New Bookmarks
Year 2018 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Bob Jensen's Threads ---

574 Shields Against Validity Challenges in Plato's Cave ---



Choose a Date Below for Additions to the Bookmarks File






December 2018


Bob Jensen's New Additions to Bookmarks

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

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

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


Bob Jensen's Pictures and Stories


All my online pictures ---

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  

Google Scholar ---

Wikipedia ---

Bob Jensen's search helpers ---

Bob Jensen's World Library ---

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 ---

Find a corporate home page quite easily by going to

Bob Jensen's search helpers ---

Fall 2018 edition of Accounting Education News ---

Jensen Comment
This edition has a number of interesting links, including the links to the 2018 best paper awards.
Accountics scientists are still taking all the (yawn) awards.
I wonder if those "top" research papers had much effect on accounting course content.

My hypothesis is that the accountics scence bias is not so much due to the selection committees. It's instead the result of the aggressiveness of accountics scientists in nominating their own. The selection committees (I was on the Notable Contributions to the Accounting Literature Award) frequently have no alternatives to choose from other than accountics science papers. I wish the nominators would be forced to demonstrate how their nominated papers impacted or will impact classrooms.

In the past most of the award winning papers are long forgotten in both teaching and practice.

December 6, 2018 reply from Paul Williams

You raise a crucial point.  I haven't looked at the link, but the AAA
changed the process for selecting the best papers in Horizons and
Issues.  In the past every paper that was published was eligible and
the membership voted for that slate.  The accountics folks found this
was too dicey since a paper could be selected that wasn't up to their
"standards."  So now there is some process invisible to the membership
that selects a slate of only five of the papers that are eligible.
All of the Horizons candidates this past time were financial reporting
related and methodologically acceptable.  Of course the AAA membership
apparently willingly pays for the privilege of being abused by the
accountics folk.  No wonder we continue themes about "becoming a
learned profession" or "imagining new accountings" because the AAA
continues to police accounting knowledge to purify it from any
heretical intrusions.  Heaven forbid we should let the entire
community decide what literature is best; they might get it wrong.
And the members get their noses rubbed in it without even a whimper of


Under the Tax Cuts and Jobs Act, the parking benefits that churches, synagogues, hospitals, colleges and other nonprofits offer their employees are now taxable ---

Jensen Comment
I've not tracked what states with income taxes are also affected by this new rule. It's great to live in New Hampshire, but not in terms of Federal income tax.

This may be one of the first new taxes that Nancy Pelosi will try to repeal, but she will probably have to override President Trump among other hurdles to the tax elimination.

The Year 1552:  The First Arithmetic Book Printed in England

Luca Pacioi  ---
There are at least two common mistakes with respect to Luca Pacioli (a close friend of Leonardo da Vinci). One is to assume Pacioli's famous 1494 book is an accounting book. Pacioli only used bookkeeping as an illustration of algebraic equations in his famous Summa mathematics book in 1494.
A second mistake is to assume Pacioli invented double-entry bookkeeping. The origins of double-entry bookkeeping are unknown and this type of bookkeeping is only illustrated by Pacioli in Summa.

From this wonderful mathematics history site on December 18, 2018 ---

Cuthbert Tunstall died in Lambeth, London, England in 1559. He wrote (in Latin in 1552) the first arithmetic book printed in England, which he based on Pacioli's Summa de arithmetica.

More information about:
Cuthbert Tunstall
Luca Pacioli

Bob Jensen's threads on accounting history are at

U.K. regulators proposed sweeping changes to rules governing British audit firms Tuesday in moves designed to increase competition, prevent conflicts of interest and restore public confidence in an industry tarnished by an accounting scandal that led to the collapse of one of Britain’s largest construction companies, report Michael Rapoport and CFO Journal’s Nina Trentmann.

The measures, if implemented, would see audit firms separate their auditing and consulting operations, introduce two-firm audits for large companies and replace the current auditing regulator. The changes were in part triggered by the scandal that brought down Carillion PLC.

In the wake of the construction company’s collapse, U.K. affiliates of the Big Four audit firms—KPMG LLP, PricewaterhouseCoopers LLP, Ernst & Young LLP and Deloitte Touche Tohmatsu Ltd.—have faced criticism that their auditing hasn’t been tough enough and they have been too cozy with their clients.

Excellent, Cross-Disciplinary Overview of Scientific Reproducibility in the Stanford Encyclopedia of Philosophy ---

Bob Jensen's threads on the lack of validity and replication research in accountancy ---

Management accountants’ job prospects in 2019 ---

Jensen Comment
Once again all this good news for management accountants does not translate to inexperienced new college graduates. Unlike CPA firms, the IRS, and consulting firms that yearly hire a great many inexperienced accountancy graduates, business firms do not create such great employment tracks for inexperienced management accountants. Note how the article above repeatedly stresses "skilled" management accountants where in most cases "skilled" also means experienced. That does not mean it's impossible for new graduates to become employed in managerial rather than financial accounting or AIS. But it does mean that there are many fewer opportunities for new managerial accounting graduates. A typical career path for newly graduated accounting majors is to get a job in financial accounting and then shift by various means into managerial accounting in the first few years of working after graduation. Colleges generally would love to add more courses in managerial accounting specialties if there were more entry level opportunities for such graduates.

Biggest Product Launches of 2018 ---

Microsoft's surprising comeback over Apple is the outcome of two new CEOs with radically different game plans ---

What PCAOB Inspectors Will Look for in 2019 ---

New tax credit for paid family and medical leave ---

2018 CPA Journal:  Finding the Right Tax Software ---

Four types of retirement plans for small businesses: SEP, Simple IRA, 401(k), and Solo 401(k) ---

Excel:  How to Use the FREQUENCY Function in Excel ---

Excel:  Will Dynamic Arrays kill Data Tables, PivotTables?

Excel:  Tips for recovering broken Excel files ---

Excel: What's new in Excel 2019 ---

Excel function focus: SEQUENCE and RANDARRAY ---

Excel:  Focus on 2 new functions: UNIQUE and FILTER ---

Excel:  This Excel change is more than SORT of a big deal ---

Excel:  Part three of this series describes what happens when errors occur in Excel's new Dynamic Arrays capabilities ---

Excel:  Excel: Arrays, Tables, and ‘The Twilight Zone’ ---

Virginia’s public colleges pose risk to state taxpayers



KPMG To Hire 3,000 Lawyers (up from 1,800) ---

Jensen Question
When will auditing just be pocket change for the Big Four?

Federal Judge Sides with KPMG in Gender Discrimination Lawsuit ---

Bob Jensen's threads on the two faces of KPMG are at

The Atlantic:  Why Hasn’t Australia Had a Recession in Almost 30 Years?

Jensen Comment
Although Australia avoided the subprime real estate collapse of 2006, real estate prices are purportedly in somewhat of a price bubble ---

Report: Vermont among worst states when it comes to fiscal transparency

NOVEMBER 29, 2018 | by Bethany Blankley | TRUE NORTH REPORTS (VERMONT)

Wells Fargo Agrees to Pay $575 Million to Resolve State Investigations ---


America's fifth-largest trucking company 'defrauded' the Department of Defense, DOJ suit alleges ---
Jensen Comment
It's hard to think of any contractor that does not defraud the Department of Defense and most other government piñatas.
HealthSouth ---
Lessons learned from a multibillion-dollar HealthSouth accounting fraud ---
Bob Jensen's Fraud Updates ---

How the IRS was Gutted ---

The IRS has been gutted. Last year, it had 9,510 auditors, down a third from 2010. The rate of audits themselves dropped 42 percent, and the agency’s budget has fallen $2 billion. While I don’t imagine many of you harbor especially warm and fuzzy feelings for the IRS, these are the biggest winners from the now thinly stretched agency, according to ProPublica: corporations and the wealthy.

IRS Releases New Shorter Form 1040 For 2018, With Six New Schedules ---

One of those humbling thoughts of life before computers
In your head can you compute the square root of

From the Math On this Day site on December 22, 2018


"In a dark night, in bed, without pen, ink, or paper, or anything equivalent, I did by memory extract the square root of 3,00000,00000,00000,00000,00000,00000,00000,00000, which I found to be 1,73205,08075,68077,29353, ... and did the next day commit it to writing." - John Wallis
More information about:

John Wallis

Inside the massive (Nevada) factory where Tesla will soon make 60 percent of the world’s lithium-ion batteries ---

Jensen Comment
Audit reports must now discuss both sustainability and financial risks. The above article seems to avoid mention of the biggest risk to this company --- the risk of being dependent upon an oligopoly of foreign-based lithium suppliers.

Lithium ---

There's also some political risk, especially from the EU's revenue-salivating monopoly hunters ---

Google threatened with break up by EU over monopoly fears ---

Amazon’s looming challenge: Europe’s antitrust laws ---

Wired's Bold (Reckless) Claim:  "BMW's new electric car powertrain system totally torpedoes Tesla" ---

FASB tweaks leases standard with new update ---

Three lessons "It's a Wonderful Life" can teach you about revenue recognition ---

Apple can't sell some iPhones in Germany because of its legal war with Qualcomm ---

What state barely beat out Illinois for fiscal health?
Connecticut ranks 49th in terms of fiscal health
Massachusetts ranked 45th --- how wonderful!

Things to know about lease accounting implementation ---

How to Mislead With Statistics
Left-Leaning VOX: The $21 trillion Pentagon accounting error that can’t pay for Medicare-for-all, explained ---

The US military budget is such a bloated monstrosity that it contains accounting errors that could finance two-thirds of the cost of a government-run single-payer health insurance system. All Americans could visit an unlimited array of doctors at no out of pocket cost. At least that’s a notion spreading on left-wing Twitter and endorsed and amplified by newly elected Rep. Alexandria Ocasio-Cortez, one of Democrats’ biggest 2018 sensations and an undeniable master at the fine art of staying in the public eye.


Unfortunately, it’s not true.


The idea spread like a game of telephone from a Nation article to the US Congress while losing a crucial point of detail: The Pentagon’s accounting errors are genuinely enormous, but they’re also just accounting errors — they don’t represent actual money that can be spent on something else.

Proponents of this vision have the political wind at their backs and continue to deploy the idea effectively to win intra-party arguments without really making any headway on the core obstacles to writing a Medicare-for-all bill that could become law. That said, to the extent that political power rather than concrete legislation is the goal, that’s probably for the best.

Misunderstandings fly around on Twitter all the time, and AOC’s level of policy knowledge is pretty typical for a member of Congress. But this particular flub is telling about progressive frustration over the double standard on military versus non-military spending, and also the fraught state of play regarding the push for a Medicare-for-all program.

The Pentagon’s mystery $21 trillion, explained

The underlying article by Dave Lindorff in the Nation that kicked this off is an investigative report into the Defense Department’s accounting practices. Lindorff reveals that Pentagon accounting is quite weak, that the department keeps flunking outside audits, that funds are shifted between accounts without proper oversight, and that overall documentation of what’s actually happening with the Pentagon’s vast budget is extremely poor.

Lindorff goes beyond these observations to allege that what’s happening amounts to deliberate fraud, the purpose of which is to persuade Congress to increase appropriations levels beyond what would otherwise be approved.

Continued in article

Jensen Comment
We really cannot compare proposed Medicare-for-All plan without more specific definitions of "Medicare-for-All" and the "cared for population." For example, Medicare currently does not pay for the enormous cost of long-term nursing care. Medicare only pays 80% of most of the things it does cover like hospital and doctor care.

Also Medicare has built up trust funds over the 50 years using payroll deductions from individuals and employers. The trust funds are not sustainable at predicted usage rates, but it's not like the existing Medicare program did not accumulate any finds for the elderly and disabled. A Medicare-for-All plan does not have 50 years of payroll deductions to help pay for an abrupt shock to the system.

Advocates of Medicare-for-All never mention that Medicare for all is mostly a private sector program where claims are serviced in the private sector along with private sector doctor, nursing, and medicine delivery of goods and services. Medicare is not like the U.K. system where most services are delivered by government employees.

The Nation's analysis of the Defense Department's expenses ignores the fact that even if we entirely eliminated the current Army, Navy, and Air Force the government's obligations to retired and disabled former military personnel would carry on for hundreds of billions of dollars into the indefinite future. And how long would the USA and its Medicare-for-All program survive without any Army, Navy, and Air Force?

The Nation's analysis is an example of totally irresponsible and misleading statistics.

Cryptocurrency ---

The world's largest maker of cryptocurrency mining chips will likely lay off more than 50% of its staff, according to reports ---

Bitcoin is close to becoming worthless ---

NPR:  Why is the price of bitcoin fluctuating so wildly? ---

Forbes:  The Great Cryptocurrency Scam ---
Thank you Glen Gray for the heads up.

Washington Post:  The only currency worse than bitcoin is Venezuela’s ---
Jensen Comment
Under ASC 350 cryptocurrency is an intangible asset
Accounting Rule ASC 350 for Reporting Cryptocurrency as an Intangible Asset Subject to Value Impairment Tests$FILE/TechnicalLine_04623-181US_Cryptocurrency_18October2018.pdf

Why might this be awful timing for the State of Ohio?
The people of Ohio can now pay their taxes in bitcoin ---

Bitcoin usage among major payment processors has dropped 80% ---

Blockchain ---

Fraud is expected to cost the ad industry $44B in 2022 — here’s how blockchain could help stop it ---

Beyond Bitcoin: Here are some of the new use cases for distributed ledger technology ---

Different Ways to Understand Blockchain ---

AICPA's Blockchain Certificate ---

Walmart:  The robotic moppers will be deployed in US stores by the end of January ---

From David Giles on December 2, 2018

December Reading for Econometricians

My suggestions for papers to read during December:

·                     Askanazi, R., F. X. Diebold, F. Schorfheide, & M. Shin, 2018. On the comparison of interval forecasts. PIER Working Paper 18-013, Penn. Institute for Economic Research, University of Pennsylvania.


·                     Meintanis, S. G., J. Ngatchou-Wandji, & J. Allison, 2018. Testing for serial independence in vector autoregressive models, Statistical Papers, 59, 1379-1410.


·                     Milas, C., T. Panagiotidis, & T. Dergiades, 2018. Twitter versus traditional news media: Evidence for the sovereign bond markets. Mimeo., Management School, University of Liverpool.


·                     Ollech, D., 2018. Seasonal adjustment of daily time series. Discussion Paper No. 41/2018, Deutsche Bundesbank.


·                     Sickles, R. C., W. Song, & V. Zelenyuk, 2018. Econometric analysis of productivity: Theory and implementation in R. Working Paper WP08/2018, Centre for Efficiency and productivity Analysis, Department of Economics, University of Queensland.


·                     Skeels, C. L. & F. Windmeijer, 2018. On the Stock-Yogo tables. Econometrics, 6 (4), 44.

Madoff Victims Recoveries to Date ---

US News and World Report:  How to Fix Chicago ---
Jensen Comment
Personally, I think that it might be easier to fix Venezuela.

Chicago Mayor Rahm Emanuel endorses pension amendment to Illinois Constitution ---

Journey of a Product: A loaf of bread ---
Jensen Comment
The Website ignores some externalities. For example, bread (especially white bread) is converted into sugar in the human body, thereby increasing the demand for insulin in diabetics and possibly even contributing to lower life expectancy in society. This is an example where accountants accumulate costs of bread all the way to the store shelves but ignore intangible costs along the way including such other intangibles as air pollution costs of production and delivery, soil erosion losses, and on and on and on. On farms such resources as rain water and ground water may be treated as free or nearly-free goods by accountants.

From a Chronicle of Higher Education Newsletter on December 11, 2018

Quick hits.

·         The Foundation for Individual Rights in Education claims in a study released this morning that nine in 10 American colleges restrict their students' free speech.

·         U.S. Olympic Committee officials concealed their knowledge of sexual-abuse accusations against Larry Nassar for years, according to a report by a law firm hired by the committee.

·         George Washington University students are asking the institution not to end a project that honors the civil-rights legacy of Jackie Robinson.

·         A University of Indiana study finds that half of those who pursue careers as scientists at colleges will drop out of the field after five years.

·         Fliers with images of Adolf Hitler and swastikas were found throughout the State University of New York at Purchase.

·         An ex-fraternity leader at Baylor University, accused of rape two years ago, will not serve jail time after a district judge in Waco, Tex., accepted his plea bargain.

  A new study finds that colleges' endowment returns are markedly worse than those of other nonprofits.

Jensen Comment
I don't know why colleges' endowment returns tend to be lower, but if I were to investigate I would look for a tendency of colleges to look for longer term returns (think real estate) at the expense of higher short-run returns and risks.

The Pros and Cons of LLCs ---

How to Create a Syllabus ---

Tools and Tricks of the Trade ---

The Effects of Disclosing Critical Audit Matters and Auditor Tenure on Investors’ Judgments


48 Pages
Posted: 19 Dec 2018

See all articles by Eric T. Rapley

Eric T. Rapley

Colorado State University, Fort Collins - Department of Accounting

Jesse C. Robertson

University of North Texas

Jason L. Smith

University of Nevada, Las Vegas

Date Written: December 1, 2018


The Public Company Accounting Oversight Board (PCAOB) recently adopted sweeping changes to the audit report, requiring the audit firm to disclose whether or not it identified a critical audit matter (CAM), and its tenure with the client. To our knowledge, this is the first study to (1) provide experimental evidence on the effects of a CAM disclosure or an explicit statement that the auditor did not identify a CAM on investor judgments, and (2) examine whether auditor tenure disclosure influences investors’ judgments. We find that, relative to disclosing that no CAMs were identified, disclosing a CAM reduces nonprofessional investors’ investment intentions. Concerning investors’ cognitive processes, CAM disclosure negatively impacts perceptions of management’s influence on financial reporting quality, which mediates the relationship between CAM disclosure and investment intentions. Additionally, CAM disclosure also has an indirect effect on investment intentions through its positive effect on perceptions of the auditor’s influence on financial reporting quality. We do not find a significant effect of tenure disclosure on investment intentions. Our contributions include furthering the understanding of cognitive mechanisms through which CAM disclosure influences investment intentions, identifying a relatively unique setting in which management’s and the auditor’s influences on financial reporting quality move in opposite directions, and documenting that tenure disclosure requirement does not appear to affect investment intentions.



Keywords: Critical audit matters, auditor tenure, nonprofessional investors, financial reporting quality

JEL Classification: M40, M41, M42

Strategic Withholding and Imprecision in Asset Measurement


69 Pages
Posted: 18 Dec 2018

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

Davide Cianciaruso

HEC Paris - Accounting and Management Control Department

Date Written: November 30, 2018


How precise should accounting measurements be, if management has discretion to strategically withhold? We examine this question by nesting an optimal persuasion mechanism, which controls what measurements are conducted, within a voluntary disclosure framework a la Dye (85) and Jung and Kwon (1988). In our setting, information has real effects because the firm uses it to make a continuous operating decision, increasing in the market's belief. Absent frictions other than uncertainty about information endowment, we show that imprecision can reduce strategic withholding but always decreases firm value. We then examine plausible environments under which, by contrast, there is an optimal level of imprecision featuring coarseness at the marginal discloser. We offer additional implications in the contexts of enforcement against strategic withholding and financing with collateralized assets.

Keywords: real effects, imprecision, voluntary disclosure, accounting standards

JEL Classification: G3, M4

Do International Differences in Certain Cultural Dimensions Lower Cross-Country Accounting Comparability Under IFRS? - An Examination of Risk Aversion and Materialism

49 Pages
Posted: 18 Dec 2018

See all articles by Byung Hun Chung

Byung Hun Chung

Nanyang Technological University (NTU) - Division of Accounting

Date Written: October 4, 2018


I examine whether differences in cultural dimensions of risk aversion and materialism lower accounting comparability between countries that require IFRS. I posit that certain cultural beliefs and values affect the estimates and judgements of those involved in financial reporting, resulting in inconsistent reporting decisions and lower cross-country comparability. I find that having greater differences in risk aversion and materialism lowers comparability. In cross-sectional tests, I find weak evidence that stronger enforcement of IFRS moderates the decrease in the cross-country comparability. Having stronger legal or regulatory systems does not moderate the decrease in the comparability due to differences in risk aversion and materialism. These findings suggest that having strong enforcement regimes does not effectively moderate the impact of cultural differences on cross-country comparability. A possible explanation is that those in charge of the enforcement are affected by the same cultural beliefs and values as the reporting parties, making moderation less likely.

Keywords: IFRS, Comparability, National Culture

JEL Classification: M40

Price Discrimination in International Airline Markets

52 Pages
Posted: 17 Dec 2018

See all articles by Gaurab Aryal

Gaurab Aryal

University of Virginia - Department of Economics

Charles Murry

Boston College - Department of Economics

Jonathan W. Williams

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: November 26, 2018


We develop a model of inter-temporal and intra-temporal price discrimination by airlines to study the ability of different discriminatory mechanisms to remove sources of inefficiency and the associated distributional implications. To estimate the model’s multi-dimensional distribution of preference heterogeneity, we use unique data from international airline markets with flight-level variation in prices across time and cabins, and information on passengers' reason for travel. We find that current pricing practices grant late-arriving business passengers substantial informational rents and yield 81% of first-best welfare, with stochastic demand and asymmetric information accounting for 65% and 35% of the gap, respectively.

JEL Classification: D42, L00, L93

State of the Practice: Sustainability Standards for Infrastructure Investors

94 Pages
Posted: 17 Dec 2018

See all articles by Michael Bennon

Michael Bennon

Stanford University - Global Projects Center

Rajiv Sharma

Stanford University

Date Written: October 26, 2018


Infrastructure development and investment has a profound impact on the environment and local communities, and governments worldwide have continued to develop and refine regulatory reviews for large infrastructure projects to better asses their environmental impacts. Environmental and social metrics for the institutional investors and fund managers that invest in and manage infrastructure, however, are a relatively new development. Today several sustainability assessment tools have been developed to assist infrastructure investors in measuring and managing the environmental and social impacts of their portfolios. This study includes a detailed review of a dozen assessment tools available to infrastructure investors with cross-sector investment portfolios. They include project screening tools, which may be used for the detailed assessment of an individual project, and accounting tools designed to standardize sustainability reporting across investors. The reviews include assessments of environmental criteria addressed, the assessment process, and the specific metrics included. The study draws conclusions as to the future of sustainability assessment in the infrastructure sector and the challenges in environmental and social metric development for infrastructure.

Keywords: Infrastructure Investment, Sustainability Metrics, Environmental Social and Governance Investment, Institutional Investment

Should FASB and IASB Be Responsible for Setting Standards for Nonfinancial Information?

43 Pages
Posted: 15 Dec 2018

See all articles by Richard Barker

Richard Barker

University of Oxford - Said Business School

Robert G. Eccles

University of Oxford - Said Business School

Date Written: October 12, 2018


The goal of this ‘Green Paper’ is to contribute, in a neutral way, to a conversation that has been going on for some time amongst a variety of actors, concerning whether mandatory reporting standards are a prerequisite for effective ‘sustainability’ or ‘nonfinancial’ corporate reporting. Specifically, we ask whether the existing standard-setting regime for financial reporting – that of the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) – should be extended to include setting standards for nonfinancial information.


Practitioner Mentoring of Undergraduate Accounting Students: Helping Prepare Students to Become Accounting Professionals

Accounting & Finance, Vol. 58, Issue 4, pp. 939-963, 2018

25 Pages
Posted: 14 Dec 2018

See all articles by Ralph Adler

Ralph Adler

University of Otago

Carolyn Stringer

University of Otago

Date Written: December 2018


Employers have long raised concerns about university accounting graduates' business awareness and understanding of the real world. This paper describes and explores the effectiveness of an undergraduate student mentoring programme for accounting majors that includes as one of its aims promoting students' real‐world understandings of accounting. The programme has been operating for the past 12 years at a large Australasian, research‐focused university and involves highly experienced business practitioners as mentors (i.e. partners of accounting firms, CFOs, COOs or CEOs), who represent a wide range of industries (e.g. Big Four, small/regional accounting firm, healthcare, manufacturing, retail). The programme has been associated with a high degree of success. Compared with a control group of students who did not participate in the mentoring programme, mentored students reported having better professional networks and a better understanding of the benefits and responsibilities of being a member of a professional accounting body. Some support was also found for mentored students having superior understandings of work and career opportunities. As encouraged by The Pathways Commission Report ([, 2012]) and the 2015 CPA Australia report Shaping the future of accounting in business education in Australia, the study's findings provide support for how a mentoring programme like the one described in this paper can assist with showcasing the wider purposes and career opportunities associated with the accounting profession, as well as forge closer linkages between accounting practitioners and accounting educators and better integration of accounting practice into accounting curricula.

Keywords: Mentoring, Accounting students, Real‐world, Business practitioner mentors, Group‐based mentoring

Non-GAAP Earnings and the Earnings Quality Trade-off

47 Pages
Posted: 14 Dec 2018

See all articles by Andrea Ribeiro

Andrea Ribeiro

NSW New South Wales (Government) - NSW Treasury

Yaowen Shan

University of Technology Sydney (UTS) - School of Accounting; Financial Research Network (FIRN)

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: November 2, 2018


Using a large sample of earnings press releases by Australian firms, we compare multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. We find that, on average, non-GAAP earnings are more persistent, smoother, more value-relevant, and have higher predictive power than their closest GAAP equivalent. However, the same set of non-GAAP earnings disclosures are also less conservative and less timely than their closest GAAP equivalent. The results are consistent with non-GAAP earnings measures reflecting a reversal of the trade-off between the valuation and stewardship roles of accounting inherent in accounting standards and the way they are applied. We also find that differences in several of these attributes between GAAP and non-GAAP earnings are more evident in larger firms, firms with lower market-to-book ratios, firms with a higher proportion of independent directors and firms that report profits rather than losses. Our evidence is consistent with the argument that accounting standards impose significant amounts of conditional conservatism at some cost to the valuation role of accounting information. Non-GAAP earnings measures can therefore be seen as a response to the challenges faced by a single GAAP performance measure in satisfying the competing demands of value relevance and stewardship.

Keywords: Non-GAAP disclosures, Earnings quality

JEL Classification: J33, M41

Accounting Regulations, Enforcement and Stock Price Crash Risk: Global Evidence in the Banking Industry

48 Pages
Posted: 14 Dec 2018

See all articles by Pejman Abedifar

Pejman Abedifar

University of St Andrews - School of Management

Ming Li

Wuhan University of Technology

Dean L. Johnson

Michigan Technological University - School of Business and Economics

Liang Song

Michigan Technological University

Date Written: October 28, 2018


This paper uses the banking industry as a unique testing setting to examine the impact of accounting and enforcement regulations on stock price crash risk. We find that stocks are less likely to crash in countries with stricter enforcement standards and accounting regulations. More importantly, we provide evidence that the impact of accounting regulations is more significant in countries with stricter enforcement standards, suggesting that enforcement mechanisms and accounting regulations are complementary. We find that the main channels for accounting regulations and enforcement standards to affect stock price crash risk are regulations that strengthen information disclosure and improve the effects of direct supervision and external auditors. Our findings are robust after we include more control variables, employ regional regulatory developments as instrumental variables, conduct change regressions, use alternative measures of enforcement, and estimate in various subsamples. Our study has policy implications about how to design accounting regulations and enforcement mechanisms in a more effective manner.

Keywords: M41; M48

JEL Classification: accounting regulations; industry-specific enforcement standards; stock price crash risk; banking ind

The Effect of Auditor Litigation Risk on Client Access to Bank Debt: Evidence from a Quasi-Experiment

47 Pages
Posted: 13 Dec 2018

See all articles by Mahfuz Chy

Mahfuz Chy

University of Missouri at Columbia

Gus De Franco

Tulane University - A.B. Freeman School of Business

Barbara Su

Temple University - Fox School of Business and Management

Date Written: November 28, 2018


We exploit state-level staggered shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client’s access to private debt markets. We argue that higher auditor litigation risk reduces the agency costs of debt by improving financial statement quality. Further, greater auditor litigation risk enhances the insurance value to creditors of the auditing process. Consistent with these arguments, we find that an exogenous increase in auditor litigation risk leads to both an increase in a client’s likelihood of receiving bank loans and the average amount of bank loans that the client receives. Our cross-sectional tests show that the effect of auditor litigation risk on clients’ access to debt finance is stronger when borrowers face ex-ante greater agency costs of debt and when creditors benefit more from the enhanced insurance value of auditors. Last, we also find that increased auditor litigation risk leads to an increase in the contractibility of accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing. To the best of our knowledge, we are the first to document these relations between auditor litigation risk and clients’ borrowing in a “clean” setting that ensures confidence in causal inferences.

