New Bookmarks
Year 2019 Quarter 1: January 1 - March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to http://www.trinity.edu/rjensen/bookurl.htm
For earlier edition of Tidbits go to --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

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 http://www.searchedu.com/.

Bob Jensen's Threads --- http://www.trinity.edu/rjensen/threads.htm

Choose a date below for additions to New Bookmarks

2019

March

February

January

March 2019

Bob Jensen's New Additions to Bookmarks

March 2019

Bob Jensen at Trinity University

My Latest Web Document
Over 400 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

USA Debt Clock --- http://www.usdebtclock.org/ ubl

How Your Federal Tax Dollars are Spent ---
http://taxprof.typepad.com/.a/6a00d8341c4eab53ef01b7c8ee6392970b-popup

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
http://finance.townhall.com/columnists/politicalcalculations/2016/05/25/spring-2016-to-whom-does-the-us-government-owe-money-n2168161?utm_source=thdaily&utm_medium=email&utm_campaign=nl
The US Debt Clock in Real Time --- http://www.usdebtclock.org/
Remember the Jane Fonda Movie called "Rollover" --- https://en.wikipedia.org/wiki/Rollover_(film)
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) ---
http://money.cnn.com/2013/01/15/news/economy/entitlement-benefits/
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 ---
http://faculty.trinity.edu/rjensen/Entitlements.htm

For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm
Bookmarks for the World's Library --- http://faculty.trinity.edu/rjensen/bookbob2.htm

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 http://www.searchedu.com/

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296

Google Scholar --- https://scholar.google.com/

Wikipedia --- https://www.wikipedia.org/

Bob Jensen's search helpers --- http://faculty.trinity.edu/rjensen/searchh.htm

Bob Jensen's World Library --- http://faculty.trinity.edu/rjensen/Bookbob2.htm

Possibly the Number 1 Resource for CPA Exam Candidates
AICPA: Uniform CPA Exam Blueprints ---
http://www.aicpa.org/BecomeACPA/CPAExam/ExaminationContent/DownloadableDocuments/cpa-exam-blueprints-effective-20170401.pdf?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Apr2017

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 ---
http://www.journalofaccountancy.com/news/2016/apr/new-cpa-exam-201614166.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=04Apr2016

Bob Jensen's CPA Exam Helpers ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

Find a corporate home page quite easily by going to
https://en.wikipedia.org/wiki/List_of_companies_of_the_United_States

Bob Jensen's search helpers ---
http://faculty.trinity.edu/rjensen/searchh.htm

A former colleague named Petrea Sandlin died in March. She headed the accounting program at Trinity University for many years, and consistently received top evaluations for her teaching (mostly intermediate accounting). What set her apart was her exceptional caring for students and help in launching their careers. Her Ph.D. was from the University of Texas, and she spent most of her career at Trinity University.

She and her daughter found the way to our cottage in the mountains a few years back after we were both retired.

It's so like her to not want a fuss made over her funeral just like she did not want a fuss made over her in life. Her husband died a number of years before she passed on.

In the earliest days of technology in education, long before PowerPoint was even invented, she and I wrote a book together ---
http://faculty.trinity.edu/rjensen/245cont.htm

Luca Pacioli's 1494 book on business, accounting could fetch $1.5M at auction ---
https://www.foxbusiness.com/personal-finance/luca-paciolis-1494-book-on-business-accounting-could-fetch-1-5m-at-auction
Sadly, only a few living accounting scholars like Alan Sangster can read this historic book

Alan Sangster (2018)
Pacioli's Lens: God, Humanism, Euclid, and the Rhetoric of Double Entry
The Accounting Review: March 2018, Vol. 93, No. 2, pp. 299-314.
https://doi.org/10.2308/accr-51850

This paper investigates why, in 1494, the Franciscan friar and teacher of mathematics, Luca Pacioli, published an instructional treatise describing the system of double entry bookkeeping. In doing so, it also explores the rhetoric and foundations of double entry through the lens of Pacioli's treatise. Recent findings on Pacioli's life and works, his writings, and the medieval accounting archives are combined to identify how he was inspired by his faith and his humanist beliefs to give all merchants access to the practical mathematics and the bookkeeping they required. The paper finds that Pacioli's teaching method was inspired by Euclid, his Franciscan education, and his humanist beliefs, and that Pacioli reveals a simplicity in the then-unrecognized axiomatic foundation of double entry that has been largely overlooked. The findings represent a paradigm shift in how we perceive Pacioli, his treatise, and double entry.

"The Genesis of Double Entry Bookkeeping," by Alan Sangster, The Accounting Review, Volume 91, Issue 1 (January 2016) ---
http://aaajournals.org/doi/full/10.2308/accr-51115
The above link has a pay wall.

The emergence of double entry bookkeeping marked the shift in bookkeeping from a mechanical task to a skilled craft, and represented the beginnings of the accounting profession. This study seeks to identify what caused this significant change in bookkeeping practice. I do so by adopting a new accounting history perspective to investigate the circumstances surrounding the emergence of double entry in early 13th century Italy. Contrary to previous findings, this paper concludes that the most likely form of enterprise where bookkeeping of this form emerged is a bank, most likely in Florence. Accountability of the local bankers in Florence to the Bankers Guild provided a unique external impetus to generate a new form of bookkeeping. This new bookkeeping format provided a clear and unambiguous picture of the accounts of all debtors and creditors, along with the means to check that the entries between them were complete and accurate.

I. INTRODUCTION

Historians generally accept that the “Italian method” of double entry bookkeeping, based upon making entries of equal amounts to the debit and credit of two different accounts, was the foundation for modern accounting. Although all modern accounting systems rely upon the principle of duality enshrined in that technique, we do not understand how this system emerged. This unanswered question is the focus of this paper: What led to the emergence of double entry bookkeeping?

The importance of this question to accountants is that the emergence of double entry marked the point at which accounting evolved from a mechanical task that virtually anyone could perform to become a skilled craft. It signaled the beginnings of the accounting profession. By identifying what led to this development, we learn about our roots and improve our understanding of the importance of our discipline and of its place in the economic history of the past millennium.

I adopt a “new accounting history” perspective that reflects the historical context, the local conditions, and the language and vocabulary in which this particular practice was articulated (Miller and Napier 1993, 631). I incorporate these factors and surviving records of the period to understand the reasons behind the change in bookkeeping practice that gave rise to the emergence of double entry bookkeeping.

The motivation for this study was the recent publication of a best-selling book that has popularized the history of double entry bookkeeping. Its title—Double Entry: How the Merchants of Venice Shaped the Modern World and How their Invention Could Make or Break the Planet (Gleeson-White 2011)—tells us that Venetian merchants invented double entry bookkeeping, but did they?

Various scholars have speculated upon the origin of double entry bookkeeping, including Rossi (1896), Besta (1909), Littleton (1927, 1931, 1933), Peragallo (1938), Melis (1950), Zerbi (1952), de Roover (1971), Lee (1972, 1973a, 1973b, 1977), and Martinelli (1974). However, with the exception of Rossi and Littleton and, to a lesser extent, Martinelli, they focus on the presence of an enterprise-wide accounting system based upon double entry, something that tells us little of the origins of double entry many years earlier. To identify how, where, why, and by whom double entry was first developed, the conditions that gave rise to it are likely to be more fundamental than the circumstances of its first identifiable enterprise-wide application. Consequently, in looking for the genesis of double entry bookkeeping, I focus on how and where the concept of double entry originated, the circumstances that led to its development, and, particularly, which professional group first developed it.

I follow the approach adopted by Rossi and Littleton. Littleton also considered what the terminology of double entry tells us of its origins. However, neither of them specifically sought to identify the group that developed the method, nor where it first emerged. This study builds upon and extends their work. We know with certainty that the technique of double entry emerged in the 13th century in Italy. Unfortunately, no complete set of documentation from that period has survived. The earliest confirmed instance of its enterprise-wide application is from the final year of the 13th century (Lee 1977), while the evidence indicates that this was many decades after the technique first appeared.1

Previous studies document that double entry bookkeeping emerged in different places at different times, and that the form it took varied from place to place. However, these various forms all share the fundamental characteristic of “dual entries” that serve as the starting point in the shift to double entry bookkeeping. Dual entries require that when accounts were being maintained for the parties to and/or items involved in a transaction, for each entry made in one account, an equal and opposite “contra entry” must be made in another account. To that end, I begin this study by seeking instances of items being recorded in a consistent dual form that could then have developed into a recognizable form of double entry bookkeeping.

The difference between dual entry and double entry lies in how the contra entry is recorded. In double entry, each entry in an account must include the location of the account in which the contra entry has been made. No such information is provided in dual entry. Therefore, I include this essential requirement in the definition of double entry in this study. That is, my approach requires that this additional step be included in order for bookkeeping entries to qualify as double entry bookkeeping.

This is an appropriate definition for double entry for two further reasons. The account books of this period were solely for debtors and creditors (Goldthwaite 2009) and entries were sometimes made transferring amounts between two of these accounts, such as between the accounts of a debtor and a creditor. In such cases, dual entry occurs by chance because an equal amount is entered on the opposite sides of two accounts. In contrast, as defined here, the emergence of double entry stemmed from the belief that each entry should include the location of the contra entry. This conscious step marked the genesis of double entry bookkeeping. At this point, bookkeeping moved from being a device used to maintain a historical record of a transaction to a method that enabled rapid confirmation that the transaction had been entered accurately in both accounts. It had become important to ensure that entries were made correctly. This also marked the point at which bookkeeping shifted from being a mechanical task to a skilled craft, requiring far more care and attention, and signaling the beginnings of the accounting profession.

This step was the common starting point for double entry, the link among all the Italian variants of double entry bookkeeping that were in use during the 13th to 17th centuries. These variants included “mingled accounts” (Martinelli 1974) with credits immediately below the debits, and vice versa; account books with debtor accounts at the front and creditor accounts at the back; bilateral account books with the debit and credit entries in each account on opposite-facing pages; and bilateral account books with the debit and credit entries of each account in two columns of the same page. All of these formats had their own variants in word sequence and in the manner in which dates, cross-references, and amounts were entered. The commonality in the basic underlying rationale of double entry bookkeeping enabled all these variants to merge into one unified method many centuries later. Beyond the scope of this study, the emergence of double entry bookkeeping eventually led to another phase in the evolution of accounting, which ended with firms combining the details in their accounts to calculate profits and losses. This subsequent double entry-based accounting system (Gurskaya, Kuter, Deliboltoayn, and Zinchenko 2012) combined all accounts, represented initially in lists of balances and then in income statements and balance sheets.

Contribution This study contributes to the debate concerning the conditions that gave rise to modern bookkeeping and accounting by amending and extending previous theories. I introduce a context focused in the city of Florence, as opposed to the entire country of Italy. My approach embraces explanatory conditions that are unique to Florence and would explain the emergence of double entry there before other locations. The continuous threat of external scrutiny and penalties for failure to meet standards present only in Florence were conditions that demanded an effective response by bankers. Adopting double entry was the ideal response.

Continued in article

Jensen Comment
Just think about it --- two TAR articles without equations!
Next thing we know there may be articles that are not General Linear Model studies using purchased data bases or hypothetical assumptions for mathematical analysis.

Times may be changing, but I would not count on it just yet.

Bob Jensen's threads on accounting history ---
http://faculty.trinity.edu/rjensen/theory01.htm#AccountingHistory

SEC adopts rule to modernize and simplify Regulation S-K disclosures --- "
https://www.sec.gov/rules/final/2019/33-10618.pdf

Tax Identity Theft Information and Tools ---
Click Here

The auditor's report is undergoing the biggest change in 70 years, and the PCAOB staff is providing guidance to assist in implementation ---
https://www.journalofaccountancy.com/news/2019/mar/pcaob-insight-on-critical-audit-matters-201920822.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=19Mar2019

Jensen Comment
One of my main concerns is how the audit report will address fraud detection.

From the CFO Journal's Morning Ledger on March 20, 2019

U.S. auditors are gearing up to revamp and expand the yearly letter in which they bless a company’s financial statements. Starting later this year, those audit reports must tell investors more about what an auditor found most difficult or challenging when scrutinizing a company’s books.

PwC must pay FDIC $625.3 million over bank's collapse: U.S. judge ---
https://www.reuters.com/article/us-at-t-directv-now/pwc-must-pay-fdic-625-3-million-over-banks-collapse-u-s-judge-idUSKBN1JS2CB

Jensen Comment
This is yet another instance of external auditors being held accountable for not uncovering fraud. For educators, one of the best known early cases of this was when Grant Thornton failed to detect former Koss Corp. executive's $34 million embezzlement. Normally external auditors rested easy when such frauds did not materially affect the financial statements or they had strong cases that they were deceived by the client in a way that they were not responsible to detect such fraud in a financial statement audit ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/
One of the problems in holding external auditors accountable for fraud detection might become an enormous increase in auditing fees since fraud detection that is not material to the financial statement outcomes is extremely difficult and expensive to detect.

Bob Jensen's threads on PwC, Grant Thornton, and other large auditing firms ---
http://faculty.trinity.edu/rjensen/fraud001.htm

IIRS’s Dirty Dozen scams — 2019 edition
https://www.journalofaccountancy.com/news/2019/mar/2019-irs-dirty-dozen-tax-scams-201920830.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=20Mar2019

Jensen Comment
Most are not new and date back almost as long as income taxes were imposed. Some, however, like phone scams telling you the police are about to be on their way to your house are new scams on ignorant Americans.

Age-old scams like unreported income are what keeps the $2 trillion underground economy thriving. Employers benefit by paying below minimum wage and not paying payroll taxes. Employees benefit by not paying any payroll taxes or income taxes (and getting a job when having trouble finding work elsewhere).

How working in retirement affects Social Security ---
https://www.barrons.com/articles/unretirement-social-security-51552661091?shareToken=stf0e5da95a6bc42899d7dde4e267ec063&mod=e2smartbrief&reflink=smartbrief
This is not a free article (it costs one dollar).
But you can read more about this at
https://en.wikipedia.org/wiki/Social_Security_(United_States)#Benefits_while_continuing_work

The official SSA site on this matter is at
https://www.ssa.gov/planners/retire/whileworking.html

How to Mislead With Statistics
Who Got the Better MLB Contract—Bryce Harper or Manny Machado?
https://www.theatlantic.com/entertainment/archive/2019/03/bryce-harper-or-manny-machado-better-mlb-contract/584644/
Jensen Comment
The above article is misleading because it leaves out taxes. Most financial recommendations are misleading if they don't factor in taxes. Manny Machado gets clobbered with income tax.

Why California's Income Tax is Scary
Bryce Harper Will Save Tens Of Millions In Taxes By Spurning California Teams ---
https://taxprof.typepad.com/taxprof_blog/2019/03/bryce-harper-will-save-tens-of-millions-in-taxes-by-spurning-the-dodgers-and-giants.html

400+ other examples of how to mislead with statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

CPA Journal: Auditing Accounting Estimates ---
https://www.cpajournal.com/2019/03/07/auditing-accounting-estimates/

Jensen Comment
In 1983, nearly four decades ago if you do the math, I wrote my second monograph published by the AAA
Review of Forecasts: Scaling and Analysis of Expert Judgments Regarding Cross-Impacts of Assumptions of Business Forecasts and Accounting Measures, (Sarasota, FL: American Accounting Association, 1983).

The AICPA had recently changed auditing rules allowing auditors to "review" forecasts in the spirit of giving a new line of professional services to auditing firms. Auditors were not to validate forecast numbers themselves. The idea, however, was that auditors could review management forecasts and pass judgment on the "reasonableness" of assumptions underlying management's forecasts.

I don't think the auditing firms ever made much revenue reviewing forecasts. Apparently clients did not see a whole lot of value added in when paying auditing firms for a review of forecasts. One of the huge problems is that circumstances can impact assumptions so suddenly that forecasts are much more tenuous. Exhibit A is how Tesla's forecasted revenues and profits keep changing almost day-to-day. One example of where an auditing firm (Price Waterhouse) signed off on a "Review of Forecasts" is the 1987 Annual Report of Days Inn which was then privately owned and contemplating going public. That 1987 annual report is exceptional in other regards, especially the enormous investment Days Inn made that year to report exit values of 300+ hotels.

Increasingly, forecasts/estimates are subject to enormous and shifting tides in multinational business and politics. Think of how hard it is for technology giants like Google and Apple to forecast revenues and profits in the European Union given the EU's constantly shifting regulations and tax laws. Think of how difficult it is to forecast revenues during the pending Trump Administration trade negotiations. Think of how difficult it is to predict the future of banking under the threat of hostile socialist democrats winning power of the executive and legislative branches of the Federal government. And of course there are great unknowns about how technology will impact business firm future (think AI, robotics, cyber warfare, etc.).

CPA exam requirements by state ---
https://financialanalystinsider.com/cpa-state-requirements/

New: An alphabetical list with links to all of MAAW's Great Bibliographies ---
https://maaw.info/MAAWBibliographies.htm

MAAW's Accounting Index Updated (great accounting literature guide) ---
https://maaw.info/AccountingForArticlesByTopic.htm

Monopoly was designed 100 years ago to teach the dangers of capitalism ---
https://phys.org/news/2019-03-monopoly-years-dangers-capitalism.html
Applications of Monopoly and other edutainment tools for learning ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Monopoly

Stocks are fleeing the exchanges in the US. Small and young stocks are disappearing most, with older larger stocks dominating. Less public means more private, not less companies ---
https://johnhcochrane.blogspot.com/2019/03/less-listing.html

Tax Cut?
What tax cut?
Trump Tax Reform Hits Home in Wealthy New York Suburbs ---
https://www.bloomberg.com/news/articles/2019-03-21/trump-tax-reform-causing-freakouts-in-rich-new-york-area-towns?cmpid=BBD032119_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190321&utm_campaign=bloombergdaily

Book Review: Big Business: A Love Letter to an American Anti-Hero ---
https://www.publishersweekly.com/9781250110541
Jensen Comment
I can't say I entirely agree with Tyler, especially regarding to anti-competitive behavior of big business and what I think is outrageous executive pay, especially those unethical golden parachutes ---
http://faculty.trinity.edu/rjensen//FraudConclusion.htm#OutrageousCompensation

But I do have to support multinationalism in general (certainly not all instances of outrageous exploitation). Exhibit A is an article by the Nobel Prize winning hero among progressive leftist economists, Paul Krugman, who also comes out in defense of multinational corporations.

