaya | May 09, 2018

TOPICS: Earning Announcements, Revenue Recognition

SUMMARY: In announcing Dish Network Corp. earnings, CFO Steve Swain said on Tuesday, May 8, 2018, that "new revenue accounting standards income by around 7% during its latest quarter...Prior to the adoption of (the new standards), certain sales incentive payments made to third-party retailers were booked as incurred....Now these costs are deferred over the average customer life." The company's income tax expense also dropped 44% due to the new tax law passed in 2017.

CLASSROOM APPLICATION: The article may be used to discuss new requirements under the revenue recognition standard.



1. (Advanced) What is the underlying model of accounting under the new revenue recognition requirements?


2. (Introductory) When were the new revenue recognition requirements adopted? When are they being implemented by most publicly traded U.S. companies?


3. (Advanced) What part of the new revenue recognition requirement benefited Dish Network Corp.'s first quarter 2018 results? Does this surprise you? Explain your answer.


4. (Introductory) What other factors besides the new revenue accounting impacted Dish Network's results?



Reviewed By: Judy Beckman, University of Rhode Island


"Dish Network Profit Boosted by New Accounting Rules," by Ezequiel Minaya, The Wall Street Journal, May 9, 2018

A Dish Network satellite dish is shown on a residential home in Encinitas, Calif., U.S., Nov. 8, 2017. Photo: Reuters

New revenue accounting standards buoyed Dish Network Corp.’s net income by around 7% during its latest quarter, the company’s finance chief said Tuesday.

The positive impact from the regulatory shift wasn’t enough, however, to offset the exodus of subscribers that pushed the company’s first quarter profit down 2% when compared to the same period last year.

The new accounting rules require companies to recognize revenue from contracts at the time the promised goods and services are delivered to a customer. The uniform standard, which became effective for public companies this year, replaces a patchwork of industry-specific rules with the aim of making comparisons of revenue and fiscal performance easier. The rules also affect how and when companies report the costs associated with delivering their products and services.

“Prior to the adoption of (the new standards), certain sales incentive payments made to third-party retailers were booked as incurred,” said Steve Swain, the chief financial officer of the company, during a conference call Tuesday. “Now these costs are deferred over the average customer life.”

The rule change “positively impacted DISH’s net income by $27 million,” Mr. Swain said. He also added that the company’s income tax for the period dropped 44% to $116 million mostly due to to the recently passed U.S. tax legislation, which lowered the corporate tax rate to 21% from 35% previously.

Still, the satellite-TV company’s earnings fell to $368 million for the quarter, down from $376 million during the same period last year. Revenue for the period slipped about 6% to $3.46 billion.

The company reported that net pay-TV subscribers declined by 94,000 in quarter. Traditional cable-TV companies have been pressured by customers’ growing preference for streaming and on-demand services. Dish officials declined to give further comment.

The new