Keywords: debt financing; auditor litigation risk; state liability laws

Company-Specific Characteristics and the Choice of Hedge Accounting for Derivatives Reporting: Malaysian Case

Abdullah, A., & Ismail, K. N. I. K. (2017). Company-Specific Characteristics and the Choice of Hedge Accounting for Derivatives Reporting: Malaysian Case. International Journal of Accounting, Auditing and Performance Evaluation, 13(3), 280-292. DOI: 10.1504/IJAAPE.2017.085183

20 Pages
Posted: 13 Dec 2018

See all articles by Azrul Abdullah

Azrul Abdullah

Universiti Teknologi MARA (Perlis); Accounting Research Institute

Ku Nor Izah Ku Ismail

Universiti Utara Malaysia - School of Accountancy

Date Written: 2017


This paper investigates the adoption of hedge accounting by Malaysian listed companies in reporting their use of derivatives for hedging activities. Based on a sample of 300 Malaysian listed companies, we found that only 162 companies (54 percent) used derivatives to hedge their financial risks exposure and only 30 percent of the companies chose to apply hedge accounting. In addition, this study examines the relationship between the company specific characteristics and their application of hedge accounting. The logistic regression results showed that the decision to apply hedge accounting by Malaysian companies is positively influenced by the company size and leverage. The implications of the findings were discussed.

Keywords: Derivatives; Financial instruments; Hedge Accounting; Company Specific Characteristics

JEL Classification: G30; G32; G31

Impact of the Disclosure of Audit Engagement Partners on Audit Quality: Evidence from the United States

International Journal of Auditing (Forthcoming)

Posted: 12 Dec 2018

See all articles by Mai Dao

Mai Dao

University of Toledo - College of Business Administration

Hongkang Xu

University of Massachusetts Dartmouth

Long Liu

University of Texas at San Antonio

Date Written: November 20, 2018


The debate concerning the recent regulation in the United States mandating accounting firms to disclose engagement partners’ identity is ongoing. We examine the impact of the Public Company Accounting Oversight Board’s (PCAOB) requirement of disclosing engagement partners’ names on Form AP on the quality of audit engagements. Using two measures of audit quality (abnormal accruals and the probability of detecting material weaknesses in internal control), we find that disclosing engagement partners’ names is associated with a lower level of abnormal accruals and a higher probability of accounting firms detecting material weaknesses in internal control. Our study extends the contemporary research on the disclosure of engagement partners’ identification by providing additional evidence to the literature on this issue in the U.S. setting. Our study also provides evidence supporting the PCAOB’s perception that this disclosure leads to higher audit quality.

Keywords: engagement partners; audit quality; partner identification

Altera's Bonkers Accounting: Stock Compensation Really is a Cost

161 Tax Notes 339 (October 15, 2018)
9 Pages
Posted: 11 Dec 2018

See all articles by Calvin H. Johnson

Calvin H. Johnson

University of Texas at Austin - School of Law

Date Written: December 11, 2018


In this article, Johnson discusses Altera v. Commissioner, 145 T.C. 91 (2015) on appeal in the Ninth Circuit and the regulations that would match the costs of stock compensation to foreign income under a qualified cost-sharing agreement, and he argues that there is no merit to professor Joseph A. Grundfest’s claims that stock compensation has no cost.

The Role of Accounting Conservatism in Capital Structure Adjustments

Journal of Accounting, Auditing and Finance, Forthcoming

41 Pages
Posted: 10 Dec 2018

See all articles by Santhosh Ramalingegowda

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Yong Yu

University of Texas at Austin

Date Written: November 15, 2018


This study examines the relation between accounting conservatism and firms’ capital structure adjustments. We find that firms with more conservative financial reporting adjust their capital structure toward the target more quickly, especially within firms that rely more on external financing for adjustments. Further, we find that the positive effect of conservatism on adjustment speeds is concentrated in under-levered firms and this effect occurs through conservatism facilitating debt issuance. Additionally, we show that higher conservatism is associated with higher future profitability for under-levered firms. Taken together, our findings suggest that accounting conservatism plays an important role in facilitating under-levered firms’ adjustment of capital structure toward the target.

Keywords: conservatism, capital structure, adjustment speed, under-levered firms, over-levered firms

JEL Classification: G20, M41, M43

Show Us the Numbers: Grading the Financial Reports of Canada’s Municipalities

C.D. Howe Institute Commentary 524

24 Pages
Posted: 7 Dec 2018

See all articles by William B. P. Robson

William B. P. Robson

C.D. Howe Institute

Farah Omran

C.D. Howe Institute

Date Written: November 13, 2018


In nearly all larger Canadian municipalities, obscure financial reports – notably, inconsistent presentations of key numbers in budgets and end-of-year financial statements – hamper councillors, ratepayers and voters who seek to hold their municipal governments to account. Simple information, such as how much the municipality plans to spend this year or how its spending plan this year compares with the previous year’s, is hard or impossible for a non-expert citizen or councillor to find. The differences between how the numbers appear in budgets and in financial results have real-world consequences. For example, by presenting net, rather than gross, budget figures, municipalities exclude key services such as water and the fees that fund them, obscuring key activities and understating both their revenue and expense. By using cash, rather than accrual, accounting, they exaggerate infrastructure investment costs, hide the cost of pension obligations, and make it hard to match the costs and benefits of their activities. Moreover, many municipalities approve their budgets after significant money has already been committed or spent in the fiscal year, fail to publish their fiscal year-end financial results in a timely way and bury key numbers deep in their documents. This report card grades the financial presentations of major Canadian municipalities in their most recent budgets and financial statements. Of those we assessed, Toronto, Durham Region, Kitchener, Quebec City, Longueuil and Montreal failed, providing little information in reader-friendly form. More happily, Surrey garners an A for clarity and completeness of its financial presentation, York Region is a close second with an A, while Vancouver and Markham are also good performers. We have two key recommendations. First, municipal governments should present their annual budgets on the same accounting basis as their year-end financial statements. Their budgets should use accrual accounting, recording revenues and expenses as the relevant activities occur. For their part, provincial governments that impede the use of accrual-based budgets – by mandating that cities present separate operating and capital budgets, for example – should stop doing so. Indeed, provinces should mandate cities to present accrual budgets so the fiscal pictures of municipalities and the province use the same transparent standard. Even in cases where a province is an impediment, municipalities could release the relevant information on their own – and they should. Second, budgets, like financial statements, should show city-wide consolidated, gross revenue and spending figures that represent the city’s full claim on its citizens’ resources and the full scope of its activities. These changes would help raise the financial management of Canada’s municipalities to a level more commensurate with their importance in Canadians’ lives.

Keywords: Public Governance and Accountability; Capital Projects Costs and Benefits; Property Taxes; Transparency of Public Finances; Urban Issues

Determinants of IPO Delisting: Lessons form Athens Stock Exchange

Posted: 6 Dec 2018

See all articles by Michalis Makrominas

Michalis Makrominas


Yannis K Yannoulis

School of Economics and Business-Department of Accounting and Finance

Date Written: November 27, 2018


Stock delisting is a commonly value destructive process imposing significant costs on investors, firms and public markets. A relatively recent surge in the number of delistings across international markets restates the question on the roots and causes of delisting. Using a hand-picked sample from the Athens Stock Exchange we investigate early warning signs of delisting manifested prior or on the day of the Initial Public Offering. Controlling for other factors, through a propensity score methodology, we find that the probability of delisting is positively associated with relative size issuance and earnings’ manipulation, and negatively associated with hot-issuance periods and the joint effect of audit quality and amount of information divulged through I.P.O. prospectus. In distinguishing between alternative cases of delisting, we find that the effects of audit quality, relative size offer and earnings’ manipulation are further accentuated for voluntary delisted firms. Our results are useful to regulators aiming at reversing the ongoing “listing gap”, not least, in the grossly under-researched Greek market.

Keywords: Accounting, Auditing, Corporate Governance, Delisting, Athens Stock Exchange

Attention Please: Does Audit Committee Directors’ Unequal Allocation of Attention to Multiple Directorships Affect Firms’ Earnings Management?

Posted: 6 Dec 2018

See all articles by Henry He Huang

Henry He Huang

Yeshiva University - Sy Syms School of Business

Gerald J. Lobo

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

Chong Wang

The Hong Kong Polytechnic University

Jian Zhou

University of Hawaii at Manoa

Date Written: November 1, 2015


We examine the relationship between audit committee directors’ unequal allocation of attention to multiple directorships and firms’ earnings management. We find that firms with a greater proportion of audit committee directors for whom the directorship is more important than their other directorships have lower abnormal accruals. These firms are also less likely to have securities litigation with GAAP violations, accounting restatements, and internal control weaknesses. Our study documents how audit committee directors’ unequal prioritization of their time and effort to different directorships affects the strength of accounting monitoring and thus highlights the importance of considering how much monitoring attention a firm would receive when hiring an audit committee director.

Keywords: multiple directorships, audit committees, earnings management

Accounting Discretion and Regulation: Evidence from Health Insurers and the Affordable Care Act

63 Pages
Posted: 6 Dec 2018

See all articles by Evan Eastman

Evan Eastman

Florida State University

David L. Eckles

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Andrew Van Buskirk

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: October 26, 2018


Under the Patient Protection and Affordable Care Act (ACA), health insurers are required to spend a certain portion of premium revenue on policyholder benefits; the failure to do so triggers rebate payments to policyholders. The reported expenditure includes not only realized payments, but also estimated future payments for claims that have either not been reported or not been finalized. As a consequence, the ACA changed incentives for how firms estimate their claims and liabilities. We exploit pre-ACA variation in state-level regulation as well as granular claims information from insurers’ ACA filings to study how this type of regulatory oversight influences health insurer reporting. We find consistent evidence of reporting management in both the pre-ACA period and the post-ACA period. Specifically, we find that 1) prior to the ACA, insurers subject to state-level regulation overstated claims; 2) the ACA’s enactment led to previously-unregulated insurers increasing their claims overstatements; and 3) in the post-ACA period, insurers below ACA thresholds have systematically overstated their claims, leading to an estimated 10% underpayment of policyholder rebates. Our results show real and measurable consequences of reporting management, and illustrate how product-market regulation based on financial information is subject to manipulation by regulated firms.

Keywords: Earnings Management, Regulation, Health Insurance

Literature Review on Islamic Banking: Summarizing Articles in Islamic Banking

28 Pages
Posted: 2 Dec 2018

See all articles by Jassim Aljowder

Jassim Aljowder

Ahlia University

Date Written: November 14, 2018


The objective of this article to review previous articles in Islamic banking in Bahrain. The aim of this paper is to know the level of the quality of previous studies conducted in Bahrain. The method used is Google scholar based on Literature review articles. The main findings show that Bahrain is proven by the fourteen Islamic Shari’ah compliant banks that served as their proper venue in adopting Islamic standards on their investments and financial statements. Findings also show that there is a need for future research to contribute to a better understanding and acceptability of the Islamic accounting standards such as AAOIFI.

Keywords: Islamic Banking, Islamic Accounting Standards, Zakah, Islamic Accounting

Gender Discrimination? Evidence from the Belgian Public Accounting Profession

55 Pages
Posted: 27 Nov 2018

See all articles by Kris Hardies

Kris Hardies

University of Antwerp

Clive S. Lennox

University of Southern California

Bing Li

City University of Hong Kong (CityUHK)

Date Written: October 1, 2018


While prior studies document that women receive lower salaries and are less likely to be promoted compared with men, these findings could reflect intrinsic differences between men and women rather than gender discrimination. We provide new tests for discrimination by examining the fees generated by partners in accounting firms and the types of clients assigned to partners. We show that female partners are associated with fee premiums, but female partners are also less likely to be assigned to prestigious clients. To determine whether these patterns could be attributable to gender discrimination, we examine whether the associations are stronger in accounting offices that have a higher percentage of male partners, because this is where we would expect to find the most discrimination against women. Consistent with discrimination, the fee premiums to female partners are larger in offices with more male partners while the negative association between prestigious clients and female partners is stronger in offices with more male partners. Collectively, our findings are consistent with gender discrimination and are inconsistent with other possible explanations.

How U.S. GAAP Distorts the Effective Tax Rate As a Measure of Tax Avoidance

Kelley School of Business Research Paper No. 18-92

37 Pages
Posted: 26 Nov 2018

See all articles by Casey M. Schwab

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting

Bridget Stomberg

Indiana University - Kelley School of Business

Junwei Xia

Indiana University - Kelley School of Business

Date Written: November 8, 2018


We examine how U.S. Generally Accepted Accounting Principles (GAAP) that govern accounting for income taxes can distort GAAP effective tax rates (ETRs) as a measure of corporate tax avoidance for poorly performing firms. We provide both detailed firm-specific examples and large-sample evidence on the magnitude and pervasiveness of these distortions among U.S. publicly-traded corporations. We also offer suggestions to researchers, policy makers, standard setters, investors and analysts for how to identify situations in which GAAP ETRs are likely affected by these rules and analyze potential approaches for obtaining a better measure of tax avoidance.

Keywords: corporate tax, tax avoidance, accounting for income taxes, effective tax rate

EY:  Financial Reporting Developments Earnings per share ---

EY: How the new revenue standard affects the insurance industry

What you need to know

• Entities in the insurance industry will need to consider whether to apply the new revenue and cost guidance in ASC 606 and ASC 340-40 to contracts that are outside of the scope of ASC 944.

• Contracts that may be in the scope of ASC 606 include contracts for administrative services (e.g., claims processing) without any insurance element.

• Insurance entities that enter into warranty contracts in the scope of ASC 944 should continue to apply that guidance.

• Non-insurance entities that enter into warranty contracts (e.g., car warranties, product warranties) will need to determine whether they should account for these contracts under ASC 606 or ASC 460-10.

Overview The new revenue recognition standard1 issued by the Financial Accounting Standards Board (FASB or Board) became effective2 for public entities for fiscal years beginning after 15 December 2017 and for interim periods therein. Nonpublic entities have to adopt the standard for fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019.

The new standard, which supersedes virtually all legacy revenue guidance in US GAAP, affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other US GAAP requirements).


EY: December 2018 Financial reporting briefs issued ---$FILE/FinancialReportingBriefs_05298-181US_20December2018.pdf

EY:  FASB proposes more amendments to help lessors apply the new leases standard ---$FILE/TothePoint_05315-181US_LessorCodificationImprovements_19December2018.pdf

EY:  2018 AICPA Conference on Current SEC and PCAOB Developments Compendium of significant accounting and reporting issues ---$FILE/AICPACompendium_05162-181US_16December2018.pdf

Summary Regulators and standard setters discussed a broad range of financial reporting topics and emerging issues last week at the annual AICPA Conference on Current SEC and PCAOB Developments (Conference) in Washington, D.C.

The speakers and panelists included representatives of the Securities and Exchange Commission (SEC or Commission), the Financial Accounting Standards Board (FASB or Board), the International Accounting Standards Board (IASB) and the Public Company Accounting Oversight Board (PCAOB) who shared their views on various accounting, financial reporting and auditing issues.

The overall theme of the Conference was how regulators, standard setters, preparers and auditors are responding to changes in accounting and auditing standards, new technologies and other risks and uncertainties in the market.

Highlights included:

New accounting standards — SEC staff members said their comments to registrants on their application of the new revenue recognition standard have focused on areas of significant judgment, such as the identification of performance obligations and the timing of revenue recognition. The staff encouraged companies to continue to improve and refine their disclosures based on their increasing experience with the standard and disclosures provided by their peers.

While several preparers cited the lack of available information technology (IT) solutions as a major challenge to their implementation of the new leases standard, representatives from the SEC and the FASB said the effective date of the standard will not be deferred.

EY:  New AICPA auditing standard will change the requirements for ERISA plan audits and auditor’s report ---$FILE/TothePoint_05177-181US_ERISAStandard_6December2018.pdf

EY:  SEC Financial Reporting Series Now Available

The publications in our SEC Financial Reporting Series have been updated to reflect final SEC rules, certain proposed rules and interpretive guidance issued through 31 October 2018:


·         2018 SEC annual reports – Form 10-K

·         2019 SEC quarterly reports – Form 10-Q

·         2019 proxy statements

·         Pro forma financial information



Zorba:  Companies Must Take More Responsibility for Education ---

Zorba:  AI for Better Customer Service ---


From the CFO Journal's Morning Ledger on December 24, 2018

The U.S. Securities and Exchange Commission is pushing Inc. and other companies to disclose more about where they get their revenue; some companies are pushing back.

From the CFO Journal's Morning Ledger on December 24, 2018

Good day. Stores wrapped up one of the strongest holiday seasons in years, with shoppers crowding retailers for last-minute Christmas gifts and delivery companies so far able to keep up with the surge in online orders, The Wall Street Journal reports.

Yuletide sales boost: Total U.S. retail sales, excluding automobiles, rose 5.2% from Nov. 1 through Dec. 19 compared with last year, according to Mastercard SpendingPulse, which tracks online and in-store spending with all forms of payment. Online sales continued to grow faster than sales overall, rising 18.3% during that time and accounting for 13% of total sales, the highest percentage ever recorded by Mastercard.

Keep it moving: United Parcel Service Inc. delivered 98.3% of packages on time through the four weeks since Thanksgiving, up from 94.1% last year, when the carrier struggled with too many parcels at times, according to ShipMatrix Inc., a software provider that analyzes shipping data. On-time performance for FedEx Corp. and the U.S. Postal Service came in at 96.9% and 98%, respectively, roughly the same as last year.

Everything must go: This is the last Christmas at Sears Holding Corp. for thousands of workers across the country after the company filed for bankruptcy protection. The promise of deep discounts has drawn customers back to Sears, making the day-to-day job more difficult.

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

The U.S. Public Company Accounting Oversight Board on Thursday adopted stricter standards for auditing accounting estimates and strengthened requirements for auditors that rely on the work of specialists.

The new rules direct auditors to pay more attention to addressing potential management bias, create a more uniform approach to substantive testing for estimates, and integrate risk management standards to focus on estimates with greater risk of material misstatements, the regulator said.

The regulator also bolstered requirements for how auditors evaluate the work of specialists, whether employed or engaged by the company, and how auditors supervise auditor-employed and auditor-engaged specialists

Zero-Based Budgeting ---

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

Good day. Walgreens Boots Alliance Inc. will turn to zero-based budgeting—a cost-management strategy that is coming back in fashion—as part of a plan by the drugstore chain to cut $1 billion in annual costs.


Deeper insights: Walgreens has started a 16-week assessment of its global cost base, with an initial focus on the U.S. and U.K. “At the end of that 16 weeks, we will have enormous transparency and granularity,” James Kehoe, the Deerfield, Ill., company’s finance chief, said Thursday during an earnings call. “We will know who spends what on what.”


More discipline: When managers approach operations with fresh eyes, they can reshape their organization by channeling funds to areas that will drive growth, said Steve Player, managing partner at consulting firm the Player Group. For some companies, the exercise can be expensive and overwhelming, and it can reveal undisciplined spending in pockets of the company.


Not frictionless: “ZBB strikes fear in the hearts of some managers,” said Nilly Essaides, senior director of research at the Hackett Group Inc.’s advisory practice. Deploying the practice also is challenging for managers who have spent years investing in and expanding their units, and can cause friction over where those funds are diverted.

Goodwill Impairments Continue to Climb Despite Strong Economy
From the CFO Journal's Morning Ledger on December 20, 2018

The value of goodwill impairments by U.S. public companies is on the rise as a period of synchronized global economic growth and booming stock markets appears to be drawing to a close.

Major goodwill impairments reported in 2018—including a major write-down by General Electric Co. —already exceed $40 billion, according to valuation firm Duff & Phelps LLC. That figure alone, which doesn’t account for the fourth quarter or smaller impairments, is up 16% from the total goodwill impairments of $35.1 billion recorded in 2017.

Companies record goodwill on their balance sheets when they buy a business for more than the value of its hard assets, such as cash or factories. The acquiring company must then measure the fair value of its reporting units annually and, if that figure is less than the amount recorded on the books, reduce the value of the goodwill.

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

U.K. regulators proposed sweeping changes to rules governing British audit firms Tuesday in moves designed to increase competition, prevent conflicts of interest and restore public confidence in an industry tarnished by an accounting scandal that led to the collapse of one of Britain’s largest construction companies, report Michael Rapoport and CFO Journal’s Nina Trentmann.

The measures, if implemented, would see audit firms separate their auditing and consulting operations, introduce two-firm audits for large companies and replace the current auditing regulator. The changes were in part triggered by the scandal that brought down Carillion PLC.

In the wake of the construction company’s collapse, U.K. affiliates of the Big Four audit firms—KPMG LLP, PricewaterhouseCoopers LLP, Ernst & Young LLP and Deloitte Touche Tohmatsu Ltd.—have faced criticism that their auditing hasn’t been tough enough and they have been too cozy with their clients.

From the CFO Journal's Morning Ledger on December 18, 2018

Good day. U.S. Federal Reserve officials will debate this week how to telegraph less certainty about the path of interest rates without signaling they are done raising them, The Wall Street Journal reports.

Wordplay: Fed officials have been debating how and when to remove language from their postmeeting policy statements that says the central bank expects “further gradual increases” in interest rates. President Trump argued Monday that it was “incredible” that Fed policy members were considering raising interest rates again, continuing his public campaign against tighter monetary policy.


Economic outlook: The Fed expects U.S. economic growth to slow in the coming year, but the recent data remain solid. Employers are hiring at a pace strong enough to push down the already low unemployment rate. Retail sales and other measures of consumer spending have been strong. On the other hand, the rate-sensitive housing sector has slowed and manufacturing has sputtered.

Market response:
U.S. government bond prices rose on Monday,
reflecting expectations that Fed policy makers will scale back their forecasts for rate increases in 2019 and could also lower estimates for the pace of future growth

An Accounting Theory Question of Vehicle Leases Used as Debt Collateral

From the CFO Journal's Morning Ledger on December 17, 2018

Tesla Inc. sold $837 million of bonds backed by auto leases Friday, taking advantage of a rebound in investors’ sentiment toward the company to provide further support to its fast-growing leasing operation.

Jensen Comment
This raises interesting questions about possible mismatches in timing between collateral amortization and debt payoffs. The typical vehicle lease is for three years at which time the car or truck is usually put up for sale at a depreciated value. Presumably the lease is cancelled after three years and no longer has value as collateral (in fact it's value declines steadily over the three year lease period). What happens if the debt payoff does not match the lease amortization? Does the debt owner simply lose collateral value? Does this create accounting issues that students could possible debate.

One possibility is that new leases replace old leases along the way as collateral until the debt is repaid. I don't know if this happens in the real world.

Even though Tesla has never earned an annual profit and is highly leveraged, its debt is not as risky as it might seem since the company probably worth more than its debt if sold to another company like Ford or Chrysler or Volkswagen. It's most certainly not the same as loaning money to Sears before Sears became bankrupt.

But there's an technology risk for Tesla and other battery EV manufacturers. Suppose there's an enormous breakthrough in lowering the cost of fuel cell vehicles? Suppose there's an enormous breakthrough in hybrids (BMW thinks it's close to such a breakthrough) ?

My point is that there's enormous risk in both equity investing and long-term debt investing in Tesla, and vehicle lease collateral probably is not such great collateral for long-term debt.

From the CFO Journal's Morning Ledger on December 17, 2018

General Electric Co. is moving ahead with a plan to solicit bids for an independent auditor after the industrial conglomerate revealed a series of accounting issues earlier this year.

Bloomberg:  GE Opens Door to Replace KPMG as Auditor After Financial Miscues ---


From the CFO Journal's Morning Ledger on December 14, 2018

Global revenue at the Big Four accounting firms rose more than 10% in 2018, their strongest annual growth in at least a decade, as they continued a long shift toward consulting over their core auditing businesses.

A proposal for a monumental change in financial reporting:  An enormous paradigm shift
The Problem of Management Bias in Accounting Estimates:  An Investor Perspective on Root Causes and Solutions

In his paper with Bo Nordlund, Tom Selling is now going to try to sell us on replacement cost accounting (misleadingly termed fair value accounting in their paper) on the basis that independent appraisers estimates of replacement costs are more independent than audited GAAP book values and earnings traditionally presented in financial statements like 10-K reports.



The standards of the PCAOB implicitly, yet unmistakably, presume that auditors are capable of eliminating the material effects of management bias by constraining point estimates to a ‘reasonable’ range. Yet, from inspection results of the PCAOB and its global counterparts we can confidently infer that auditors far too often fail to exercise sufficient skepticism of management's estimates. The consequences could be profound. Therefore, we are proposing fundamental changes to the rules of engagement between the auditor and its client. We would, incrementally over time, transfer the responsibility for financial statement judgments to independent appraisers. Auditing would become solely a verification service, and financial statements would better serve investors and the public interest.


Jensen Comments on September 4, 2018
I will try to keep my comments Selling and Nordlund Paper as short as possible.
The paper proposes that independent appraisal firms take over the responsibility of financial reporting of businesses, especially corporations now subject to SEC financial reporting rules under GAAP promulgated by the FASB and tradition. Historical cost book values will be replaced by replacement cost book values (after depreciation) estimated by independent appraisers rather than management.

Firstly, I might say that to do so without complete transitioning by the rest of the world (think of 100+ nations reporting under IFRS) would lead to worldwide capital markets chaos if the USA diverged fundamentally from the rest of the world in financial reporting.  Presumably Selling and Nordlund are making a monumental proposal for the entire financial world. There's nothing wrong with proposing such a monumental upheaval in financial reporting. Just be aware that it's a truly monumental global paradigm shift that's entailed. I don't think the USA could go it alone.

Secondly, I might point out that I read the paper as wanting to reduce auditing to a clerical process of counting cash, counting inventory items, etc.:

Walter Schuetze has argued that auditors are incapable of judging the reasonableness of management's estimates  ( quoted from Page 505 of the paper)

However, our proposal is not to completely overhaul the annual audit, because many audit tasks are already verification tasks. Prominent examples include the verification of cash balances, the existence of assets and their historic costs, and supporting documentation to confirm contractual amounts due and owed.  (quoted from Page 505 of the paper)

Since CPA auditors are supposedly incapable of judging the "reasonable estimates of management" it follows that  Selling and Nordlund believe that CPA auditors are totally incapable of judging the reasonableness of replacement cost estimates of independent appraisers as well. Thus the only auditors left in the Big Four will be inexpensive clerks counting cash and inventory items unless the Big Four transitions to an oligopoly of Big Four appraisal firms.

Presumably, nobody will audit the replacement cost estimates of independent appraisers.

Would Big Four not be allowed to abandon financial auditing and transform themselves into independent appraisers?
In other words Selling and Nordlund could have auditing firms abandoning efforts to judge the reasonableness of management's estimates by making their own estimates as "independent appraisers."
Or would Walter Schuetze argue that auditors are incapable of becoming independent appraisers even though real estate agents are capable of learning to be financial statement replacement cost appraisers?

To date appraisers are either specialists in jewelry, real estate, insurance claims, etc. or they are business value appraisers estimating the total value of all the tangibles and intangibles of a business, including the value in use (synergy) value of a business in particular uses such as the total value of Tesla if purchased by Ford versus a different total value of Tesla if purchased by Chrysler.

Selling and Nordlund are not so naive as to believe that there is not tremendous range for subjective judgment differences in appraised values where 20 different appraisers might give you 20 differing estimates. They claim, however, that the range of difference will not be whole lot different than the range of error now existing in audited GAAP outcomes.

I disagree sharply here. Auditors with their GAAP and auditing regulations face huge limits to the degrees of freedom when allowing management in making judgments. And hovering overhead are the millions of lawyers seeking to sue on behalf of shareholders and creditors. Independent appraisers have many more degrees of freedom for subjectivity.

Selling and Nordlund rightly claim that there are countless instances where managers have persuaded auditors to cheat. They provide zero evidence of why it would not be even easier for managers to persuade appraisers to cheat. One year I paid a professional real estate appraiser to assess the value of our cottage and its surrounding land. His first question for me was:  Is this an appraisal to sell the property or is this an appraisal to reduce property taxes? The implication was that he would change the numbers somewhat to suit my purpose.

Lastly I have all sorts of objections to both exit value accounting and entry value (replacement cost) accounting. But I will forego repeating all of this today. I will, however, summarize my main objections to entry value (replacement cost, current cost) measurement:

  1. Don't call replacement cost accounting "value" or "fair value" accounting. Tom Selling does not like to write about replacement cost depreciation and other arbitrary accruals. Tom Selling does not like to dwell on the fact that in many, many instances existing assets or liabilities are impossible to replace with new versions that aren't markedly different in features. Often older assets like COBOL systems or other data storage and computing systems cannot be replaced in the used product markets.
  2. I really don't like making earnings more variable with unrealized (fictional) transitory changes in market prices or rates such as the highly variable value of land under Tesla's enormous factory complex in Freemont, California, value that depends heavily on type of use.  I was pleased when the FASB introduced Other Comprehensive Income to absorb some earnings variability such as gains and losses from the effective portions of financial hedges. Maybe OCI can be used to absorb replacement cost ups and downs that have not yet been realized.

The main issue I wanted to address today is that replacing audited management estimates in a 10-K with unaudited appraiser replacement cost estimates of items in a 10-K is not likely to yield benefits in excess of costs of this monumental change in financial reporting. If management can manipulate its auditors it most likely can manipulate its appraisers.