Paul Krugman --- https://en.wikipedia.org/wiki/Paul_Krugman

In some ways I'm hypocritical about Paul Krugman. I fully agree with him that free trade and multinational exploitation of low wages is probably a good thing for developing nations ---
"In Praise of Cheap Labor," by Paul Krugman, Slate, March 21, 1997 ---
https://slate.com/business/1997/03/in-praise-of-cheap-labor.html

After all, global poverty is not something recently invented for the benefit of multinational corporations. Let’s turn the clock back to the Third World as it was only two decades ago (and still is, in many countries). In those days, although the rapid economic growth of a handful of small Asian nations had started to attract attention, developing countries like Indonesia or Bangladesh were still mainly what they had always been: exporters of raw materials, importers of manufactures. Inefficient manufacturing sectors served their domestic markets, sheltered behind import quotas, but generated few jobs. Meanwhile, population pressure pushed desperate peasants into cultivating ever more marginal land or seeking a livelihood in any way possible–such as homesteading on a mountain of garbage.

Given this lack of other opportunities, you could hire workers in Jakarta or Manila for a pittance. But in the mid-’70s, cheap labor was not enough to allow a developing country to compete in world markets for manufactured goods. The entrenched advantages of advanced nations–their infrastructure and technical know-how, the vastly larger size of their markets and their proximity to suppliers of key components, their political stability and the subtle-but-crucial social adaptations that are necessary to operate an efficient economy–seemed to outweigh even a tenfold or twentyfold disparity in wage rates.

And then something changed. Some combination of factors that we still don’t fully understand–lower tariff barriers, improved telecommunications, cheaper air transport–reduced the disadvantages of producing in developing countries. (Other things being the same, it is still better to produce in the First World–stories of companies that moved production to Mexico or East Asia, then moved back after experiencing the disadvantages of the Third World environment, are common.) In a substantial number of industries, low wages allowed developing countries to break into world markets. And so countries that had previously made a living selling jute or coffee started producing shirts and sneakers instead.

Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I say “inevitably” because their employers are not in business for their (or their workers’) health; they pay as little as possible, and that minimum is determined by the other opportunities available to workers. And these are still extremely poor countries, where living on a garbage heap is attractive compared with the alternatives.

And yet, wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing–and of the penumbra of other jobs that the new export sector creates–has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise. Where the process has gone on long enough–say, in South Korea or Taiwan–average wages start to approach what an American teen-ager can earn at McDonald’s. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)

Continued in article

Jensen Comment
Where I disagree with him is his willingness impose high taxes (think 70+%) on the developed nations who are in a convoluted way are probably doing more for the third world than all of its corrupt dictators combined (unless tax rates go so high that capitalist incentives and innovations are destroyed).

One question for students to debate is whether opening USA borders to anyone and everyone would end world poverty better than multinationalism?

AICPA: Flip or flop: Construction industry revenue recognition issues ---
https://blog.aicpa.org/2019/03/flip-or-flop-construction-industry-revenue-recognition-issues.html#sthash.bhaXmeHl.dpbs

Ex-KPMG Partner’s Fraud Trial: David Middendorf and Jeffrey Wada GUILTY! ---
https://goingconcern.com/ex-kpmg-partners-fraud-trial-david-middendorf-and-jeffrey-wada-guilty/
It will be interesting to see how much more they are penalized than their colleagues who pled guilty before a trial.

KPMG Gets One-Year Auditing Suspension in Oman Due to "Irregularities" ---
https://www.reuters.com/article/oman-kpmg/oman-regulator-suspends-kpmg-from-new-auditing-work-over-irregularities-idUSL8N1XP5P2

Bob Jensen's threads on KPMG and other large auditing firms ---
http://faculty.trinity.edu/rjensen/fraud001.htm

National Taxpayer Advocate: The IRS Should Either Fix Or Eliminate The Free File Program ---
https://taxprof.typepad.com/taxprof_blog/2019/03/national-taxpayer-advocate-the-irs-should-either-fix-or-eliminate-the-free-file-program-.html

Products people waste too much money on that you should (maybe) stop buying immediately ---
https://www.businessinsider.com/products-that-are-waste-of-money-2018-01

Jensen Comment
Obviously there are circumstances where you should buy such things as DVDs, Books, and cafe coffee. You can wait a long time to borrow a popular new book from a library. Before it becomes available at the library used copies may appear on Amazon. Many films are not available from streaming services like NetFlix, and you may have to wait over a year for a requested DVD version from those same services. I now buy more movie boxed sets from Amazon. A few years later I enjoy watching most of them again. At my age I can't remember if the murder was committed by the butler or the maid.

You get more than coffee by meeting friends at a cafe. Buying one or two lottery tickets buys you dreams even if the odds are lousy. There's a more important incentive to quit smoking than the dollars you save.

But I agree on a lot of the ways to save money suggested in the above article. How many people are really happy that they bought a time share?

And there are other ways to save that are not mentioned. A lot of people don't rush out to get a new dog when old Jake dies. Remember those vet bills and pooper scooping. People living on acreages more often than not have empty horse stalls. Is that cruse really worth the money and hassle? Europe is horribly crowded with tourists.

Now Dogs as Well as Humans are Being Replaced by Technology (think sheep herding in New Zealand) ---
https://www.radionz.co.nz/national/programmes/checkpoint/audio/2018685575/barking-drones-used-on-farms-instead-of-sheep-dogs

AICPA: Mastering accounting for business combinations ---
https://www.journalofaccountancy.com/issues/2019/mar/accounting-for-business-combinations.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Mar2019

How Sears Lost the American Shopper ---
https://www.wsj.com/articles/how-sears-lost-the-american-shopper-11552647601?mod=djemalertNEWS
Thank you Denny Beresford for the heads up.

Jensen Comment
This article is too long and complex to summarize in a few short paragraphs.

When I was a kid on an Iowa farm the Sears Catalog was great for everything --- shoes, clothing, furniture, and tools; My Uncle Martin even bought his big two-story (elegant) farm house from Sears. It came into Fenton, Iowa on train cars and was hauled by wagon to his wonderful farm where it was assembled from prefabricated pieces. People came from miles around to admire this big house in the middle of an orchard.

To make a long story short, Sears should've nipped Amazon in the bud by expanding the Sears Catalog into online shopping early on in the game. Instead Sears abandoned the catalog in favor of expensive leases in glitzy malls --- malls that failed. The steps along the way to failure are summarized in the above article. It's a tragedy that Sears' dying took place while Amazon was investing billions in online software and warehouses while Sam Walton invested store profits in ever more stores near but not inside glitzy malls. Meanwhile the glitzy malls often became war zones for competing drug gangs.

I miss Sears in these mountains. We had a very small Sears display store about ten miles away (not in a mall). The main attraction for me was Sears' wonderful at-home extended warranty program. It was great to have technicians come to the house when needed to repair my snow thrower, my washing machine, my television, my stove, my leaf blower, my freezer, my microwave, my three refrigerators, my yard sweeper, and on and on. Now that Sears display store is empty. I guess I still have some items covered under warranty, but I will probably not renew those warranties. Instead of having these products repaired I will simply have new ones delivered (not from Sears) and pay to have the old ones carted off --- in our throw-away culture.

Blockchain --- https://en.wikipedia.org/wiki/Blockchain

How library professionals are approaching blockchain technology and its potential impact ---
https://americanlibrariesmagazine.org/2019/03/01/library-blockchain-reaction/

Cryptocurrency --- https://en.wikipedia.org/wiki/Cryptocurrency

Nearly 95% of all bitcoin trading is faked by unregulated exchanges ---
Click Here

MIT: A crypto firm is helping startups to raise millions while trying to dodge the law ---
https://www.technologyreview.com/s/613159/the-crypto-firm-that-got-the-memo-about-icos-being-overand-ignored-it/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=71035101&_hsenc=p2ANqtz-8XoNEF6t4CBnlcjX2IhP9yccytv5AacEgAhbxouDxNL1u9f6qPUrD0I5WAQdk1U1XE4zcM0fxaOEDV_eLKjWEN_DKDMA&_hsmi=71035101

How Neo-Nazis bet big on bitcoin (and lost) ---
https://foreignpolicy.com/2019/03/19/neo-nazis-banked-on-bitcoin-cryptocurrency-farright-christchurch/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=70953930&_hsenc=p2ANqtz-8pvrmGC87IV5QcY5IFbnuobRptlHfC9pObGT2YKJ6JRQy45FSt5yUzur9zHswpreEQ7EKKsJ_UlhndRiHuPMzyBb6pMQ&_hsmi=70953930
Including how the New Zealand terrorist lost in bitcoin
Now he really needs the free room and board he will get for the rest of his miserable life

The New Zealand shooter profited from a notorious crypto pyramid scheme ---
https://qz.com/1575323/the-new-zealand-shooter-got-rich-off-crypto-scam-bitconnect/

Three Moments in History that Explain the ICO Bubble ---
https://hackernoon.com/3-moments-in-history-that-explain-the-ico-bubble-e7c42896ca6f

MIT: North Korea has stolen more than half a billion dollars in cryptocurrency ---
https://www.technologyreview.com/the-download/613099/north-koreas-military-has-stolen-more-than-half-a-billion-dollars-in/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=70646360&_hsenc=p2ANqtz--ykhx9lTFlsq_rbntNHrwfuoXdFXo4ApI_TRrU4zOs4zUMTzIeZRMUQNPXzPd077Ru3wCWfOZOLDGQEfrozxYZXr-4Iw&_hsmi=70646360

Bitcoin: The New Swiss Banks ---
https://taxprof.typepad.com/taxprof_blog/2019/03/bitcoin-the-new-swiss-banks.html

Do Fundamentals Drive Cryptocurrency Prices?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3342842
62 Pages Posted: 6 Mar 2019

Siddharth Bhambhwani

University of Miami, School of Business Administration, Department of Accounting

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Date Written: February 26, 2019

Abstract

We posit that cryptocurrency prices are related to fundamentals like the computing power expended on creating their blockchains and the adoption levels of their respective blockchains. Using data for the most prominent cryptocurrencies, we find evidence of a significant long-run relationship between prices and these two fundamental factors. Conducting factor analysis, we also document that cryptocurrencies are exposed to cryptocurrency factors related to market-level computing power and market-level adoption, even after accounting for the returns of Bitcoin and cryptocurrency price momentum. Overall, our results suggest that cryptocurrencies have intrinsic value, which is related to the computing power and the adoption of their respective blockchains.

How To Think About Taxing And Spending Like A Swede ---
https://taxprof.typepad.com/taxprof_blog/2019/03/how-to-think-about-taxing-and-spending-like-a-swede.html

Europe has less inequality and more social mobility because its taxation schemes reach deeper into society (especially the middle class) and do more for everyone.

In the recent rush of proposals to tax the rich, Democrats have forgotten — or never really cared to learn — an important lesson: The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor.

Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is.

We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less: 19.8 percent, compared with 34.2 percent in the United States in 2017, the last year for which we have comparative data — and yes, that’s after all the loopholes and deductions have been accounted for. The American rate will be lower after the 2017 tax bill, but it’s still unlikely to be as low as Sweden’s. ...

Continued in article

In 1979 the highest marginal tax rate on individuals was 87% which proved to be a disaster;
In 1990 is was down to 65%
In 2002 it was further reduced to 56% and that covers a lot more services (think health care) than income taxes fund in the USA
Marginal Tax Rate Declines in Sweden and the Rest of the World ---
http://www.econlib.org/library/Enc/MarginalTaxRates.html

The fleet of Democratic Party candidates are active in promoting $100+ trillion dollar government spending but are vague or silent on taxation.
What these candidates don't like is how Nordic countries tax the middle class ---
http://reason.com/blog/2019/03/06/low-tax-socialists-medicare-for-all-gnd

Consider how taxation works in the nordic countries that many American socialists describe as their models. Yes, taxes are high on the rich. But as the Tax Foundation noted during Sanders' last presidential campaign, they are also high on the middle class. The 70 percent top marginal tax rate floated by Ocasio-Cortez would apply to income earned over $10 million, affecting only about 16,000 Americans each year. In countries like Denmark, Sweden, and Finland, marginal tax rates of near 60 percent hit earners deep into the middle class. Denmark's 60 percent marginal rate applies to income over 1.2 times the national average, which in the U.S. would hit earners making just $60,000 a year—not exactly millionaires and billionaires. These countries also typically rely on value-added taxes that are inherently regressive, placing a bigger burden on the poor and middle class than on the rich.

Highest Marginal Tax Rate Declines in the Rest of the World ---
http://www.econlib.org/library/Enc/MarginalTaxRates.html

Controversial Top 50 Accounting Program Rankings
The sort-of Ridiculous Ranking ---
https://goingconcern.com/top-50-accounting-college-rankings-2019/

This one is not quite as much of a joke as the earlier ranking shown below, but it's sort of a joke by listing Loyola University of Maryland at Rank 7 and Fairfield at Rank 9 with the following accounting programs left out of the Top 50 listing entirely:

Indiana
Iowa
Minnesota
Michigan
Nebraska
Oklahoma
Mississippi
Tennessee
Virginia
North Carolina
North Carolina State
Florida State

By now I think you get the idea

The above Top 50 is less of a joke that the absolutely ridiculous Top 50 that also excluded USC, Illinois, Ohio State, Texas, Penn State, and Bentley ---
https://goingconcern.com/top-50-accounting-school-rankings-2019/

I'll stick with the US News rankings where CPA firm recruiters search harder for graduates ---
https://www.accountingdegreetoday.com/schools/

US News
University of Texas-Austin.
University of Illinois Urbana-Champaign.
Brigham Young University.
University of Pennsylvania.
University of Michigan.
University of Notre Dame.
University of Southern California.
Indiana University Bloomington
New York University
Ohio State University
More at https://www.accountingdegreetoday.com/schools/
Scroll down at the above site to find other credible rankings

Form 990 --- https://en.wikipedia.org/wiki/Form_990

Tips to ease the stress of Form 990 preparation ---
https://www.journalofaccountancy.com/podcast/irs-form-990-preparation.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=28Mar2019

GASB issues proposed lease accounting implementation guide ---
https://www.journalofaccountancy.com/news/2019/feb/gasb-lease-accounting-implementation-guidance-201920733.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Mar2019

"Leases: A Review of Contemporary Academic Literature Relating to Leases," by Angela Wheeler SpencerThomas Z. Webb, Accounting Horizons, Volume 29, Issue 4
(December 2015) ---
http://aaajournals.org/doi/full/10.2308/acch-51239

Accounting for corporate leasing activities has been examined and debated for more than 30 years. Currently both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are developing standards to modify financial reporting for operating leases, which are currently reported off-balance sheet. In light of these proposals, we examine existing literature to better anticipate possible effects of any changes. Namely, we review existing studies to understand why firms engage in operating leases and how information about these arrangements impacts users. First, we review studies directly examining leases. As that review reports, some studies show that companies engage in off-balance sheet leasing at least in part to manage financial statement presentation. Other studies, however, suggest that firms utilize operating leases to manage costs and preserve capital. In general, the research reports that lenders, credit rating agencies, and other capital market participants sufficiently understand off-balance sheet leases and consider them in their decision making. Second, we provide commentary on one of the current proposals' more debated areas and a current point of FASB and IASB divergence: classification of expenses associated with operating leases. While the IASB proposes disaggregating interest and amortization elements, the FASB proposes reporting a single, combined lease expense. However, very little research explicitly addresses expenses associated with operating leases. Existing studies do, however, suggest that information disaggregation, particularly with regard to operating and financing activities, is important. Our review may be useful to regulators as the reporting standards for operating leases are debated.

In May 2013, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued a long-awaited Exposure Draft on accounting for leases. If enacted, this proposed standard will fundamentally alter accounting for operating leases, most notably, by eliminating current off-balance sheet treatment for long-term leases and by requiring lessees to recognize a right-of-use (ROU) asset and associated liability. Subsequent decisions, however, reflect divergence between the IASB and FASB regarding income statement reporting related to leases. While the IASB proposes treating all leases in a similar manner and requiring segregation of interest and amortization components, the FASB proposes to continue allowing the reporting of a single operating lease (rent) expense on the income statement.

Proponents of the 2013 Exposure Draft maintain that these changes will increase faithful representation, aligned with Concept Statement No. 8 (FASB 2010a), thus improving the usefulness of financial reporting. Detractors charge that these changes will distort the underlying economics of some leases, obscure valuable information, and fail to increase the quality and reliability of financial statements (e.g., Rapoport 2013; Equipment Lease and Finance Association [ELFA] 2013). In light of this ongoing debate, we review evidence relevant to the issue of lease accounting, as it may prove informative in the continuing discussion and research on this issue. We focus on recent findings related to why firms lease, broadly speaking, and how information related to these structures may be applied by users of the financial statements.