Do you think Enron could not have happened if financial statements were prepared by "independent appraisers?" Would Andersen's appraisers magically be more ethical than Andersen's auditors?

Do you think thousands and thousands of CPA auditors are simply going to wait on tables in restaurants rather than become "independent appraisers" working for mostly the same supervisors they had when they were GAAP auditors? The least profitable margins and riskiest profits of the Big Four are in auditing services. My guess is that the Big Four would love to replace auditing services with financial statement appraisal services if they can make billions in profits with higher margins and less litigation risk.

It will be wonderful for the Big Four if their appraisal estimates do not have to be validated and are less vulnerable in civil torts. Dream on!

I think what's going to happen is that the roles of management and CPA auditors will remain unchanged, although there's a lot or room for tightening up regulations such as SEC regulations. Auditors will, and should, face increased scrutiny regarding independence. Audit firms are also facing increased litigation risks that will force them to become better independent auditors or wind up out of business like Andersen.

The roles of business value appraisers, such as appraisers for merger and acquisition decisions, will remain the same with increasing disputes over required qualifications of those appraisers.

Final point. The tone of the Selling and Nordlund paper is that current audited financial statements are doing less and less good because there seem to be more and more scandals. They state on Page 508 that:

If history is our guide, none of this (PCAOB efforts to improve auditing) is working. GAAP is becoming more susceptible to management estimation bias, and the problems are getting worse. Accordingly, we have proposed to fundamentally change the rules of engagement between the auditor and its client by transferring the responsibility for financial statement judgments to (unaudited) independent appraisers.

This is like saying that police in the USA are doing less and less good because there are more scandals.
You don't measure success by only looking at only the scandals. You have to somehow give credit were credit is due rather than disproportionately look at only the scandals. Look at the countless good things police officers do each day, good things that mostly go unnoticed in the media. Empirical evidence in total shows that the existing financial reporting system is helping capital markets thrive. It's really, really dangerous to recklessly implement what is an untested paradigm shift.

There's always room for improvement in almost anything, and financial reporting is certainly something that continually needs to be studied and improved. But reckless paradigm shifts can do more harm than good. For example, MIT recently warned Californians that their new law requiring a shift to 100% renewable energy was going to do more harm than good. But the zealous California state legislature is not listening to the scientists this time and will destroy nuclear plants, oil refineries, and natural gas power plants much too quickly.

I suspect that Tom Selling and Bo Nordund will counter my criticisms above by saying that they want gradual experimentation long before implementation of a complete global paradigm shift in financial reporting.
The good news is that we can experiment before having to eradicate the existing infrastructure too rapidly. My favored multi-column reporting system is the answer. Traditional GAAP reporting can appear in Column 1. The Selling and Nordlund independent appraiser numbers of replacement costs can appear experimentally in Column 2 for a limited number of companies. If Column 2 benefits significantly exceed costs in capital markets, the numbers of experimental firms reporting this way can then be increased until we are assured that a paradigm shift will make capital markets much more effective and efficient.

My point here is that Selling and Nordlund really did not propose that their be a paradigm shift be as reckless as some of the socio-economic transitioning taking place in California today.


From the CFO Journal's Morning Ledger on December 13, 2018

Apple Inc. plans to invest $1 billion building a new corporate campus in Austin, Texas, the company said Thursday, as the iPhone maker seeks to make good on its promises to strengthen its contributions to the American economy.

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

Organic- and natural-products maker Hain Celestial Group Inc. has settled charges brought by the U.S. Securities and Exchange Commission over its revenue-recognition practices, which had led to several quarters of delayed financial reports.

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

Good day. China agreed to reduce tariffs on U.S. autos to 15%, down from 40% currently, during a phone call with U.S. officials that opened the latest round of talks aimed at settling the trade dispute between the world's largest economies, The Wall Street Journal reports.

Tit-for-tat: It wasn’t clear when the change would take effect, but Washington is pushing Beijing to make concessions as soon as possible. President Donald Trump and President Xi Jinping earlier this month agreed to a 90-day truce to negotiate a settlement to the trade frictions.

Asking for a friend: An easing of tariffs on U.S.-made cars would help German auto makers. Daimler AG and BMW AG build cars and sport-utility vehicles in the U.S. and export them to China. They were hit hard by China’s move to levy a 40% border tax on U.S.-built cars and weighed moving some production out of the U.S. to China to meet local demand there and avoid the tariffs.

Masterplan: As part of the trade truce reached between Mr. Xi and Mr. Trump, Chinese officials are also considering making changes to the "Made in China 2025" plan, a state-led industrial policy aimed at enabling Chinese companies to dominate a number of industries such as artificial intelligence and robotics, said people familiar with the matter.

From the CFO Journal's Morning Ledger on December 10, 2018

U.S. public companies paid a median of 2.5% more in 2017 to auditors for assuring that their financial statements are free from material misstatements, according to an annual survey by the Financial Education & Research Foundation.

The increase was nearly double the 1.3% median rise in audit fees recorded in 2016 and came as companies prepared to implement sweeping new revenue accounting rules, which became effective for most public companies in 2018, reports CFO Journal's Tatyana Shumsky. U.S. public companies were also preparing to adopt new lease accounting rules, which come into effect for fiscal years starting after Dec. 15, 2018.

FERF examined audit fees reported in securities filings by 6,340 U.S. public companies, and surveyed more than 250 financial executives at public and private companies as well as nonprofit organizations.

From the CFO Journal's Morning Ledger on December 10, 2018

As the Big Four accounting firms in the U.K. are criticized over the quality of their audits, some investors worry about the work the companies have done on the audits of U.S. companies.

Elon Musk ---

From the CFO Journal's Morning Ledger on December 10, 2018

Tesla Inc. Chief Executive Elon Musk delivered a new barrage of criticism at the SEC, saying he doesn’t respect the agency and that his communications on Twitter haven’t been censored by the company.

Jensen Comment
On December 9 I watched the CBS Sixty Minutes interview with Elon ---

The interview humanized Elon somewhat, but much of it seemed bitter --- his abusive childhood, his disdain for the SEC, and his suspicions that labor unions like the UAW are playing dirty tricks to win over his employees. As a young man he moved to the USA with virtually nothing and rose to be a multi-billionaire (much of it on paper). His American Dream rise to fame and fortune life seems to fit the old adage "truth is stranger than fiction."

He's a brilliant guy who started various companies and factories, but most of his time and most of the media focus on him seems to be with one company --- Tesla. This is also the case with this interview with veteran Lesley Stahl.

I'm in awe of Elon Musk as an innovator and living example of the American Dream. But if I were a shareholder (which I'm not) in Tesla or one of his other companies I would be concerned about his willingness to gamble with money invested in or loaned to his companies. For example, all Tesla patents are open sharing, many of which must be quite valuable. It seems to me these are gifts to competitors that, he openly admits, may put Tesla's future at risk. His troubles with the SEC appear to stem from his seeming attempts to manipulate stock prices --- and then he gets mad at the SEC regulators.

His attitude about his investors and regulators seems to be that "it's either my way or the highway." Exhibit A seems to be his ignoring of court-ordered requirements to have his Twitter Tweets pre-approved.

I wonder how open he is to what perhaps are Tesla's most profitable alternatives. For example, he may have reached a point where Tesla investors might be better off if it was sold Tesla to GM or Volkswagen or Ford or whomever. His ego at this point would probably prevent him from considering such alternatives. Investors may be better off if he purchased or leased an idle GM plant in Ohio even if it is located on UAW turf. I think he's paranoid about UAW turf.

This wonder man has so many irons in the fire (think Tesla, a new mega battery factory in Nevada, a space rocket company, and a earth tunneling company just for openers) that the stress he lives under must be enormous. He claims to sleep (catnap) most nights in his Tesla factory in spite of the alleged bad air quality of the factory.

His interview answers seemed flippant, but this could be either because he was aware of the short time frame for the entire interview or that he viewed even this interview as a waste of his valuable time. Lesley Stahl's questions seemed to be more negative than positive.

I keep remembering that Tesla and most of his other ventures have never had profitable years and are facing staggering cash flow worries (think hundreds and hundreds of millions of dollars).  But I also remember that Amazon faced many similar problems during early years of losses. Most of Elon's investors are looking forward to him to deliver them another Apple, Google, or Amazon. Perhaps they should worry more about a possible breakdown under stresses that, to me, seem completely overwhelming.

While I watched the December 9 interview I kept wishing I had the trained eyes of a brain scientist or physician --- an ability to study eye blinking and the head/lip movements that seemed to me that they might be revealing while I was too ignorant to pick up on their clues.

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

Good day. Canadian authorities in Vancouver have arrested Huawei Technologies Co.’s chief financial officer at the request of the U.S. government for alleged violations of Iranian sanctions, the latest move by Washington to crack down on the Chinese cellular-technology company, The Wall Street Journal reports.

Hearing pending: A spokesman for Canada’s justice department said Meng Wanzhou was arrested in Vancouver on Dec. 1 and is sought for extradition by the U.S. A bail hearing has been tentatively scheduled for Friday, according to the spokesman. Ms. Meng, the daughter of Huawei founder Ren Zhengfei, serves as the company’s CFO and deputy chairwoman.

Face-off: Ms. Meng’s arrest comes amid a year-long U.S. government campaign against a company it views as a national-security threat. In the past year, Washington has taken a series of steps to restrict Huawei’s business on American soil and, more recently, launched an extraordinary international outreach campaign to persuade allied countries to enact similar curbs. Because of that, Huawei is losing a chunk of business from one of its biggest and oldest Western customers.


More to come: U.S. authorities have suspected Huawei’s alleged involvement in Iranian sanctions violations since at least 2016, when the U.S. investigated ZTE Corp., Huawei’s smaller Chinese rival, over similar violations.

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

A Treasury-led task force is proposing that the U.S. Postal Service charge more for certain package deliveries, going after Inc. and other online retailers that President Trump has said benefit at the post office’s expense.

Jensen Comment
It would be most interesting to have students discuss this proposal in cost/managerial accounting courses that have CPV modules. Executives of the Post Office dispute claims that they lose money on Amazon's business. I suspect this is true, because the big loser for the Post Office is the drop in postage revenues caused by email and Internet communications. 

Revenues from first class postage market share plummeted while the Post Office still has to deliver mail to all of rural America, including Bob Jensen's remote mail box in the White Mountains.  

A big loser for the USPO is the cost of rural mail delivery, including driver, fuel, and vehicle costs. The added revenues from Amazon help to cover variable and fixed costs of rural mail delivery. It would be great if raising Amazon's postage fees did not result in a loss of revenue from Amazon. Unfortunately, other services like UPS and FedEx also deliver Amazon's packages (daily) to Bob Jensen's garage. At some point the USPO could be hurting itself with charging Amazon higher prices.

I personally think Amazon's business to date has helped rather than hurt the USPO. That does not, of course, mean that the USPO cannot benefit with reasonable price increases to online vendors like Amazon. 

As in most CPV problems, much depends upon the interaction of price changes with changes in variable and fixed costs. Unfortunately, the USPO could probably lose all of Amazon's business without seeing any decline in variable and fixed costs.


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

Alibaba Group Holding Ltd. and Inc. are squaring off in Europe—and not just in e-commerce, but also in the quickly growing cloud-computing market.

Jensen Comment
In theory both companies can benefit from this competition. The EU is extremely aggressive in fining large foreign companies under aggressive EU anti-trust legislation. Having competition restrains salivating anti-trust enforcers.

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

Good day. China is beginning to provide details of a weekend tariff truce with the U.S., after days of vague Chinese statements and a barrage of comments from President Trump and other administration officials, reports The Wall Street Journal. 


Carrot and stick: Mr. Trump expressed optimism Tuesday that China would hold to commitments made in Argentina last week, but indicated he was willing to pivot and continue a campaign of tariffs if China doesn’t move to end the trade dispute.


Detente: On Saturday, the two presidents and their negotiators worked toward a settlement of a trade dispute that has resulted in retaliatory tariffs and other geopolitical measures. At the meeting, Mr. Trump agreed to suspend a planned Jan. 1, 2019, increase in tariffs on $200 billion in Chinese goods to 25%, from 10%.


On various fronts: Meanwhile, German auto executives outlined plans for U.S. investments on Tuesday during meetings with President Trump and top White House officials, a strategy aimed at easing U.S. threats of auto tariffs. The senior executives of Germany’s biggest auto makers laid out proposals for financing new vehicles, plant expansions and cooperation with U.S. manufacturers.

From the CFO Journal's Morning Ledger on December 3, 2018

Good day. Executives' attempts to redirect the market's focus from short-term to long-term trends can spark a swift, negative response from Wall Street, The Wall Street Journal's John D. Stoll reports.

Bad Apple? Apple Inc. ended its practice of reporting quarterly sales numbers for individual units, saying a 90-day performance for iPhones isn't a proxy for the underlying strength of product lines. Its stock sank 6.6% on the day of the announcement. Apple's decision highlights the challenge for executives trying to justify major capital investments that can take years to pay off in an era when investors are fixated on three-month reporting periods.


Quarterly focus: Many critics of short-term thinking on Wall Street say the area most in need of immediate change is quarterly earnings. President Trump directed the Securities and Exchange Commission to study a move to six-month reporting following consultations with business leaders, including PepsiCo Inc. Chairman Indra Nooyi.


Private hopes: Barnes & Noble Inc. Chairman Leonard Riggio said in October the bookseller is considering going private because public shareholders may not be patient to weather a costly and extensive turnaround play.

From the CFO Journal's Morning Ledger on December 3, 2018

Where were the KPMG auditors?  Accounting problems at GE

Federal investigators are questioning former employees of General Electric Co. about intricate details in a legacy insurance business that led to accounting problems at the conglomerate in the past year.

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 30, 2018

Walgreens, Humana Are in Preliminary Talks to Take Stakes in Each Other

By Dana Mattioli, Michael Siconolfi and Dana Cimilluca | Nov 21, 2018

TOPICS: Investments

SUMMARY: "Drugstore owner Walgreens Boots Alliance Inc. and health insurer Humana Inc. are in preliminary discussions to take equity stakes in each health-industry players scramble for tie-ups that will help them compete in a rapidly evolving environment....[A] closer connection with Humana could replicate expected benefits of the CVS-Aetna deal at a much lower cost than a takeover, especially given the strong performance of Humana stock in recent years. Humana's market value currently stands at about $42 billion, while Walgreens' is $78 billion. Cross-shareholdings could increase incentives for the companies to work together and make their partnership work. Walgreens, based in Deerfield, Ill., has more than 18,500 stores in 11 countries, including those from equity-method investments. Its brands include Walgreens and Duane Reade in the U.S. and Boots abroad."

CLASSROOM APPLICATION: The article may be used to help students understand the economics behind equity-method accounting for investments.



1. (Introductory) Based on the context provided in the article, what is the meaning of "cross shareholdings"?


2. (Introductory) Why would cross shareholdings "replicate benefits" of a corporate takeover or business combination?


3. (Introductory) Why might these benefits be achieved at a lower cost than would be required for a full business combination of Walgreens and Humana?


4. (Advanced) Summarize the equity method of accounting for investments.


5. (Advanced) How does the equity method create accounting which faithfully represents the underlying economics of a deal such as this one between Walgreens and Humana?



Reviewed By: Judy Beckman, University of Rhode Island


"Walgreens, Humana Are in Preliminary Talks to Take Stakes in Each Other," by Dana Mattioli, Michael Siconolfi and Dana Cimilluca, The Wall Street Journal, November 21, 2018 ---

Wide-ranging talks include possibility of expanding clinic partnership

Drugstore owner Walgreens Boots Alliance Inc. WBA -0.64% and health insurer Humana Inc. HUM -3.67% are in preliminary discussions to take equity stakes in each other, according to people familiar with the matter, as health-industry players scramble for tie-ups that will help them compete in a rapidly evolving environment.

The companies, which already have a partnership focused on serving seniors from two Walgreens locations, are having wide-ranging talks that also include the possibility of expanding that venture, the people said. Details of the talks couldn’t be learned and there’s no guarantee there will be any new deal between the companies.

Drugstore owners and other health providers are looking for ways to diversify, bulk up and insulate themselves against external threats, including from Inc.

The latest talks come nearly a year after Walgreens rival CVS Health Corp. announced a $69 billion deal to buy insurer Aetna Inc. The proposed acquisition is aimed at securing new avenues for growth for the pharmacy company and capturing more of what consumers spend on health care.

For Walgreens, a closer connection with Humana could replicate expected benefits of the CVS-Aetna deal at a much lower cost than a takeover, especially given the strong performance of Humana stock in recent years. Humana’s market value currently stands at about $42 billion, while Walgreens’ is $78 billion. Cross shareholdings could increase incentives for the companies to work together and make their partnership work.

Read More

·         Why Americans Spend So Much on Health Care (July 31)

·         Amazon Buys Online Pharmacy PillPack for $1 Billion (June 28)

·         Walmart in Early-Stage Acquisition Talks With Humana (March 29)

      Walgreens Has Made Takeover Approach to AmerisourceBergen (Feb. 12)

Walgreens, based in Deerfield, Ill., has more than 18,500 stores in 11 countries, including those from equity-method investments. Its brands include Walgreens and Duane Reade in the U.S. and Boots abroad. Walgreens earlier this year bought more than 1,900 stores from Rite Aid Corp. for more than $4 billion. It is one of the world’s largest purchasers of prescription drugs and also has a big wholesale business, which distributes drugs and other health-care products to pharmacies, doctors and hospitals in several countries, mainly in Europe.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 30, 2018

Slowing Global Economy Weighs on U.S. Profits and Trade

By Sarah Chaney and Theo Francis | Nov 28, 2018

TOPICS: Profitability

SUMMARY: "U.S. profits earned overseas rose 7% in the third quarter [of 2018] from a year earlier...[while] U.S. domestic profits...climbed 10.8%...." The article cites Commerce Department reporting on Wednesday, November 28, for this information. The article then discusses specific issues of potential slowdown in U.S. profit growth and specific companies' results. Executives from a laboratory-instrument maker, TJX Cos., and Deere & Co. discuss their outlooks.

CLASSROOM APPLICATION: The article may be used to discuss the focus on forecasting profits by paying attention to individual companies' data and to overall economic trends.



1. (Introductory) Name the corporate executives quoted in the article as discussing their companies' forecasts of earnings.


2. (Advanced) What factors favorably impacted domestic U.S. profits in the third quarter of 2018?


3. (Advanced) What factors cause concern about future profits by U.S. companies, domestic or international?



Reviewed By: Judy Beckman, University of Rhode Island


"Slowing Global Economy Weighs on U.S. Profits and Trade," by Sarah Chaney and Theo Francis, The Wall Street Journal, November 28, 2018 ---

Data showed moderately stronger business spending than originally reported, but weaker consumer spending

Overseas profit growth at American firms is slowing, a new sign of how the faltering global economy is reverberating back to the U.S.

U.S. profits earned overseas rose 7% in the third quarter from a year earlier, a slowdown from profit growth of 13.7% in the second quarter and 15.6% in the first, the Commerce Department reported Wednesday.

The corporate profit figures came alongside the agency’s second estimate for third-quarter gross domestic product, which was unrevised at a 3.5% seasonally adjusted annual rate.

Many large overseas economies showed signs of weakening in the third quarter. Growth in China slowed, and output in Germany and Japan contracted. A stronger dollar may also have been a factor, because it translates into less income earned in other currencies.

The third-quarter picture looks different for U.S. domestic profits, which climbed 10.8% in the third quarter from a year earlier, the strongest pace since 2012. Domestic profits benefited from strong consumer spending associated with low unemployment and individual income tax cuts enacted last year.


Headwinds to U.S. profit growth could be building. Companies are grappling with rising material and labor costs, as well as an uncertain trade environment.

“Sales, orders, even leads look solid,” Olivier Filliol, chief executive of laboratory-instrument maker Mettler-Toledo International Inc., told analysts in early November. “But there are many reasons to be cautious about the global economy, including higher interest rates, a strong dollar and uncertainty and costs arising from tariff disputes. I would characterize it as a sunny weather but clouds on the horizon.”

Christine Short, senior vice president at Estimize, said the forecasting firm is projecting profits at S&P 500 firms to slow to an annual growth rate of 9% in 2019, down from 20% in 2018.

“On top of increased input costs for some of the materials a lot of these companies use, it’s also increased labor costs that they’re unable to potentially handle going forward,” Ms. Short said.

The Commerce Department’s revised data on third-quarter GDP showed moderately stronger business spending and private-inventory investment in the quarter than originally reported. Weaker consumer spending and state and local investment offset those increases.

Forecasting firm Macroeconomic Advisers predicted a growth rate of 2.5% in the fourth quarter, according to estimates released Wednesday.

TJX Co s., the parent company of T.J. Maxx, will likely notch down its earnings forecast for next year because of headwinds and uncertainty circulating in the broader economy, said Ernie Herrman, chief executive of the retailer.

“Foreign currency, tariffs, Brexit—all those things are weighing in” on the earnings outlook, Mr. Herrman told analysts in a conference call on Nov. 20.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 30, 2018

Backlog and Revenue Growth Power Salesforce Results

By Patrick Thomas | Nov 28, 2018

TOPICS: Earnings Forecasts

SUMMARY: Salesforce "...guided fourth-quarter revenue growth of 25% from the year prior...and for revenue for the coming fiscal year to reach about $16 billion....While revenue growth of nearly 21% in fiscal 2020 would be slower for Salesforce than in the recent year, Salesforce executives told analysts on a conference call Tuesday that companies are continuing to push for investments to support their digital transformation efforts...In the third quarter, Salesforce posted stronger sales and grew its backlog of business though higher operating expenses weighed on its bottom line...Unearned revenue...grew 25% to $5.38 billion."

CLASSROOM APPLICATION: The article may be used to discuss management guidance and of revenue and profitability as well as the importance of unearned revenue in subscription types of sales.



1. (Introductory) Click on the live link in the article to reach the WSJ's summary page describing Inc. What does the company do?


2. (Introductory) What have been the trends in Salesforce's revenues through the third quarter of 2018?


3. (Advanced) What factor negatively impacted Salesforce's results during the third quarter of 2018?


4. (Advanced) What is unearned revenue? Given Salesforce's business model, how do you think this unearned revenue is created? When will the unearned revenue show as revenue in the income statement?



Reviewed By: Judy Beckman, University of Rhode Island


"Backlog and Revenue Growth Power Salesforce Results," by Patrick Thomas |, The Wall Street Journal, November 28, 2018 --- |

The business-software company reported revenue of $3.39 billion, up 26% from a year earlier Inc. CRM +0.30% gave a rosy outlook for sales in the current quarter and forecast growth ahead in the coming fiscal year, helping assuage investor concerns about a potential slowdown in technology spending and global economic growth.

The business-software maker guided fourth-quarter revenue growth of 25% from the year prior, which came in ahead of analysts’ estimates, and for revenue for the coming fiscal year to reach about $16 billion. Co-Chief Executive Marc Benioff said in prepared remarks that Salesforce, founded in 1999, would become the fastest enterprise software company to reach the $16 billion annual revenue milestone.

Shares of Salesforce rose more than 7% in post-market trading as the firm on Tuesday also raised its forecast for revenue and profit for the current fiscal year. Salesforce’s stock has gained 24% over the past 12 months.

While revenue growth of nearly 21% in fiscal 2020 would be slower for Salesforce than in recent years, Salesforce executives told analysts on a conference call Tuesday that companies are continuing to push for investments to support their digital transformation efforts.

“We still see very, very much a huge investment focus going on,” Salesforce finance chief Mark Hawkins said on the call.

Salesforce also is benefiting from increased use in its Customer Success Platform, which powered more than 20 million e-commerce orders in the days between Black Friday and Cyber Monday, Mr. Benioff said. During the period, Salesforce said, retailers with which it has been working found that roughly 50% of orders were being placed by phone and 67% of online retail traffic is mobile.

In the third quarter, Salesforce posted stronger sales and grew its backlog of business though higher operating expenses weighed on its bottom line. Revenue rose 26% to $3.39 billion, as the company posted growth across geographic regions and industry groups. Analysts polled by FactSet had expected $3.37 billion of revenue in the quarter. Unearned revenue, which includes future billings, grew 25% to $5.38 billion.

Over all, Salesforce reported a profit of $105 million, or 13 cents a share, compared with $107 million, or 14 cents a share, the same period a year ago. Expenses related to research and development and marketing rose 22% and 36%, respectively.

The San Francisco company earned an adjusted profit, a figure that excludes costs like stock-based compensation, of 61 cents a share. Analysts were expecting earnings of 50 cents a share on an adjusted basis.

Salesforce’s $6.5 billion acquisition of MuleSoft Inc., which closed in May, added $128 million in revenue in the latest quarter. The deal was aimed at helping customers tap data from older computer systems as they move to the cloud. Best known for its customer-management technology, Salesforce has been branching into other sectors through acquisitions.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 30, 2018

Possible Ghosn Defense: He Didn't Think He Needed to Report Deferred Pay

By Sean McLain | Nov 26, 2018

TOPICS: Corporate Governance, Disclosures

SUMMARY: Carlos Ghosn was arrested in Toyko and awaits the charges against him in jail "on suspicion of underreporting his income in financial statements by ¥5 billion, or about $44 million, over five fiscal years ended March 2015..." The amounts allegedly unreported in violation of Japanese law relate to deferred income to be paid in retirement, though the article indicates that "the exact terms and payout period of that money couldn't be learned....Mr. Ghosn told colleagues that if he was set to receive the deferred money after retirement, it wouldn't have to be reported in Japanese regulatory filings, but Nissan said it should have been reported....In addition to the allegations made by prosecutors, Nissan's investigation alleged that Mr. Ghosn used corporate money to buy and renovate residences he used in Beirut and Rio de Janeiro."

CLASSROOM APPLICATION: The article may be used to discuss the demarcation of business versus personal expenses, disclosure of executive compensation, and general corporate governance.



1. (Introductory) Of what wrongdoing(s) is Carlos Ghosn accused?


2. (Advanced) What entities does Mr. Ghosn preside over? Might that business arrangement explain the occurrence of the events leading up to Mr. Ghosn's arrest? Explain your answer based on information in the article.


3. (Advanced) "U.S. Securities law requires disclosure of all kinds of deferred compensation for executives..." What is deferred compensation? Name one type of deferred compensation and explain the disclosure that must be made about it.


4. (Introductory) According to the article, how does the specificity of U.S. disclosure requirements differ from the requirements under Japanese law?


5. (Advanced) Refer to the related article. In the U.S., what entities provide regulations which mark the line between business and personal expenses?


6. (Advanced) Are there gray areas across this demarcation line between business and personal expenses? Explain your answer.





Ghosn's Arrest Exposes Culture Gap When It Comes to Executive Pay
by Andrew Peaple and Kosaku Narioka
Nov 23, 2018
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island


"Possible Ghosn Defense: He Didn't Think He Needed to Report Deferred Pay," by Sean McLain, The Wall Street Journal, November

Former Nissan chairman has denied wrongdoing, according to media reports

TOKYO—Carlos Ghosn received tens of millions of dollars in deferred compensation at Nissan Motor Co. NSANY -1.95% and told colleagues he was acting appropriately when he didn’t report that money in financial disclosures, people familiar with Nissan’s investigation said.

The new information suggests a possible line of defense emerging for Mr. Ghosn, who was arrested Nov. 19 in Tokyo on suspicion of underreporting his income in financial statements by ¥5 billion, or about $44 million, over five fiscal years ended March 2015.

The Japanese car maker’s annual reports to regulators show Mr. Ghosn received about ¥1 billion, or $8.9 million, for each of those five years. People familiar with the Nissan investigation said it alleged he earned a similar amount in deferred compensation that was to be paid at retirement.

Altogether, Mr. Ghosn, 64 years old, earned about ¥8 billion, or $70.86 million, in what Nissan calls unreported deferred compensation in the eight years ended March 2018, these people said. The exact terms and payout period of that money couldn’t be learned.

The structure was formulated in consultation with Nissan executive Greg Kelly, whom Nissan has publicly called the “mastermind” of the plan, one of the people said.

Mr. Ghosn told colleagues that if he was set to receive the deferred money after retirement, it wouldn’t have to be reported in Japanese regulatory filings, but Nissan said it should have been reported, this person said.

Mr. Ghosn has told prosecutors he denies wrongdoing, Japanese public broadcaster NHK said Sunday. Mr. Kelly, who was also arrested Nov. 19, denied wrongdoing after his arrest, saying that Mr. Ghosn’s compensation was set in consultation with Nissan, NHK said.

Former Japanese prosecutor Motonari Otsuru, now in private practice, is representing Mr. Ghosn, said a person familiar with the matter. Mr. Otsuru’s office previously declined to comment and a call to his office on Sunday wasn’t returned.

Mr. Ghosn also has hired U.S.-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, this person said. Brad Karp, the firm’s chairman and a defense attorney for major Wall Street banks, will represent Mr. Ghosn along with another of the firm’s partners, Michael E. Gertzman, the person said.