Long-standing concerns about accounting for leases focus largely on the fact that a substantial portion of these structures are kept off-balance sheet. Under U.S. GAAP, this treatment is made possible through the application of bright-line tests prescribed by Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases (FASB 1976) codified as ASC Topic 840, Leases. Currently, leases are classified into two groups: (1) capital leases, which are effectively treated like purchases, with required recognition of an associated asset and liability, and (2) operating leases, for which only rent (lease) expense is recognized. Because of the bright-line tests associated with this classification, economically similar transactions sometimes receive dramatically different accounting treatment, in some cases due to deliberate structuring of the underlying arrangements (e.g., Weil 2004). Criticism of this standard began almost immediately after SFAS No. 13 was adopted. In fact, in a March 1979 meeting a majority of the FASB agreed that if SFAS No. 13 were to be reevaluated, then they would instead support “a property right approach in which all leases are included as ‘rights to use property' and as ‘lease obligations' in the lessee's balance sheet” (Dieter 1979, 19).

Concern about proper accounting for operating leases is understandable, as their economic significance is large. For instance, the Securities and Exchange Commission (SEC) in 2005 estimated that while 22 percent of issuers report capital leases totaling approximately $45 billion (undiscounted), 63 percent of issuers report off-balance sheet operating leases totaling approximately $1.25 trillion (undiscounted) (SEC 2005, 64). Cornaggia, Franzen, and Simin (2013) further detail a dramatic 745 percent relative increase in the use of operating leases since 1980.

Despite concerns about off-balance sheet treatment, a substantial body of evidence indicates that users generally see through the accounting associated with these structures and price the underlying economics. Given this apparent market efficiency relating to lease obligations, one might argue there is no need for regulators to act. However, as the Group of Four Plus One (G4+1)1 proposal noted in 2000, “The present accounting treatment of operating leases is not the most relevant of the choices available” (Nailor and Lennard 2000, 5) and, as Lipe (2001, 302) discusses:

This argument ignores the costs and inaccuracies that result from numerous analysts performing their own computations. It also ignores the fact that some contracts or regulations depend solely on recognized amounts. The representational faithfulness of a coverage ratio that ignores material amounts of operating leases is questionable given the empirical results today.

Lipe (2001) summarizes key findings of the literature related to leasing; however, the last decade has seen a number of studies, which also examine the leasing question, providing greater insight into why firms utilize leases as a financing mechanism and how users interpret the information about these structures. As the FASB and IASB revise the leasing model to a right-of-use framework, and thus require recognition of nearly all leases, and as the boards consider the possible economic consequences of this change in regulation, analysis of existing evidence is vital. Consequently, this paper extends the work of Lipe (2001) by summarizing certain studies he includes and discussing in greater detail key work completed since publication of his paper. Specifically, after summarizing the institutional background relating to leases, we synthesize existing work to address questions likely to be of concern to regulators and researchers as they anticipate the possible economic consequences associated with a change in financial reporting for these structures. Specifically, we seek to address the following two questions: (1) Why do firms engage in off-book lease arrangements? (2) How do users assess information related to these off-book structures?

Long-standing criticisms of operating leases charge that the bright-line rules associated with these structures enable many lessees to enter into these arrangements simply to achieve off-book reporting. While some recent evidence does suggest that firms use certain types of leases opportunistically (e.g., Zechman 2010; Collins, Pasewark, and Riley 2012), other work indicates that firms use leases as a means of efficient contracting and not simply to achieve off-book treatment (e.g., Beatty, Liao, and Weber 2010).2

Even if operating leases are entered into for the purpose of minimizing costs rather than simply to achieve financial reporting objectives, recognition of these structures may have substantial contracting implications for affected firms. For example, while evidence suggests that operating leases may be indirectly included in contract terms (e.g., through the inclusion of debt ratings), the results of Ball, Bushman, and Vasvari (2008) suggest that few debt covenant provisions appear to directly constructively capitalize operating leases, and a Deloitte (2011) survey reports that 44 percent of firms anticipate that recognition of operating leases will affect existing debt covenants.

Further, while the bulk of the evidence supports the conclusion that off-balance sheet leases are generally well understood by users, some work suggests that less reliable and less transparent disclosures may receive different treatment (e.g., Bratten, Choudhary, and Schipper 2013). Consequently, recognition of these structures may in fact result in observable shifts in market behavior (e.g., Callahan, Smith, and Spencer 2013). Additionally, contrary to the proposed change requiring uniform capitalization of most leases, other evidence suggests that users do not necessarily consider all leases to have the same economic implications (e.g., Altamuro, Johnston, Pandit, and Zhang 2014).

Finally, although scant work regarding the income statement reporting for operating leases exists, this is perhaps the most controversial of the proposal's unsettled issues. Users have mixed views (FASB 2013) and this issue is currently a point of divergence between the FASB and IASB.3 To better understand the potential implications of reporting the financing and operating components separately (the IASB's proposal) and of reporting lease costs as a single combined amount (the FASB's proposal), we extend our review to include literature on income statement disaggregation. While some evidence suggests limited information content associated with disaggregated earnings (e.g., Callen and Segal 2005), other work suggests information about disaggregated earnings is useful to users (e.g., Lipe 1986), particularly with regard to information concerning operating and financing activities (e.g., Lim 2014).

From our review we conclude that while some negative contracting effects may be associated with recognition of operating leases, given what appears to be a sophisticated understanding of these structures, balance sheet recognition of these leases should have minimal implications from a user perspective. If anything, recognition would appear to aid users in understanding the value of the more opaque aspects of these arrangements. However, considering that users appear to value these arrangements differently in certain contexts, it seems imperative that complete disclosures be provided about recognized amounts. Finally, although users express different opinions on the proper income statement treatment for operating lease arrangements (e.g., Financial Accounting Standards Board [FASB] and International Financial Reporting Standards [IFRS] Foundation 2013), based on evidence to date, information on the operating and financing components of these structures appears important.

We proceed by first examining the institutional background of leases. Second, we review literature on why firms enter into leases (broadly speaking) and operating leases (specifically). Finally, we review literature on how users apply information about operating leases, including potential use of operating and financing expense components. Table 1 summarizes a selection of the accounting studies cited.

Continued in article

Grant Thornton Current and Former Partners Will Have a Seat In the PCAOB’s Penalty Box ---
https://goingconcern.com/grant-thornton-current-and-former-partners-will-have-a-seat-in-the-pcaobs-penalty-box/

Bob Jensen's threads on Grant Thornton troubles ---
http://faculty.trinity.edu/rjensen/fraud001.htm

Excel: Excel range names: What you need to know ---
https://www.fm-magazine.com/news/2019/mar/microsoft-excel-range-names-201920560.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=22Mar2019

Excel: How to Excel with past, present, and future data ---
https://www.fm-magazine.com/news/2019/feb/forecast-projections-in-excel-201920559.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=20Mar2019

Excel: Excel app for Android has a new tool that lets users import data into an Excel document by taking a picture of a spreadsheet ---
https://www.cnbc.com/2019/03/02/how-to-import-a-spreadsheet-into-excel-by-taking-a-picture-of-it.html

Excel: How to Calculate a Z-Score Using Excel (with great illustrations) ---
https://www.howtogeek.com/400178/how-to-calculate-a-z-score-using-microsoft-excel/
This article also shows why more researchers should report Z-scores

A Quick and Dirty Summary of Elizabeth Holmes and Her Theranos Fraud ---
Click Here

Boston Woman Sentenced for $2.7M Bank Fraud Scheme ---
https://www.justice.gov/usao-ma/pr/boston-woman-sentenced-27-million-bank-fraud-scheme

Chicago Corruption as Usual: The consummate political insider linked to the burgeoning City Hall corruption probe ---
https://www.statedatalab.org/news/detail/the-consummate-political-insider-linked-to-the-burgeoning-city-hall-corruption-probe

The undeniable corruption of Chicago and Illinois: Unpaid vendors program ---
https://www.statedatalab.org/news/detail/the-undeniable-corruption-of-chicago-and-illinois-unpaid-vendors-program

Books about the biggest business scams of our time — including Enron, Bernie Madoff, and Theranos ---
https://www.businessinsider.com/business-books-about-fraud-scandal

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Comics retailers are struggling to adapt to changes among consumers and publishers ---
https://www.publishersweekly.com/pw/by-topic/industry-news/comics/article/79292-comics-is-a-market-in-transition.html

Reports of elder financial exploitation have increased ---
Financial elder fraud reports quadruple; amount reaches $1.7 billion
https://www.mcknightsseniorliving.com/home/news/financial-elder-fraud-reports-quadruple-amount-reaches-1-7-billion/

Current snd past editions of Bob Jensen's blog called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

From David Giles in March 2019 ---
https://davegiles.blogspot.com/2019/03/some-recommended-econometrics-reading.html

Some Recommended Econometrics Reading for March

This month I am suggesting some overview/survey papers relating to a variety of important topics in econometrics:

Bruns, S. B. & D. I. Stern, 2019. Lag length selection and p-hacking in Granger causality testing: prevalence and performance of meta-regression models. Empirical Economics, 56, 797-830.

Casini, A. & P. Perron, 2018. Structural breaks in time series. Forthcoming in Oxford Research Encyclopedia in Economics and Finance.

Hendry, D. F. & K. Juselius, 1999. Explaining cointegration analysis: Pat I. Mimeo., Nuffield College, University of Oxford.

Hendry, D. F. & K. Juselius, 2000. Explaining cointegration analysis: Part II. Mimeo., Nuffield College, University of Oxford.

Horowitz, J., 2018. Bootstrap methods in econometrics. Cemmap Working Paper CWP53/18.

Marmer, V., 2017. Econometrics with weak instruments: Consequences, detection, and solutions. Mimeo., Vancouver School of Economics, University of British Columbia.

How to Mislead With Statistics (non-stationary data)

Macroeconomics --- https://en.wikipedia.org/wiki/Macroeconomics

There's only one reliable rule of thumb in macroeconomics (so typical of economics)---
https://www.themoneyillusion.com/theres-only-one-reliable-rule-of-thumb-in-macro/

In the 1950s, rates began rising and frequent mild recessions were the new norm.

In the 1960s, one long “Phillips Curve” expansion was the new norm. We had it all figured out.

In the 1970s, the Phillips Curve fell apart, and we just had to live with stagflation.

In the 1980s, we didn’t have to live with stagflation, but big deficits were the new norm.

In the 1990s, we achieved budget surpluses and a Great Moderation (noninflationary boom), something no one expected.

In the 2000s, the Great Moderation collapsed into a deep recession that few expected (certainly not me or Robert Lucas.) Also, America’s first big housing boom and bust. Also, bank runs that were supposedly ended by FDIC.

In the 2010s, we had near-zero interest rates even as the economy recovered and unemployment fell to moderate levels. Also unexpected.

Every decade produces a new and unexpected macro situation and the 2020s will be no different. Rules of thumb don’t hold up over time.

So don’t tell me, “When you look at history, it’s clear that X will happen.”

Sorry, but there’s only one reliable rule of thumb in macro:

Things change.

PS. I am reluctant to hazard a guess as to what will make the 2020s special; perhaps it will violate the rule of thumb that says, “American expansions never last more than 10 years.”

PPS. I have a post on the Steve Moore nomination at Econlog.

PPPS. But don’t read the Steve Moore post, read this one.

Jensen Comment
It is so typical that accountics researchers devoted to multiple regression ignore non-stationarities where things change.

From Two Former Presidents of the AAA
"Some Methodological Deficiencies in Empirical Research Articles in Accounting." by Thomas R. Dyckman and Stephen A. Zeff , Accounting Horizons: September 2014, Vol. 28, No. 3, pp. 695-712 ---
http://aaajournals.org/doi/full/10.2308/acch-50818 (not free)

This paper uses a sample of the regression and behavioral papers published in The Accounting Review and the Journal of Accounting Research from September 2012 through May 2013. We argue first that the current research results reported in empirical regression papers fail adequately to justify the time period adopted for the study. Second, we maintain that the statistical analyses used in these papers as well as in the behavioral papers have produced flawed results. We further maintain that their tests of statistical significance are not appropriate and, more importantly, that these studies do not�and cannot�properly address the economic significance of the work. In other words, significance tests are not tests of the economic meaningfulness of the results. We suggest ways to avoid some but not all of these problems. We also argue that replication studies, which have been essentially abandoned by accounting researchers, can contribute to our search for truth, but few will be forthcoming unless the academic reward system is modified.

The free SSRN version of this paper is at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324266

This Dyckman and Zeff paper is indirectly related to the following technical econometrics research:
"The Econometrics of Temporal Aggregation - IV - Cointegration," by David Giles, Econometrics Blog, September 13, 2014 ---
http://davegiles.blogspot.com/2014/09/the-econometrics-of-temporal.html

**How to Mislead With Statistics
PBS Nova: How did the polls get it so wrong?
http://www.pbs.org/wgbh/nova/next/body/why-did-the-polls-get-it-wrong/

Forbes: The Science Of Error: How Polling Botched The 2016 Election ---
https://www.forbes.com/sites/startswithabang/2016/11/09/the-science-of-error-how-polling-botched-the-2016-election/#6deb3b337959

Scientific American: Where Are the Real Errors in Political Polls?
https://blogs.scientificamerican.com/guest-blog/where-are-the-real-errors-in-political-polls/

Examples of misleading statistics and polls ---
https://www.datapine.com/blog/misleading-statistics-and-data/

NYT: Affirmative Action Is an Example of How Polls Can Mislead
https://www.nytimes.com/2017/08/04/upshot/affirmative-action-and-why-polls-on-issues-are-often-misleading.html

Misleading Charts ---
https://qz.com/580859/the-most-misleading-charts-of-2015-fixed/

The Top 10 Ways to Get Misleading Poll Results (many times these are intentional mistakes for political purposes) ---
http://www.charneyresearch.com/resources/the-top-10-ways-to-get-misleading-poll-results/

Fake Polls are the Real Problem ---
https://fivethirtyeight.com/features/fake-polls-are-a-real-problem/

**How to Mislead With Statistics
Bogus Straw Stats Popped Up in October 7, 2018 Shark Tank ---
http://reason.com/blog/2018/10/08/bogus-straw-stats-pop-up-in-last-nights

From David Giles on March 26, 2019

A World Beyond p < 0.05

The American Statistical Association has just published a special supplementary issue of The American Statistician, titled Statistical Inference in the 21st. Century: A World Beyond p < 0.05.

This entire issue is open-access. In addition to an excellent editorial, Moving to a World Beyond "p < 0.05" (by Ronald Wasserstein, Allen Schirm, and Nicole Lazar) it comprises 43 articles with such titles as:

·                     The p-Value Requires Context, Not a Threshold (by Rebecca Betensky)

·                     The False Positive Risk: A Proposal Concerning What to do About p-Values (by David Colquhoun)

·                     What Have we (Not) Learnt From Millions of Scientific Papers With P Values? (by John Ioannidis)

·                     Three Recommendations for Improving the Use of p-Values (by Daniel Benjamin and James Berger)

I'm sure that you get the idea of what this supplementary issue is largely about.

But look back at its title - Statistical Inference in the 21st. Century: A World Beyond p < 0.05. It's not simply full of criticisms. There's a heap of excellent, positive, and constructive material in there.

Highly recommended reading!

How Many Ways Can You Misinterpret p-Values, Confidence Intervals, Statistical Tests, and Power? 25
https://replicationnetwork.com/2019/02/09/how-many-ways-can-you-misinterpret-p-values-confidence-intervals-statistical-tests-and-power-25/

Time to say goodbye to “statistically significant” and embrace uncertainty, say statisticians ---
https://retractionwatch.com/2019/03/21/time-to-say-goodbye-to-statistically-significant-and-embrace-uncertainty-say-statisticians/

Three years ago, the American Statistical Association (ASA) expressed hope that the world would move to a “post-p-value era.” The statement in which they made that recommendation has been cited more than 1,700 times, and apparently, the organization has decided that era’s time has come. (At least one journal had already banned p values by 2016.) In an editorial in a special issue of The American Statistician out today, “Statistical Inference in the 21st Century: A World Beyond P<0.05,” the executive director of the ASA, Ron Wasserstein, along with two co-authors, recommends that when it comes to the term “statistically significant,” “don’t say it and don’t use it.” (More than 800 researchers signed onto a piece published in Nature yesterday calling for the same thing.) We asked Wasserstein’s co-author, Nicole Lazar of the University of Georgia, to answer a few questions about the move.

So the ASA wants to say goodbye to “statistically significant.” Why, and why now?

In the past few years there has been a growing recognition in the scientific and statistical communities that the standard ways of performing inference are not serving us well. This manifests itself in, for instance, the perceived crisis in science (of reproducibility, of credibility); increased publicity surrounding bad practices such as p-hacking (manipulating the data until statistical significance can be achieved); and perverse incentives especially in the academy that encourage “sexy” headline-grabbing results that may not have much substance in the long run. None of this is necessarily new, and indeed there are conversations in the statistics (and other) literature going back decades calling to abandon the language of statistical significance. The tone now is different, perhaps because of the more pervasive sense that what we’ve always done isn’t working, and so the time seemed opportune to renew the call.

Much of the editorial is an impassioned plea to embrace uncertainty. Can you explain?

The world is inherently an uncertain place. Our models of how it works — whether formal or informal, explicit or implicit — are often only crude approximations of reality. Likewise, our data about the world are subject to both random and systematic errors, even when collected with great care. So, our estimates are often highly uncertain; indeed, the p-value itself is uncertain. The bright-line thinking that is emblematic of declaring some results “statistically significant” (p<0.05) and others “not statistically significant” (p>0.05) obscures that uncertainty, and leads us to believe that our findings are on more solid ground than they actually are. We think that the time has come to fully acknowledge these facts and to adjust our statistical thinking accordingly.

Continued in article

Bob Jensen's threads on the decline of p-values from favor in statistical analysis ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

To p-Value or Not to p-Value? An Answer From Signal Detection Theory ---
https://open.lnu.se/index.php/metapsychology/article/view/871

“In statistics, Type I errors (false alarms) and Type II errors (misses) are sometimes considered separately, with Type I errors being a function of the alpha level and Type II errors being a function of power. An advantage of signal detection theory is that it combines Type I and Type II errors into a single analysis of discriminability…”

“…p values were effective, though not perfect, at discriminating between real and null effects.”

“Bayes factor incurs no advantage over p values at detecting a real effect versus a null effect … This is because Bayes factors are redundant with p values for a given sample size.”

“When power is high, researchers using p values to determine statistical significance should use a lower criterion.”

“… a change to be more conservative will decrease false alarm rates at the expense of increasing miss rates. False alarm rates should not be considered in isolation without also considering miss rates. Rather, researchers should consider the relative importance for each in deciding the criterion to adopt.”

“…given that true null results can be theoretically interesting and practically important, a conservative criterion can produce critically misleading interpretations by labeling real effects as if they were null effects.”

“Moving forward, the recommendation is to acknowledge the relationship between false alarms and misses, rather than implement standards based solely on false alarm rates.”

Continued in article

February 6, 2019 Message from Tom Dyckman (now retired from Cornell University)

Bob: Here is a new paper you might want to alert your readers too along with Dave's blog today.

Greenland, S., S. J. Senn, K. R. Rothman, J. B. Carlin, C. Poole, S. N. Goodman, & D. G. Altman, 2016. Statistical tests, p values, confidence intervals, and power: A guide to misinterpretations. European Journal of Epidemiology, 31, 337-350.
https://fermatslibrary.com/s/statistical-tests-p-values-confidence-intervals-and-power-a-guide-to-misinterpretations

Abstract
Misinterpretation and abuse of statistical tests, conﬁdence intervals, and statistical power have been decried for decades, yet remain rampant. A key problem is that there are no interpretations of these concepts that are at once simple, intuitive, correct, and foolproof. Instead, correct use and interpretation of these statistics requires an attention to detail which seems to tax the patience of working scientists. This high cognitive demand has led to an epidemic of shortcut deﬁnitions and interpretations that are simply wrong, sometimes disastrously so—and yet these misinterpretations dominate much of the scientiﬁc literature. In light of this problem, we provide deﬁnitions and a discussion of basic statistics that are more general and critical than typically found in traditional introductory expositions. Our goal is to provide a resource for instructors, researchers, and consumers of statistics whose knowledge of statistical theory and technique may be limited but who wish to avoid and spot misinterpretations. We emphasize how violation of often unstated analysis protocols (such as selecting analyses for presentation based on the P values they produce) can lead to small P values even if the declared test hypothesis is correct, and can lead to large P values even if that hypothesis is incorrect. We then provide an explanatory list of 25 misinterpretations of P values, conﬁdence intervals, and power. We conclude with guidelines for improving statistical interpretation and reporting.

Continued in article

**How to Mislead With Statistics

How to Mislead With P-Values
When You’re Selecting Significant Findings, You’re Selecting Inflated Estimates ---
https://replicationnetwork.com/2019/02/16/goodman-when-youre-selecting-significant-findings-youre-selecting-inflated-estimates/

How Many Ways Can You Misinterpret p-Values, Confidence Intervals, Statistical Tests, and Power? 25
https://replicationnetwork.com/2019/02/09/how-many-ways-can-you-misinterpret-p-values-confidence-intervals-statistical-tests-and-power-25/

Jensen Comment
The sad thing is that journal editors of leading accounting research journals seem to not care --- they're addicted to P-values

The ground is shaking beneath the accountics science foundations upon which all accounting doctoral programs and the prestigious accounting research journals are built. My guess is, however, that the accountics scientists are sleeping through the tremors or feigning sleep because, if they admit to waking up, their nightmares will become real!
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
by Bob Jensen
http://faculty.trinity.edu/rjensen/AccounticsWorkingPaper450.pdf

Bob Jensen's threads on the recent p-value saga ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Gap will shutter 230 stores as sales plunge ---
https://www.businessinsider.com/gap-to-close-230-stores-2019-2
It's also spinning off Old Navy.

More than 300 store closures are announced in a single day as the retail apocalypse rips through JCPenney, Gap, and Victoria's Secret ---
https://www.businessinsider.com/jcpenney-gap-and-victorias-secret-announce-300-store-closures-2019-2
Why aren't they just relocating to Queens in NYC now that Amazon left a "gap."?

More than 4,300 stores are closing in 2019 as the retail apocalypse drags on — here's the full list as of March ---
https://www.businessinsider.com/stores-closing-in-2019-list-2019-3
Jensen Comment
Keep in mind that these are not net losses since stores opening are not accounted for --- especially innovative food stores, telephone/electronic stores, and pharmacies with expanded medical services. But the outlook for onsite retail is still gloomy.

Does Ford have an internal control problem in Mexico?
Mexico's Sinaloa cartel allegedly used shipments of new Ford cars to smuggle meth to Canada ---
https://www.businessinsider.com/sinaloa-cartel-allegedly-use-ford-cars-to-send-meth-mexico-to-canada-2019-3

UW-Madison settles with U.S. government for $1.5 million for ‘technical accounting issue’---
https://www.statedatalab.org/news/detail/uw-madison-settles-with-us-government-for-15-million-for-technical-accounting-issue

These surprising spending truths could upend your retirement ---
https://www.cnbc.com/2019/03/05/these-surprising-spending-truths-could-upend-your-retirement.html

Jensen Comment
One of the real surprises is how medical costs alone pretty well eat up Social Security Income, especially the costs Medicare (it's not free), Medicare Supplements (ours are really expensive), and expenses that aren't covered like dentists and eyewear and the many drugs not fully covered by Medicare D. Congress sneaked in a surprise surcharge for Medicare for persons having taxable income of $85,000 or joint return income of $170,000.

If you take out long-term nursing insurance, premiums recently doubled. Nursing homes can be really, really, really expensive if you want one that's halfway decent. Insurance companies must charge enough to cover their losses.

Be sure to vote for a Democratic candidate since they all promise free long-term nursing care for 330 million citizens and all resident non-citizens. At current prices that alone adds trillions more to the estimated $32 trillion cost of Medicare-for-All. The problem is that none of them have a clue how to pay for Medicare-for-All.

Nursing Homes --- https://en.wikipedia.org/wiki/Nursing_home_care

How to Mislead With Statistics (distortions)
Median prices per month for nursing homes in all 50 states ---
https://www.businessinsider.com/nursing-home-private-room-monthly-median-price-by-state-2019-3#10-delaware-10950-per-month-1

Jensen Comment
Firstly I might note that Medicare does not pay for long-term nursing care whereas Medicaid does pay for long-term nursing care, and this leads to a scramble by heirs to drain off parent or grandparent assets five or more years before those older folks come into need of long-term care. However, Medicaid caps of monthly care result in most of those "poverty" cases to be put in low-standard nursing facilities well below the median prices in each state. Also it's a crap shoot predicting if and when those folks will need long-term care.

Long-term care insurance has always been expensive and is often limited in terms of what it will pay per month. To add pain to misery the premiums almost doubled recently because insurance companies were losing so much money on long-term care insurance do to such factors as exploding prices of nursing homes and increased demand for nursing home care relative to supply --- due mostly to the bubble of aging baby boomers ---
https://en.wikipedia.org/wiki/Baby_boomers

One of the things greatly increasing the new Democratic bill for Medicare-for-All to over $30 trillion is that it proposes adding extremely expensive long-term care coverage to everybody in the USA (including millions of undocumented immigrants) ---
https://www.politico.com/story/2019/02/26/house-democrats-medicare-for-all-1189139

Now what's so misleading about the median prices reported by state?
https://www.businessinsider.com/nursing-home-private-room-monthly-median-price-by-state-2019-3#10-delaware-10950-per-month-1

Firstly, averages (whether mean or median) should be accompanied by variance and skewness distribution information. Skewness at the low end for cheap and substandard nursing homes in particular brings down those averages such that heirs wanting better care for their elders can expect to pay much more than the medians reported in this study.

Prices can also vary greatly in terms of services provided. My granddaughter is a licensed pharmacist for a nursing center in Bangor, Maine. Many nursing homes cannot afford pharmacists, expensive therapists, and expensive recreational facilities. The quality of available physicians also varies a great deal such when a nursing home in the boondocks is very far away from physicians. I suspect this is one of the factors that greatly increases the cost of nursing care in Alaska where, I suspect, that there's a shortage of physicians in most of the state.

Most nursing homes also offer a menu alternative services that vary with varying patient needs. This distorts medians reported in the above study ---
https://capitalretention.com/jimmy-buffett-long-term-care/

Insurance considerations ---
https://www.usatoday.com/story/money/2019/03/04/nursing-home-cost-care-makes-planning-ahead-important/3004694002/

And beware
Reports of elder financial exploitation have increased ---
Financial elder fraud reports quadruple; amount reaches $1.7 billion
https://www.mcknightsseniorliving.com/home/news/financial-elder-fraud-reports-quadruple-amount-reaches-1-7-billion/

The Use of Forecast Accuracy Indicators to Improve Planning Quality: Insights from a Case Study

European Accounting Review, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3336365
39 Pages Posted: 8 Mar 2019

Silvia Jordan

University of Innsbruck

Martin Messner

University of Innsbruck

Date Written: February 18, 2019

Abstract

Accounting studies have analyzed rolling forecasts and similar dynamic approaches to planning as a way to improve the quality of planning. We complement this research by investigating an alternative (complementary) way to improve planning quality, i.e., the use of forecast accuracy indicators as a results control mechanism. Our study particularly explores the practical challenges that might emerge when firms use a performance measure for forecast accuracy. We examine such challenges by means of an in-depth case study of a manufacturing firm that started to monitor sales forecast accuracy. Drawing from interviews, meeting observations and written documentation, we highlight two possible concerns with the use of forecast accuracy: concerns related to the limited degree of controllability of the performance measure and concerns with its goal congruence. We illustrate how organizational actors experienced these challenges and how they adapted their approach to forecast accuracy in response to them. Our empirical observations do not only shed light on the possibilities and challenges pertaining to the use of forecast accuracy as a performance measure; they also improve our understanding of how specific qualities of performance measures apply to ‘truth-inducing’ indicators, and how the particular organizational and market context can shape the quality of performance measures more generally.

Keywords: forecasting, accuracy, planning, budgeting, controllability, goal congruence

JEL Classification: M41, M11

The Impact of Transition to Ind as on Key Accounting Areas: An Assessment

The IUP Journal of Accounting Research & Audit Practices, Vol. XVI, No. 4, October 2017, pp. 35-43

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3336432
Posted: 8 Mar 2019

Kshema Shrivastava

Independent

D.D. Bedia

Vikram University

Date Written: February 18, 2019

Abstract

In the scenario of economic and financial globalization where the countries around the world are moving towards adoption of International Financial Reporting Standards (IFRS) as their financial reporting language, India could not cocoon itself from this phenomenon occurring globally. Accordingly, India resolved to converge Indian Accounting Standards with IFRS at the G20 Summit in 2009. Consequentially, a new set of reporting standards known as Ind AS were issued by Accounting Standards Board (ASB) in India. Ind AS or Indian Accounting Standards converged with IFRS have now become the new accounting standards applicable for preparation of financial information by Indian companies. This study discusses how in a phase-wise manner, Ind AS will be implemented and explores the impact of Ind AS transition on selected key accounting areas.

The Human Asset Report

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3333413
36 Pages Posted: 7 Mar 2019

Ahmed Riahi-Belkaoui

University of Illinois at Chicago - Department of Accounting

Date Written: February 12, 2019

Abstract

The article examines the rationale for human resource accounting and the methods used both in the literature and in practice for human resource valuation and the production of human asset reports.

Keywords: human resource accounting, human asset report

JEL Classification: M41

Financial Statement Change and Equity Risk

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3335910
26 Pages Posted: 7 Mar 2019

Michael Senteney

Ohio University

David L. Stowe

Ohio University; Ohio University - College of Business; Ohio University - Department of Finance

John D. Stowe

Ohio University

Date Written: February 16, 2019

Abstract

While financial statement analysis is a rich tool, there is no widely used holistic measure of the amount of change in corporate financial statements. Statistical decomposition analysis has been employed as an index of the amount of change, but has fallen into disuse because it does not allow negative accounting numbers. As a remedy, this paper suggests three distance measures adapted from cluster analysis that avoid this critical data limitation. We successfully apply these proposed distance measures to explain the total and systematic risk of stock returns (in the CAPM and Fama-French model), corporate bond ratings, and corporate distress.

Keywords: financial statement change, distance measures, accounting statistical decomposition measures, CAPM, Fama-French model, corporate bond ratings, Altman Z-score

JEL Classification: G11, G12, M41

Politically Connected Independent Directors and Corporate Fraud in China

Accounting & Finance, Vol. 58, Issue 5, pp. 1347-1383, 2019

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3347980
37 Pages Posted: 7 Mar 2019

Dongmin Kong

School of Finance, Zhongnan University of Economics and Law; Department of Finance, Huazhong University of Science and Technology

Junyi Xiang

Huazhong University of Science and Technology (Formerly Tongi Medical University)

Jian Zhang

Southwestern University of Finance and Economics (SWUFE)

Yiyang Lu

Vanderbilt University

Date Written: March 2019

Abstract

This study investigates the effect of politically connected independent directors on a firm's likelihood of committing fraud in China. We classify the political backgrounds of independent directors into three categories based on their employment histories: local background, central background, and local and central background. Using corporate fraud data from 2000 to 2014, we find that independent directors with local political backgrounds significantly reduce the likelihood of a firm committing fraud. Further analysis shows that locally connected independent directors are more likely to have both employment experience in regulatory agencies and financial/accounting/law expertise.

Time to Act: Response to Questions Posed by the Expert Panel on Sustainable Finance on Fiduciary Obligation and Effective Climate-Related Financial Disclosures

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3335530
127 Pages Posted: 6 Mar 2019

Janis P. Sarra

University of British Columbia (UBC), Faculty of Law

Cynthia A. Williams

York University - Osgoode Hall Law School

Date Written: January 26, 2019

Abstract

While there are numerous strategies to be deployed to move Canada to a financially sustainable future, this study addresses two critically important issues: fiduciary obligation of corporate- and pension-fiduciaries, and national action on environmental, social and governance (“ESG”) financial disclosure, including climate-related financial risk disclosure. The Canadian economy is facing significant challenges and disruptions in the transition to a lower carbon world. Absent clear and innovative steps to ensure our corporations and financial institutions act to address carbon emissions and other environmental, social and governance risks and opportunities, we will be seriously prejudiced in a world that is rapidly moving towards greener and more sustainable economic activity. The study offers a comprehensive set of recommendations on these fiduciary obligations and disclosure, specifically, amending corporate, banking and insurance law to embed ESG factors, including climate-related risks and opportunities, in the fiduciary obligation of directors and officers. Institutional investors and asset managers, including pension funds and mutual funds, should be required to disclose how their portfolio management, voting and engagement activities are contributing to a lower carbon economy. The study endorses the TCFD disclosure framework, suggesting ow government could work with accounting standards setters and securities authorities to align climate-related financial disclosure. Imprecision in respect of information available on long-term climate-related financial risk or other ESG risks is not a bar to directors and officers acting now with a view to the best interests of the corporation. The Supreme Court of Canada has held that the defences of good faith and acting on a prudent and reasonable basis are very strong, even in the face of less than full information. Material ESG risks, costs and assets should be included in the company’s financial statements and notes thereto.

Meta Dynamic Pricing: Learning Across Experiments

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3334629
45 Pages Posted: 6 Mar 2019 Last revised: 7 Mar 2019

Hamsa Bastani

University of Pennsylvania - The Wharton School

David Simchi-Levi

Massachusetts Institute of Technology (MIT) - School of Engineering

Ruihao Zhu

Massachusetts Institute of Technology (MIT) - School of Engineering

Date Written: February 14, 2019

Abstract

We study the problem of learning \emph{across} a sequence of price experiments for related products, focusing on implementing the Thompson sampling algorithm for dynamic pricing. We consider a practical formulation of this problem where the unknown parameters of the demand function for each product come from a prior that is shared across products, but is unknown a priori. Our main contribution is a meta dynamic pricing algorithm that learns this prior online while solving a sequence of non-overlapping pricing experiments (each with horizon $T$) for $N$ different products. Our algorithm addresses two challenges: (i) balancing the need to learn the prior (\emph{meta-exploration}) with the need to leverage the current estimate of the prior to achieve good performance (\emph{meta-exploitation}), and (ii) accounting for uncertainty in the estimated prior by appropriately ``widening" the prior as a function of its estimation error, thereby ensuring convergence of each price experiment. We prove that the price of an unknown prior for Thompson sampling is negligible in experiment-rich environments (large $N$). In particular, our algorithm's meta regret can be upper bounded by $\widetilde{O}(\sqrt{NT})$ when the covariance of the prior is known, and $\widetilde{O}\left(N^{\frac{3}{4}}\sqrt{T}\right)$ otherwise. Numerical experiments on synthetic and real auto loan data demonstrate that our algorithm significantly speeds up learning compared to prior-independent algorithms or a naive approach of greedily using the updated prior across products.