Mr. Kelly’s family has retained Nashville, Tenn.-based attorney Aubrey Harwell to represent him. Mr. Harwell said in a phone interview that he hasn’t had contact with Mr. Kelly yet, but that Mr. Kelly’s family believes he did nothing wrong. Mr. Kelly’s family plans to hire a Japan-based lawyer for him, Mr. Harwell said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 30, 2018

Airbnb Hires New CFO From Amazon

By Nina Trentmann | Nov 26, 2018

TOPICS: Accounting Careers, Initial Public Offerings

SUMMARY: Airbnb Inc. has name a new chief financial officer, Dave Stephenson, who is expected to lead the company through its planned IPO. The company made the announcement on its blog post. Mr. Stephenson is leaving his current post as vice president and chief financial officer responsible for Amazon's global web sales. He had been with Amazon 17 years and was previously in finance and engineering roles at Procter & Gamble.

CLASSROOM APPLICATION: The article may be used to discuss the role of the CFO in an IPO.



1. (Advanced) What is an initial public offering (IPO)?


2. (Introductory) What mix of job experience does the new Airbnb chief financial officer bring to his position?


3. (Advanced) How do you think the new CFO will use his mix of skills in fulfilling his responsibilities to help the company through its planned IPO?


4. (Advanced) Explain what you think is meant by the statement that "In the years ahead, Dave [Stephenson] will be Airbnb's quarterback for long-term growth...."



Reviewed By: Judy Beckman, University of Rhode Island


"Airbnb Hires New CFO From Amazonm" by Nina Trentmann, The Wall Street Journal, November 26, 2018 ---

Finance chief is expected to guide home-sharing platform through potential IPO next year

Airbnb Inc. has hired another executive from Inc., this time naming Dave Stephenson as chief financial officer of the vacation-rental portal ahead of a potential initial public offering.

Mr. Stephenson will join the San Francisco-based company in early January, according to a company blog post, and will report to Airbnb Chief Executive Brian Chesky. He joins Airbnb after 17 years at Amazon, where he was most recently vice president and finance chief of the company’s world-wide consumer organization and responsible for Amazon’s global web sales.

Before that, he was vice president for Amazon’s international consumer business and oversaw the finances of various business units, including the North American retail operation, merchant services and Amazon Web Services.

Airbnb Inc. has hired another executive from Inc., this time naming Dave Stephenson as chief financial officer of the vacation-rental portal ahead of a potential initial public offering.

Mr. Stephenson will join the San Francisco-based company in early January, according to a company blog post, and will report to Airbnb Chief Executive Brian Chesky. He joins Airbnb after 17 years at Amazon, where he was most recently vice president and finance chief of the company’s world-wide consumer organization and responsible for Amazon’s global web sales.

Before that, he was vice president for Amazon’s international consumer business and oversaw the finances of various business units, including the North American retail operation, merchant services and Amazon Web Services.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 7, 2018

CFOs Face a Tough Task: Freeing Cash Trapped on Their Balance Sheets

By Nina Trentmann and Ezequiel Minaya | Nov 29, 2018

TOPICS: Cash Management

SUMMARY: "Finance executives are struggling to reduce the amount of excess working capital at companies around the world, resulting in about $1.5 trillion trapped on balance sheets-funds that could be spent on growing these businesses....CFOs didn't make much progress speeding up the cash conversion cycle in 2017, according to a study by PricewaterhouseCoopers LLP. It took them an average of 51.8 days to collect a payment after a sale, a 0.1 day improvement compared with 2016. Companies in 2017 held 58.2 days of inventory on hand, a 0.7 day gain compared with the prior year, and paid suppliers 0.3 days earlier, after an average of 67.7 days. The findings come as capital spending by companies in 2017 has dropped and central banks are tightening policies, resulting in higher financing costs for businesses. As a result, some companies may need more cash on hand to fund or finance certain transactions."

CLASSROOM APPLICATION: The article may be used when discussing working capital, current assets and liabilities, or the operating cycle.



1. (Introductory) What definition is given in the article for working capital?


2. (Advanced) Does this definition agree with the definition given in your accounting text? Explain, commenting on how the two compare and how the statement in the article makes the concepts clear for general readers.


3. (Advanced) What steps do corporations take to manage working capital as well as possible?


4. (Introductory) What measures determine whether companies are improving in their management of working capital? State all that you find in the article.



Reviewed By: Judy Beckman, University of Rhode Island


"CFOs Face a Tough Task: Freeing Cash Trapped on Their Balance Sheets," by Nina Trentmann and Ezequiel Minaya, The Wall Street Journal, November 20, 2018

Businesses struggle to reduce working capital, resulting in about $1.5 trillion stuck on corporate balance sheets world-wide

Finance executives are struggling to reduce the amount of excess working capital at companies around the world, resulting in about $1.5 trillion trapped on balance sheets—funds that could be spent on expanding these businesses.

Working capital is money that companies spend paying suppliers and holding inventories while waiting for payments from customers. Chief financial officers seek to convert working capital into cash as quickly as possible to use it for other, higher-yielding purposes.

The current scenario comes as capital spending by companies dropped last year and central banks are tightening policies, resulting in higher financing costs for businesses. As a result, some companies may need more cash on hand to fund or finance certain transactions.

Publicly listed businesses had $5.2 trillion in working capital on their books in 2017, about one-third of which could be deployed more wisely, according to a study by PricewaterhouseCoopers LLP, which examined about 14,700 companies in a variety of sectors, with annual revenue averaging $2.9 billion.

Finance chiefs didn’t make much progress speeding up the cash-conversion cycle in 2017. It took them 51.8 days on average to collect a payment after a sale, nearly unchanged from 2016, PwC said. Companies last year held 58.2 days of inventory on hand, a 0.7 day gain compared with 2016, and paid suppliers 0.3 day earlier, after an average of 67.7 days.

“Companies need to make more radical changes,” said Daniel Windaus, a partner in PwC’s working capital practice in the U.K.

ITT Inc., a maker of components for the aerospace, transportation, energy and industrial markets, has spent the past two years trying to reduce its cash-conversion cycle.

The White Plains, N.Y.-based manufacturer accelerated production, shrank inventories and nudged its customers to pay on time. It broke down bigger tasks into smaller steps.

“Instead of saying, ‘We need to reduce working capital by reducing inventory,’ we said, ‘We need to improve our material ordering process so we have only the material, the inventory that we need,’ ” said Emmanuel Caprais, ITT’s vice president for strategic and financial planning.

The company started small, applying the changes at an operations center in Mexico. It then replicated the program at other business units world-wide, Mr. Caprais said.

ITT’s working capital has been falling since the first quarter of 2016. In the third quarter of this year, it was 22.1% of sales, down 1.1 percentage points from a year earlier.

Working capital also has declined at Philips NV. It amounted to 9% of sales in 2017, down from 9.9% of sales in 2016 and 11% in 2015.

“The biggest challenge when managing working capital is to keep strict discipline,” said Abhijit Bhattacharya, the finance chief of the Dutch health-technology company.

That can be achieved by harmonizing and standardizing processes, focusing on overdue receivables and aged inventory and working with suppliers on payment terms, he said.

Another challenge is collaborating with other business units. The CFO is often at the center of the business, managing different targets by different teams in different regions. Mr. Bhattacharya said he regularly works across business units and markets to closely manage inventories and receivables. He also works with procurement and treasury teams to efficiently manage outstanding payments to suppliers.

External factors, though, can upend internal strategies. Philips has increased inventories in some markets to mitigate the effects of tariffs imposed by the U.S. and China. The measures recently contributed to the company’s first year-to-year increase in working capital and inventories in three years, Mr. Bhattacharya said on an October earnings call.

In some sectors, CFOs are battling pressure from customers to alter payment terms to get a better deal.

Customers have asked train makers including France’s Alstom SA to reduce down payments required at the beginning of the contract, said James Stettler, an analyst at Barclays PLC. As a result, companies are building up working capital in a sector that historically had very little of it.

Alstom “has done a very good job in the face of lower down payments,” Mr. Stettler said.

The company’s working capital program involves payment plans with customers and setting milestones for payments, Alstom CFO Laurent Martinez said in an interview.

Continued in article

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 7, 2018

U.S. Treasury Offers Halfway Solution to Companies Vexed by Foreign Tax Rules

By Richard Rubin | Nov 28, 2018

TOPICS: International Taxation, Foreign Tax Credit

SUMMARY: An unintended consequence of the 2017 tax law stems from continuing requirements to allocate U.S. expenses for interest, administrative costs, and research provided to foreign operations when calculating foreign tax credits. This provision hurts the foreign tax credit calculation, particularly for companies operating in relatively high tax locations such as France and Germany. "As it was written, the law potentially overtaxes companies that aren't engaging in aggressive tax maneuvers, Senate Finance Democrats said in a report earlier this year." The Treasury has now issued regulations which limit the amount of the expense allocation "but Treasury officials concluded that they didn't have the authority to go further, and they specifically rejected some arguments advanced by companies." The chief tax counsel for the U.S. Chamber of Commerce thus expressed her organization's disappointment that the regulations do not "provide sufficient relief for companies."

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



1. (Advanced) What is the "unexpected consequence" of the 2017 tax law? In your answer, explain the acronym "GILTI."


2. (Introductory) What expenses must be allocated against foreign income in calculating tax credits designed to reflect when the corporation has paid sufficient foreign taxes?


3. (Advanced) Explain how you think the author calculates that "for every $100 in expenses companies are required to allocate, they can face $21 in additional taxes under current law."



Reviewed By: Judy Beckman, University of Rhode Island


"U.S. Treasury Offers Halfway Solution to Companies Vexed by Foreign Tax Rules," by Richard Rubin , The Wall Street Journal, November 28, 2018

Proposed regulations will help U.S. companies operating in high-tax foreign countries

WASHINGTON—The Treasury Department issued long-awaited corporate tax regulations on Wednesday, partly accommodating companies’ pleas for help with an unexpected consequence of last year’s tax law.

Under the proposed rules, some companies will still effectively face U.S. taxes related to income they earn in high-tax foreign countries, an outcome that seems contrary to what Congress promised. The rules offered companies what a senior Treasury official described as a 50% solution.

“The proposed guidance provides clarity and certainty for taxpayers in applying the new law, as well as modernizes current regulations and repeals out-of-date provisions,” said Treasury Secretary Steven Mnuchin.

The rules, which will likely reduce federal revenue, address an issue that is been bothering companies all year. In concept, the tax law enacted in late 2017 was supposed to end U.S. taxes on companies’ foreign income if their foreign tax rates go above 13.125%. Lawmakers wanted to reduce the U.S. tax bite on companies operating in major markets, but Congress also included a backstop to prevent multinational companies from escaping all U.S. taxes by putting profits abroad.

That backstop in last year’s law was a minimum tax on “Global Intangible Low-Taxed Income,” or GILTI, that limits the benefits U.S. companies can get from shifting profits into low-tax jurisdictions. Technology and pharmaceutical companies have been particularly adept at sending their patents and other intellectual property into places such as Bermuda and Ireland and reaping the benefits of low rates there.

To wipe out the benefits of operating in low-tax countries, GILTI has a minimum rate of 10.5%. It also has a theoretical ceiling. When foreign tax rates get above that 13.125% threshold, companies were supposed to avoid U.S. taxes on their foreign income. They would pay only the same local taxes in higher-tax countries such as France and Germany that French and German companies would pay. But the interaction of the new law and pre-existing rules on foreign tax credits has been causing problems for companies operating in those and other high-tax countries.

Here’s why: Foreign tax credits exist to prevent the U.S. from taxing income that is already been taxed abroad. But there are limits to prevent companies from using foreign tax credits to offset U.S. income. When companies calculate their foreign tax credits, the law as it existed before and after 2017 makes them allocate some domestic expenses for interest, administrative costs and research to foreign jurisdictions.

As a result, for U.S. tax purposes, companies’ foreign income looks smaller than it actually is, imposing a stricter the limit on the foreign tax credits they can use. Those capped foreign tax credits, in turn, could mean that companies face additional U.S. taxes on top of their foreign tax bills.

For every $100 in expenses companies are required to allocate, they can face $21 in additional taxes under current law. The proposed regulations would effectively require companies to allocate expenses on only half of their GILTI income. That reduces the tax law’s bite, but Treasury officials concluded that they didn’t have the authority to go further, and they specifically rejected some arguments advanced by companies.

“That approach will mitigate some of the problems,” said David Noren, a partner at McDermott Will & Emery. “But it will leave some undue tax burden in place for companies with relatively high foreign effective tax rates.”

In their regulations Treasury officials determined that Congress “did not intend to eliminate generally-applicable limitations on foreign tax credits associated with foreign earnings,” regardless of companies’ foreign tax rates.

“What we’ve got to do is balance this statutory structure against a desire to avoid unnecessarily eroding the competitiveness of the United States as a holding jurisdiction for international operations,” a senior Treasury official said Wednesday.

Treasury will also consider further changes to expense-allocation rules, though it can’t enforce the 13.125% limit unless Congress changes the law.

Because U.S. expenses lead to extra taxes, companies have an incentive to shift executives and borrowing out of the U.S.

As it was written, the law potentially overtaxes companies that aren’t engaging in aggressive tax maneuvers, Senate Finance Democrats said in a report earlier this year.

Companies affected include Kansas City Southern, a railroad that operates only in the U.S. and Mexico. Earlier this year, the railroad said it could pay $25 million extra annually because of GILTI, though it has since revised that estimate to $10 million and said the regulations were likely to at least partially resolve the issue.

Other companies that have said they are watching these rules include Equifax Inc., Mastercard Inc. and MGM Resorts International. The U.S. Chamber of Commerce has urged Treasury not to require companies operating in high-tax jurisdictions to allocate their interest and other expenses.

Caroline Harris, the chamber’s chief tax counsel, said Wednesday the group was disappointed by the rules because it believes they don’t provide sufficient relief for companies.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 7, 2018

Apple Investigated Possible Business Misconduct in Its Supply Chain


By Yoko Kubota and Tripp Mickle | Dec 01, 2018

TOPICS: Ethics, Foreign Corrupt Practices Act

SUMMARY: "Apple Inc. conducted an investigation earlier this year into possible business misconduct within its supply chain-including possible kickbacks and bribes...Inside Apple, the supply-management team in China handling nonelectrical components for iPhones experienced some turnover this year....The reasons for their exits aren't clear."

CLASSROOM APPLICATION: The article may be used to discuss the Foreign Corrupt Practices Act and requirements to maintain ethical practices in supply chains, domestic or international.


  1. (Advanced) What is a supply chain?
  2. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)?
  3. (Advanced) Why must U.S. companies be concerned about behavior complying with U.S. law in their international supply chains?
  4. (Introductory) What was the result of this most recent investigation by Apple into its supply chain?
  5. (Advanced) Given the outcome of this investigation, why do you think the story about this investigation is newsworthy?




Reviewed By: Judy Beckman, University of Rhode Island


"Apple Investigated Possible Business Misconduct in Its Supply Chain," by Yoko Kubota and Tripp Mickle, The Wall Street Journal, December 1, 2018

Company says it found no evidence of bribery or kickbacks

Apple Inc. AAPL -2.79% conducted an investigation earlier this year into possible business misconduct within its supply chain—including possible kickbacks and bribes—rattling some of the tech giant’s suppliers and staff in China.

The company in May inquired with at least one supplier about possible kickbacks to Apple employees, according to people familiar with the probe.

In response to The Wall Street Journal’s questions, an Apple spokesman acknowledged the investigation and said the company found no evidence of bribery or kickbacks.

“We have over 2,300 operations employees in China and, while misconduct issues are rare, we take any allegations very seriously and investigate each one thoroughly,” the spokesman said. He declined to disclose what prompted the probe or its findings.

Inside Apple, the supply-management team in China handling nonelectrical components for iPhones experienced some turnover this year. A top procurement executive left in May, and two junior members of the team exited Apple around that time, according to people familiar with the departures. The reasons for their exits aren’t clear. Apple declined to comment on the departures.

The companies that were questioned in connection with the probe continue to supply Apple, people familiar with the investigation said. Changing suppliers of key components could disrupt iPhone production.

The probe has been a source of concern for some Apple staff and suppliers amid this year’s iPhone cycle, primarily in the segment tied to nonelectrical components, the people said.

The company has thousands of suppliers and supply-management employees spread across China and the U.S.

Apple has strict rules for its employees on dealing with suppliers, said Apple suppliers and former staff. Apple employees working on parts procurement cannot accept gifts from suppliers or go out for lavish meals, they said.

It also spells out rules for suppliers. According to its “Supplier Code of Conduct” on the company’s website, Apple suppliers “shall not engage in corruption, extortion, embezzlement, or bribery to obtain an unfair or improper advantage.”

The possibility of corruption has been a challenge for businesses operating in China, said Daniel C.K. Chow, a professor of business law at Ohio State University who has testified before the U.S. International Trade Commission on Chinese business practices.

For example, Mr. Chow said, the country’s pharmaceutical industry long depended on drug-sales executives paying doctors for prescribing their medications, a practice GlaxoSmithKline was found guilty of in China in 2014.

JPMorgan Chase & Co. settled a case with the U.S. government over a scheme to hire relatives of powerful government officials in Asia to win business. JPMorgan agreed to pay $264 million and admitted it violated the Foreign Corrupt Practices Act, which bars U.S. firms from paying bribes to foreign governments to win business.

Apple had a kickback scandal of its own in 2010 involving Paul Shin Devine, a global supply manager, who was accused of receiving more than $1 million in kickbacks from six Apple suppliers in Asia. He was arrested in the U.S. and sentenced to about a year in prison and fined about $4.5 million in restitution after admitting to taking payoffs from suppliers.

Continued in article

Clawback ---

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 14, 2018

Bernie Madoff's Legacy: Whistleblower Inc.

By Gregory Zuckerman and Dave Michaels | Dec 08, 2018

TOPICS: SEC, Securities and Exchange Commission, Whistleblowing

SUMMARY: After revelations that Harry Markopolos, a forensic accountant, had been trying to alert the Securities and Exchange Commission (SEC) for years that Bernard Madoff must be running a multi-billion dollar Ponzi scheme, the SEC established its Office of the Whistleblower. The Office manages receipts of tips from whistleblowers about potential fraud and the cash-for-tips program that has paid out more than $326 million to 59 whistleblowers in seven years. That potential lucrative payout has led to an industry of forensic accountants and others "devoted to surfacing tips from company insiders and expert analysts who scrutinize corporate filings....Critics say the deluge of those seeking rewards is now overwhelming the system. More than 5,200 tips have been filed this year, compared to 3,000 in 2012."

CLASSROOM APPLICATION: The article may be used when discussing financial reporting, regulation, or financial statement analysis.



1. (Advanced) What is the Securities and Exchange Commission (SEC) Office of the Whistleblower?


2. (Introductory) What is "Whistleblower, Inc."? What incentives drive this "industry"?


3. (Introductory) What issues currently face the SEC is managing its Office of the Whistleblower?


4. (Advanced) Because of the issues highlighted in answer to question 3, what are the arguments for changing the SEC's process--perhaps reducing payouts--for encouraging whistleblowers?


5. (Advanced) What are the arguments against changing the SEC's process for encouraging whistleblowers?



Reviewed By: Judy Beckman, University of Rhode Island


"Bernie Madoff's Legacy: Whistleblower Inc.," by Gregory Zuckerman and Dave Michaels, The Wall Street Journal, December 8, 2018

A decade after Madoff’s arrest, an industry of bounty-hunting tipsters aims to cash in on the next big fraud.

Ten years ago, Bernard Madoff’s multibillion-dollar Ponzi scheme, the biggest fraud in U.S. history, shocked the financial world. It soon emerged that a forensic accountant, Harry Markopolos, had been alerting regulators for years to Mr. Madoff’s fraud, but no one had listened. At Mr. Markopolos’s urging, the Securities and Exchange Commission created a cash-for-tips program, designed to encourage reports of financial wrongdoing and prevent the lapses in oversight that gave Mr. Madoff free rein.

Today, an entire industry is devoted to surfacing tips from company insiders and expert analysts who scrutinize corporate filings. Whistleblower Inc. is the most tangible consequence of the Madoff scandal a decade after the money manager’s Dec. 11, 2008 arrest.

At the center of this new ecosystem stands the Securities and Exchange Commission’s Office of the Whistleblower, which has paid more than $326 million to 59 whistleblowers in seven years. The potential for sharing in such a huge payday has attracted plaintiffs’ lawyers, forensic accountants and former FBI agents to this government-sanctioned fraud hunt.

Critics say the deluge of those seeking rewards is now overwhelming the system. More than 5,200 tips have been filed this year, compared to 3,000 in 2012.

Requests from undeserving reward seekers have slowed the pace of payments, potentially discouraging future tipsters. Two individuals filed so many frivolous reward requests—one person has filed 143—that they were banned from making future requests, according to agency records.

Mr. Markopolos is among the concerned. “If they don’t fix the program they’re going to kill it,” he says.

About 53% of all reward requests remain undecided, according to a Wall Street Journal analysis of SEC figures and data obtained from a Freedom of Information Act request. It takes the SEC about two years to decide if a whistleblower’s tip merits a reward, according to a sample of whistleblower award decisions analyzed by The Wall Street Journal. In some cases, the wait is much longer.

“As you lengthen the time period between the work the whistleblower does, the risks they take, and the reward, it is very discouraging and stressful,” said Edward Siedle, a forensic investigator whose clients include pension funds and wealthy individuals.

Mr. Siedle said he acted as a co-whistleblower for a 2015 case that resulted in a $267 million penalty against JPMorgan Chase & Co. The case centered on whether the bank failed to disclose that it preferred to invest client money in its own mutual funds and hedge funds, as well as other hedge funds that shared fees with the bank. Mr. Siedle said the SEC informed him a year and a half ago that it would recommend that he receive a $48 million award , but he still doesn’t have final confirmation.

Mr. Siedle provided the same tip to the CFTC, which also investigated JPMorgan and settled a case with the bank related to its sale of in-house mutual funds and hedge funds. The CFTC, a smaller agency that processes fewer reward requests, awarded him $30 million in July.

But the SEC now is considering reining in some of the biggest payouts. Under one proposal, the agency could restrict mega-awards deemed “not reasonably necessary to reward the whistleblower.”

Continued in article

Bob Jensen's threads on the Madoff Ponzi Scheme ---

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 14, 2018

The Secret Way Seniors Can Keep Deducting Gifts to Charity

By Laura Saunders | Dec 08, 2018

TOPICS: Individual Taxation, IRAs, Medicare

SUMMARY: The article discusses ways in which retirees taking the standard tax deduction may still achieve a tax benefit from charitable deductions. By taking assets directly from an IRA, seniors above age 70.5 who are required to take distributions from IRAs can reduce taxable income. They also may lower Medicare premiums that are based on adjusted gross income.

CLASSROOM APPLICATION: The article may be used in an individual income tax course to discuss IRAs and charitable deductions.



1. (Introductory) "Millions of Americans will no longer get tax deductions for their charitable donations this year." Why?


2. (Introductory) When must IRA owners begin taking withdrawals from these accounts?


3. (Advanced) What is the impact on taxable income of IRA withdrawals?


4. (Advanced) How does the tax strategy described in this article rely on the taxability of IRA distributions?



Reviewed By: Judy Beckman, University of Rhode Island


"The Secret Way Seniors Can Keep Deducting Gifts to Charity," by Laura Saunders, The Wall Street Journal, December 8, 2018

Americans age 70½ or older can donate IRA assets, lowering their taxable income.

Millions of Americans will no longer get tax deductions for their charitable donations this year. But givers age 70½ or older often have a great way to get around this change.

It involves making donations directly from a traditional individual retirement account to one or more charities by using a smart move with a clunky name—qualified charitable distribution, or QCD.

“This transfer is usually the best way for IRA owners older than 70½ to do their giving,” says IRA specialist Ed Slott.

A growing number of IRA owners can use this maneuver. Roughly 3.2 million U.S. residents turned 70 in 2018, about 50% more than in 2010, according to estimates based on U.S. Census Bureau data.

The new focus on QCDs arises from the tax overhaul. It nearly doubled the standard deduction taxpayers get if they don’t itemize their write-offs for state taxes, mortgage interest, donations and the like on Schedule A.

This deduction is now $12,000 for single filers and $24,000 for most married couples—high enough so that nearly 29 million more filers will take it than in 2017. Those who do will no longer get write-offs they used to, including for donations.

Yet IRA owners who are 70½ and older have the best of both worlds: They can get a tax break for donations and take the higher standard deduction. In fact, the standard deduction rises to $13,600 for singles and $26,600 for couples age 65 and older.

Here’s how an IRA QCD provides benefits. Say that Mary and Jack, a married couple, are 71 and 72. Because they’re older than 70½, they must withdraw a certain amount every year from their traditional IRAs. This year it’s $40,000.

This couple contributes about $10,000 to various charities such as their church and colleges. They can choose to write checks to these groups, or give appreciated assets such as stock held in a taxable account, or donate from their IRAs.

But they won’t get a write-off if they send checks, as they’re taking the standard deduction of $26,600. They also don’t want to give appreciated stocks, because that would deprive their heirs of a tax break, called the step-up, that eliminates capital-gains tax on some assets held at death.

Donating IRA assets gives Mary and Jack the best outcome. While they won’t get a charitable deduction, they won’t owe tax on the $10,000 in donations and will reduce their taxable IRA payout to $30,000.

Continued in article

Jensen Comment

Itemized deductions --- 

I do two things to keep my itemized deductions. One is to keep a big low-interest fixed mortgage on my home and invest savings along with other savings (except for our lifetime pension annuities) in a long-term tax exempt mutual fund (Vanguard). In my case this has given me a net annual tax break for my entire retirement to date. The tax-exempt savings can be easily tapped for long-term nursing care should the need arise down the road (God forbid). Also my tax exempt savings fund did relatively well when the stock market and real estate market crashed in 2008. The value of our home did not fare as well.

 The other way I keep itemizing deductions is to have a rather large medical deduction due to carrying premium Medicare Supplements from Blue Cross Anthem. After workers retire they're often surprised that the medical expense deductions they never could itemize while they worked become deductible in retirement in part because Medicare is not free, Medicare supplements are not free, and medical bills and medication bills become quite large for many of us in our senior years --- especially for Erika who keeps having surgeries --- 

By itemizing deductions I don't have to worry as much about charity contributions being non-deductible. But there is a limit to consider.

Note that what I do is not necessarily an optimal plan for other seniors. Retirement investing is a unique problem for which there is no one-fits-all solution. One thing I do not do in retirement is speculate heavily with savings. Many  investors have done much better than me by taking more financial risks, especially when they're younger than me and still working. By the way I was 100% CREF with TIAA when I was still teaching and lucked out by retiring in 2006 and buying my fixed lifetime annuities before the stock market and interest rates crashed.

Note that it's harder to keep itemizing deductions these days, especially for high income workers in states having income taxes. If you don't pay for expert tax advice one thing you can do is to play around with your tax software such as Tax Act or TurboTax for various hypothetical planning and investing scenarios.

 Itemized deductions --- 

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 14, 2018

Looking to Double Your Salary? Try an M.B.A.

By Kelsey Gee | Dec 08, 2018

TOPICS: Compensation

SUMMARY: The article presents results of analyzing responses from 7,000 MBA alumni from 2012 to 2015 to a survey about salary history and career-switching. The WSJ and Times Higher Education conducted the survey. The data show significant pay increases among MBA graduates who switch careers, but a persistent gender pay gap.

CLASSROOM APPLICATION: The results may be used in any class addressing career trajectories.



1. (Introductory) Who conducted the survey discussed in this article? Who responded to it?


2. (Introductory) What were the overall survey findings?


3. (Advanced) What do you think are the motivations for conducting this survey?


4. (Advanced) How could the results of this survey be biased? (Hint: think about the type of individuals most likely to respond to this survey.)



Reviewed By: Judy Beckman, University of Rhode Island


"Looking to Double Your Salary? Try an M.B.A.," by Kelsey Gee, The Wall Street Journal, December 8, 2018

Yes, the cost of business school is soaring, but a new survey shows that career-switchers can reap substantial financial rewards from getting their masters of business administration.

Fully 75% of those who earn an M.B.A. switch careers, a new survey shows, and they can double their salary by doing so. But the survey of thousands of graduates from dozens of U.S. business schools also reveals that the pay gap between men and women persists—except in the tech sector.

At a time when the cost of business school is skyrocketing and enrollment in many programs is declining, The Wall Street Journal, in partnership with Times Higher Education, polled nearly 7,000 alumni who earned master’s of business administration degrees between 2012 and 2015 on their salary history and career-switching opportunities.

M.B.A.s from the Yale School of Management, Stanford Graduate School of Business, Jones Graduate School of Business at Rice University, among others, reported making tens of thousands of dollars a year more after graduating from the two-year programs.