Keywords: Thompson sampling, transfer learning, dynamic pricing, meta learning

Do Fundamentals Drive Cryptocurrency Prices?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3342842
62 Pages Posted: 6 Mar 2019

Siddharth Bhambhwani

University of Miami, School of Business Administration, Department of Accounting

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Date Written: February 26, 2019

Abstract

Crazy Accounting at Crazy Eddie Inc.

Journal of Forensic and Investigative Accounting, Volume 9, Issue 1, 2017

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3334713
Posted: 6 Mar 2019

Norbert Tschakert

Salem State University

Date Written: 2017

Abstract

The case describes a well-known fraud at a consumer electronics chain in the tri-state New York area in the 1980s. Due to its notoriousness and multifacetedness, the case is engaging and provides many learning opportunities for accounting students. The case exposes students to several important concepts, including: (1) financial statement fraud; (2) fraud motivation triangle; (3) fraud element triangle; (4) red flags; (5) fraud schemes; (6) audit risk, independence, professional skepticism and audit failure; and (7) the importance of internal control.

Keywords: accounting fraud, forensic accounting

Modes of Timing and Spacing Professional Decisions: On the Relationship Between Costing and Caring in Child Protection Work

Forthcoming in Financial Accountability & Management Journal

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3334416
Posted: 6 Mar 2019

Ida Schrøder

Copenhagen Business School - Department of Operations Management; Copenhagen University College

Date Written: November 14, 2018

Abstract

Within public sector accounting research the question of how “costing” is implemented, and how it transforms professional “caring” work has been widely studied and debated. Studies have, for instance, pointed to contextual variables that make cost information more or less useful in professional decision-making. However, in doing so, scholars also assume that decision-making follows a linear path that can be informed and transformed by cost information. In this paper, I take it as my starting point that both costing and caring vary as they are combined in professional decision-making processes. I use the broad and processual definition of calculation from the work of Callon and Muniesa (2005) to analyse how distinctions about vulnerable children’s situations are made relevant for the choice and delimitation of social services. This allows me to investigate how, when, and where distinctions between costing and caring are drawn rather than assuming that costing and caring are pre-existing and stable practices that can be put to use or not.

Keywords: Costing, Caring, Professional Decisions, Social Services, Actor-Network Theory

Using an Active Learning Approach to Close the Loop

Business Education & Accreditation, v. 10 (1) p. 1 - 8

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241535
8 Pages Posted: 5 Mar 2019 Last revised: 9 Mar 2019

Jamie Eng

San Francisco State University

Kenneth Leong

Menlo College

Janis K. Zaima

Menlo College

Date Written: 2018

Abstract

The AACSB International requires schools accredited by that body to assess student learning outcomes and to meet the standard set by the school as well as to create a method to improve student performance. We use the active learning approach to improve the Managerial Accounting class performance which was below par. In support of other studies in the science fields, the active learning approach is the driving force to improve student performance in Managerial Accounting. However, it appears that active learning does not help improve learning at the higher levels of Bloom’s Taxonomy.

Keywords: Active Learning Approach, Accounting, Education

The Effects of Information Systems Compatibility on Firm Performance Following Mergers and Acquisitions

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3333811
47 Pages Posted: 4 Mar 2019

Uday S. Murthy

University of South Florida - School of Accountancy

Thomas Joseph Smith

University of South Florida

James Whitworth

University of South Florida

Yiyang Zhang

Youngstown State University

Date Written: February 13, 2019

Abstract

This study investigates the consequences of information systems compatibility between the target and acquirer firms in the context of mergers and acquisitions (M&A). We posit that the degree of information systems compatibility impacts post-M&A operating efficiency and audit efficiency. Using a unique data set of ERP implementations, we find that acquirers using the same ERP vendor as their targets exhibit shorter post-merger operating cycles and shorter post-merger audit delays relative to acquirers with different ERP vendors than their targets. We suggest that our operating cycle finding is likely due to higher systems compatibility fostering post-merger operating efficiency to a greater degree than mergers involving incompatible systems. The audit efficiency finding we document is consistent with acquirers with the same ERP vendor as their target realizing more efficient financial reporting and accounting close processes relative to mergers involving different ERP vendors. In supplemental analysis, we find evidence that acquirers with the same ERP vendor as their target also exhibit more accurate management forecast guidance following the acquisition. Taken together, the findings of this study should be of interest to capital market participants and managers involved in M&A activity by providing evidence about how the degree of compatibility between acquirer and target ERP systems impacts post-merger activities across different economically significant functional areas.

Keywords: ERP Integration, Mergers and Acquisitions, Operating Cycles, Audit Delay

Impact of IAS 39 Reclassification on Income Smoothing by European Banks

Journal of Financial Reporting and Accounting, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3331771
19 Pages Posted: 4 Mar 2019

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Date Written: 2019

Abstract

We examine the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. We predict that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. Our findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

Keywords: Banks; Earnings Management; Income Smoothing; Loan Loss Provisions; IFRS; IAS 39; Financial Crises

Expected Loan Loss Provisioning: An Empirical Model

Chicago Booth Research Paper No. 19-11

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3344657
49 Pages Posted: 1 Mar 2019 Last revised: 7 Mar 2019

Yao Lu

University of Chicago - Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: February 28, 2019

Abstract

Recently introduced accounting standards require that financial institutions provision for expected losses on their loan portfolios. Understanding the economic consequences of provisioning for expected losses is of significant interest to academics and regulators. We develop an empirical model of expected loan loss provisioning and use it to construct a bank-year measure of under-provisioning for expected losses. The model relies on forward-looking bank- and macro-economic indicators of future losses. The estimated expected losses are substantially more informative in explaining realized losses as compared to the reported numbers. Unlike the reported provisions, the estimated provisions for expected losses behave in a counter-cyclical fashion. Using our measure of under-provisioning, we find evidence consistent with under-provisioning for expected losses distorting banks’ lending, financing, and dividend decisions. While in practice banks need not provision in the way predicted by the model, we provide a useful benchmark to evaluate provisioning under the new accounting rules.

Keywords: expected loss model, loan loss provisioning, under-provisioning, bank decisions

JEL Classification: G21, M40, M41

Positive Sanctions versus Imprisonment

George Mason Law & Economics Research Paper No. 19-03

24 Pages Posted: 18 Jan 2019

Murat C. Mungan

George Mason University - Antonin Scalia Law School, Faculty

Date Written: January 17, 2019

Abstract

This article considers the possibility of simultaneously reducing crime, prison sentences, and the tax burden of ?financing the criminal justice system by introducing positive sanctions, which are benefits conferred to individuals who refrain from committing crime. Specifically, it proposes a procedure wherein a part of the imprisonment budget is re-directed towards financing positive sanctions. The feasibility of reducing crime, sentences, and taxes through such reallocations depends on how effectively the marginal imprisonment sentence reduces crime, the crime rate, the effectiveness of positive sanctions, and how accurately the government can direct positive sanctions towards individuals who are most responsive to such policies. The article then highlights an advantage of positive sanctions over imprisonment in deterring criminal behavior: positive sanctions operate by transferring or creating wealth, whereas imprisonment operates by destroying wealth. Thus, the conditions under which positive sanctions are optimal are broader than those under which they can be used to jointly reduce crime, sentences, and taxes. The analysis reveals that when the budget for the criminal justice system is exogenously given, it is optimal to use positive sanctions when the imprisonment elasticity of deterrence is small, which is a condition that is consistent with the empirical literature. When the budget for the criminal justice system is endogenously determined, it is optimal to use positive sanctions as long as the marginal cost of public funds is not high.

Keywords: Positive sanctions, carrots, sticks, crime, deterrence, imprisonment, mass incarceration, over-incarceration

JEL Classification: K00, K14, K42

Jensen Comment
With crime so much depends upon circumstances. Some people are not rational when drunk or when enflamed in domestic disputes (often leading to physical violence). For some people, especially some males, sexual obsessions override restraints like financial incentives to behave normally. Pedophiles are particularly known to not be able to control urges. Some people seem to have abnormal tempers that go out of control.

There are also complications with anticipated rewards of crime. Enormous anticipated payoffs such as those of the Ponzi schemes of Bernie Madoff and Elizabeth Homes were in the billions of dollars where a pay-not-to-play incentive cannot compete. Some criminals, such as serial killers and rapists, cannot resist the challenge of beating the police. To them victory in playing the game is more important than financial payoffs.

Beyond that there's the problem of who should receive financial incentives not to commit crimes.

I did not do research on this matter, but where I would start would go be crime. For example, how successful are sizeable rewards for academics such as promising a new sports car for graduating from college with gpa higher than 3.0 in computer science. Of course there are all sorts of problems with spurious correlation. A student may really want that new sports car, but chances are there are many other incentives driving that student for success in computer science. There's also a problem in spurious correlation when a person is offered a new car if she or he loses 100 lbs. There are many factors other than a new car that drive people to lose weight.

I would like to see an experiment where hardcore heroine addicts are given free fixes if they remain crime free. I suspect this has already been tried. The trouble is that each addict at each age in each nation has so many other variables affecting addiction and crime. For example, crime is also dependent upon opportunity and punishment.

Do Corporate Governance Measures Impact Audit Pricing of Smaller Firms? Evidence from the United States and New Zealand

The International Journal of Business and Finance Research, v. 12 (2) p. 77-94, 2018

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241731
18 Pages Posted: 28 Feb 2019

Umapathy Ananthanarayanan

New York Institute of Technology

Date Written: 2018

Abstract

Motivated primarily by the claims that audit committee independence and accounting expertise and CEO compensation influence audit fees, this study examines the effect of such factors, on audit fees in two different institutional settings in the post-Sarbanes Oxley Act (SOX) era. The institutional settings are those of the U.S. and New Zealand audit markets, where the U.S. market is more regulated and litigious than the New Zealand market. The study sample comprises firms of similar size from each country. Firms in the U.S. with higher audit committee accounting expertise charge higher audit fees than New Zealand firms. The results also suggest that short-term incentives and total compensation in both the countries are considered as audit risk and priced accordingly even though N.Z. firms operate in a different regulatory environment. Study findings suggest that firms with better corporate governance arrangements in the post-SOX era in the U.S. demand a better audit effort from audit firms and pay higher audit fees.

Keywords: New Zealand, Audit Fees, SOX, IFRS

JEL Classification: M42, M48, M49

The Fraud Triangle and Tax Evasion

Indiana Legal Studies Research Paper No. 398

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3339558
55 Pages Posted: 28 Feb 2019

Leandra Lederman

Indiana University Maurer School of Law

Date Written: February 22, 2019

Abstract

The “fraud triangle” is the preeminent framework for analyzing fraud in the accounting literature. It is a theory of why some people commit fraud, developed out of studies of individuals, including inmates convicted of criminal trust violations. The three components of the fraud triangle are generally considered to be (1) an incentive or pressure (usually financial), (2) opportunity, and (3) rationalization.

There is a separate, extensive legal literature on tax compliance and evasion. Yet the fraud triangle is largely absent from this legal literature, although tax evasion is a type of fraud. This article rectifies that oversight, analyzing how the fraud triangle—and its expanded version, the “fraud diamond”—can inform the legal literature on tax compliance. The article argues that the fraud triangle can provide a frame that brings together distinct tax compliance theories discussed in the legal literature, the traditional economic (deterrence) model and behavioral theories focusing on such things as social norms or tax morale.

Keywords: fraud triangle, fraud diamond, tax evasion, tax fraud, white-collar crime, Donald Cressey, Edwin Sutherland, Svend Riemer, deterrence, fraud, opportunity to evade, tax noncompliance, tax compliance

JEL Classification: K29, K34, K42, M42

The Fraud Triangle and Tax Evasion

Indiana Legal Studies Research Paper No. 398

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3339558
55 Pages Posted: 28 Feb 2019

Leandra Lederman

Indiana University Maurer School of Law

Date Written: February 22, 2019

Abstract

Zorba: Impact of New Technologies on Accounting and Audit - UN/CEFACT ---
https://zorba-research.blogspot.com/2019/03/for-more-than-thirty-years-uncefact-has.html

EY: FASB amends accounting for costs of films and license agreements for media and entertainment entities ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_05713-191US_FilmCost_7March2019/$FILE/TothePoint_05713-191US_FilmCost_7March2019.pdf

EY: The FASB added guidance to ASC 842 (leases) that is similar to the fair value exception in Accounting Standards Codification (ASC) 840-10-55-44 for lessors that are not manufacturers or dealers ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_05751-191US_LessorCodificationImprovements_5March2019/$FILE/TothePoint_05751-191US_LessorCodificationImprovements_5March2019.pdf

EY: Derivatives and hedging (after the adoption of ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities) ---
https://www.ey.com/ul/en/accountinglink/frd-05712-191us-derivatives-and-hedging

EY: Impairment or disposal of long-lived assets ---
https://www.ey.com/ul/en/accountinglink/frd-bb1887--impairment-or-disposal-of-long-lived-assets

EY: What key priorities will boards navigate in 2019? ---
https://www.ey.com/us/en/issues/governance-and-reporting/ey-key-priorities-for-boards-in-2019

A Great New Illustration for Cost Accounting Courses

From the CFO Journal's Morning Ledger on March 29, 2019

Johnson & Johnson plans to start airing the first U.S. television commercial for a prescription drug that discloses how much it costs, a nod toward rising political pressure over prices.

New spot for bloodthinner Xarelto will show a list price of $448 a month, the first television ad containing a drug’s list price

Johnson & Johnson JNJ +0.36% plans to start airing the first U.S. television commercial for a prescription drug that discloses how much it costs, a nod toward rising political pressure over prices.

The ad for J&J’s bloodthinner Xarelto—a version of which has already been on the air without mentioning price—will now end by briefly showing its list price of $448 a month. It is scheduled to start running nationally on Friday, according to Scott White, head of J&J’s pharmaceuticals business in North America.

The commercial also states that most patients pay between zero and $47 a month, depending on insurance coverage and eligibility for financial-assistance programs. J&J said about 75% of patients pay within that range.

The introduction of such pricing information would be a big change to the nature of drug ads, which have blanketed TV airwaves for more than two decades and have become as memorable for the litany of side effects they run through as for the drugs they promote.

The spots have become a lightning rod in attacks on the drug industry, its marketing and pricing. Critics say the commercials encourage use of expensive medicines, when less-costly generics may suffice.

Some members of Congress have proposed ending drug companies’ tax deductions for the expense of such ads. The drug industry says the ads educate patients about treatment options.

In October, the Trump administration took aim at the lack of pricing information in the commercials, proposing a new rule that would require companies to include the list price as part of a broader plan to rein in prices.

The Centers for Medicare and Medicaid Services has said the proposed rule would increase transparency around prices and allow patients to make informed decisions based on cost. Government officials also have said the rule could spur drug companies to reduce prices.

The proposed rule hasn’t taken effect. And it faces a fight. The drug industry trade group Pharmaceutical Research and Manufacturers of America objected, saying the list price could lead some patients to think they have to pay the full list price, rather than a copay or coinsurance if they have insurance.

The industry group also said the proposed rule runs afoul of the First Amendment by compelling drugmakers to communicate list prices.

PhRMA has instead proposed that drugmakers’ voluntarily include in their TV ads links to company websites or other sources of information about prices.

Continued in article

Jensen Comment
What should have been included in the Johnson and Johnson cost accounting is an explanation of why USA consumers are required by Johnson and Johnson to bear a lion's share of the cost recovery relative to other nations like Canada, Mexico, and EU nations where Xarelto is sold much cheaper than in the USA.

By the way one justification for pricing Xarelto higher in the USA is risk of litigation that is almost higher in the USA than anywhere else in the world (since the USA has over 80% of the world's lawyers).

Bayer AG and Johnson & Johnson have agreed to pay $775 million to resolve claims that the blood thinner Xarelto causes excessive bleeding, according to the companies.

From the CFO Journal's Morning Ledger on March 29, 2019

Finance chiefs are often tasked with navigating the capital markets as a company is ramping up. At Lyft Inc., long the ride-hailing underdog, that task was complicated by larger rival Uber Technologies Inc., which deployed aggressive tactics to corner the capital markets and make it difficult for rivals to land cash to fuel their growth, The Wall Street Journal reports.

Pick your team. Before looking at Uber’s financials, potential investors had to sign away their right to invest in Lyft or any other ride-hailing company for as long as a year. Investors said they had never seen another company ask for such an agreement. Lyft also struggled to work with Wall Street investment banks as many were wary of helping the company for fear of losing out on potential work with Uber.

Unusual fundraising sources. Many thought Lyft was doomed as it battled a cutthroat rival in an industry where the winner would take all. Lyft founders Logan Green and John Zimmer connected with Hiroshi Mikitani, the CEO of Japanese e-commerce company Rakuten Inc., who saw room for a second player and led a $680 million round in March 2015.

First to IPO. Lyft, the company with the hot-pink logo, will beat Uber to the public markets after pricing its IPO Thursday at $72 a share, which values the company at roughly $24 billion. It will start trading Friday after a deal in which investors hungry for its shares far outnumbered the amount available in the IPO.

Huawei Technologies Ltd --- https://en.wikipedia.org/wiki/Huawei

From the CFO Journal's Morning Ledger on March 28, 2019

British officials accused Huawei Technologies Co. of repeatedly failing to address security flaws in its products and said the company hasn’t demonstrated a commitment to fixing them.

Jensen Comment
Maybe this is because those security flaws aid Huawei spies.

From the CFO Journal's Morning Ledger on March 28, 2019

The IFRS Foundation, which oversees the setter of International Financial Reporting Standards, on Wednesday published its 2019 taxonomy.

This year’s changes to the taxonomy include the disclosure of fair value measurement under IFRS 13 and other, general improvements, the IFRS Foundation said in a statement.

The taxonomy enables corporates to report financial information prepared under observance of IFRS standards electronically.

Jensen Comment
The IFRS Taxonomy notice is at https://www.ifrs.org/news-and-events/2019/03/ifrs-foundation-publishes-ifrs-taxonomy-2019/

From the CFO Journal's Morning Ledger on March 28, 2019

A new auditor often means more work for the finance chief. But while General Electric Co. has signaled it may want to switch auditors after more than a century with KPMG LLP, that won’t be easy, The Wall Street Journal’s Michael Rapoport reports.

Conflicts of interest. The only other firms big enough to take GE’s massive audit all have potential conflicts of interest that could block them from doing so. PricewaterhouseCoopers LLP does GE’s tax work, and GE’s 600-employee tax-services team is now housed at PwC. Ernst & Young LLP is one of GE’s biggest lobbyists in Washington. Deloitte & Touche LLP has business ties to GE that a GE unit has said would pose conflict-of-interest concerns.

By the rules. Any new auditor would have to follow U.S. Securities and Exchange Commission rules that a company’s auditor be “independent”—free of any relationships that could compromise its ability to perform a tough, impartial audit of the company’s finances. Auditors aren’t allowed to provide many types of consulting services to their audit clients, for instance. “If you want a choice, you need to be careful about the connections and the relationships you have,” said Steve Glover, a Brigham Young University accounting professor.

Lucrative prize. GE paid KPMG $133.3 million in 2018 for its audit and other services, the most by any U.S.-traded company, according to consulting firm Audit Analytics. Over the past decade, GE’s fees to KPMG have totaled nearly $1.1 billion.

From the CFO Journal's Morning Ledger on March 26, 2019

Bayer AG and Johnson & Johnson have agreed to pay $775 million to resolve claims that the blood thinner Xarelto causes excessive bleeding, according to the companies.

Jensen Comment
Xarelto floods USA TV networks with advertising. It will be interesting to see if and how this huge settlement affects those commercials. There is a warning in those commercials about risks of bleeding. But this settlement, in my opinion, makes it important to make a bigger deal out of bleeding.

When auditing market-to-market security valuations do auditors always trust market pricing?
From the CFO Journal's Morning Ledger on March 26, 2019

Japan’s financial watchdog recommended a fine of $1.2 million for a unit of Citigroup Inc. for alleged manipulation of the futures market for Japanese government bonds.

From the CFO Journal's Morning Ledger on March 26, 2019

More finance chiefs are looking to technological advances to reduce costs and add strategic value to existing processes as the digital transformation of the finance function gathers urgency, CFO Journal’s Ezequiel Minaya reports for WSJ Pro AI.

AI by the numbers. Grant Thornton LLP polled 378 senior finance executives and found that 25% of respondents were using artificial intelligence, up from 7% in a similar survey the firm did last year. In addition, 41% plan to dedicate additional resources to AI in the next two years. Forty-two percent reported making use of advanced and automation technologies in corporate development and strategic planning, up from 18% a year earlier.

More to come. Within the next 12 months, respondents said they expected to increase the deployment of technology in key areas, with 30% projecting greater use in financial planning and analysis, 28% in financial reporting and control and 29% in treasury and working capital management.

Crystal ball 2.0. CFOs are moving beyond improving transactional processes and are now looking to apply technologies to forward-looking, strategic procedures such as budgeting, forecasting and treasury, said Mike Ward, national managing principal of business consulting at Grant Thornton. The surveyed executives also increasingly forecast the greater use of advanced technologies and automation in risk management, tax and compliance, and budgeting.

Just-In-Time Inventory Strategy --- https://en.wikipedia.org/wiki/Just-in-time_manufacturing
Stockpiling Strategy --- When a Just-In-Time Strategy is Just Too Risky

This really was not posted as a joke or intended to be comedy
From the CFO Journal's Morning Ledger on March 21, 2019

One of the biggest importers of toilet paper in the U.K.—Germany's Wepa Hygieneprodukte GmbH—has been stockpiling supplies to prepare for a potential a no-deal Brexit, the BBC reports.

From the CFO Journal's Morning Ledger on March 21, 2019

A Lithuanian man pleaded guilty to his role in a complex wire fraud scheme that resulted in the theft of more than $100 million from Alphabet Inc.’s Google and Facebook Inc., prosecutors said Wednesday.

From the CFO Journal's Morning Ledger on March 21, 2019

Finance chiefs are often tasked not only with capital allocation, but the best place to source that capital. Lately that’s been Europe, The Wall Street Journal’s Avantika Chilkoti reports. As corporate borrowers returned in force to the bond market following one of the weakest stretches in years, Europe’s debt market is on a particularly strong run.

Everybody loves the Yankees. U.S. companies have ramped up issuance of euro-denominated bonds, known as “reverse Yankees,” to a total of €28.46 billion ($32.31 billion) so far this year, according to data firm Dealogic, compared with €6.71 billion in the same period of 2018. Large deals include a €3.5 billion round of bonds issued by Coca-Cola Co., and €1 billion from toothpaste maker Colgate-Palmolive Co.

Lower costs. European benchmark rates are still negative and nearly 3 percentage points lower than in the U.S., making that market more appealing. And while hedging costs were elevated last year, those costs have fallen more recently, as seen in derivatives known as cross-currency basis swaps.

Tax law impact. The U.S. tax law overhaul, passed in late 2017, has encouraged U.S. companies to repatriate more of their foreign profits. This, in turn, is increasing the need to issue debt abroad to fund local operations.

From the CFO Journal's Morning Ledger on March 20, 2019

U.S. auditors are gearing up to revamp and expand the yearly letter in which they bless a company’s financial statements. Starting later this year, those audit reports must tell investors more about what an auditor found most difficult or challenging when scrutinizing a company’s books.

From the CFO Journal's Morning Ledger on March 19, 2019

A former vice president for the United Auto Workers union was charged Monday with allegedly receiving tens of thousands of U.S. dollars in illegal payments from Fiat Chrysler Automobiles NV executives, the latest in a widening probe into allegations of corruption in the union’s top ranks.

From the CFO Journal's Morning Ledger on March 18, 2019

Good morning. The U.S. Securities and Exchange Commission’s charges against Volkswagen AG dealt a blow to the efforts of its finance chief in his yearslong quest to engage with investors to rebuild trust in the company, reports CFO Journal.

A "tough week." Chief Financial Officer Frank Witter, in an email on Friday, said he is in regular contact with investors and that the company’s recent debt sales show Volkswagen has progressed in regaining "the trust of capital markets." He added that the company’s recent bond sales have been oversubscribed.

Another lawsuit. The SEC on Thursday charged the German auto maker, two of its units and former Chief Executive Martin Winterkorn with defrauding U.S. bond investors in connection with its diesel emissions cheating. Volkswagen re-entered the U.S. bond market in November after a 3½ year absence. The recent bond sales aren’t the subject of the SEC’s lawsuit.

Dealt a blow. The suit is a setback to Mr. Witter’s efforts to reintroduce Volkswagen to the capital markets, analysts and accountants said. “I think it creates additional headwinds that he has to deal with,” said Peter Bible, chief risk officer at accounting firm EisnerAmper LLP and a former chief accounting officer at General Motors Co.

Booking More for Goodwill Than was Paid
From the CFO Journal's Morning Ledger on March 13, 2019

General Electric Co. booked more in goodwill than it paid for Alstom SA's power business—a way of telling investors that the assets it bought had a net worth less than zero.

From the CFO Journal's Morning Ledger on March 12, 2019

Almost 80 investment advisory firms—including divisions of Wells Fargo & Co. and Deutsche Bank AG—agreed to pay back more than $125 million to clients who were steered into higher-cost mutual funds without adequate disclosure.

An unlikely illustration of hedging not eligible for hedge accounting relief
From the CFO Journal's Morning Ledger on March 7, 2019

Tesla Inc. faces criticisms from Chinese customers complaining that they ended up paying thousands of U.S. dollars more for their new cars because they bought before the company’s recently enacted price cuts.

Jensen Comment
In essence the buyers of undelivered Tesla vehicles hedge against price increases rather than decreases.
In the USA we teach (or should be teaching) the risks of call options, futures contracts, and forward contracts.
If companies did this (say for undelivered Tesla Budweiser trucks) would they be eligible for hedge accounting against price increases in those undelivered trucks?
My guess is no to hedge accounting since Tesla truck future prices (unlike corn prices and benchmark interest rates) are not traded on qualified exchange markets.
Under both FASB and IFRS standards you can hedge but hedges are not necessarily eligible for hedge accounting relief.

This of course begs the question: Just what is hedge accounting relief?
http://faculty.trinity.edu/rjensen/caseans/000index.htm

From the CFO Journal's Morning Ledger on March 7, 2019

Concerns about the U.S. economy are putting a chill on spending and expansion plans among U.S. executives, according to a first-quarter survey by the Association of International Certified Professional Accountants released Thursday.

Fading optimism. Fifty-seven percent of U.S. business leaders reported an optimistic outlook on the U.S. economy for the year ahead, down from 79% in the same period of 2018, according to a survey of 844 finance leaders. And only 34% said they are optimistic about prospects for the global economy over the next year.

Not if, but when? Many CFOs are concerned that the nearly decadelong U.S. economic expansion will soon be over, said Joselin Martin, finance chief at plasterwork contractor Hayles & Howe Inc. “Every conversation I’ve had hasn’t been ‘are we going to have a recession?’ but, ‘when is it going to hit?’ ” she said.

Dimmed view. Survey respondents also lowered their estimates for revenue and profit growth at their own companies. Revenue is now expected to climb 4.4% over the next year, compared with 5% in the first quarter of 2018. Profits are expected to increase 3.6%, down from a forecast of 4.4% growth a year earlier.

How to Mislead With "Unvetted" Forecasts/Predictions

Elon Musk --- https://en.wikipedia.org/wiki/Elon_Musk

The Securities and Exchange Commission says an "unvetted" tweet Elon Musk sent in February claiming that Tesla would produce 500,000 vehicles in 2019 was a "blatant violation" of a court settlement between himself, Tesla, and the agency ---
https://www.businessinsider.com/sec-responds-to-elon-musk-in-contempt-of-court-claim-2019-3

·         The Securities and Exchange Commission says a tweet Elon Musk sent in February claiming that Tesla would produce 500,000 vehicles in 2019 was a "blatant violation" of a court settlement between himself, Tesla, and the agency.

·         Among other things, that settlement requires Tesla to appoint a "Twitter czar" who vets Musk's tweets for information material to Tesla before publishing.

·         The SEC, citing Musk's own words, accuses him of not doing that and says "there was never any good faith effort to comply with the Court's order."

·         Musk's lawyers criticized the SEC's latest filing on Monday, accusing the agency of making new allegations against the Tesla CEO.

Continued in article

Jensen Comment
Musk keeps trying to manipulate Tesla's stock and bond market prices with dubious forecasts (although in its best week Tesla did produce 7,000 vehicles before laying off workers to reduce expenses).
It's not so much that 500,000 per year is entirely unreachable. The issue is that Musk agreed in court to have such predictions "vetted" before making them public.
This is no longer limited to a dispute between the SEC and Elon Musk. It's now a contempt of court violation --- which is a much more scary violation for Musk to face up to in court.

Ironically, no enforcement agency requires that President Trump's tweets be vetted, although the national media seems to have taken on that job.
Trump and Musk seem to be in competition to see how long tweeted lies will be tolerated --- by voters (in the case of Trump) and by investors (in the case of Musk).
The SEC's mandate is to protect investors from fraud and market manipulations.

From the CFO Journal's Morning Ledger on February 27, 2019

The latest legal action between U.S. securities regulators and Tesla Inc. Chief Executive Elon Musk highlights the challenge facing regulators and boards when it comes to reining in a wealthy chief executive whose identity is closely tied to the value of the company he or she leads, CFO Journal’s Tatyana Shumsky and Nina Trentmann report.

Round two. The Securities and Exchange Commission on Monday asked a federal judge to hold Mr. Musk in contempt of court over social-media messages he made last week about Tesla’s projected production volumes. The regulator said the tweets violated the terms of a fraud settlement he reached with the SEC in September because they weren’t preapproved by Tesla officials. U.S. District Judge Alison Nathan on Tuesday ordered Mr. Musk to respond to the claims by March 11.

Crime and punishment. Mr. Musk’s personal wealth, estimated in the billions, could cushion the impact of potential financial penalties. And any action that curtails his leadership responsibilities risks hurting the value of Tesla because Mr. Musk’s identity is closely intertwined with the company’s value, says Bonnie Hancock, executive director of the Enterprise Risk Management Initiative at the North Carolina State University Poole College of Management.

Effective measures. Mr. Musk’s settlement deal with the SEC in part required that Tesla officials preapprove statements from him that could affect the company’s stock price. Steven Peikin, co-director of the SEC’s division of enforcement, said in October that the regulator deployed one of its most effective tools—a tailor-made directive—to prevent potential harm to investors caused by a lack of oversight of Mr. Musk’s communications.

“The SEC has bent over backwards to allow Tesla to continue to get the benefits of Musk’s creative genius, but they have also attempted to put in place procedures and methodologies to prevent shareholders from being misled by his tweets.”

— Harvey Pitt, former chairman of the SEC.

Consumer Reports no longer recommends buying a Model 3 --- because it's too unreliable.

How far does the First Amendment protect the right of CEOs to manipulate market prices (bonds and stocks) ---
ELON MUSK (think Tesla) FILES HIS DEFENSE: Says SEC seeks to violate his First Amendment rights, and its filing 'smacks of retaliation and censorship' ---
https://www.businessinsider.com/musk-response-to-contempt-of-court-2019-3

Jensen Comment
There's a real threat to capital markets if he wins on this one. At risk is the scaring off of investors in the markets, investors who fear market manipulation beyond which the SEC can fight these days.
But there's a second risk --- should he be allowed to defy a court order?
I think there's huge risk in using the First Amendment to defend against contempt of court.

Three Times You Should Consider Business Valuation (usually infrequent events) ---
https://www.accountingweb.com/practice/clients/3-times-you-should-consider-business-valuation

Jensen Comment
The three major problems with business valuation is that:

1. Respectable valuations are costly (not usually cost effective on an annual basis)

2. Business valuations are highly subjective (due largely varying assumptions) and differ between teams of valuators --- which is the reason mergers and acquisitions often take place when "buyers" are more optimistic than "sellers." Exhibit A is the widely varying valuation between the Michael Jackson Estate between his family versus the IRS. Exhibit B is the valuation of Tesla based on stock price fluctuations where prices fluctuate greatly both due to news releases about Tesla and ups and downs of the stock market apart from news about Tesla.

3. Business valuations are unstable and change with not only economic conditions but with such things as scandals. Exhibit A is the expected 2019 crash in the value of the the Michael Jackson estate as media outlets are now banning the playing of his music and videos following the current release of the HBO documentary leaving the audiences more convinced that he was a serial pedophile who bought off witnesses before court trials. Whether or not he's guilty as implied is not so much an issue as the impact of media outlets to new publicity that he's guilty. Exhibit C is the real estate value in Queens between the Amazon announcement of HQ 2 in Queens and the subsequent crash in valuations following the Amazon announcement that it was reneging on Queens. Value can be fickle indeed.

Exhibit D is the Non-GAAP Earnings Management at Kraft Heinz Co.
From the CFO Journal's Morning Ledger on March 6, 2019

The problems Kraft Heinz Co. disclosed last month are shining a light on a growing concern: the company’s tailored financial metrics that help make its results look better.

You say tomato, I say $6 billion. Since the 2015 merger that created Kraft Heinz, the packaged-food company has reported adjusted operating earnings totaling more than $24 billion. But reported cash flow from operations under standard accounting rules for that same period was only about $6 billion.

Mind the GAAP. The gap in cash flow tallies underscores the need for investors to be cautious when relying on nonstandard metrics, rather than those that governed by U.S. Generally Accepted Accounting Principles. The relatively low operating cash flow might have been a tipoff to investors that Kraft Heinz was faltering. Last month it announced a big write-down and a decline in the value of several key brands.

Caveat emptor. Companies are allowed to report tailored financial metrics, but they must provide detailed disclosures and can’t feature them more prominently than official measures. In recent years, the U.S. Securities and Exchange Commission has criticized many companies over the way they feature adjusted measures.

Bob Jensen's threads on pro forma and other non-GAAP reporting ---
http://faculty.trinity.edu/rjensen/theory02.htm#ProForma

From the CFO Journal's Morning Ledger on March 4, 2019 --- Going Concern Justification

U.K. Audit Regulator Proposes Tougher Requirements for Auditors

The U.K.’s Financial Reporting Council on Monday proposed an overhaul of how auditors assess a company’s ability to stay in business. Auditors will be expected to challenge a company’s assessment of its own health, consider all evidence obtained from management and judge whether management’s assessment is appropriate, the FRC said.

The going concern proposals come after several high-profile U.K. corporate bankruptcies, including that of construction company Carillion PLC in January 2018. “Recent corporate failures and the FRC’s own enforcement work has shown the existing Going Standard needs to be strengthened,” said Mike Suffield, acting executive director of audit and actuarial regulation at the FRC in a statement.

The consultation period for the proposal ends June 7.

LIBOR --- https://en.wikipedia.org/wiki/Libor

Libor became an important benchmark for hedging interest rate swaps in FAS 133, FAS 138, and IAS 39 ---
http://faculty.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

From the CFO Journal's Morning Ledger on March 4, 2019 --- The end of LIBOR?