The results show that the credential sought-after by generations of bankers and consultants still helps those graduates get ahead at work. The median salary for consultants who returned to professional services firms like McKinsey Co. or Deloitte Touche LLP after getting an M.B.A. was $162,000 a year, the highest pay in any sector, and a boost of $82,000 annually. Alumni surveyed in finance and tech jobs tied for second-highest pay, making $150,000 if they also worked in those sectors before business school.

The data also show that for most women who earned their M.B.A., a pay gap persisted. The median salary of women who worked full-time before entering business school was $63,000 a year to men’s median salary of $67,000, or 94 cents on the dollar. Both men and women reported more than doubling their earnings after graduation. In their post-M.B.A. careers, the median of those women’s earnings was $130,000 annually and men’s was $140,000.

But for women who used the M.B.A. as an opportunity to switch careers, the pay gap narrowed. In tech, where employers like Alphabet Inc.’s Google and Intel Corp. have waged a public push to improve the diversity of their employees and managers, the gender pay gap virtually disappeared for M.B.A.-holders, according to the alumni survey data. Female M.B.A.s who broke into tech after business school earned a whopping 132% more than their previous salary, at $139,000 per year, compared with male M.B.A.’s 100% boost after graduation to $140,000 a year

Continued in article

Jensen Warning
Much depends upon the prestige of the university where you got your MBA. Sometimes an MBA is of zero help in getting a job in business or in changing your career to business. Many prestige universities that offer MBA degrees do not offer specialties in auditing and tax. If I were seeking an entry-level job with a masters degree from a university not in the Top 25 prestigious universities I think I would rather be graduating with a masters degree in accounting than with an MBA degree unless I had hot undergraduate degree to go with it such as a computer science degree.

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 14, 2018

Nissan, Carlos Ghosn Charged With Underreporting His Compensation

By Sean McLain | Dec 10, 2018

TOPICS: Disclosures, Executive Compensation

SUMMARY: "Nissan Motor Co.'s Carlos Ghosn was formally charged with understating his compensation in Nissan's financial reports, and prosecutors took steps to ensure he would spend Christmas in jail."

CLASSROOM APPLICATION: The article may be used when discussing executive compensation or corporate governance in a financial reporting class.



1. (Advanced) Why is it important for executive compensation to be disclosed in financial reports?


2. (Introductory) What is the penalty to Nissan for having filed improper financial reports?


3. (Advanced) What forms of compensation other than cash payments may be used by corporations for their executives? Name all you can think of or learn from your accounting text.


4. (Advanced) Select one of the forms you mention in answer to the question above. What is the reasoning behind offering that form of compensation?


5. (Advanced) What is the form of compensation which was given to CEO Carlos Ghosn by Nissan? Do you think this form of compensation supports a similar reasoning to the answer you gave to question 4 above? Explain.



Reviewed By: Judy Beckman, University of Rhode Island


"Nissan, Carlos Ghosn Charged With Underreporting His Compensation," by Sean McLain, The Wall Street Journal, December 10, 2018

In addition to indictment, prosecutors lay out new suspicions that Ghosn underreported his income for three years ended March 2018.

TOKYO—Nissan Motor Co.’s Carlos Ghosn was formally charged with understating his compensation in Nissan’s financial reports, and prosecutors took steps to ensure he would spend Christmas in jail.

Bringing their first charges against Mr. Ghosn, Tokyo prosecutors alleged he conspired to report only about half of his compensation during the five years ended March 2015. They said his true compensation added up to the equivalent of about $87 million over the period, but the company’s financial reports said it was $44 million.

The charges close off any chance Mr. Ghosn could put an early end to his troubles and depart the country that once feted him for his achievement in turning around Nissan. Instead, barring a confession, he is poised for a legal struggle that could last years and keep him behind bars well into 2019.

Nissan was indicted alongside Mr. Ghosn. In a written statement, Nissan apologized for what it called “false disclosures” and said it would improve its governance. A Nissan representative declined to say whether the company would contest the allegations.

Greg Kelly, Mr. Ghosn’s right-hand man at Nissan and a former representative director there, was indicted on charges of conspiring with Mr. Ghosn to understate his compensation.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 14, 2018

Hain Celestial Settles SEC Charges for Internal Control Failures

By Aisha Al-Muslim | Dec 11, 2018

TOPICS: Revenue Recognition

SUMMARY: This article provides a conclusion to the case of Hain Celestial's accounting and internal control problems in revenue recognition. This article provides more detail than was discussed when the company delayed submitting its financial filings upon discovering the problem in 2016. The case was previously covered in this review in June 2017; that article is listed as related. NOTE TO INSTRUCTORS: DELETE THE FOLLOWING STATEMENTS BEFORE DISTRIBUTION TO STUDENTS AS THEY PROVIDE ANSWERS TO QUESTION 4 CONCERNING ACCOUNTING REQUIREMENTS FOR SALES INCENTIVES. Topic 605, now superseded by Topic 606, in the Accounting Standards Codification addresses accounting issues related to Customer Payments and Incentives in section 605-50: 605-50- 25-3 For a sales incentive offered voluntarily by a vendor and without charge to customers that can be used or that becomes exercisable by a customer as a result of a single exchange transaction, and that will not result in a loss on the sale of a product or service, a vendor shall recognize the cost of such a sales incentive at the later of the following: • a. The date at which the related revenue is recognized by the vendor • b. The date at which the sales incentive is offered 605-50-25-7...The vendor shall recognize the rebate or refund obligation as a reduction of revenue based on a systematic and rational allocation of the cost of honoring rebates or refunds earned and claimed to each of the underlying revenue transactions that result in progress by the customer toward earning the rebate or refund. Measurement of the total rebate or refund obligation shall be based on the estimated number of customers that ultimately will earn and claim rebates or refunds under the offer. Topic 606-10-55-22 and 23 address current requirements for sales with a right of return. Paragraph 606-10-55-23 a states that revenue should be recognized "in the amount of consideration to which the entity expects to be entitled."

CLASSROOM APPLICATION: The article may be used when discussing the impact of sales returns and incentives to increase quarter end sales on revenue recognition. It also may be used to discuss internal control weaknesses and the importance of the finance department maintain knowledge of business operating



1. (Introductory) What does Hain Celestial Group Inc. do?


2. (Advanced) What accounting and reporting problems arose at Hain Celestial Group Inc.? You may refer to the related article to help answer this question.


3. (Introductory) What actions did Hain Celestial first take upon discovering these problems?


4. (Advanced) Given the description in the article of the Hain Celestial quarterly sales practices, why would the company be required under U.S. GAAP to delay recognizing revenue beyond the date on which product is shipped? Cite appropriate accounting standards either in effect at the time of Hain Celestial's violation (Topic 605s) or currently in effect (Topic 606) as your instructor directs.


5. (Introductory) What specific laws has the Securities and Exchange Commission now charged Hain Celestial with violating?



Missing From Hain: Quarterly Reports
by Annie Gasparrof
Jun 16, 2017
Page: B3

Reviewed By: Judy Beckman, University of Rhode Island


"Hain Celestial Settles SEC Charges for Internal Control Failures," by Aisha Al-Muslim , The Wall Street Journal, December 11, 2018

Food-products company consented to cease and desist order without admitting to or denying regulatory findings.

Organic- and natural-products maker Hain Celestial Group Inc. has settled charges brought by the U.S. Securities and Exchange Commission over its revenue-recognition practices, which had led to several quarters of delayed financial reports.

Hain violated books-and-records as well as accounting-controls provisions of federal securities laws, the SEC said. The company had internal control failures and poor documentation because its end-of-quarter sales-incentives practices “were designed to help the company meet its internal sales targets,” the agency said in a news release on Tuesday.

The SEC ordered Hain to cease and desist from further violations. Hain consented to the SEC’s order without admitting or denying the findings.

The SEC didn’t impose a monetary penalty on Hain, citing the company’s “extensive cooperation” with the investigation. Hain had self-reported the situation and made “significant changes” voluntarily, including hiring compliance staff and implementing changes to its revenue-recognition practices, the SEC said.

Representatives for Hain, whose brands including Celestial Seasonings tea, Earth’s Best baby food, Terra chips and Spectrum oils, didn’t immediately respond to requests for comment.

At the end of fiscal quarters, during a period spanning 2014 and 2016, Hain’s sales personnel offered incentives to its two largest distributors to purchase inventory so that Hain would meet its sales targets, according to the SEC.

The incentives included the right to return products that spoiled or expired before they were sold to retailers, as well as cash incentives of as much as $500,000, discounts and extended payment terms, the SEC said. Hain’s finance department wasn’t aware of the quarterly incentive practices until May 2016, the SEC said.

The SEC didn’t name the distributors in its release or the order, referring to them only as “Distributors 1 and 2.” About 30% of Hain’s net sales for its U.S. business segment from fiscal 2014 to fiscal 2016 were derived from the two distributors, the SEC order said.

According to Hain’s annual filings, distributor United Natural Foods Inc. as well as Walmart Inc. and its affiliates, Sam’s Club and ASDA, each account for more than 10% of sales.

“We were cleared of any implication in this matter,” an UNFI spokesman said in an email Tuesday.

In February 2017, Hain disclosed that it was being investigated by the SEC into whether revenue from certain U.S. distributors was recorded in the correct period. Hain had been recognizing revenue when products were shipped to distributors rather than when the products were sold through its distributors to customers.

The company based in Lake Success, N.Y., voluntarily notified the SEC in August 2016 that it was delaying the release of its financial results.

In June 2017, Hain released the delayed financial reports for fiscal 2016, ended June 30, 2016, as well as the financial reports for the quarters that ended Sept. 30, 2016; Dec. 31, 2016; and March 31, 2017.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 21, 2018

Regulators Propose Overhaul of U.K. Audit Industry


By Michael Rapoport and Nina Trentmann | Dec 19, 2018

TOPICS: Audit Quality, Auditing Services, Ethics

SUMMARY: Following the collapse of a large construction company, Carillion PLC, due to an accounting scandal, "U.K. regulators proposed sweeping changes to rules governing British audit firms Tuesday..." The proposals are "designed to increase competition, prevent conflicts of interest, and restore public confidence...." The proposals include requirements to increase competition by requiring two auditors for large entities, separation of audit from consulting practice (as is done here in the U.S.), and replacing the profession's self-regulatory body-the Financial Reporting Council-with an independent body having stronger power.

CLASSROOM APPLICATION: The article may be used to discuss ethics, concerns with worldwide auditing practices, or many other issues associated with regulating the audit profession.


  1. (Introductory) What is the most recent scandal leading to this proposal to reform audit practice in the U.K.?
  2. (Introductory) What proportion of U.K. public accounting firms' revenues stem from sources other than auditing? What are those business activities?
  3. (Advanced) How are recent scandals tied to these sources of revenue for public accounting firms?
  4. (Advanced) What proposal has the U.K. regulator made to change auditing practice? Do you think the proposal will produce change needed in the auditing profession? Explain.
  5. (Advanced) "An audit isn't's just 'a professional opinion.'" Explain.




Reviewed By: Judy Beckman, University of Rhode Island


"Regulators Propose Overhaul of U.K. Audit Industry," by Michael Rapoport and Nina Trentmann, The Wall Street Journal, December 19, 2018 ---

Accounting firms have come in for criticism for being too cozy with their clients

U.K. regulators proposed sweeping changes to rules governing British audit firms Tuesday in moves designed to increase competition, prevent conflicts of interest and restore public confidence in an industry tarnished by an accounting scandal that led to the collapse of one of Britain’s largest construction companies.

The measures, if implemented, would see audit firms separate their auditing and consulting operations, introduce two-firm audits for large companies and replace the current auditing regulator. The changes were in part triggered by the scandal that brought down Carillion PLC. In the wake of the construction company’s collapse, U.K. affiliates of the Big Four audit firms—KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte Touche Tohmatsu—have faced criticism that their auditing hasn’t been tough enough and they have been too cozy with their clients.

“Addressing the deep-seated problems in the audit market is now long overdue,” Andrew Tyrie, chairman of the U.K. Competition and Markets Authority, said in a statement. Millions of investors depend on quality audits, he said, and “if a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.”

One of the CMA’s recommendations, a measure already under discussion among investors and accounting experts, is for firms to split audit and nonaudit business into separate operating entities, with separate management, accounts and compensation. U.K. audit firms get at least 75% of their revenue from nonaudit services, the regulator said, and in some cases provide consulting services to the same companies they audit. Many observers fear that creates potential conflicts of interest and pulls focus from the firms’ core auditing function.

The authority also proposed that two firms audit the books of larger U.K. companies, with at least one from outside the Big Four. That would help ensure a cross-check on audit quality and spur competition, the regulator said. Currently, almost all large British companies are audited by one of the Big Four.

The CMA also proposed scrutiny of how companies appoint their auditors. Too often, the regulator said, companies pick the auditor with which they have the best “cultural fit” or “chemistry,” instead of making sure they’re choosing an auditor prepared to challenge their finances.

A separate report, carried out for the government by Sir John Kingman, recommended replacing the Financial Reporting Council, the current U.K. audit regulator, with a new Audit, Reporting and Governance Authority that would have stronger powers.

The Big Four said in statements after the release of the proposals that they support changes that improve the quality of audits but cautioned that these need to be workable and proportionate.

Accountants “accept the need for change,” said Michael Izza, chief executive of ICAEW, a group which represents U.K. accountants. The recommendations “amount to the kind of bold intervention that we have been calling for.”

Mazars, a smaller firm that could benefit from the proposal to require dual auditors, said it would be “an effective method of bringing new firms into the market while simultaneously strengthening audit quality.”

Sir Win Bischoff, chairman of the Financial Reporting Council, said the recommendations “have the potential to bring about significant improvements to the work we do in protecting the interests of investors and the wider public.”

But some observers were skeptical. Joint audits and hiving off auditing into its own business would create their own challenges and the problems with U.K. auditing are more fundamental, said Michael Power, an accounting professor at the London School of Economics and Political Science. Auditors often lack time and the ability to think critically, he said, and tend to sign off on financial statements rather than questioning them.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 21, 2018

Why Fixing Sloppy U.K. Auditors Matters for Wall Street

By Paul J. Davies | Dec 18, 2018

TOPICS: Audit Quality, Auditing Services, International Auditing

SUMMARY: This Heard on the Street article focuses on the U.S. perspective toward proposed regulatory reforms in U.K. audit practices. The breakdown of revenue by audit and consulting practices begins the piece. Discussion of differences between U.K. and U.S. practices in regulating auditors ensues.

CLASSROOM APPLICATION: The article may be used to discuss the types of revenues earned by public accounting firms, the regulation of audit service, the internationalization of auditing practice, or any number of ethical issues.



1. (Advanced) "Investors should see the U.S. approach [to the regulation of audit practice] as a minimum standard." Explain: what is the U.S. approach to the regulation of services provided by public accounting firms?


2. (Advanced) The U.K. regulator, the Financial Reporting Council, is an industry, self-regulating body. How does that compare with the regulatory structure in the U.S. system?


3. (Introductory) Refer to the graphic entitled "Off the Books." What is depicted there? What problem does this graph imply with U.K. audit practices?


4. (Introductory) How do problems in U.K. audits impact U.S. markets?



Regulators Propose Overhaul of U.K. Audit Industry
by Michael Rapoport and Nina Trentmann
Dec 19, 2018
Page: B11

Reviewed By: Judy Beckman, University of Rhode Island


"Why Fixing Sloppy U.K. Auditors Matters for Wall Street," by Paul J. Davies, The Wall Street Journal, December 18, 2018 ---

Two British government-backed reports take aim at audit practices, but could go further

Audit scandals come and go, but audit regulation stays much the same. The U.K. is having another crack at stamping out poor practices. Once again, it looks like rule makers should go further.

Globally, the last major overhaul was in the U.S. more than a decade ago, when lawmakers stopped the Big Four accounting firms—PwC, Deloitte, EY and KPMG—from offering consulting services to clients they audited.

The U.K., which doesn’t require this split, has endured a string of accounting failures. Auditors can be punished for shoddy work, but the deterrents are often weak. The failure of retailer BHS landed PwC with a fine of just $13 million and a lengthy ban for one partner. In the U.S. fines can be bigger: PwC was this summer ordered to pay the Federal Deposit Insurance Corp $625 million for its work on a failed lender, Colonial Bank.

Poor U.K. auditing standards are a problem for U.S. investors, too, because the U.K. arms of the Big Four audit the British divisions of U.S. companies such as Amazon and Citigroup.

In a report published Tuesday, the U.K. antitrust regulator criticized a lack of competition and the way auditors are appointed on the basis of “cultural fit” or price. The Big Four audit 97% of the biggest U.K. companies and make at least 75% of U.K. revenue from nonaudit work.

The regulator wants a structural split between audit and consulting, with separate executives and accounts. But it hasn’t proposed a full breakup, or even a ban on firms doing both types of work for the same client. Investors should see the U.S. approach as a minimum standard.

It also proposed more scrutiny of how auditors are appointed and of the directors that make the decision. This is a good start, but only if individuals can be legally held to account, as senior managers in financial services firms now can be in the U.K.

A second government-backed report took aim at the industry’s self-regulatory body, the Financial Reporting Council. It called for its replacement with an independent regulator funded by mandatory rather than voluntary contributions. Again, this should be a minimum

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 21, 2018

Two Former Executives of Panasonic Unit Settle With SEC Over Charges of Accounting Violations

By Samuel Rubenfeld | Dec 18, 2018

TOPICS: Foreign Corrupt Practices Act, Internal Controls, Sarbanes-Oxley Act

SUMMARY: The former chief executive and chief financial officer of Panasonic Avionics Corp. settled charges by the U.S. Securities and Exchange Commission that they caused false financial reporting by their parent company, Panasonic Corp. "Panasonic Avionics falsely recorded...payments [to consultants totaling $1.76 million] and [the chief executive officer] circumvented company procedures [in order] to engage the consultants...[The two executives] also made misleading statements to the auditor..." regarding accounting controls and the accuracy of books and records.

CLASSROOM APPLICATION: The article may be used to discuss the interaction of the Foreign Corrupt Practices Act and the requirement for U.S. companies to maintain accurate books and records.


  1. (Advanced) Under what U.S. law are senior executives personally responsible for representations made in financial reports of publicly-traded companies?
  2. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)?
  3. (Introductory) What specific actions does the U.S. Securities and Exchange Commission (SEC) allege that the executives of Panasonic Avionics made, ultimately leading to the settlement discussed in this article?
  4. (Advanced) Do you think these actions fall under the purview of the FCPA? Explain.




Reviewed By: Judy Beckman, University of Rhode Island


"Two Former Executives of Panasonic Unit Settle With SEC Over Charges of Accounting Violations." by Samuel Rubenfeld, The Wall Street Journal, December 18, 2018 ---

The company reached a settlement in April, agreeing to pay more than $280 million

Two former senior executives of a U.S. unit of electronics manufacturer Panasonic Corp. violated accounting rules stemming from a scandal that cost the company more than $280 million, the Securities and Exchange Commission said Tuesday.

Paul A. Margis, the former chief executive of Panasonic Avionics Corp., and Takeshi “Tyrone” Uonaga, its former finance chief, reached deals with the SEC. Lawyers for both men didn’t immediately respond to requests for comment; neither admitted nor denied the SEC’s findings.

Panasonic Avionics in April agreed to pay $137.4 million to the U.S. Justice Department as part of a deferred-prosecution agreement over a charge it caused the falsification of the financial records of its parent company. Panasonic Corp. agreed at the time to disgorge about $143 million in profits.

A Panasonic Avionics spokesman said neither man is with the company any longer, declining to comment further.

Mr. Margis, the SEC said, used a third party to pay more than $1.76 million to consultants, including a government official who was offered a position to assist the company in obtaining and retaining a business relationship with a state-owned airline. Panasonic Avionics falsely recorded the payments and Mr. Margis circumvented company procedures to engage the consultants, who provided few, if any, services, the SEC alleged.

Mr. Margis also made misleading statements to the Panasonic Avionics auditor regarding its accounting controls and the accuracy of the books, the SEC said.

Mr. Uonaga, the Panasonic Avionics CFO, caused the parent company, Panasonic Corp., to improperly record $82 million in revenue based on a backdated contract and made false representations to the subsidiary’s auditor regarding financial statements, internal accounting controls, books and records, the SEC said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 21, 2018

U.S. Companies Asked to Disclose More about Their Workers

By Heather Gillers | Dec 13, 2018

TOPICS: Disclosure, Disclosure Requirements, Executive Compensation

SUMMARY: The article discusses a letter sent in November 2018 to the boards of all companies in the Fortune 500. The letter is signed by various financial statement users such as asset managers and large public pension retirement systems as well as religious organizations. In it, the signatories request information about workers, such their geographic locations and full-time versus part-time status, as well as the companies' overall "compensation philosophy." The disclosures go beyond the Securities and Exchange requirements for compensation disclosures. The related article addresses the initial reporting of median worker pay as required under the Dodd-Frank Act. It was covered in this review.

CLASSROOM APPLICATION: The article may be used when covering disclosure in general, executive compensation and related disclosure, or regulation.



1. (Introductory) Who wrote this letter to all companies in the Fortune 500? To whom was it addressed?


2. (Introductory) What information is requested in this letter?


3. (Advanced) How does the information requested exceed current requirements? In your answer, include a statement about the source of requirements to disclose compensation information.


4. (Advanced) Why do you think the signers of this letter want this additional disclosure beyond current requirements?


5. (Advanced) Why do some companies report information about worker compensation beyond what is required by U.S. law and SEC regulations?



Dodd-Frank Pay Disclosures
by Vanesso Ko
Aug 28, 2013
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island


"U.S. Companies Asked to Disclose More about Their Workers," by Heather Gillers, The Wall Street Journal, December 13, 2018 ---

Religious organizations, asset managers and many of the nation’s largest retirement systems want firms to go beyond SEC requirements

Some of the country’s largest pension funds want companies to disclose more information on worker pay, location and the types of jobs their employees do.

In a letter reviewed by The Wall Street Journal, the pension funds and some charitable organizations are asking these publicly traded companies to disclose information that goes well beyond what the Securities and Exchange Commission requires.

The letter, which was sent last month, asks for the breakdown of a company’s workforce by job function or business unit, geographic location of employees, the number of full-time or part-time workers, and whether the company uses subcontractors. The letter asks about the experience and education levels of employees, different types of compensation such as benefits and incentives, and the company’s “overall compensation philosophy.”

The letter was sent to the boards of all companies in the Fortune 500, according to a spokeswoman for one of the signatories, the California State Teachers’ Retirement System. Several companies have responded to thank the institutions for their suggestions, the spokeswoman said.

he letter is signed by representatives of several religious organizations, asset managers and many of the nation’s largest retirement systems. They manage or advise on a combined total of $3.3 trillion in investments, the letter said.

U.S. publicly traded firms began reporting median employee pay, CEO pay and the ratio between the two earlier this year. The CEO pay-ratio rule was required by the 2010 Dodd-Frank Act, in the aftermath of the global financial crisis, as a way to help shareholders better assess executive- and employee-pay practices.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 21, 2018

Banks Get a Break on Soured-Loan Accounting

By Michael Rapoport and Andrew Ackerman | Dec 18, 2018

TOPICS: Banking, Loan Loss Allowance

SUMMARY: "The Federal Deposit Insurance Corp. approved a measure, proposed in April, that will allow banks to take three years to phase in the impact of the new accounting rule on their regulatory capital." The accounting standard known as the current expected credit losses method, or CECL, is to be implemented by 2020. Banks also are undertaking efforts to delay or change the CECL requirements as established by the Financial Accounting Standards Board (FASB).

CLASSROOM APPLICATION: The article may be used when discussing banking and recording of allowances for loan losses.



1. (Advanced) What is the new accounting requirement "to book losses on sourced loans more quickly"? Cite the authoritative accounting guidance establishing this requirement.


2. (Introductory) What is the implementation date of this accounting standard?


3. (Advanced) How does the accounting differ from previous requirements related to loan losses? Cite the authoritative guidance for previous accounting requirements.


4. (Advanced) Has the Federal Deposit Insurance Corp. (FDIC) changed the requirement as established by the Financial Accounting Standards Board (FASB)? Explain.



Reviewed By: Judy Beckman, University of Rhode Islan


"Banks Get a Break on Soured-Loan Accounting," by Michael Rapoport and Andrew Ackerman, The Wall Street Journal, December 18, 2018 ---

Banks received a reprieve on Tuesday from a new accounting rule that requires them to book losses on soured loans more quickly

Banks received a reprieve on Tuesday from a new accounting rule that requires them to book losses on soured loans more quickly.

The Federal Deposit Insurance Corp. approved a measure, proposed in April, that will allow banks to take three years to phase in the impact of the new accounting rule on their regulatory capital.

The rule, which publicly traded banks must adopt by 2020, will require lenders to book all expected losses from their loans as soon as the loans are issued, and that could require some banks to significantly boost their loan-loss reserves, which would reduce regulatory capital.

The FDIC’s move is separate from a continuing push by some banks for a delay and softening of the rule. In that effort, banks are arguing the need to book loan losses up front will exacerbate any future recession or economic downturn.

Tuesday’s measure was approved without any significant changes from the April proposal, according to documents the FDIC distributed at its meeting.

The reprieve comes a day before a separate panel of senior financial regulators known as the Financial Stability Oversight Council is set to conduct its own review of the accounting provision in a closed-door meeting at the Treasury Department. The American Bankers Association and 52 state banking groups in October asked the FSOC to seek a delay in the rule to allow time for a comprehensive study of its impact.

The FSOC has no authority to impose a delay on its own, though it does have a bully pulpit it can use to pressure policy makers on issues.

Currently, banks don’t book losses on their loans until they have evidence the losses will occur. But critics said that method led banks to be too slow in recording losses after the 2008 financial crisis, and that investors needed more timely information about banks’ finances.

The new accounting method—known as CECL, for current expected credit losses—was approved in 2016 by the Financial Accounting Standards Board, which sets accounting rules for U.S. companies.

ABA President and CEO Rob Nichols said his group “appreciates” the FDIC’s changes but added they don’t go far enough.

“Banks have long been concerned about CECL’s cost and impact on our ability to serve our customers and communities,” Mr. Nichols said in a written statement, adding his group wants a delay until “a quantitative impact study can be conducted and the economic consequences of the accounting standard are fully understood.”

The FDIC’s measure also makes changes in how bad-loan reserves are counted in regulatory capital. Banks also will be able to delay having the loan-loss change affect their regulatory “stress tests” until the 2020 testing cycle.

Continued in article

Humor for December  2018

51 hilarious White Elephant gifts under $50 that are guaranteed to get a good laugh ---

College Humor ---

The Best of Britain’s 2018 Christmas Commercials ---

About Punmanship ---

Puns about German sausage are generally considered the worst ---

Forwarded by Kimberlyn

Ode to the Spell Checker

Eye halve a spelling chequer It came with my pea sea It plainly marques four my revue Miss steaks eye kin knot sea.

Eye strike a key and type a word And weight four it two say Weather eye am wrong oar write It shows me strait a weigh.

As soon as a mist ache is maid It nose bee fore two long And eye can put the error rite Its rare lea ever wrong.

Eye have run this poem threw it I am shore your pleased two no Its letter perfect awl the weigh My chequer tolled me sew.

NPR's 2018 Comedy Book Recommendations ---

Forwarded by Paula

A New York woman was so depressed that she decided to end her life by throwing herself into the ocean. Just before she could throw herself from the docks, a handsome young man stopped her.

"You have so much to live for," said the man. "I'm a sailor. We're off to Italy tomorrow. I can stow you away on my ship. I'll take care of you, bring you food every day, & keep you happy."

With nothing to lose, combined with the fact that she had always wanted to go to Italy, the woman accepted.

That night the sailor brought her aboard & hid her in a small but comfortable compartment in the hold. From then on, every night he would bring her sandwiches, red wine, & they would make love til dawn.

Three weeks later she was discovered by the captain during a routine inspection. "What are you doing here?" asked the captain.

"I have an arrangement with one of the sailors," she replied. "He brings me food & I get a free trip to Italy."

"I see," the captain says.

Her conscience got the best of her so she added, "Plus he's screwing me."

"He certainly is," replied the captain. "This is the Staten Island Ferry."

Announcement from


After being airborne approximately thirty minutes on an outbound evening Air Lingus flight from Dublin, the lead flight attendant nervously made the following painful announcement in her lovely Irish brogue:

"Ladies and gentlemen, I'm so very sorry, but it appears that there has been a terrible mix-up by our catering service. I don't know how this has happened, but they did not deliver our meals until one minute prior to take-off. We have 103 passengers on board, and, unfortunately, we received only 40 dinner meals. I truly apologize for this mistake and inconvenience."

When passengers' muttering had died down, she continued, "Anyone who is kind enough to give up their meal so that someone else can eat, will receive free, unlimited drinks for the duration of our 4 hour flight."

Her next announcement came about 2 hours later...