Corporate finance teams are rifling through loans, investments and derivatives to assess the potential fallout from moving to a new benchmark for short-term borrowing costs, reports CFO Journal’s Tatyana Shumsky.

Goodbye Libor. Global financial regulators have been working on an alternative to the London interbank offered rate, or Libor, which will be discontinued at the end of 2021. Now, dozens of companies including McCormick & Co. and food giant Mondelez International Inc. are starting to tell investors about the risks of making this transition.

Self-assessment. Companies must look at three areas—borrowing, derivatives and investments—when assessing the scope of their exposure, said Roy Choudhury, the Americas capital markets advisory leader at Ernst & Young LLP. They must also consider any implications for hedging and hedge accounting, as well as how the risk varies by currency and jurisdiction. “This is not just a U.S. dollar problem, this is a euro problem, really all of the major currencies,” Mr. Choudhury said.

Start now. Libor-related disclosures will become more detailed in the coming quarters as regulatory efforts to establish alternative benchmarks advance and as companies get a firmer grasp of the risks, lawyers and accountants said. Finance chiefs don’t yet have a clear path to transition away from the benchmark, limiting what they can tell investors, but that doesn’t mean they can put off the work.

From the CFO Journal's Morning Ledger on March 1, 2019

Tesla Inc. said it would begin shutting stores and move to selling vehicles only over the internet, an extraordinary step aimed at cutting costs so the company can offer its Model 3 compact at a long-awaited starting price of $35,000.

Jensen Question
This is an admission that most stores weren't selling enough cars to justify their existence. The electric car market is growing but is still miniscule in the USA (not so small in China).

For warranty service do you now have to haul your Tesla on a diesel truck back to the Freemont California factory for repairs?
Or is this the new Repair-it-Yourself Tesla policy?

Consumer Reports no longer recommends buying a Model 3 --- because it's too unreliable.

Instead of shutting stores the SEC is trying to shut CEO Elon Musk's mouth --- charging him with contempt of court in his effort to manipulate Tesla's bond and stock markets.

From the CFO Journal's Morning Ledger on February 28, 2019

Greece’s European creditors are threatening to withhold €1 billion ($1.14 billion) of funTeading the country’s government was expecting to receive this spring because Athens hasn’t implemented economic overhauls.

From the CFO Journal's Morning Ledger on February 28, 2019

The number of existing homes that went under contract in the U.S. rose 4.6% in January, a sign of improvement for the housing market at the start of the year.

From the CFO Journal's Morning Ledger on February 28, 2019

Biopharmaceutical company Syneos Health Inc. on Wednesday said U.S. securities regulators are investigating its accounting policies and delayed the release of its fourth-quarter and year-end earnings.

Shares of the Nasdaq-listed company, which had closed up 0.8% before the announcement and were then paused, tumbled more than 27% to $37.75 when after-hours trading resumed. Those losses come after Syneos Health shares fell about 7% in Tuesday’s trading.

The Securities and Exchange Commission notified the Morrisville, N.C., company on Feb. 21 that it had launched an investigation into its revenue accounting policies, internal controls and related matters, Syneos said. The company said it is cooperating with the SEC.

From the CFO Journal's Morning Ledger on February 27, 2019

The latest legal action between U.S. securities regulators and Tesla Inc. Chief Executive Elon Musk highlights the challenge facing regulators and boards when it comes to reining in a wealthy chief executive whose identity is closely tied to the value of the company he or she leads, CFO Journal’s Tatyana Shumsky and Nina Trentmann report.

Round two. The Securities and Exchange Commission on Monday asked a federal judge to hold Mr. Musk in contempt of court over social-media messages he made last week about Tesla’s projected production volumes. The regulator said the tweets violated the terms of a fraud settlement he reached with the SEC in September because they weren’t preapproved by Tesla officials. U.S. District Judge Alison Nathan on Tuesday ordered Mr. Musk to respond to the claims by March 11.

Crime and punishment. Mr. Musk’s personal wealth, estimated in the billions, could cushion the impact of potential financial penalties. And any action that curtails his leadership responsibilities risks hurting the value of Tesla because Mr. Musk’s identity is closely intertwined with the company’s value, says Bonnie Hancock, executive director of the Enterprise Risk Management Initiative at the North Carolina State University Poole College of Management.

Effective measures. Mr. Musk’s settlement deal with the SEC in part required that Tesla officials preapprove statements from him that could affect the company’s stock price. Steven Peikin, co-director of the SEC’s division of enforcement, said in October that the regulator deployed one of its most effective tools—a tailor-made directive—to prevent potential harm to investors caused by a lack of oversight of Mr. Musk’s communications.

“The SEC has bent over backwards to allow Tesla to continue to get the benefits of Musk’s creative genius, but they have also attempted to put in place procedures and methodologies to prevent shareholders from being misled by his tweets.”

— Harvey Pitt, former chairman of the SEC.

Consumer Reports no longer recommends buying a Model 3 --- because it's too unreliable.

Other News From the CFO Journal's Morning Ledger on February 27, 201

General Electric Co. disclosed that it shed 30,000 workers last year as the conglomerate restructured its operations and sold off some business lines.

Volkswagen AG plans to invest about $1.7 billion in a self-driving car venture with Ford Motor Co.’s Argo subsidiary, according to people familiar with the matter.

Online marketplace eBay Inc. and activist investors Elliott Management Corp. and Starboard Value LP are nearing a settlement deal that would give the activists board seats and could open the door to the company breaking itself up.

Fiat Chrysler Automobiles NV plans to spend $4.5 billion to expand factory production in Michigan, but also said it will lay off workers at a plant in Illinois.

Berkshire Hathaway Inc. has agreed to sell one of its workers’ compensation insurance companies, a rare move for Warren Buffett.

Dean Foods Co. said it is exploring strategic alternatives including the possible breakup of the biggest U.S. milk producer, as pressure mounts on dairy processors facing low prices and new competition from big retailers.

Macy’s Inc. signaled 2019 would be a challenging year, predicting sales wouldn’t grow at all and announcing another round of cost cuts.

The Lego Group returned to growth last year, helped by sales of its plastic bricks in new channels like U.S. dollar stores and a stronger focus on China.

Bayer AG on Wednesday said the number of plaintiffs suing the German company over its weedkillers had risen by another 1,900 over the past three months.

Leaders from seven drugmakers representing $140 billion in U.S. revenue defended their pricing in a Senate hearing that showcased bipartisan support for what would be some of the most significant changes to the industry in decades.

The U.S. Labor Department is investigating Fidelity Investments over an obscure and confidential fee it imposes on some mutual funds, according to a person familiar with the inquiry.

Nevada gambling regulators levied their largest fine in the state’s history against Wynn Resorts Ltd. after the Las Vegas company admitted that it ignored sexual-misconduct allegations against founder and former chief executive Steve Wynn.

A federal appeals court rejected the U.S. Justice Department’s bid to roll back AT&T Inc.’s 2018 acquisition of entertainment company Time Warner, a second defeat for government antitrust enforcers.

U.S. lawmakers on Tuesday launched a new attack on consumer credit-reporting companies, a year and a half after the data breach at Equifax Inc. exposed personal financial details of millions of Americans.

Swedbank AB on Tuesday abruptly switched the external auditor in charge of investigating allegations the bank facilitated billions in suspicious transactions.

Few companies are telling securities regulators about cyberattacks, a new analysis finds, despite recent efforts to bolster disclosures of such incidents to investors.

Teaching Cases and Videos
Go to the wonderful MAAW site on ethics at
https://maaw.info/EthicsMain.htm

Search for "Ethics Case" after logging in at the AAA Commons ---
http://commons.aaahq.org/pages/home

Accounting Scandals --- https://en.wikipedia.org/wiki/Accounting_scandals
Search for books, articles, and videos using the company names and people names at the above site
Note the many footnote references at the above site

Accounting Ethics Videos

Enter "Accounting Ethics" into the search box at https://www.youtube.com/

Enter "Accounting Case" into the search box at https://www.youtube.com/

Enter "Enron Ethics" into the search box at https://www.youtube.com/

Enter "Other Peoples Money" into the search box at https://www.youtube.com/

Enron Documentary Film --- https://en.wikipedia.org/wiki/Enron:_The_Smartest_Guys_in_the_Room

Enter "Ethics" into the search box at https://www.khanacademy.org/

Contact Marc Gerrone at mgerrone@imanet.org (ask about the IMA video contests)

Enter "Ethics" into https://www2.deloitte.com/us/en/pages/about-deloitte/articles/deloitte-university-leadership-center.html
This witl give you some contacts to ask about videos

Play around a bit at https://www.kpmguniversityconnection.com/for-faculty

Contact PwC's Julie Peters at https://www.linkedin.com/in/julie-peters-14b45325/

Hunt Around Sixty Minutes at https://www.cbsnews.com/60-minutes/business/ (Click the More Results Button)

Hunt Around Frontline at https://www.pbs.org/wgbh/frontline/

Here's an entire free video course on Corporate Social Responsibility from the University of Pennsylvania ---
https://www.class-central.com/course/edx-corporate-social-responsibility-csr-a-strategic-approach-9510?utm_source=qz&utm_medium=web&utm_campaign=ivy_league_courses_2019

If you want to really dig into Enron, have studentS take my Enron Quiz at
http://faculty.trinity.edu/rjensen/FraudEnronQuiz.htm

Bob Jensen's links to teaching cases in general
http://faculty.trinity.edu/rjensen/bookurl.htm
Click on any file and then search for "Teaching Case"
Some of these hundreds of cases are focused on ethics

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 1, 2019

Kraft Heinz's Goodwill Charge Tops Consumer-Staples Record

By Tatyana Shumsky | Feb 23, 2019

TOPICS: Financial Accounting, Goodwill, Goodwill Impairments

SUMMARY: Kraft Heinz Co.'s $7.3 billion goodwill impairment is the largest such write-down in the U.S. consumer staples industry in at least a decade. The size of the hit is unusual for the sector, which recorded 88 such write-downs between 2013 and 2017 totaling $9.6 billion. Companies record goodwill on their books when they buy a business for a higher price than the value of its hard assets, such as property and equipment. The buyer must test the fair value of its reporting units each year and, if that figure is less than the amount on the balance sheet, impair the goodwill.

CLASSROOM APPLICATION: This article is appropriate for coverage of goodwill and goodwill impairments. It is one part of the many problems Kraft Heinz is facing.

QUESTIONS:

1. (Advanced) What is goodwill? How can it be created? How and when is it entered into the financial records of company?

2. (Advanced) What is a goodwill impairment charge? In what situations should a company take such a charge?

3. (Introductory) What are the facts of Kraft Heinz's financial situation and goodwill impairment?

4. (Advanced) What are the conditions that contributed to the decline in Kraft Heinz's goodwill?

5. (Advanced) What is a discount rate? How can discount rates affect the reporting of goodwill? What part did it play in this situation?

READ THE ARTICLE

RELATED ARTICLES:
Kraft Heinz Divulges SEC Investigation, Swings to Loss
by Annie Gasparro
Feb 21, 2019
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Kraft Heinz's Profit Suffers as Costs Rise
by Annie Gasparro
Nov 01, 2018
Online Exclusive

Reviewed By: Linda Christiansen, Indiana University Southeast

"Kraft Heinz's Goodwill Charge Tops Consumer-Staples Record,' By Tatyana Shumsky , The Wall Street Journal, February 23, 2019
https://www.wsj.com/articles/kraft-heinzs-goodwill-charge-tops-consumer-staples-record-11550874959

Food maker’s hit to goodwill comes as industry grapples with shifting consumer tastes

The $7.3 billion goodwill impairment Kraft Heinz Co. announced this week is the largest such write-down in the U.S. consumer staples industry in at least a decade, according to valuation firm Duff & Phelps LLC.

The size of the hit, disclosed Thursday, is unusual for the sector, which recorded 88 such write-downs between 2013 and 2017 totaling $9.6 billion, according to Duff & Phelps.

“This goodwill impairment alone is greater than that entire sector over the last three years,” said Carla Nunes, a managing director at Duff & Phelps.

The food maker’s write-down places it second behind General Electric Co.’s $22 billion goodwill write-off among the 10 largest write downs reported last year, she said.

Companies record goodwill on their books when they buy a business for more than the value of its hard assets, such as property and equipment. The buyer must test the fair value of its reporting units each year and, if that figure is less than the amount on the balance sheet, impair the goodwill.

Kraft Heinz’s charge reduced the company’s overall goodwill balance by nearly 17% to $36.2 billion as of Dec. 29, according to regulatory filings. It was part of a total impairment of $15.9 billion for 2018 that included an $8.7 billion write-down to its intangible assets, particularly the Kraft and Oscar Mayer brands.

The company telegraphed a potential goodwill impairment in its third- quarter filings. The company disclosed that five reporting units that carry goodwill had a fair value that exceeded their carrying value by less than 10% as of Sept. 29. The company’s goodwill is spread across 20 reporting units and had an aggregate carrying value of $44.3 billion, according to the third-quarter filing.

“Our quarterly disclosures are intended to provide information regarding reporting units and brands that we believe could be at risk of future impairments,” a Kraft Heinz spokesman said in an email.

Securities regulators require companies to boost their disclosure about goodwill when the fair value of the business unit falls within 10% of its carrying value, Ms. Nunes said. When the value is that close, companies also must conduct a more thorough analysis of the goodwill.

“Any change in one driver may tip you into a goodwill impairment,” she added.

A global shift in consumer tastes and higher interest rates from the Federal Reserve may have contributed to the write-down.

Consumer preferences have been moving away from highly processed products and toward fresh food, a trend that’s pressured the consumer staples sector to adjust its product mix. That raises questions about the value of certain business units, Ms. Nunes said. “If these companies grew through acquisition and there’s a lot of goodwill on their books, they’re at risk of impairment,” she said.

The impairment to Kraft Heinz’s goodwill and intangible assets reflected revised profitability expectations for the company’s Kraft cheese and Oscar Mayer cold-cuts businesses, its Canadian retail business, as well as weaker business performance over the past six months, David Knopf, the company’s finance chief, said during a company earnings call on Thursday.

Mr. Knopf also cited pressure from higher discount rates on valuations among the reasons the company impaired its goodwill and intangibles.

Companies use a so-called discount rate to calculate the fair value of their business units. The discount rate is informed by the Federal Reserve’s benchmark rate, which the central bank raised four times last year.

“When that rate moves up, the rates people use in the analysis will go up accordingly. That then causes the value to come down,” said Peter Bible, a partner and chief risk officer at accounting firm EisnerAmper LLP.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 1, 2019

IRS Proposal Could Crimp Earnings for Manufacturers, Energy Companies

By Michael Rapoport and Richard Rubin | Feb 24, 2019

TOPICS: Interest Expense, Interest Expense Deduction, Managerial Accounting, Tax Cuts and Jobs Act

SUMMARY: The December 2017 law helped companies by slashing the corporate tax rate. But it also limited businesses' ability to deduct interest costs. Now, the Internal Revenue Service has proposed guidelines that would further restrict interest deductions at some companies that invest heavily in facilities and equipment. Advocates for manufacturers and oil-and-gas companies want the agency to reconsider. In the past, companies could generally deduct all the interest they pay on their debt. The 2017 tax overhaul capped that deduction at 30% of a company's adjusted income. The IRS proposal would define adjusted income more restrictively. And for the companies affected, that means their adjusted income would be lower - which means more of them would have interest expenses that exceed the 30% cap. That could potentially cost some companies tens of millions of dollars a year in added tax payments. The IRS proposal centers on depreciation and amortization. The 2017 law had indicated companies could exclude those costs for the next few years, along with interest and taxes, when they calculate the "adjusted taxable income" yardstick. But the IRS proposal said companies will have to include those costs if they are "capitalized to inventory" - i.e., placed on the balance sheet as part of inventory, and gradually worked into earnings over a period of years. Effectively, that means manufacturers and other companies whose businesses require large investments in physical assets will be most affected.

CLASSROOM APPLICATION: This update to the Tax Cuts and Jobs Act is appropriate for corporate tax classes.

QUESTIONS:

1. (Introductory) What new tax law was recently enacted? When was it enacted? When did it take effect? Did it affect individuals or companies or both?

2. (Introductory) What are the details of the new IRS proposal? To what revenues or expenses does it apply?

3. (Advanced) What types of companies are affected by this proposal? Please explain why some companies are affected to a greater degree, but others are not affected as much.

4. (Advanced) If this proposal goes into effect, is there anything companies could do to minimize its effects and costs?

5. (Advanced) That article states the proposal was a surprise to many. Why might it have been a surprise?

6. (Advanced) In general, what are the reasons for limiting the deductibility of these expenses?

READ THE ARTICLE

Reviewed By: Linda Christiansen, Indiana University Southeast

"IRS Proposal Could Crimp Earnings for Manufacturers, Energy Companies," By Michael Rapoport and Richard Rubin, The Wall Street Journal, February 24, 2019
https://www.wsj.com/articles/irs-proposal-could-crimp-earnings-for-manufacturers-energy-companies-11550930400

Tax law’s slashing of corporate rates benefited many companies, but possible limits on interest deductions could hurt some

The tax overhaul fueled earnings for many companies. But a proposal about how to implement it could hurt some manufacturers and energy companies, by further crimping a key tax break.

The December 2017 law helped companies by slashing the corporate tax rate. But it also limited businesses’ ability to deduct interest costs. Now, the Internal Revenue Service has proposed guidelines that would further restrict interest deductions at some companies that invest heavily in facilities and equipment.