"If anyone would like to change their minds, we still have 40 dinners available"


Forwarded by Paula

For those who travel, often the best food is a truck stop.  wonder what the waitress would have to say if someone actually ordered their breakfast as this guy did?

A trucker came into a Truck Stop Cafe' and placed his order. He said, "I want three flat tires, a pair of headlights and a pair of running boards."

The brand new blonde waitress, not wanting to appear stupid, went to the kitchen and said to the cook, "This guy out there just ordered three flat tires, a pair of headlights and a pair of running boards. What does he think this place is, an auto parts store?"

'No,' the cook said. 'Three flat tires... mean three pancakes; a pair of headlights... is two eggs sunny side up; and a pair of running boards...are 2 slices of crisp bacon"

 'Oh... OK!' said the blonde. She thought about it for a moment and then spooned up a bowl of beans and gave it to the customer.

 The trucker asked, 'What are the beans for, Blondie?'

 She replied, 'I thought while you were waiting for the flat tires, headlights and running boards, you might as well gas up!

Forwarded by Paula

Did I read that sign right?


------------------------------ ------------------------------ ------------------------------ -

In a Laundromat:


------------------------------ ------------------------------ -----------------------------

In a London department store:


------------------------------ ------------------------------ -------------------------

In an office:


------------------------------ ------------------------------ ------------------------------ ------------------------------ ---------------

In an office:


------------------------------ ------------------------------ ------------------------------ --

Outside a second-hand shop:


------------------------------ ------------------------------ ------------------------------ ------------------------------ --

Notice in health food shop window:


------------------------------ ------------------------------ ------------------------------ ------------

Spotted in a safari park:  
(I sure hope so.)


------------------------------ ------------------------------ ---------

Seen during a conference:


------------------------------ ------------------------------ --------------------------

Notice in a farmer's field:


------------------------------ ------------------------------ --------------------

Message on a leaflet:


------------------------------ ------------------------------ -----------------------

On a repair shop door:


Proofreading is a dying art, wouldn't you say?

------------------------------ ------------------------------ ------------------------------ --

Man Kills Self Before Shooting Wife

And Daughter

This one I caught in the SGV Tribune the other day and called the Editorial Room and asked who wrote this. It took two or three readings before the editor realized that what he was reading was impossible!!! They put in a correction the next day.

------------------------------ ------------------------------ ------------------------------ ------------------------------ -----------------

Something Went Wrong in Jet Crash, Expert Says

Really? Ya' think?

------------------------------ ------------------------------ ------------------------------ ----------------------

Police Begin Campaign to Run Down Jaywalkers

Now that's taking things a bit far!

------------------------------ ------------------------------ ------------------------------ ---------------------

Panda Mating Fails; Veterinarian Takes Over

What a guy!  
------------------------------ ------------------------------ ------------------------------ ---------------------

Miners Refuse to Work after Death

No-good-for-nothing' lazy so-and-so's!

------------------------------ ------------------------------ ------------------------------ ---------------------

Juvenile Court to Try Shooting Defendant  
See if that works better than a fair trial!

  ----------------------------- ------------------------------ ------------------------------ -----------------------

War Dims Hope for Peace

I can see where it might have that effect!

------------------------------ ------------------------------ ------------------------------ ----------------------

If Strike Isn't Settled Quickly, It May Last Awhile

Ya' think?!

------------------------------ ------------------------------ ------------------------------ ----------------------

Cold Wave Linked to Temperatures

Who would have thought!

------------------------------ ------------------------------ ------------------------------ ---------------------

Enfield ( London ) Couple Slain; Police Suspect Homicide

They may be on to something!

------------------------------ ------------------------------ ------------------------------ --------------------

Red Tape Holds Up New Bridges

You mean there's something stronger than duct tape?  
------------------------------ ------------------------------ ------------------------------ --------------------

Man Struck By Lightning: Faces Battery Charge

He probably IS the battery charge!

------------------------------ ------------------------------ ------------------------------ --------------------

New Study of Obesity Looks for Larger Test Group

Weren't they fat enough?!

------------------------------ ------------------------------ ------------------------------ --------------------

Astronaut Takes Blame for Gas in Spacecraft

That's what he gets for eating those beans!

------------------------------ ------------------------------ ------------------------------ --------------------

Kids Make Nutritious Snacks

Do they taste like chicken?

****************************** ****************************** ********************

Local High School Dropouts Cut in Half

Chainsaw Massacre all over again!

****************************** ****************************** ****************************** ****

Hospitals are Sued by 7 Foot Doctors

Boy, are they tall!

****************************** ****************************** ****************************** *****

And the winner is...

Typhoon Rips Through Cemetery; Hundreds Dead

Did I read that right?


Humor December 2018---  

Humor November 2018--- 

Humor October 2018---  

Humor September 2018--- 

Humor August 2018---   

Humor July 2018--- 

Humor June 2018---

Humor May 2018---

Humor April 2018---

Humor March 2018--- 

Humor February 2018---

Humor January 2018--- 

Humor December 2017---

Humor November 2017--- 

Humor October 2017---

Humor September 2017---

Humor August 2017---

Humor July 2017---

Humor June 2017 ---

Humor June 2017 --- 

Humor May 2017 --- 

Humor April 2017 --- 

Humor March 2017 ---

Humor February 2017 ---

Humor January 2017 ---

Tidbits Archives ---

And that's the way it was on December 31, 2018 with a little help from my friends.


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

Bob Jensen's Threads ---

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

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

Bob Jensen's Resume ---

Bob Jensen's Homepage ---

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



November 2018

Tom AmlieBob Jensen's New Additions to Bookmarks

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

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

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


Bob Jensen's Pictures and Stories


All my online pictures ---

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  

Google Scholar ---

Wikipedia ---

Bob Jensen's search helpers ---

Bob Jensen's World Library ---

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 ---

The PCAOB is currently soliciting interested applicants for research fellowships. Applications are due no later than December 15, 2018.--- Call for fellows 2019 FINAL.pdf

Ancient Inca Accounting and Messaging
How the Inca Used Intricately-Knotted Cords, Called Khipu, to Write Their Histories, Send Messages & Keep Records

Bob Jensen's threads on accountancy history ---

Converging Technologies Will Lead to ‘Continuous Auditing’---

Cybercurrency ---

NPR:  Why is the price of bitcoin fluctuating so wildly? ---

Forbes:  The Great Cryptocurrency Scam ---
Thank you Glen Gray for the heads up.

Washington Post:  The only currency worse than bitcoin is Venezuela’s ---
Jensen Comment
Under ASC 350 cryptocurrency is an intangible asset
Accounting Rule ASC 350 for Reporting Cryptocurrency as an Intangible Asset Subject to Value Impairment Tests$FILE/TechnicalLine_04623-181US_Cryptocurrency_18October2018.pdf

Why might this be awful timing for the State of Ohio?
The people of Ohio can now pay their taxes in bitcoin ---

Bitcoin usage among major payment processors has dropped 80% ---

Bad Ending to a Boring Tale:  Community Activists Kill Elon Elon Musk's Plan for an Underground Freeway Tunnel in LA ---


Proposed regs. outline new business interest expense limitation ---

From The Guardian:  The Financial (Accounting) Scandal Nobody is Talking About

Accountancy used to be boring – and safe. But today it’s neither. Have the ‘big four’ firms become too cosy with the system they’re supposed to be keeping in check?

In the summer of 2015, seven years after the financial crisis and with no end in sight to the ensuing economic stagnation for millions of citizens, I visited a new club. Nestled among the hedge-fund managers on Grosvenor Street in Mayfair, Number Twenty had recently been opened by accountancy firm KPMG. It was, said the firm’s then UK chairman Simon Collins in the fluent corporate-speak favoured by today’s top accountants, “a West End space” for clients “to meet, mingle and touch down”. The cost of the 15-year lease on the five-story building was undisclosed, but would have been many tens of millions of pounds. It was evidently a price worth paying to look after the right people.

Inside, Number Twenty is patrolled by a small army of attractive, sharply uniformed serving staff. On one floor are dining rooms and cabinets stocked with fine wines. On another, a cocktail bar leads out on to a roof terrace. Gazing down on the refreshed executives are neo-pop art portraits of the men whose initials form today’s KPMG: Piet Klynveld (an early 20th-century Amsterdam accountant), William Barclay Peat and James Marwick (Victorian Scottish accountants) and Reinhard Goerdeler (a German concentration-camp survivor who built his country’s leading accountancy firm).

KPMG’s founders had made their names forging a worldwide profession charged with accounting for business. They had been the watchdogs of capitalism who had exposed its excesses. Their 21st-century successors, by contrast, had been found badly wanting. They had allowed a series of US subprime mortgage companies to fuel the financial crisis from which the world was still reeling.

“What do they say about hubris and nemesis?” pondered the unconvinced insider who had taken me into the club. There was certainly hubris at Number Twenty. But by shaping the world in which they operate, the accountants have ensured that they are unlikely to face their own downfall. As the world stumbles from one crisis to the next, its economy precarious and its core financial markets inadequately reformed, it won’t be the accountants who pay the price of their failure to hold capitalism to account. It will once again be the millions who lose their jobs and their livelihoods. Such is the triumph of the bean counters.

The demise of sound accounting became a critical cause of the early 21st-century financial crisis. Auditing limited companies, made mandatory in Britain around a hundred years earlier, was intended as a check on the so-called “principal/agent problem” inherent in the corporate form of business. As Adam Smith once pointed out, “managers of other people’s money” could not be trusted to be as prudent with it as they were with their own. When late-20th-century bankers began gambling with eye-watering amounts of other people’s money, good accounting became more important than ever. But the bean counters now had more commercial priorities and – with limited liability of their own – less fear for the consequences of failure. “Negligence and profusion,” as Smith foretold, duly ensued.

After the fall of Lehman Brothers brought economies to their knees in 2008, it was apparent that Ernst & Young’s audits of that bank had been all but worthless. Similar failures on the other side of the Atlantic proved that balance sheets everywhere were full of dross signed off as gold. The chairman of HBOS, arguably Britain’s most dubious lender of the boom years, explained to a subsequent parliamentary enquiry: “I met alone with the auditors – the two main partners – at least once a year, and, in our meeting, they could air anything that they found difficult. Although we had interesting discussions – they were very helpful about the business – there were never any issues raised.

Continued in article

GASB proposes implementation guidance ---

How data analytics is transforming audit ---

Chevy Volt (dead future) ---

Chevy Bolt (bright future) ---

GM is laying off thousands of workers, closing three plants, and ending production of the Chevy Volt ---

Jensen Comment
The Chevy Volt seemed like a great hybrid idea at the time, but the car was never profitable for GM. In large part this was its very limited all-electric range before having to kick over to a gasoline powered generator.

Mergers and Acquisitions ---

ERP ---

Addressing Common M&A Challenges With Cloud-based ERP ---

Business operating models are now taking advantage of cloud-first thinking as the technology continues to mature and flexible computing solutions become mainstays.

In the wake of an M&A transaction how to treat the respective organizations’ technologies is a perennial issue: how (and whether) to merge them, or, in the case of a divestiture, how to decouple them. Conventional dogma has long counseled that the wise course is to “transition, then transform.” However, cloud-based technology commitments now afford executives a “transform in transition” model. The cloud-centric flexible computing solutions (FCS) models allow for simultaneous cost structure and capability transformation while being optimized for timing.

Cloud models replace aging, capital-intensive technology characterized by increasing fixed costs with a more flexible, consumption-based operating model based on variable costs. Such models can scale up or down as a business’s organic and inorganic needs dictate, and provide advanced capabilities based on leading practices with minimized investments into the future.

Cloud-based ERP technology options may be especially relevant for organizations looking to divest underperforming or non-core assets. Divestitures often include transition service agreements (TSAs) provided by the seller to the buyer post-deal, including operational services or support for an interim period after the transaction closes. TSAs often include financial penalties for not exiting the agreement prior to the agreed upon date, increasing the pressure on both sides to exit quickly and with minimal impact to the business. But this can be challenging if the TSA includes support services for a traditional, on-premises or hosted ERP system, due to the complexity involved with ERP system configuration.

Cloud-based ERP systems can help turn a potential M&A deal-breaker into a deal-maker. Opting for a cloud-based ERP solution as part of the FCS architecture can be a practical, cost-efficient alternative to traditional fixed-cost on-premise or hosted solutions and may appeal to both seller and buyer. Requiring minimal hardware and manageable configuration, a medium-sized organization can often be operational on a cloud-based ERP system in one to two quarters; a large international organization may require about twice that time.

But in both cases, this approach is typically two to three times faster than traditional on-premises solutions, thereby facilitating accelerated exits from the TSA. Considering that a cloud ERP system provides regular upgrades, the ability to scale users, easy adjustments to system functionality, state-of-the-art security and increased system capability, it may offer the ultimate in flexibility during a post-deal transition.

Selecting the Appropriate ERP Platform

“Choosing a cloud-based platform set should involve the same thorough due diligence as any other strategic facet of an M&A transaction,” says Asish Ramchandran, a principal with Deloitte Consulting LLP. “Each vendor has a defined set of current and developing strengths, and different approaches to managing and enhancing their products,” he adds.

For example, there are pure-play vendors that focus solely on cloud while traditional on-premises vendors that maturing offerings in the cloud space. There are vendors that require customers or clients to stay current on all releases, and other vendors that allow them to skip releases if they decide they don’t want to put their configuration through the system testing required to stay current for a point in time.

Regardless of the vendor, there are a few keys criteria for a buyer to consider when selecting an FCS with a cloud ERP option:

—Buy for the present. Prioritize the capabilities required to exit TSAs with urgency, and plan to add more capabilities and functionality in phases post TSA exits.

—Use a two-tier strategy. For companies acquiring a new subsidiary with minimal integration plans, having the subsidiary migrate to a cloud based system can be a viable cost optimized, scalable option. This provides the subsidiary with a degree of autonomy, allows for long term ERP optionality for the parent while minimizing the impact on the acquirer’s current on-premises ERP solution, especially if the footprints are complementary.

—Keep it simple. To fully leverage the true value of a cloud solution and reduce implementation timelines, consider adopting the standard process workflows (e.g., accounts receivable, accounts payable) inherent to the system. These workflows are typically based on best-in-class processes, so changes should be challenged early and often. A 10-percent customization is a KPI threshold that should not be exceeded if possible

Understand the price drivers. Go in with your eyes wide open, because there are many drivers and strategies that vendors will use to price a cloud ERP system. Expect to evaluate costs driven by: users (typically priced in tiers); transaction volumes (i.e., the amount of data that flows through the system); functionality (core functionality such as GL, AR and AP is typically included, but additional functionality may cost more); revenue (percentage of annual revenue); and legal entities (some vendors utilize entities as a multiplier). Continuous cost discipline is key to cloud ecosystems.

—Don’t forget third-party add-ons. “Even the most comprehensive cloud ERP solution does not have all the functionality needed to run the business,” notes Ramchandran, “but often this can be addressed via add-on or bolt-on applications designed to work effectively with the cloud ERP solution.” Typical bolt-on products include tax, business intelligence, reconciliation, HR, payment gateways, and others.

Continued in article

Auditing Teachers Take Note
The Role of Risk and Compliance in Cloud Decisions

By understanding the benefits of cloud technology, operational risk and regulatory compliance teams can become a valued partner to their business and technology counterparts.

In a number of industries, particularly heavily regulated ones, risk and compliance teams that focus on operational and regulatory risk sometimes weigh in significantly on technology decisions, including deciding whether a company can or should move to the cloud, which provider to choose, and what tools and processes should be used.

With cloud established as a business tool that is increasingly used by organizations to bring new products and services to market and help improve customer experiences, risk and compliance teams have an opportunity to redefine their roles with respect to cloud decisions and partner with the business.

Part of any sound cloud strategy is identifying roles and responsibilities. For example, the operational risk and regulatory compliance teams should play a role in defining policies, and helping balance risk management with their organization’s need to innovate and achieve efficiencies. Meanwhile technology teams should focus on architecting solutions that not only meet the business’s needs but also comply with risk and compliance policies.

Becoming comfortable with managing cloud risks may require these risk and compliance professionals to become better acquainted with the technology, acknowledging the risks, but addressing them differently than they might approach the risks of physical data centers.

Following are some common challenges to balancing risk oversight with technology objectives when moving to the cloud.

Mistaking Current Implementations and Processes as Requirements

Often requirements are used to dictate which process or vendor solutions are put in place in the cloud. An example is the requirement of “network segmentation,” the practice of separating networks into smaller networks to help improve performance and security. Many requirement documents spell out exactly how network segmentation should be implemented in the cloud. This approach can create inefficiencies and be detrimental to the cloud’s architecture.

Consider that public cloud service providers (CSPs) allow companies to configure network segmentation to meet their specific needs. What’s more, virtual private cloud functionality, which isolates certain sections of the public cloud, provides flexibility for architects to meet policy requirements in support of security, risk, and compliance requirements. As a result, leveraging leading cloud practices for network segmentation enables the organizations to let go of the on-premise data center way of doing things, often with improved results.

Applying Data Center Auditing Practices to Cloud Providers

CSPs typically do not allow access to physical machines in their data centers, and do not allow external parties on the floors of the cloud data center to protect themselves against potential breaches and others risks. While there are some cloud providers that allow companies and their auditors to tour a facility, the tour overall can be a distant view of machines with blinking lights, and it’s virtually impossible to know which machines host the data to be audited. So while a tour of a CSP center may sound reasonable, it generally is not time well spent and can end up being a “check the box” exercise to adhere to audit requirements.

Auditing CSPs’ IT processes also can pose difficulties. Granted, CSP certifications represent only a point in time and therefore do not ensure that the proper processes are being followed daily. However, what is important to understand is that CSPs deploy multiple times daily, and are audited more than once a year. A real-time certification may not be necessary, or feasible, considering that CSPs deploy hundreds of times a day. At some point, operational risk and regulatory compliance teams may have to accept that the CSP certifications are sufficient and some level of potential risk may exist. Alternatively, risk and compliance teams can consider updating their risk assessment and testing procedures to more closely align CSP IT process audits with the potential risks presented by cloud technology.

Understanding the Delineations of a Shared Responsibility Model

CSPs generally have a well-defined shared responsibility model. In the example model below, cloud customers are responsible for areas above the hypervisor, and the CSP is responsible for those below the hypervisor.

Continued in article

Mistakes Grow Your Brain ---

WSJ: Forget The Playoff, College Football’s Burning Question Is About Taxes ---
The tax treatment of college football donations has turned into a bewildering tangle thanks to last year’s tax overhaul, the most far-reaching rewrite of the U.S. tax code since 1986. Buried in the bill was the repeal of a write-off for so-called seat donations. Internal Revenue Service guidance on lingering questions about the change isn’t expected for months.

Stanford University:  Itemized Deductions in a High Standard Deduction World ---

Jensen Comment
In previous years my real estate deductions (think property taxes and mortgage interest) served me well as itemized deductions. In retirement this would no longer be the case under Trump's new income tax rules if it were not for emergence of relatively large amount of medical deductions that arise when you shift from your employer to Medicare. Medicare is not free, but the 800 lb guerilla in retirement is the cost of premium Medicare Supplemental Insurance.  Yeah, I know I could save some by buying cheaper supplemental plans for my wife and myself. But we find comfort in having our expensive premium Blue Cross supplemental plans. In 2019, however, the exclusion for medical deductions jumps from 7.5% to 10%. Ouch!

Revenue Recognition:  FASB clarifies collaborative arrangement accounting rules ---

Understanding the new kiddie tax Find out how the taxation of children’s unearned income was changed by the Tax Cuts and Jobs Act ---

July 2018 California Bar Exam Pass Rate Falls To 67-Year Low ---
Other states are also witnessing a decline in BAR exam passage rates.
As the CPA exam gets easier to pass, the BAR exam may be getting harder (or the graduates are of lower quality)

The Defense Department's first ever agency-wide financial audit discovered problems that cost approximately $559 million to fix, the Pentagon said Thursday.--- 
Jensen Wish
If only the total fix would be so easy or so cheap. The DOD will always be a fraud hole.

Teaching Case:  Solar panels: Basis and bonus depreciation ---

A recent Tax Court case illustrated several issues common to trades or business but in the unusual context of a taxpayer who purchased solar-powered electricity-generating equipment installed on a third-party "host" property.

The IRS found taxpayers Donald and Sheila Golan responsible for a tax deficiency of $150,694 and an accuracy-related penalty of $30,139 after examining their 2011 income tax return. The taxpayers challenged the assessment in Tax Court. The court's opinion in the case, Golan, T.C. Memo. 2018-76, addressed issues including whether the taxpayers:

  • Established a basis in solar panels and related equipment for purposes of claiming an energy credit under Secs. 46 and 48 and a special allowance for depreciation under Sec. 168(k) (bonus depreciation);
  • Satisfied the requirements of then-applicable Sec. 168(k)(5);

In 2010, Donald Golan purchased as an investment solar equipment and its related rights and obligations from Solar Energy Equities LLC. The LLC offered discounted electricity to property owners in exchange for permission to install solar panels and related solar equipment on their properties. The LLC temporarily retained the burdens and benefits of ownership (including resulting tax credits and rebates) once contracts with the hosts were finalized. The LLC then sold the equipment to investors. Golan bought the equipment installed on three of the properties.

For all three properties, an application was filed with a local utility company for an interconnection agreement. The LLC entered into a power purchase agreement (PPA) with the owner of each host property; the LLC temporarily retained ownership of solar equipment and was responsible for any servicing or repairs. The PPA prohibited the host property from assigning the PPA to another party without the LLC's consent, but the LLC could assign its interest in the PPA to another party with 30 days' notice to the host. Once the solar panels were installed, the utility company informed the host of eligible rebates, which were then assigned to the LLC.

The sale to Golan was effected by: (1) a solar project asset purchase agreement; (2) Golan's promissory note; (3) Golan's guarantee; and (4) a bill of sale and conveyance. The purchase agreement specified that the "original use" of the solar equipment "shall commence on or after the Closing Date." The stated purchase price was $300,000, which was the sum of (1) a $90,000 down payment (due on the closing date in January 2011, but Golan did not pay any part of it in 2011); (2) a $57,750 credit for the rebates the LLC received from the utility company before the sale; and (3) Golan's promissory note in the principal amount of $152,250 with interest at 2%.

The note required Golan to pay toward the note all monthly revenue generated by the solar equipment. If the accrued interest exceeded the monthly receipts in any month, the difference would be carried forward and owed by Golan in future months. Conversely, monthly receipts exceeding the accrued interest and amortized principal would accelerate the loan's repayment.

The note was secured by the solar equipment, and, in the event of a default, the LLC agreed to seek recourse against the solar equipment before exercising any rights or remedies against Golan. However, the note also stated that Golan would be liable to pay any deficiency owed to the LLC if, in the event of foreclosure, a sale of the project assets was insufficient to pay all the amounts owed to the LLC under the note. Golan also signed a guarantee for the note and copies of the PPAs.

Basis in the solar equipment

The allowance of depreciation and the energy credit both depend on a taxpayer's having basis in the property, which under Sec. 1012 generally is the property's cost. Cost can include a promissory note issued in exchange for property.

In calculating the special allowance and energy credit, the taxpayers reported a basis in the solar equipment of $300,000 ($90,000 down payment, $57,750 credit for the utility company rebates the host property owners assigned to the LLC, and the $152,250 principal amount of the promissory note). The IRS argued that the Golans did not have basis in the solar equipment for 2011 because no money changed hands between Golan and the LLC that year.

The court noted that the $90,000 down payment was not paid in 2011; therefore, under Regs. Sec. 1.1012-1(a), the taxpayers could not add it to their basis for that year. The court also agreed with the IRS about the $57,750 — the record established the host property owners assigned the utility company rebates to the LLC, and as such, Golan did not receive them or report them as income. The court consequently found that the credit was a price reduction based on the LLC's receipt of the rebates. Because the rebates were not part of the solar equipment's cost to Golan, the taxpayers could not add the $57,750 credit to their basis in the solar equipment. However, the court further found that the $152,250 promissory note (a recourse obligation) was issued in exchange for the solar equipment, so the taxpayers could include the face amount of the note in their basis. Thus, the court determined that the basis in the solar equipment for 2011 was $152,250.

Bonus depreciation

Under Sec. 168(k)(1)(A), the depreciation deduction provided by Sec. 167 includes a special allowance for qualified property for the tax year in which the property is placed in service.

For 2011, the special allowance was 100% of the adjusted basis of certain qualified property. Qualified property had the following elements under then-applicable Sec. 168(k)(5) (these provisions were later moved, with modifications, into Sec. 168(k)(2)): (1) a recovery period of 20 years or less; (2) the original use of the property commenced with the taxpayer after Dec. 31, 2007; (3) the taxpayer acquired the property after Sept. 8, 2010, and before Jan. 1, 2012; and (4) the taxpayer placed the property in service before Jan. 1, 2012. The IRS agreed that the taxpayers satisfied the first two requirements but contended that they failed to meet the third and fourth requirements. Since the record established that Golan acquired the solar equipment in January 2011 and placed it in service in 2011, the court determined that he met the third and fourth requirements for bonus depreciation.

Sec. 465

Losses are allowed only to the extent of the aggregate amount at risk for an activity (Sec. 465(a)(1)). Any losses disallowed under this section for the tax year are treated as a deduction in the following tax year (Sec. 465(a)(2)). Under Sec. 465(b), a taxpayer is considered to be at risk for an activity with respect to amounts including:

1. The amount of money and the adjusted basis of other property the taxpayer contributed to the activity, and

2. Amounts borrowed for the activity to the extent that the taxpayer is personally liable for the repayment of those amounts, or has pledged property other than property used in the activity, as security for the borrowed amount.

However, if amounts borrowed for the activity are from a person who has an interest in the activity or from a related person to a person (other than the taxpayer) who has such an interest, those amounts are not considered to be at risk. The aforementioned exceptions, however, do not apply to an interest as a creditor in the activity or to an interest as a shareholder (Sec. 465(b)(3)).

Regs. Sec. 1.465-8 provides a detailed definition of a person who has a prohibited continuing interest under Sec. 465(b)(3):

If a borrower is personally liable for the repayment of a loan for use in an activity, a person shall be considered a person with an interest in the activity other than that of a creditor only if the person has either a capital interest in the activity or an interest in the net profits of the activity.

A capital interest in an activity entitles the holder to the distribution of the assets of the activity upon liquidation. An interest in net profits is not limited to the person who has ownership in the activity under Regs. Sec. 1.465-8. For example, an employee or independent contractor whose compensation is determined in any part by reference to the net profits of the activity is considered to have an interest in the net profits of the activity.

The IRS argued that the taxpayers were not at risk under Sec. 465 because the LLC owner retained a continuing prohibited interest in the solar equipment, which excluded the promissory note as a borrowed amount that established risk under Sec. 465(b)(3). Thus, the IRS contended, the taxpayers could not deduct a loss with respect to the solar activity.


Continued in article

Individual Retirement Account ---

Deciding Between a Roth vs. Traditional IRA in 2018 ---

Teaching Case
From The Wall Street Journal Accounting Weekly Review on January 10, 2014

Delaying IRA Contributions Can Be Costly
by: Jonnelle Marte
Jan 05, 2014
Click here to view the full article on

TOPICS: Individual Income Taxation, Individual Taxation, IRA Contributions, IRAs

SUMMARY: Taxpayers can contribute up to $5,500 each year to individual retirement accounts--$6,500 for those over 50. "An analysis of traditional and Roth IRA contributions made by Vanguard Group customers for the 2007 through 2012 tax years showed that, on average, 41% of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year. Half of those dollars are contributed in the first half of April...and only 10% of dollars are contributed in January of the corresponding tax year...." A time value of money comparison in the article shows that this habit-which most advisers think stems from investor laziness-can cost a substantial difference in final savings available at retirement

CLASSROOM APPLICATION: The article may be used in a class on personal taxes or when covering topics in the time value of money.

1. (Advanced) What is an individual retirement account? A Roth IRA?

2. (Advanced) According to tax law, when are taxpayers allowed to make IRA deductions?

3. (Introductory) According to findings by Vangauard Group from analyzing their customer deposits to IRA accounts, when do most taxpayers make IRA contributions?

Reviewed By: Judy Beckman, University of Rhode Island"

"Delaying IRA Contributions Can Be Costly," by Jonnelle Marte, The Wall Street Journal, January 5, 2014 ---

It's a new year. And that means it's time for investors to do what they could have done last year—but didn't.

Namely: make contributions to their 2013 individual retirement accounts. Indeed, an analysis of traditional and Roth IRA contributions made by Vanguard Group customers for the 2007 through 2012 tax years showed that, on average, 41% of the dollars contributed to IRAs for any given tax year are invested between January and April of the following year. Half of those dollars are contributed in the first half of April—the final weeks when contributions for the previous year can be made.

The study found only 10% of dollars are contributed in January of the corresponding tax year, the earliest month contributions can be made. "We are trying to encourage people to change their way of thinking and think about it sooner," says Maria Bruno, a senior investment analyst with Vanguard Investment Strategy Group. Valid Excuse?

There are legitimate reasons that big dollars flow into IRAs near the tax-filing deadline. At that point, taxpayers typically know whether their income for the prior year was low enough to qualify for deductible contributions, and can see by exactly how much a contribution would lower their tax bill.

But some advisers say the habit is one of the ultimate examples of investor laziness, nearly on par with not maxing out the company match for 401(k) contributions or not seeking retirement advice until after retirement.

"As humans we naturally procrastinate," says Mackey McNeill, an accountant and financial adviser in Bellevue, Ky.

Procrastination can be costly. The problem, advisers and retirement consultants say, is that investors who make IRA contributions at the last moment miss out on 16 months of potential gains (from January of one year until April of the following year), as well as the chance for those gains to compound over many years. Even if two investors contribute the same amount of money over the years, the person who starts earlier could end up with significantly more savings down the line.

Compare a saver who makes the maximum annual IRA contribution of $5,500 for those under age 50 in January of each year with another saver who contributes the same amount each April 15 of the following year. Over 31 years, assuming the money is invested in a moderate portfolio earning a hypothetical 7% annual return, the saver who makes full contributions in January could end up with $83,000 in additional savings after 30 years, even though both investors contributed equal amounts—about $170,500—overall, according to an analysis by Ms. McNeill. Tax Burden

Another downside to putting off contributions: It could add to your tax bills. Money in a taxable account over that 16-month period may incur gains that would have been deferred in an IRA, says Ed Slott, an accountant and founder of, a website for retirement savers.

Some pros say investors' excuses for not contributing as early as possible are looking thin. Most people don't see their income swing wildly from one year to the next, Ms. Bruno says. They can likely use last year's tax return to decide whether to make a contribution for the current tax year each January.

Procrastinators still have time to change their ways. Some can catch up if they now make their 2013 and 2014 contributions—a total of $11,000 for those under 50 contributing the maximum for each year, Ms. McNeill says. Those investors can then get in the habit of making their IRA contributions at the start of each year. (Investors 50 or older can contribute as much as $6,500 to their IRAs each year.)

While a doubled-up contribution is a lot to set aside at once, she says: "You've only got to make this change for one year."

Cryptocurrency ---

Ethereum ---

A cryptocurrency millionaire is buying up land in Nevada’s desert to build a utopian village run on Ethereum — here are the design plans ---

How Can Cryptocurrency Change Retail Payments?

Jensen Comment
The current accounting treatment of crypto currency as an intangible asset may be more difficult to justify if cryptocurrency becomes a more routine method for retail payments.

Accounting Rules for Reporting Cryptocurrency as an Intangible Asset Subject to Value Impairment Tests$FILE/TechnicalLine_04623-181US_Cryptocurrency_18October2018.pdf

What you need to know

• Cryptocurrencies meet the definition of indefinite-lived intangible assets, and holders generally should account for these assets at historical cost less impairment pursuant to ASC 350.

• However, investment companies as defined under ASC 946 should account for their cryptocurrency investments as “other investments” and subsequently measure these assets at fair value through earnings. • Determining ownership of a cryptocurrency held through a third party may be challenging and could affect the determination of the appropriate accounting.

• Entities that engage in mining activities (that generate cryptocurrency) need to develop an accounting policy based on the application of current US GAAP to the economics of their mining transactions and disclose that policy.

• Entities that invest in cryptocurrencies need to have controls in place to safeguard the private key that provides access to the cryptocurrencies and to maintain complete and accurate books and records related to their cryptocurrency activities.

Overview The proliferation of cryptocurrencies and the lack of US GAAP guidance that specifically addresses cryptocurrencies have raised questions about how holders of these assets should account for them


What Makes Accounting Rules for Cryptocurrency Reporting So Difficult to Implement?  Rigged Markets

At the height of Bitcoin mania in December, when the price of the digital currency was climbing toward $20,000, finance professor John Griffin started digging into 2 terabytes of trading data—equal to a tenth of all the text housed by the Library of Congress. His findings rocked cryptocurrency markets. Griffin and Amin Shams, his co-author and a doctoral student, zeroed in on an obscure and controversial cryptocurrency, Tether. Its price is pegged to $1. Part of the idea is that crypto traders can use Tethers as convenient stand-ins for U.S. dollars.

Griffin and Shams noticed that when Bitcoin fell to certain levels, purchases using Tether would flood in to stabilize prices. After crunching the data, they concluded this fit a pattern consistent with someone, or a group of people, trying to manipulate Bitcoin prices. The two researchers made the startling claim that half the gains in Bitcoin last year can be attributed to Tether. The results of their June paper were picked up around the world, helping to send the prices of digital assets lower. J.L. van der Velde, chief executive officer of Tether Ltd., said in a statement in June that the company’s digital currency can’t be used to artificially prop up Bitcoin.

The Bitcoin paper wasn’t the first time Griffin had pointed at market data to say something was fishy. The University of Texas at Austin professor has drawn ire on Wall Street for his previous work on ratings companies, investment banks, and, last year, a paper alleging the finance industry’s favorite volatility benchmark, the VIX, was rigged. He revels in the idea that his academic work has an impact beyond academia. “I not only want to understand the world, but make it better,” he says.

Griffin’s work has found an eager readership among watchdogs. In the years after the financial crisis, he worked with the U.S. Department of Justice in its investigations into mortgage fraud. He met with the Commodity Futures Trading Commission in June about another paper of his, a meeting he declined to discuss with Bloomberg Businessweek.

Continued in article

MIT:  Using Cryptocurrency to Launder Money ---
Click Here 

Yale Invests in Crypto Fund That Raised $400 Million ---

Ethereum ---

Accounting firm EY says it has developed the first implementation of zero-knowledge proof privacy technology on Ethereum ---

How much energy does bitcoin "mining" consume?
Jensen Comment
A huge problem is that we don't know how many home "mines" there are in the world.
We do know that Iceland is very popular for bitcoins because of cheap geothermal energy.
We don't know that the global mining of bitcoins is using a massive amount of energy.

Bitcoin is 10 years old on Halloween Day 2018 — here's a look back at its crazy history ---

Blockchain ---

Forbes:  Has the blockchain bubble burst?

The Atlantic:  Sports Stadiums Are a Bad Deal for Cities ---

Cryptocurrencies may be at the heart of future wars and revolutions.

Hi Ed,

Yeah, I carved out a professional niche in derivatives and hedge accounting (FAS 133/138) in my theory courses and for consulting
But I'm not worth a tinker's damn in cryptocurrency.


FAS 133/138 and cryptocurrency accounting issues have a lot in common. Firstly, the financial transactions and financial risks are both complicated and varied, although derivatives contracting is probably more varied to date.


Both issues are similar in that they forced the FASB into uncharted territories of financial contracting for which there were no prior accounting or disclosure standards (e.g., before FAS 133 there were not rules whatsoever for interest rate swaps and most other forward contracts). For FAS 133 the FASB had to hire outside derivatives experts to assist writing FAS 133 and FAS 138 and the really, really complicated Derivatives Implementation Group (DIG) pronouncements. FAS 133 became extremely complicated when accounting rules differed for derivatives used for speculation versus derivatives used for hedging. And there are different types of hedging such as cash flow hedging, fair value hedging, and foreign currency hedging.


Derivatives contracting and cryptocurrency contracting also led to extremely complicated market-rigging frauds. One difference to date is that whistle blowing derivatives markets writers emerged (think Frank Partnoy and Michael Lewis) before and after great scandals (think Enron) exposing many of the derivatives market frauds. I closely tracked these writings and constructed a long timeline of derivatives market frauds at ---
Sadly, huge market rigging frauds in some cases went on for decades without being discovered (think of the massive LIBOR frauds that almost never were discovered).


I might state the obvious here. Both derivatives accounting and cryptocurrency accounting rules require fair value accounting. Fair value accounting is derived from market pricing such that rigged markets frauds lead to distorted accounting numbers derived from rigged markets. For example, for decades interest rate swaps were valued from yield curves based on LIBOR by a valuation process described at
Hence the majority of the interest rate swap values reported in corporate annual reports for decades were distorted by the undetected LIBOR rigged markets.


What's still lacking in the cryptocurrency uncharted territory so far are the virtual absences of great whistle blowing writers like Frank Partnoy and Michael Lewis.


The disgrace of the auditing profession for years was its incompetence in auditing derivatives scandals of investment banks, Enron, etc. Derivatives contracting scandals helped bring down one of the most respected auditing firms in history (Andersen) and none of the other big auditing  firms did much to prevent criminal exploitation of investors in derivatives markets.


We are at a similar point in time where the auditing profession is virtually useless in preventing the enormous cryptocurrency scandals in the horizon. These scandals will be much bigger deals than derivatives scandals because of the way cryptocurrencies have gone global into both developed and developing economies (think Africa, Asia, and South America).


Frank Portnoy 1 was a tremendous whistle blower for discovering and explaining derivatives scandals --- 


Where's Frank Portnoy 2 for  discovering and explaining cryptocurrency scandals?


I predict that cryptocurrency markets will become the biggest embarrassments in history for the auditing profession and regulators like the FED and the SEC.


The accounting profession was embarrassed enormously by the implosion of Andersen. The Andersen embarrassment is small potatoes relative to the embarrassments to come in cryptocurrency accounting and auditing. Cryptocurrencies may be at the heart of future wars and revolutions.


Thanks Ed,

Bob Jensen


2019 Accounting Internship Programs, Ranked ---

The best-paid and most promising internship in every field, according to more than 13,000 interns who know ---

Jensen Comment
Accountancy internships are usually less than two months and do not particularly pay well. The good news is that there are a lot of internships available, and accounting interns usually return to complete their masters degrees with job offers in hand.

Bob Jensen's threads on careers ---

IASB clarifies definition of "material" ---

US worker pay posts biggest gain in a decade ---

Social Security Wage Base Set for 2019 ---

Excel: An Excel Camera trick for overlaying sparklines ---

Offset Function:  A great function for scenario analysis in Excel

Excel:  How to Use Scenario Manager ---

Excel Hotkeys You Should Know ---

Excel: Create an automated list of worksheet names ---

Excel Help from PC World:  How to Build Schedules Using Excel ---

Excel:  The slope chart is a popular way to compare past and present performance in Excel ---

Inflated Home Appraisals Drain Billions From Government Insurance Fund:  Reverse Mortgage Fraud ---

Jensen Comment
Advocates of fair value accounting often overlook problems of rigged markets (think derivatives markets and cryptocurrency markets) and unprofessionalism of many real estate appraisers seeking to benefit people in need of retirement funds. After all the government has trillions of dollars that can be tapped by home owners.

PCAOB barred, fined, and censured three Deloitte Mexico audit partners ---

Bob Jensen's threads on Deloitte ---

The US Air Force still can't explain why it spent $1,280 on a coffee cup ---

A former Tesla employee was charged with embezzling $9.3 million from the company ---

Jensen Comment
Auditors have long known that the biggest moral hazards in organizations are usually in purchasing and supply management, both in private sector firms (think Tesla) and in public sector organizations (think Detroit and Chicago).

Bob Jensen's Fraud Updates ---

Class-action lawsuits and 'F' ratings from the Better Business Bureau: Customers should be wary of MoviePass and Sinemia ---

Bob Jensen's Fraud Updates ---

Logical Fallacies ---

What's the Real Cost to a Fraud Victim ---

How three countries are creating the roadmap to a cashless society ---

Re-Engineering Big Audit -- Cautions From The Supply Side ---

Update from the UK Audit Regulator: The FRC’s Skipper Jumps Ship ---

EDUCAUSE: 2018 Students and Technology Research Study ---

This hub provides findings from the 2018 student study in the EDUCAUSE Technology Research in the Academic Community research series. ECAR collaborated with 130 institutions in 9 countries and 36 US states to collect responses from 64,536 students.

This research explores technology ownership, use patterns, and expectations as they relate to the student experience. Colleges and universities use these findings to better engage students in the learning process, improve IT services, plan for technology shifts that impact students, and become more technologically competitive among peer institutions.

Continued in article

From David Giles on November 22, 2018

A New Canadian Macroeconomic Database

Anyone who's undertaken empirical macroeconomic research relating to Canada will know that there are some serious data challenges that have to be surmounted.

In particular, getting access to long-term, continuous, time series isn't as easy as you might expect.

Statistics Canada
has been criticized frequently over the years by researchers who find that crucial economic series are suddenly "discontinued", or are re-defined in ways that make it extremely difficult to splice the pieces together into one meaningful time-series.

In recognition of these issues, a number of efforts have been made to provide Canadian economic data in forms that researchers need. These include, for instance, Boivin et al. (2010), Bedock and Stevanovic (2107), and Stephen Gordon's on-going "
Project Link".

Thanks to Olivier Fortin-Gagnon, Maxime Leroux, Dalibor Stevanovic, &and Stéphane Suprenant we now have an impressive addition to the available long-term Canadian time-series data. Their 2018 working paper, "A Large Canadian Database for Macroeconomic Analysis", discusses their new database and illustrates its usefulness in a variety of ways.

Here's the abstract:

"This paper describes a large-scale Canadian macroeconomic database in monthly frequency. The dataset contains hundreds of Canadian and provincial economic indicators observed from 1981. It is designed to be updated regularly through (the) StatCan database and is publicly available. It relieves users to deal with data changes and methodological revisions. We show five useful features of the dataset for macroeconomic research. First, the factor structure explains a sizeable part of variation in Canadian and provincial aggregate series. Second, the dataset is useful to capture turning points of the Cana-dian business cycle. Third, the dataset has substantial predictive power when forecasting key macroeconomic indicators. Fourth, the panel can be used to construct measures of macroeconomic uncertainty. Fifth, the dataset can serve for structural analysis through the factor-augmented VAR model."

Note - these are monthly data! And they're freely available. Although the paper doesn't appear to provide the source for accessing the data, Dalibor kindly pointed out to me that there's a download link here, on his webpage. This link will give you the data in spreadsheet form, together with all of the necessary background information.

The only slight concern that I have about this resource - and I don't want to sound ungrateful - is the issue of the updating of the data over time. You'll note from the abstract that the database "...... is designed to be updated regularly through (the) StatCan database....". Given my comments (above) about some of the issues that we've all faced for a very long time when it comes to StatCan data, I  know that updating this new database on a regular basis is going to be a bit of a challenge.

However, let's not let this concern detract from the considerable benefits that we'll all derive from having access to this rich set of Canadian macroeconomic time-series.

Thanks, again, to the authors for constructing this database, and for making it freely available!


Bedock, N. & D. Stevanovic, 2017. An empirical study of credit shock transmission in a small open economy. Canadian Journal of Economics, 50, 541–570.

Boivin, J., M. Giannoni, & D. Stevanovic, 2010. Monetary transmission in a small open economy: more data, fewer puzzles. Technical report, Columbia Business School, Columbia University.

Fortin-Gagnon, O., M. Leroux, D. Stevanovic, & S. Suprenant, 2018. A large Canadian database for macroeconomic analysis. CIRANO Working Paper 2018s-25.

Gordon, S., 2018. Project Link - Piecing together Canadian economic history. Département d'économique, Université Laval.

From David Giles on November 14, 2018

A re-tweet from a colleague whom I follow on Twitter brought an important paper to my attention. I thought I'd share it more widely.

The paper is titled, "Small-sample methods for cluster-robust variance estimation and hypothesis testing in fixed effect models", bJames Pustejovski (@jepusto) and Beth Tipton (@stats-tipton). It appears in The Journal of Business and Economic Statistics.  

You can tell right away, from its title, that this paper is going to be a must-read for empirical economists. And note the words, "Small-sample" in the title - that sounds interesting.

 Here's a compilation of Beth's six tweets:

Read more »

From David Giles on November 5, 2018

Econometrics Reading for November

In between raking leaves and dealing with some early snow, I've put together this list of suggested reading for you:

·                     Beckert, W., 2018. A note on specification testing in some structural regression models. Mimeo., Department of Economics, Mathematics and Statistics, Birkbeck College, University of London.

·                     Clarke, D., 2018. A convenient omitted bias formula for treatment effect models. Economics Letters, in press.

·                     Liu, Y. & Y. Rho, 2018. On the choice of instruments in mixed frequency specification tests. Mimeo., School of Business and Economics, Michigan Technological University.

·                     Lütkepohl, H., A. Staszewska-Bystrova, & P. Winker, 2018. Constructing joint confidence bands for impulse functions of VAR models - A review. Lodz Economic Working Paper 4/2018, Faculty of Economics and Sociology, University of Lodz.

·                     Richardson, A., T. van Florenstein Mulder, & T. Vehbi, 2018. Nowcasting New Zealand GDP using machine learning algorithms.

·                     Słoczyński, T., 2018. A general weighted average representation of the ordinary and two-stage least squares estimands. Mimeo., Department of Economics, Brandeis University.

What Happens When People Plead the Fifth on Form 1040?

Ohio-based Kroger and UK-based Ocado announced they will be spending $55 million to open up the first of 20 robotics warehouses in Cincinnati --- .
They will also be creating 400 jobs

Zorba:  Automation of Accounting (the time has come) ---

Zorba:  The Need for IT Oversight ---

Zorba:  Intelligent Automation, a Path to Digital Transformation ---


EY:  Update to ASU 2016-18 on the Statement of Cash Flows ---

We have updated our Financial reporting developments (FRD) publication on the statement of cash flows to reflect the issuance of ASU 2016-18, Restricted Cash, and other recent amendments to ASC 230. See Appendix D of the publication for a summary of the updates.

EY:  A closer look at how insurers will have to change their accounting and disclosures for long-duration contracts ---$FILE/TechnicalLine_05073-181US_InsuranceLongDuration_29November2018.pdf

What you need to know

• The new guidance in ASU 2018-12 will significantly change how insurers account for and make disclosures about long-duration contracts.

• When measuring liabilities for future policyholder benefits, insurers will have to review and, if necessary, update the assumptions they use to project future cash flows, and the rate they use to discount those future cash flows so the discount rate reflects the yield on upper-medium grade fixed-income instruments.

• The guidance creates a new category of market risk benefits that insurers will have to measure at fair value and reduces the number of methods used to amortize deferred acquisition costs. It also significantly expands the related disclosures.

• Insurers will have to change their processes, systems and internal controls to apply the new guidance.

• The guidance is effective for all PBEs for fiscal years beginning after 15 December 2020 and for interim periods in those years. All other entities must apply the guidance for fiscal years beginning after 15 December 2021 and interim periods the following year. Early adoption is permitted.

Overview The new guidance the Financial Accounting Standards Board (FASB or Board) issued in Accounting Standards Update (ASU) 2018-121 will significantly change how insurers account for and make disclosures about long-duration contracts. The changes are intended to provide users

EY: SEC divisions issue joint statement on the issuance and trading of digital assets that meet the definition of a security

 The SEC’s divisions of Corporation Finance, Investment Management, and Trading and Markets issued a joint statement expressing their views on issues raised in recent Commission enforcement actions involving the issuance and trading of digital assets that meet the definition of a security. The statement highlights the importance of complying with federal securities law in the following areas:


·         Initial offers and sales of digital assets that are considered securities – The divisions stressed the importance of determining whether a digital asset is a “security” for purposes of the federal securities laws and, if it is, determining which registration requirements apply. Shortly before the statement was released, two companies agreed to settle charges that they improperly issued tokens that qualified as securities in initial coin offerings (ICOs). The companies have agreed to pay penalties and register their tokens as securities under Section 12(g) of the Securities Exchange Act, which will require the companies to file periodic reports. In addition, the companies must compensate any investor who purchased the tokens in the illegal offerings if the investor makes a claim.


·         Investment vehicles investing in digital assets that are considered securities – Investment vehicles that hold digital assets that are considered securities, as well as individuals who advise others about investing in digital assets that meet the definition of a security, including managers of investment vehicles, are subject to the registration, regulatory and fiduciary obligations of the Investment Company Act of 1940.


·         Exchange registration – A platform that offers trading in digital assets meeting the definition of a security and that operates as an exchange must register with the SEC as a national securities exchange or be exempt from registration (e.g., by qualifying as an alternative trading system (ATS) under Regulation ATS). The statement clarifies that the activity that actually occurs between the buyers and sellers, not the kind of technology or the terminology used by the entity, determines whether the platform is a national securities exchange.


·         Broker-dealer registration – Entities that facilitate ICOs and secondary trading of digital assets that are considered securities may also be acting as brokers or dealers and thus required to register with the SEC and become a member of a self-regulatory organization, typically the Financial Industry Regulatory Authority.


The divisions encouraged entities that use new technologies in the US securities markets to consult with legal counsel, as well as the SEC staff, as necessary, to make sure they comply with the federal securities laws.

EY:  FASB proposes changes to the three new standards on financial instruments ---$FILE/TothePoint_04672-181US_FICodImprovements_20November2018.pdf

What you need to know • The FASB proposed clarifying the new guidance on credit losses, hedging and recognizing and measuring financial instruments and making changes to address implementation issues.

• The proposal would clarify the scope of the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things.

• The proposal would clarify aspects of the new hedge accounting guidance regarding partial-term fair value hedges, fair value hedge basis adjustments, application by not for profits and private companies, use of the first-payments-received cash flow hedging technique and certain transition requirements, among other things.

• The proposal would clarify the scope of the guidance on recognizing and measuring financial instruments, certain disclosure requirements and the guidance on which equity securities have to be remeasured at historical exchange rates.

• Comments are due by 19 December 2018.

The Financial Accounting Standards Board (FASB or Board) proposed a number of changes to the new guidance on credit losses, hedging, and recognizing and measuring financial instruments in response to questions raised by stakeholders


EY:  FASB makes targeted changes to related party consolidation guidance ---$FILE/TothePoint_04856-181US_RelatedParty_5November2018.pdf

What you need to know

• The FASB issued final guidance that creates a new private company accounting alternative that allows private companies to make an accounting policy election to not apply the variable interest entity guidance to common control arrangements if certain criteria are met.

• The new alternative replaces the previous alternative that applied only to leasing arrangements between private companies under common control.

• The new guidance also changes how all entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis under the new guidance, rather than in their entirety, as has been the case under US GAAP.

• The guidance is effective for entities other than private companies in annual periods beginning after 15 December 2019, and interim periods therein. The guidance is effective for private companies in annual periods beginning after 15 December 2020, and interim periods within annual periods beginning after 15 December 2021. Early adoption is permitted.

Overview The Financial Accounting Standards Board (FASB or Board) issued final guidance1 that makes targeted changes to the related party consolidation guidance.

EY:  FASB TRG for Credit Losses discusses more implementation issues

What you need to know

• A FASB member said the Board will discuss at a public meeting an alternative for recording credit losses that banks plan to ask the FASB to consider in conjunction with their request that regulators study the economic effects of applying ASC 326.

• TRG members generally agreed that contractual extension options that aren’t in the lender’s control must be considered when determining contractual term and that information related to periods after the contractual term can be considered in the credit loss estimate.

• TRG members generally agreed that proceeds from sales of nonperforming financial assets could be considered when measuring credit losses.

• TRG members generally agreed that, in the vintage disclosure, loans should be presented in the year of the last underwriting date.

• The FASB staff addressed topics including partial discounting, when to recognize foreign exchange losses on AFS securities, how to evaluate impairment on beneficial interests in the scope of ASC 325-40 that are classified as trading and whether gross write offs and recoveries need to be presented in the credit quality disclosures.

Overview A member of the Financial Accounting Standards Board (FASB or Board) opened the meeting of the Transition Resource Group (TRG) for Credit Losses by acknowledging concerns the banking industry is raising about the standard.


Lithium ---

From The CFO Journal's Morning Ledger on November 26, 2018

A surge in demand for lithium, the key ingredient in rechargeable batteries that power electric vehicles and smartphones, is hastening efforts to bring transparency to prices of the metal. 

Jensen Comment
This is made more difficult by locations of mining operations in Chile and China.

From The CFO Journal's Morning Ledger on November 26, 2018

Hong Kong has the most business-friendly tax system in the world, increasing the competitiveness of the former British colony, according to a new ranking of 190 tax jurisdictions.

From The CFO Journal's Morning Ledger on November 21, 2018

Cafe Chain Audit Comes Under Regulatory Scrutiny of Grant Thornton

The Financial Reporting Council has launched an investigation into the audit of the financial statements of cafe chain Patisserie Holdings PLC for the years 2015, 2016 and 2017, writes Ms. Trentmann.

The investigation into Grant Thornton UK LLP's audit will be conducted by the Audit Enforcement Procedure, the U.K. regulator for reporting, accounting and audit said in a statement.

The probe comes after the company's announcement in October that it had discovered accounting regularities, resulting in the departure of former Chief Financial Officer Chris Marsh and an emergency fundraising from shareholders to keep the company afloat.

The FRC is also investigating the preparation and approval of financial statements of Patisserie Holdings by Mr. Marsh, the regulator said.


From The CFO Journal's Morning Ledger on November 19, 2018

General Electric Co. is seeking sales for its struggling power unit, but faces a dilemma with Iraq, according to a consultant’s report prepared for the company. The nation needs multimillion-dollar gas turbines—and poses corruption problems.

Jensen Comment

A good question to raise with students is the issue of how to mitigate risk when lending to corrupt nations. In nations of integrity the usual credit protection is typically some type of collateral that can be relied upon in case of loan default. Collateral usually cannot be relied upon in a highly corrupt nation. Have students think about alternatives. If buyers of Iraq oil badly want Iraq to have the gas turbines then perhaps those customers having better credit ratings can cosign the notes. Perhaps even the USA government will assure payment in full since having economic recovery in Iraq is deemed so important to USA interests in the Middle East.

Some types of investments are less risky than others. For example, investment in gas turbines is highly risky since a corrupt government can default and sell oil to enemies. Investment in a pipeline can be less risky if the lender is at the other end of the pipeline.

In some cases there are no good alternatives other than payments in advance. This seems to be the case these days when trying to deal with Venezuela.

From The CFO Journal's Morning Ledger on November 19, 2018

Good day. Finance chiefs at U.S. companies have recently had to offer higher yields to investors in return for their money, a sign that a long run of favorable borrowing conditions for American corporates could be coming to an end, reports The Wall Street Journal.

The upper hand: The widening gap between yields for investment-grade U.S. corporate bonds and U.S. Treasuries comes despite a relative dearth of new bond sales from companies--a sign that investors’ demand has slowed faster than supply. When businesses have sold debt recently, they have often struggled to attract much interest, giving investors more say over interest rates and other key terms. This has also impacted large debt issuers such as General Electric Co. 

Higher spreads: As of Thursday, the average investment-grade corporate bond spread was 1.28 percentage points, up from 0.85 percentage points in February but below the 2.15 level it reached in Feb. 2016, according to Bloomberg Barclays data. The average speculative-grade spread was 4.04 percentage points, compared with 3.03 percentage points in October and 8.39 percentage points in Feb. 2016.


Case in point: Hospital operator LifePoint Health Inc. was forced to make a rash of investor-friendly changes to a nearly $5 billion bond-and-loan package backing its merger with private-equity firm Apollo Global Management-owned RCCH HealthCare Partners.

From The CFO Journal's Morning Ledger on November 16, 2018

General Electric Co. raised $115 billion of debt on a reputation as one of the U.S.’s safest borrowers. Now, revelations of losses and questions about its accounting have shaken investors’ confidence, driving bond prices sharply lower in recent weeks.

From The CFO Journal's Morning Ledger on November 16, 2018

J.C. Penney Co. is finding that slashing inventory comes at a price, as efforts to clear the sales floor have also thinned margins.

Jensen Comment
It's good to ask students about the advantages and disadvantages of carrying retail inventory. One of the huge disadvantages (cost of capital tied up in unsold inventory that has been less important with near-zero interest rates) will be more troublesome as the Fed keeps bumping interest rates. 


An enormous advantage of online shopping at Amazon is the amazing selection of styles, colors, and sizes, a selection that is virtually impossible to carry in any store and even from online vendors like Walmart. Amazon has over five million products compared to about a million products online from Walmart. Amazon's amazing software tells you before you place an order whether a particular style, color, and size is available.


Alibaba at times is now selling more online than Amazon, but this is mostly because of the enormous 1.5 billion population of China. When I did comparison shopping of things like sweatshirts and shoes I found Amazon to have a better selection of styles, colors, and sizes.

Stumbling Block for Mergers and Acquisitions:  European Union’s new General Data Protection Regulation privacy law
From The CFO Journal's Morning Ledger on November 14, 2018

The European Union’s new General Data Protection Regulation privacy law is turning into a stumbling block for mergers and acquisitions involving companies in Europe, the Middle East and Africa, according to a survey released Monday by business services provider Merrill Corp., reports CFO Journal's Nina Trentmann. 

Fifty-five percent of respondents said they had worked on deals that fell apart because of concerns about a target company’s data protection policies and compliance with GDPR, a regulatory framework that took effect at the end of May.

Two-thirds of respondents expect GDPR to result in greater scrutiny of data protection policies and processes at target companies on behalf of buyers, complicating the deal-making process.

From The CFO Journal's Morning Ledger on November 14, 2018

Companies should ramp up the level of disclosure surrounding the risks posed by cybersecurity, Brexit and the planned phaseout of the London interbank offered rate, said Kyle Moffatt, chief accountant at the U.S. Securities and Exchange Commission’s Corporation Finance Division.

The SEC issued new cybersecurity disclosure guidance earlier this year, and the regulator wants companies to align their current disclosure policies with that guidance, reports CFO Journal's Tatyana Shumsky.

That means including in corporate filings discussions of board risk oversight, disclosure controls and procedures, and insider trading policies as they relate to cybersecurity, Mr. Moffatt said Tuesday at the Current Financial Reporting Issues Conference in New York.

From The CFO Journal's Morning Ledger on November 14, 2018

Good day. Walmart Inc. is rolling out a new system for scheduling its more than 1 million U.S. store workers, as the country’s largest private employer aims to hold down labor costs while offering more stable schedules to attract workers, reports The Wall Street Journal.


Battle for workers: Walmart’s efforts come as U.S. unemployment is at its lowest level in decades and wages are rising, leaving retailers to compete for workers while managing rising costs. Some rivals have raised their minimum wages above Walmart’s $11 threshold set early this year.


New system: The retailer will introduce to all 4,600 of its U.S. stores software that executives said better predicts staffing needs and allows some of those stores to give workers schedules that remain the same for 13 weeks.


Greater autonomy: Walmart also is letting workers use a company mobile app to check their schedules or swap shifts without a manager’s approval. Steadier schedules and shift-swapping via mobile have been popular, said workers and executives.


While Consumers Are Spending, Companies Aren't
From The CFO Journal's Morning Ledger on November 9, 2018

Good day. The U.S. tax overhaul that passed late last year has boosted companies’ profits. Nevertheless, executives haven’t showed the same optimism as consumers have and in fact are reining in capital spending, reports The Wall Street Journal.


Give people money, and they will spend it: About 80% of U.S. households received a tax cut this year, and, in combination with continued strength in the job market, it has provided a powerful boost to the economy--good news for consumer-facing companies. Analysts polled by Refinitiv expect same-store sales across 91 traditional retailers will be up 3.7% from a year earlier, on average, more than double the third-quarter 2017 gain of 1.7%.


But companies don't: There has been a marked slow down of growth in capital spending in recent months. Business investment grew at just an 0.8% annual rate in the third quarter, down from the second quarter’s 8.7% and the slowest pace since the fourth quarter of 2016. A survey by Duke University’s Fuqua School of Business showed that as of the third quarter, chief financial officers expected capital spending to grow by 5.7% on average over the next 12 months. In the first quarter, they expected spending to grow by 11%.


Less bang for the buck: The decline in capital spending implies that businesses have a more cautious outlook on the economy than consumers. Instead of investing to boost output and increase efficiency, companies have used their tax windfall to return money to shareholders.

From The CFO Journal's Morning Ledger on November 8, 2018

SASB Launches Sustainability Accounting Standards

A nonprofit organization Wednesday launched 77 industry-specific sustainability accounting standards aimed at providing investors with in-depth information about the impact of a company’s actions on society and the environment, reports CFO Journal's Nina Trentmann.

The release marks a six-year effort by the Sustainability Accounting Standards Board to draft accounting standards that address environmental and societal issues and comes at a time of increased investor concern about companies’ business practices.

“Companies and investors around the world now have codified, market-based standards for measuring, managing, and reporting on the sustainability factors that really drive value and affect operational performance,” said SASB Chair Jeffrey Hales.

From The CFO Journal's Morning Ledger on November 8, 2018

Good day. Tesla Inc. turned to Robyn Denholm, an Australian finance executive, to become its new chairman, replacing Chief Executive Elon Musk as the head of the car maker's board, reports The Wall Street Journal. 


Satisfying the SEC: The announcement late Wednesday comes ahead of a Nov. 13 deadline that was part of Mr. Musk’s settlement with the U.S. Securities and Exchange Commission to end claims he misled investors. That deal required Mr. Musk to step aside as head of the board for three years in favor of an independent chairman.


Industry insider: Ms. Denholm, the chief financial officer of Australian telecommunications company Telstra Corp., has served on Tesla’s board since 2014. As a board member, Ms. Denholm has provided some rare automotive experience to a company that prides itself on being an industry outsider. She spent seven years at Toyota Motor Corp. in Australia, where she was a senior financial manager.


Tasks ahead: Ms. Denholm and the Tesla board will face various challenges, including managing Mr. Musk. The executive is known for operating the company in an unconventional way that helped push Tesla’s market value to rival General Motors Co., even though Tesla has never turned an annual profit and sells a fraction of the cars.

From The CFO Journal's Morning Ledger on November 6, 2018

Good day. Inc. plans to split its second headquarters evenly between two locations rather than opting for one city, a decision that highlights the challenge for U.S. companies to recruit top talent, reports The Wall Street Journal.

Not alone: A tightening labor market in the U.S. and a period of low unemployment has made competition for workers even tougher since Amazon began its search. Technology firms, automotive companies, banks and retailers all vie for software engineers, computer programmers and artifical-intelligence experts, intensifying the war for talent.

Casting nets: By building two headquarters, Amazon can tap different geographic regions for talent, including some who may not want to move too far from home. It may also not be competing with other major tech giants in a given area, like it does with Microsoft Corp. in the Seattle area.

Not the only show in town: Amazon has wanted to avoid being the only large company in town, something it has dealt with in Seattle, according to people familiar with the company’s thinking. Adding 50,000 workers would likely cause hiccups for transit systems and potentially lead to issues like a lack of affordable housing.

From The CFO Journal's Morning Ledger on November 5, 2018

Strong hiring and low unemployment are delivering U.S. workers their best pay raises in nearly a decade.

The CFO Journal's Morning Ledger on November 5, 2018

SEC Spotlights Subjective Calls Among Adopters of Revenue Rules
The U.S. Securities and Exchange Commission i
homing in on subjective accounting decisions  made by finance teams as the regulator reviews how companies comply with new revenue-recognition rules, reports CFO Journal's Tatyana Shumsky.

The new accounting standard, which went into effect for public companies on Dec. 16, 2017, replaced prescriptive industry-specific rules with a principles-based, five-step model to make revenue booking for comparable transactions standardized across industries.

Only 32 of the roughly 4,000 U.S. publicly listed firms chose to apply the new rules early, according to a report released Monday by business and regulatory compliance analytics firm Intelligize Inc.  The SEC questioned nearly one-third of early adopters over their compliance with the revenue recognition standard. Seventy percent of the letters included questions about how companies arrived at their decisions for performance obligations measurements.

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

Berkshire Hathaway Inc. repurchased $928 million of its stock in the third quarter, a rare move that indicates Chairman Warren Buffett sees a dearth of appealing investment options for his company’s large cash pile.

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

Companies Pull Back Curtain on Auditor Selection, Oversight

More U.S. public companies in 2018 voluntarily shared with investors details about how their boards of directors select and oversee external auditors, according to an annual report from industry group Center for Audit Quality and research firm Audit Analytics.

Forty-six percent of S&P 500 companies told investors what factors they considered when judging the performance of their auditors in 2018, up from 38% in 2017, according to the report. And 26% percent said that the evaluation of their auditor is performed at least annually, up from 21% in 2017. The research is based on audit committee reports in corporate proxy statements. “

Over the past five years, audit committees have provided increasingly robust disclosures about their important investor-protection role in overseeing the external audit,” said CAQ Executive Director Cindy Fornelli in a statement.

Moreover, 40% of S&P 500 companies disclosed what factors they considered when appointing an external auditor, up from 37% in 2017. And 70% of companies in the index disclosed how long they have been working with the audit firm, up from 63% last year.


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

Good day. Wages for U.S. private-sector workers rose at the fastest pace in a decade during the third quarter, a sign that the tighter labor market is paying dividends for more workers, reports The Wall Street Journal.

Pay gains: Wages and salaries rose 3.1% from a year earlier in the third quarter, the fastest gain since the second quarter of 2008. The increases come as the unemployment rate fell to 3.7% in September, the lowest reading in 49 years.

Leverage: The combination of low unemployment and steady hiring appears to be putting workers in a position to command better compensation. And with labor market conditions still tightening, some economists expect wage growth to accelerate further.


Benefit growth cools: Benefit costs—which include health coverage, retirement benefits and paid leave—advanced a slower 0.4%.


That could be a sign that employers are shifting compensation to base pay. It also could indicate that tax-cut related bonuses, which propped up benefits growth early in the year, didn’t extend into the third quarter.


The Role of Accounting in the Prevention of Corruption: Perception of Experts from Bosnia and Herzegovina

8 Pages
Posted: 20 Nov 2018

Benina Veledar

School of Economics and Business Sarajevo

Date Written: September 10, 2015


Corruption in the public sector is problem that almost all countries in the world face with, in greater or lesser extent. During couple of past years, Bosnia and Herzegovina has had a constant growth of corruption. According to the Corruption Perception Index, Bosnia and Herzegovina has moved from 72nd position in 2013 to 80th position in 2014, with scores that had led it nearly to zones with high levels of corruption. Due to the fact that corruption in the public sector discourages innovation and entrepreneurship, and thus leaves extremely harmful effects on the entire economy of the country, at the end of 2013 research was conducted on a sample of 208 public officials and experts in the fields of accounting and auditing. The objective of the research was to determine the extent to which specific accounting tools can contribute to the suppression, or at least reducing, corruption in the public sector of Bosnia and Herzegovina. Research results showed that implementation of the program budgeting and responsibility accounting, through the efficient allocation of scarce budgetary resources between programs and the establishment of public accountability, can help the fight against corruption, improve the business climate and innovations, and thus contribute to the development of the whole country.

Keywords: program budgeting, responsibility accounting, corruption, public sector, innovation, Bosnia and Herzegovina

JEL Classification: M41

Surge Pricing and Two-Sided Temporal Responses in Ride-Hailing

37 Pages
Posted: 19 Nov 2018

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management

Ming Hu

University of Toronto - Rotman School of Management

Han Zhu

Desautels Faculty of Management, McGill University

Date Written: November 7, 2018


Surge pricing in ride-hailing markets is a pivotal and controversial subject. In this paper we investigate surge pricing and the dynamics among relevant stakeholders from a temporal perspective; in particular, we highlight the unique temporal ride-hailing characteristic that drivers respond to surge pricing much slower than riders, and their resulting strategic behavior. We find that equilibrium surge pricing patterns are more nuanced than micro-matching supply and demand. We first identify an equilibrium pattern of a short-lived sharp price surge followed by a lower price that we refer to as skimming surge pricing (SSP), in which the platform strategically inflates the initial price to make riders voluntarily wait out the initial surge period, so as to attract drivers to the surge region. This pattern agrees with current ride-hailing practices. Interestingly, we also identify another equilibrium pattern of a low initial price followed by a higher price that we refer to as penetration surge pricing (PSP), in which the platform strategically deflates the initial price to force unmatched riders to wait out the initial surge period, so as to attract drivers to the surge region. We find that PSP is superior to SSP in several major ways and has the potential to mitigate controversies caused by sharp price surges, and thus propose that platforms strive to achieve the equilibrium by sharing demand and supply information and/or surge price forecasts with drivers. Lastly, we show that high-frequency surge pricing outperforms low-frequency surge pricing, and that if a platform neglects the different timescales of riders and drivers in response to surge pricing, the performance of low-frequency surge pricing is further reduced. Our findings underscore the importance of accounting for temporal ride-hailing characteristics in managing surge pricing.

Controlling Shareholder’s Share Pledging and Accounting Manipulations

56 Pages
Posted: 19 Nov 2018

Douglas V. DeJong

University of Iowa - Tippie College of Business


Wuhan University

Deren Xie

Tsinghua University

Date Written: October 9, 2018


A controlling shareholder can pledge his\her shares to secure personal loans while retaining control of the firm, but share pledging increases the risk of a margin call and the possibility of losing control of the firm. We investigate whether and how share pledging by controlling shareholders lead firms to manipulate accounting numbers to avoid such risks. Focusing on China-listed firms, we find that firms with controlling shareholders pledging their shares engage in more positive discretionary accruals, more income-increasing real earnings management, and a higher propensity of using non-recurring items to avoid a net loss. We find that the level of accrual-based earnings management declines while levels of real earnings management and non-recurring items continue as the controlling shareholder repeatedly pledges his\her shares. As a result, such firms exhibit restatements, worse audit opinions, and more sanctions by regulators, which implies financial reporting quality suffers. Collectively, our evidence is consistent with the view that with shares pledged as collateral, the controlling shareholder behaves myopically by exerting influence over the firm’s financial reporting to defend the value of the share price.

Keywords: Share Pledging, Controlling Shareholders, Accounting Manipulations

Price Discovery on Bitcoin Markets

25 Pages
Posted: 16 Nov 2018

Paolo Pagnottoni

University of Pavia - Department of Economics and Management

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics

Dirk Baur

The University of Western Australia

Date Written: November 7, 2018


Trading of Bitcoin is spread about multiple venues where buying and selling is offered in various currencies. However, all exchanges trade one common good and by the law of one price, the different prices should not deviate in the long run. In this context we are interested in which platform is the most important one in terms of price discovery. To this end, we use a pairwise approach accounting for a potential impact of exchange rates. The contribution to price discovery is measured by Hasbrouck's and Gonzalo and Granger's information share. We then derive an ordering with respect to the importance of each market which reveals that the Chinese OKCoin platform is the leader in price discovery of Bitcoin, followed by BTC China.

Keywords: price discovery, bitcoin, hasbrouck information shares

JEL Classification: C58, C32, G23

Using the CPA Examination Blueprints to Enhance Learning Objectives for Accounting Courses

17 Pages
Posted: 16 Nov 2018

Zane L. Swanson

University of Central Oklahoma

Edward Walker

University of Central Oklahoma

Louise Miller

University of Central Oklahoma

Richard Green

Texas A&M University (TAMU) - San Antonio

Date Written: October 24, 2018


This analysis demonstrates a process (based on word frequencies) to compare CPA Examination Blueprints with a school’s syllabi objectives. The project addresses a need for faculty to keep current their curriculum with regard to evolving business practices. The accounting program at a one university is analyzed with a pilot study. Then, the information technology design is placed in EXCEL spreadsheet program which can be accessed through the internet. A second university accounting department served as a beta test. Results provide indication and guidance for change.

Keywords: CPA Exam Blueprint, Syllabi Objectives, Text Correlation

JEL Classification: I21, M4, M41, O35

Any Justification for Creative Accounting: Where Are Fraud, Examiners?

26 Pages
Posted: 16 Nov 2018

Godwin Oyedokun

OGE Professional Services Ltd; Nasarawa State University, Keffi

Date Written: October 16, 2018


The slippery slope is described as ‘playing the system’, ‘beating the system’, and fundamentally neglecting the laid down rules, regulation within the system for selfish reasons. This presentation revealed the justification, ethical or otherwise for creative accounting, aggressive earnings management and related concepts as it affects the professional judgement of fraud examiners. The role of fraud examiners is put to light in ensuring that the users of financial statements are not continued to be put in the dark with respect to the state of the concerned company. This presentation also explores both positive and negative side of Creative accounting and revealed the consequences of the same within the context of fraud examination and financial reporting structures. It is concluded that The use of aggressive accounting techniques may not necessarily be fraudulent. However, it may be the start of a slippery slope, where legitimate earnings management descends into earnings manipulation or fraudulent accounting. This presentation recommends that fraud examiners should take seriously the ACFE code of ethics in resolving the allegation of fraudulent activities as may also concern creative accounting by seeing the bigger picture.

Keywords: Aggressive accounting, Creative accounting, Earnings management, Fraud examination, Fraudulent financial statement

JEL Classification: M40, M41, M42

Effects of the Spanish Accounting Reform on the Economic and Financial Structure, and the Performance of Listed Companies

International Journal of Accounting and Taxation, June 2018, Vol. 6, No. 1, pp. 1-17

17 Pages
Posted: 15 Nov 2018

Juan L. Gandía

University of Valencia - Department of Accounting

David Huguet

University of Valencia - Department of Accounting

Date Written: June 1, 2018


The aim of this paper is to examine the impact of the 2008 accounting reform on the economic and financial indicators which are commonly used in the financial analysis, as well as analyse whether there is an evolution on these measures as a consequence of a learning process or an adaptation to the accounting reform. Firstly, we do a normative analysis to examine the differences in the Spanish GAAP before and after the accounting reform. Based on the differences we find, we formulate a series of hypotheses about how these differences affect the main measures of economic structure, financial structure, and performance which are commonly used in the analysis of financial statements, as well as their effect on the accruals. These hypotheses are tested with a multivariate analysis in a sample of listed companies. Results show that the accounting reform has effects on the financial indicators.

Keywords: Accounting reform, Comparability, Differences in accounting standards

JEL Classification: M41, M48

The Change of the Value Relevance of Accounting Information After Mergers and Acquisitions: Evidence From the Adoption of SFAS 141(R)

Accounting and Finance, Forthcoming

59 Pages Posted: 15 Nov 2018

Shin Hyoung Kwon

Pennsylvania State University - Erie

Guannan Wang

Suffolk University

Date Written: September 15, 2018


This study examines how and why investors change the use of their information sources in valuation between book value and earnings after mergers and acquisitions (M&A) in both pre- and post-SFAS 141(R) periods. We find that investors generally put less weight on earnings but more weight on book value after M&A than before M&A, and that such a change is particularly strong after the adoption of SFAS 141(R). By looking at goodwill, other intangible assets and other balance sheet accounts that SFAS 141(R) amended, we further find that SFAS 141(R) improves the value relevance of book value components after M&A.

Keywords: Value Relevance, Mergers and Acquisitions, SFAS 141(R), Financial Reporting

JEL Classification: G18, G34, M41

Audit Committee Formation in a Semi-Mandatory Setting. A Case of an Emerging European Economy

57 Pages
Posted: 14 Nov 2018

Karolina Puławska

Kozminski University

Dorota Dobija

Kozminski University

Katarzyna Piotrowska

Kozminski University

Grygorii Kravchenko

Kozminski University; Kozminski University

Date Written: September 5, 2018


This study investigates the determinants of the audit committee (AC) formation in a semi-mandatory setting of a European economy where ownership and control are predominantly in the hands of families and business groups and the voluntary practice of forming an AC has not been widely accepted. Our primary analysis provides evidence of an inverted association between the determinants of AC formation commonly accepted in the Anglo-Saxon world, such as the number of independent members on supervisory board and accounting and finance expertise of supervisory board members. When it comes to ownership structure, companies with foreign ownership are more likely to have an AC. Our results also point to an important learning effect related to the existence of other supervisory board committees as an important determinant of AC formation. The results are important for supervisory bodies and regulators, as they provide insights into factors that influence audit committee formation. Of particular interest is the link between the experience of having other supervisory board committees and the likelihood of having an AC, suggesting that the AC concept may be more successfully implemented by the promotion of best practices and benefits of having board committees rather than by adjusting the behavior of companies through additional changes in regulation. This may be particularly helpful in addressing the challenges of adopting the Eighth Directive across European states.

Keywords: corporate governance, audit committee, regulated market, audit committee determinants, Poland

JEL Classification: M19, M41, M42

The Joint Effects of Narcissism and Gender on Group Recruiting Event Performance: Implications for Large Public Accounting Firm Hiring Decisions

46 Pages
Posted: 13 Nov 2018

Kirsten Fanning

University of Illinois at Urbana-Champaign - Department of Accountancy

Jeffrey O. Williams

University of Illinois at Urbana-Champaign - Department of Accountancy

Michael G. Williamson

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: October 30, 2018


Group events, where large numbers of students interact with potential employers and other job candidates, are commonly used to facilitate on-campus recruiting. Large public accounting firms in particular tend to rely heavily on group events, providing an appropriate setting in which to examine potential consequences of using these events. We conducted three studies to test theory about how narcissists perform during these events. Collectively, our studies show that, consistent with social role theory, the success narcissists enjoy during group recruiting events depends on their gender. Specifically, narcissism is more positively associated with favorable impressions during group recruiting events for males relative to females. Our findings suggest that narcissism can increase the hiring prospects of male job seekers during group recruiting events relative to one-on-one interviews. In contrast, narcissism does not increase and can even decrease the hiring prospects of female job seekers during group recruiting events relative to one-on-one interviews. Given large public accounting firms use impressions made at on-campus group recruiting events as inputs to their hiring decisions, our results contribute to a better understanding of survey and field evidence suggesting that entry-level male and female Big Four accounting firm employees have different personalities which appear to influence their career trajectories within the firm.

Keywords: narcissism, gender, group recruiting events, Big Four public accounting, interviews

Accounting versus Prudential Regulation

51 Pages
Posted: 13 Nov 2018

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Lucas Mahieux

Tilburg University - Department of Accounting & Accountancy

Haresh Sapra

University of Chicago - Booth School of Business

Date Written: October 15, 2018


We develop a model to study how accounting and prudential regulations interact to affect banks' incentives to originate safe loans. Prudential regulators impose prudential limits on bank leverage but cannot commit to ex-ante efficient intervention, responding ex-post to accounting information. Our main result is that accounting measurement and capital requirements are tools best used in tandem. We demonstrate how suitably designed measurements can help ease credit and we derive various comparative statics linking bank leverage, quality of accounting information, and regulatory intervention. An application of our analysis is on the current debate on the expected loss provisioning model recently adopted in the financial industry.

Keywords: Prudential Regulation, Accounting Standards, Loan Loss Provisioning

Bank Earnings Management Using Commission and Fee Income: The Role of Investor Protection and Economic Fluctuation

Journal of Applied Accounting Research, Forthcoming

22 Pages Posted: 12 Nov 2018

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Erick R Outa

Charles Darwin University

Date Written: October 20, 2018


We investigate whether banks use commission and fee income to manage reported earnings as an income-increasing or income smoothing strategy. We find that banks use commission and fee income for income smoothing purposes and this behaviour persist during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings. Our findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions. From an accounting standard setting perspective, our evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically.

Keywords: Earnings Management; Commission and Fee Income; Non-interest Income; Real Earnings Management; Income Smoothing; Economic Condition; Investor Protection; Banks

JEL Classification: G21; G28; G34; M41

Model-Based Earnings Forecasts vs. Financial Analysts’ Earnings Forecasts

British Accounting Review, Forthcoming

Posted: 11 Nov 2018

Richard D. F. Harris

University of Exeter - Business School; University of Exeter

Pengguo Wang

Xfi, University of Exeter

Date Written: October 19, 2018


Existing accounting-based forecasting models of earnings either do not fully consider information that is contained in stock prices or use an ad hoc specification that is not based on rigorous valuation theory. In this paper, we develop an earnings forecasting model built on the theoretical linkages between future earnings and stock prices as well as a number of accounting fundamental variables. We find that our model-based forecasts of earnings are in general less biased and more accurate than both existing model-based forecasts and analysts’ consensus forecasts, at both shorter and longer horizons. We also show that the accuracy of both model-based forecasts and financial analysts’ forecasts depend on firm-specific characteristics such as firm size and industry membership.

Keywords: Analysts’ Earnings Forecasts, Model-Based Earnings Forecasts, Forecast Horizons, Accuracy, Incremental Information, Firm Characteristics

Essential Tips on Refereeing for Academic JournalsSSRN

10 Pages
Posted: 11 Nov 2018

Robert W. Faff

University of Queensland

Date Written: October 19, 2018


This paper is based on an “interview” I did for publons on how I approach refereeing for academic/scholarly journals. The paper covers a broad range of issues across topics including: managing invitations; writing the review; and open reviews. The views are my own, based on a career spanning 35 years, that have seen me review many hundreds of scholarly papers, for a wide variety of journals (primarily in finance, accounting and economics), across more than 60 different titles.

Keywords: Refereeing advice; Early career researcher

JEL Classification: G00; M00; B40; A20; B00; C00; D00; E00; F00; H00; I00; J00; L00; Q00; R00; Z00

Is Fair Value Information Relevant to Investment Decision-Making: Evidence From the Australian Agricultural Sector?

Australian Journal of Management, Vol. 43, No. 4, 2018

Posted: 10 Nov 2018

Liyu He

Macquarie University, Faculty of Business and Economics

Sue Wright

University of Newcastle; Financial Research Network (FIRN)

Elaine Rose Evans

Macquarie University - Department of Accounting and Finance; Macquarie University, Faculty of Business and Economics

Date Written: July 11, 2018


Despite major accounting standards boards worldwide continuing to use fair value extensively, academic evidence on the relevance of fair value accounting has focused on financial assets. This study breaks new ground to provide the first empirical evidence for the agricultural sector on the relevance of fair value accounting. It examines the forecasting power of the fair value of biological assets for future operating cash flows. Using all agribusinesses listed in Australia, where fair value accounting was first implemented in the agricultural sector, we find that fair value of biological assets does not provide incremental forecasting power for future operating cash flows, whether market-determined prices or managerially estimated value is used. The findings of this study provide empirical support for the call by Elad and Herbohn in 2011 for the International Accounting Standards Board (IASB) to revisit the implementation of fair value accounting in the agricultural sector.

Keywords: agricultural sector, future operating cash flows, relevance of fair value accounting

The Real Effects of Accounting on Debt Repurchases

Posted: 10 Nov 2018

Zawadi Lemayian

Washington University in St. Louis

Date Written: June 2018


I investigate the real effects of accounting rules that permit the inclusion of gains and losses from debt repurchases in reported income. Because the gains or losses from repurchasing a company’s own debt securities are included on the firm’s income statement, managers have incentives to strategically time gain recognition. I predict that such strategic timing will be more likely to occur when the accounting rules (SFAS 145) allow the gain to be recognized in income before extraordinary items relative to when the gain is required to be recognized as an extraordinary item. Using a sample of 778 firms that repurchased debt between 1994 and 2011, I find evidence consistent with my predictions. Specifically, firms record larger extinguishment gains when earnings are (i) less than analysts’ forecasts, (ii) low relative to the prior year’s earnings, or (iii) less than zero. I find that these effects are stronger after the application of SFAS 145. This study contributes to the literature that examines real effects of accounting rules by providing evidence that firms repurchase their own debt at least in part for accounting benefits.

Keywords: Debt Repurchases

JEL Classification: M41, M48

International PCAOB Inspections and Earnings Management Transmission within Multinational Business Groups

54 Pages
Posted: 9 Nov 2018

David Oesch

University of Zurich

Felix Urban

University of Zurich

Date Written: November 2, 2018


Does the impact of international Public Company Accounting Oversight Board (PCAOB) inspections extend beyond country borders of inspected auditors? We investigate this question by examining multinational business groups. Following initial PCAOB inspections of accounting firms auditing foreign U.S.-listed global ultimate owners, our findings indicate that their multinational subsidiaries decrease earnings management. Research design choices such as the comparison of treated observations with same country-industry-year control observations and a fixed effects structure that controls for country, industry, year, and group characteristics mitigate concerns of omitted variables. Our paper provides evidence for benefits of international PCAOB inspections over and above the previously documented effects for firms located in the countries of the inspected auditors.

Keywords: PCAOB, PCAOB International Inspection Program, Positive Externality, Cross Listing, Multinational Companies, MNC, Transmission of Shocks

JEL Classification: F23, M41, M42, M48

Do Retail Investors Use SEC Filings? Evidence from EDGAR Search

62 Pages
Posted: 8 Nov 2018

Sabrina Chi

Texas Tech University - Area of Accounting

Devin M. Shanthikumar

University of California, Irvine - Paul Merage School of Business

Date Written: October 25, 2018


We address whether retail investors use SEC filings when making trading decisions. We find that retail investor trading, both buying and selling, is significantly related to EDGAR search for 10-K and 10-Q filings, more so than to Google search. This is true for firms with high or low visibility, firm-days with and without press coverage, and during or excluding earnings-announcement and filing windows. The results of lead-lag and two-stage-least square analyses are consistent with search leading to trade. In addition, the direction of retail investors’ trading is consistent with the direction of earnings changes reported in the downloaded filings, suggesting that retail investor trading direction is influenced by the accounting information they read in the filings. We also find that the significantly positive relation between retail trading and EDGAR search is strongest for the most easily readable 10-K and 10-Q filings. Finally, we find that retail investor trading-predicted returns are higher on days with heavier EDGAR search, consistent with retail investors making more profitable, or at least less loss making, trades when doing more research on EDGAR. Overall, our results provide strong evidence that retail investors use EDGAR filings data in making their trading decisions.

Keywords: retail investors, investor sophistication, investor attention,Google search, EDGAR

JEL Classification: G11, D14, M40, M41, G12

Tax Avoidance, Financial Experts on the Audit Committee, and Business Strategy

Journal of Business Finance & Accounting, Vol. 45, Issue 9-10, pp. 1293-1321, 2018

29 Pages
Posted: 8 Nov 2018