Advocates for manufacturers and oil-and-gas companies, which could be hit hard by the IRS proposal, want the agency to reconsider. The IRS is accepting public comments through Tuesday on the possible change and other related proposals, and it plans a public hearing Wednesday.

In the past, companies could generally deduct all the interest they pay on their debt. The 2017 tax overhaul capped that deduction at 30% of a company’s adjusted income. The IRS proposal would define adjusted income more restrictively. And for the companies affected, that means their adjusted income would be lower—which means more of them would have interest expenses that exceed the 30% cap. That could potentially cost some companies tens of millions of dollars a year in added tax payments.

“Anybody reporting significant investment in manufacturing, mining, is going to be subject to this,” said Jose Murillo, director of the international tax group at Ernst & Young LLP.

The 30% cap is expected to generate $253 billion over a decade, according to Congress’s Joint Committee on Taxation. The cap was intended to discourage companies from excessive borrowing, and to make up for the revenue lost when the law cut the corporate tax rate to 21% from 35%.

The IRS proposal centers on depreciation and amortization—the expenses that account for the gradual decline in value of a company’s assets. The 2017 law had indicated companies could exclude those costs for the next few years, along with interest and taxes, when they calculate the “adjusted taxable income” yardstick.

But the IRS proposal, issued in November, said companies will have to include those costs if they are “capitalized to inventory”—i.e., placed on the balance sheet as part of inventory, and gradually worked into earnings over a period of years. Effectively, that means manufacturers and other companies whose businesses require large investments in physical assets will be most affected.

The IRS’s move came as a surprise to many. Companies that previously didn’t think the cap would affect them “now are really going to have to reconsider that,” said Stephen Comstock, who handles tax policy for the American Petroleum Institute.

An official at the Treasury Department, of which the IRS is a part, said the agency is aware of the concerns and “will continue to study the issue as we consider the final rules.”

The tax law’s complexity can make it difficult to determine which companies would be affected by the proposed “capitalized to inventory” rule. A spokesman for Celanese Corp. , a chemical and specialty-materials company, said the proposed rule “does adversely impact manufacturers like Celanese,” though the company’s $125 million in interest expense in 2018 was well below 30% of its income.

Celanese is working with its industry groups and the Treasury Department “to make sure the negative potential impact to U.S. manufacturers is properly considered before final regulations are issued,” the spokesman said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 1, 2019

Lowball Prices on Stock Options Could Be Silicon Valley's Juiciest Perk

By Jean Eaglesham, Telis Demos, and Coulter Jones | Feb 21, 2019

TOPICS: Individual Taxation, IPOs, Stock Valuation

SUMMARY: Silicon Valley startups are often eager to tout their soaring values. But they are far more pessimistic when they hand out stock before going public - a sleight of hand that creates a hidden future windfall for employees while potentially lowering their taxes. Startups often put two very different price tags on their shares at the same time, the Journal found: a heady valuation for sales to outside investors and a much lower one for insiders. A Wall Street Journal analysis of recent initial public offerings identified 68 companies that gave employees options to buy about $1.5 billion worth of shares in the 12-month run-up to their market debut. But the value of those shares was much higher based on a valuation model developed by academics - an estimated $2.2 billion, the equivalent of employees getting a 32% discount on the shares. The law states employee-allocated stock should be priced at its fair value but doesn't specify the basis of the pricing - which may give companies a tempting loophole to enrich their executives. Lowballing typically benefits employees in two ways: They get the stock cheap, and they enjoy tax savings if they buy the shares while the company is still private and sell at a much higher price later. That is because most of the profits are taxed at a lower rate as capital gains, rather than the higher income-tax rate.

CLASSROOM APPLICATION: This article would be useful for coverage of stock options and stock valuations, as well as for individual taxation classes.

QUESTIONS:

1. (Advanced) What is a stock option? How does a company account for stock options for financial accounting purposes?

2. (Introductory) What is an IPO? What is its purpose?

3. (Introductory) What are the results of the Wall Street Journal's study discussed in the article? What are the details of some of the examples presented in the article?

4. (Advanced) What are the benefits of "lowballing" stock option prices? Who is benefited? How are they benefited? Who is disadvantaged?

5. (Advanced) What are the financial accounting requirements for valuing a stock option?

6. (Advanced) What are the tax requirements for valuing a stock option? What are the 409A rules? What is the usual IRS enforcement of these rules? Why is that degree of enforcement likely the case?

7. (Advanced) What is the SEC? What is its area of authority? What actions has the SEC been taking? Why?

READ THE ARTICLE

Reviewed By: Linda Christiansen, Indiana University Southeast

"Lowball Prices on Stock Options Could Be Silicon Valley's Juiciest Perk," by Jean Eaglesham, Telis Demos, and Coulter Jones, The Wall Street Journal, February 21, 2019
https://www.wsj.com/articles/lowball-prices-on-stock-options-could-be-silicon-valleys-juiciest-perk-11550682199

Silicon Valley startups are often eager to tout their soaring values. But they are far more pessimistic when they hand out stock before going public—a sleight of hand that creates a hidden future windfall for employees while potentially lowering their taxes.

A Wall Street Journal analysis of recent initial public offerings identified 68 companies that gave employees options to buy about $1.5 billion worth of shares in the 12-month run-up to their market debut.

But the value of those shares was much higher based on a valuation model developed by academics—an estimated $2.2 billion, the equivalent of employees getting a 32% discount on the shares.

“The Journal’s findings show that the valuations being reported by companies are significantly below what the shares are really worth—the price that investors would pay for them,” said Will Gornall, an assistant finance professor at the University of British Columbia, in Vancouver.

Private-company valuations are in the spotlight this year, as some of the hottest tech startups, including Uber Technologies Inc., Lyft Inc. and Pinterest Inc., prepare to go public.

Startups often put two very different price tags on their shares at the same time, the Journal found: a heady valuation for sales to outside investors and a much lower one for insiders.

Three founders of meal-kit maker Blue Apron Holdings Inc., for instance, received a total of $30 million in October 2015 from the sale of stock to outside investors at $13.33 a share, more than triple the $3.69 a share value the company would use four months later when granting options to employees. Since the IPO, Blue Apron’s reported losses and operational problems have hit the stock, which is currently trading around $1.52 a share. A Blue Apron spokeswoman declined to comment.

Mukesh Bajaj, a financial economist who has testified in many valuation cases for the Internal Revenue Service and others, said the law states employee-allocated stock should be priced at its fair value but doesn’t specify the basis of the pricing—which may give companies a tempting “loophole to enrich their executives,” he said.

Options to buy stock are a potent weapon in the Silicon Valley war for tech talent. Discounts on the stock can be a highly profitable perk: The cost to employees of the shares in the Journal’s analysis is $1.3 billion less than investors would later pay for the stock at initial public offering prices.

While public-market investors can profit only from share price increases, employees can reap huge payouts just from the company going public.

Lowballing typically benefits employees in two ways: They get the stock cheap, and they enjoy tax savings if they buy the shares while the company is still private and sell at a much higher price later. That is because most of the profits are taxed at a lower rate as capital gains, rather than the higher income-tax rate.

“There’s a tremendous incentive to value the stock at the lowest possible figure,” said Robert Willens, a New York-based tax analyst. “It’s a tried and true strategy and the IRS surprisingly is not very vigilant about it.”

Putting a price tag on private companies is a highly subjective process, unlike public companies, whose prices are quoted on the stock market. The value of a startup typically can be influenced by assumptions made in pricing, such as financial predictions or comparisons to public companies.

Price Perks

Silicon Valley startups in the run-up to going public often handed employees options to buy stock priced sharply below what experts estimated the shares were really worth.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 1, 2019

Corporate Controllers Step Into the Spotlight as CFO Role Evolves

By Tatyana Shumsky | Feb 21, 2019

TOPICS: Accounting Careers, CFO, Controller

SUMMARY: The role of the corporate controller, often the finance chief's second-in-command, is expanding as CFOs delegate more of their traditional finance leadership work - a stressful evolution for some finance veterans who are stretching beyond their historic focus on process and efficiency. In the past, controllers were mostly expected to close the books, report results, oversee regulatory compliance and ensure that everyone follows the same accounting and financial-reporting processes. Today's controllers are expected to cover those core functions while also taking on tasks that were once performed by CFOs, whose own roles have expanded to often include oversight of technology, human resources and operations. For controllers, that means playing a leading role in deploying new technology, contributing to strategic work such as financial planning, and identifying and training new financial talent.

CLASSROOM APPLICATION: This article would be helpful to show our students the current and changing roles of accounting professionals and careers.

QUESTIONS:

1. (Introductory) What is a CFO? What are the job duties of a CFO?

2. (Introductory) What is a controller? What are the job duties of a controller?

3. (Advanced) How has the controller job changed in recent years? Why has it changed? How have changes in the CFO job resulted in changes in the controller job?

4. (Advanced) What effects have technological advancements had on the jobs of accounting professionals in general and on the controller job in particular?

5. (Advanced) What should accounting students and young accounting professionals do to prepare for a career in accounting? What could help aspiring controllers and CFOs?

READ THE ARTICLE

Reviewed By: Linda Christiansen, Indiana University Southeast

"Corporate Controllers Step Into the Spotlight as CFO Role Evolves," by Tatyana Shumsky , The Wall Street Journal, February 21, 2019
https://www.wsj.com/articles/corporate-controllers-step-into-the-spotlight-as-cfo-role-evolves-11550682000

Controllers are increasingly tasked with managing financial talent and deploying new technology, such as robotics and artificial intelligence, as finance chiefs delegate more

The role of the corporate controller, often the finance chief’s second-in-command, is expanding as CFOs delegate more of their traditional finance leadership work—a stressful evolution for some finance veterans who are stretching beyond their historic focus on process and efficiency.

In the past, controllers were mostly expected to close the books, report results, oversee regulatory compliance and ensure that everyone follows the same accounting and financial-reporting processes.

Today’s controllers are expected to cover those core functions while also taking on tasks that were once performed by CFOs, whose own roles have expanded to often include oversight of technology, human resources and operations.

For controllers, that means playing a leading role in deploying new technology, contributing to strategic work such as financial planning, and identifying and training new financial talent.

“That heavy focus on controls has not let up,” said Heather Dixon, corporate controller and chief accounting officer at health insurer Aetna Inc. “It’s there, it’s important, it’s embedded.”

She added: “Now we’re starting to do other things that are potentially more commercial.”

Ms. Dixon is responsible for traditional controllership functions such as external financial reporting and technical accounting. But she also oversees the company’s tax and finance shared-services group, a responsibility that might have traditionally fallen to the CFO.

As Aetna prepared to combine with CVS Health Corp. , a $70 billion deal completed in November, Ms. Dixon led integration planning for procurement, aviation, tax, treasury and a suite of other back-office segments, taking on a leadership role that previously would have been reserved for the finance chief.

Ninety percent of controllers said they spend more time on strategic planning than in the past decade, according to a survey of 306 accounting and finance professionals conducted by Dimensional Research and accounting software maker FloQast Inc.

As the role expands, so does job pressure. Eighty-nine percent of controllers surveyed by FloQast said their job is increasingly stressful, citing the demand for speed, a higher volume of work and compliance demands.

“They’re being asked to be in two places at once; very few organizations would give them a pass on their old responsibilities,” said Mike Tobin, a partner at Vantage Leadership Consulting. “The ones who are good at this, they’re future CFOs.”

Continued in article

Zero-Based Budgeting --- https://en.wikipedia.org/wiki/Zero-based_budgeting

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 1, 2019

It Shook the Food Business by Snagging Burger King, Kraft and Heinz. Now 3G Is Reeling

By Annie Gasparro and Vipal Monga | Feb 23, 2019

TOPICS: Budgeting, Financial Accounting, Managerial Accounting, Zero-Based Budgeting

SUMMARY: 3G Capital burst onto the business scene a decade ago when it spent billions to buy America's old-school food companies, including Heinz and Burger King, and then relentlessly cut costs, including mass layoffs, to create efficient production machines. Now, after transforming the American consumer landscape, 3G's financial strategy is encountering challenges. 3G-run Kraft Heinz Co. wrote down the value of its Kraft and Oscar Mayer brands and other assets by $15.4 billion, disclosed an investigation by federal securities regulators and slashed its dividend, sending its shares down nearly 28%. Especially at Kraft Heinz, 3G failed to see the speed of the decline in consumer interest in legacy food brands - Americans now want to buy healthier items, focusing on natural and organic ingredients, and are less loyal to the brands they grew up eating. The results are exposing the limits of 3G's hyperfocus on a financial strategy to manage its companies, while not putting enough toward marketing, research and development. 3G became the standard-bearer for zero-base budgeting, the accounting practice invented in the 1960s that 3G perfected and popularized, first with its founders' acquisitions of Brazilian beer companies, and then later on a global stage. It requires justifying every expense anew each year, no matter how small, rather than using the prior year's budget as a starting point. Deloitte estimates that only 7% of U.S. companies plan to use ZBB over the next two years, down from 16% in the past two years.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes regarding financial reporting topics, and managerial accounting classes for coverage of zero-based budgeting. The article also shows how strategic management and marketing errors can affect a company's financial statements.

QUESTIONS:

1. (Advanced) What is zero-base budgeting? When was it created? What are the benefits?

2. (Introductory) What is 3G? What is its history? What financial problems is 3G facing?

3. (Advanced) What are the causes of 3G's problems? Which of these problems is a result of management issues, and which are a result of accounting and finance decisions?

4. (Advanced) How have each of management's missteps discussed in the article affected 3G's financial results?

5. (Advanced) What are the possible disadvantages of zero-base budgeting? Which of these issues are present in the 3G situation?

READ THE ARTICLE

RELATED ARTICLES:
The Failure of Kraft Heinz and the Future of Big Food
by Aaron Back and Carol Ryan
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Kraft Heinz Divulges SEC Investigation, Swings to Loss
by Annie Gasparro
Feb 21, 2019
Online Exclusive

Kraft Heinz Made Its Factories Really Efficient. Now It Has to Sell Bolognas
by Brain Baskin and annie Gasparro
Feb 12, 2018
Online Exclusive

Kraft Heinz's Profit Suffers as Costs Rise
by Annie Gasparro
Nov 01, 2018
Online Exclusive

Kraft Heinz Hasn't Discovered the Magic Sauce
by Aaron Back
May 03, 2018
Online Exclusive

Reviewed By: Linda Christiansen, Indiana University Southeast

"It Shook the Food Business by Snagging Burger King, Kraft and Heinz. Now 3G Is Reeling," by Annie Gasparro and Vipal Monga, The Wall Street Journal, February 23, 2019
https://www.wsj.com/articles/it-shook-the-food-business-by-snagging-burger-king-kraft-and-heinz-now-3g-is-reeling-11550875206

The Brazilian investment firm cut costs relentlessly but failed to spend on new ideas when consumer tastes changed

3G Capital burst onto the business scene a decade ago when it spent billions to buy America’s old-school food companies, including Heinz and Burger King, and then relentlessly cut costs, including mass layoffs, to create efficient production machines.

Investors, including Berkshire Hathaway ’s Warren Buffett and hedge-fund owner William Ackman, expressed admiration for the Brazilian investment firm’s prowess. Headlines hailed its single-minded ability to improve profit margins. Rival companies followed suit, in some cases out of fear 3G’s founders would buy them to further bolster its lineup of storied brands, which includes Kraft Macaroni & Cheese and Bud Light.

Now, after transforming the American consumer landscape, 3G’s financial strategy appears to be running out of juice.

The latest, starkest example: On Thursday, 3G-run Kraft Heinz Co. wrote down the value of its Kraft and Oscar Mayer brands and other assets by $15.4 billion, disclosed an investigation by federal securities regulators and slashed its dividend, sending its shares down nearly 28%.

Among the problems, 3G underinvested in its brands at the expense of future growth, rivals and analysts said. Especially at Kraft Heinz, 3G failed to see the speed of the decline in consumer interest in legacy food brands—Americans now want to buy healthier items, focusing on natural and organic ingredients, and are less loyal to the brands they grew up eating.

3G’s aggressive approach to savings turned off possible acquisition targets and squelched the innovation that might have helped its brands like Maxwell House coffee and Lunchables adapt to industry trends.

The firm’s top executives themselves sounded the alarm on the shift last year. “I’m a terrified dinosaur,” said 3G co-founder Jorge Paulo Lemann at the Milken Institute conference in April. “I’ve been living in this cozy world of old brands [and] big volumes. You could just focus on being very efficient and you’d be OK. All of a sudden we are being disrupted in all ways.”

He added: “We bought brands and we thought they would last forever. Now, we have to totally adjust to new demands from clients.”

The results are exposing the limits of 3G’s hyperfocus on a financial strategy to manage its companies, while not putting enough toward marketing, research and development.

3G became the standard-bearer for zero-base budgeting, the accounting practice invented in the 1960s that 3G perfected and popularized, first with its founders’ acquisitions of Brazilian beer companies, and then later on a global stage. It requires justifying every expense anew each year, no matter how small, rather than using the prior year’s budget as a starting point.

Meticulous Monitor

‘Zero-base budgeting’ is 3G’s cost-cutting system in which managers must justify expenses from scratch every year instead of using the prior year’s budget as a baseline.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 8, 2019

Capital Gains Jumped in Final Year Before Tax Cut Started

By Richard Rubin | Mar 01, 2019

TOPICS: Capital Gains, Individual Taxation, Tax Cuts and Jobs Act, Tax Planning

SUMMARY: U.S. taxpayers reported 33.5% more in net capital-gains income in 2017 than in 2016. The strong economy and stock market in a year when the S&P 500 index rose 19% drove many asset sales. But the changing tax law itself may have also affected the numbers at the margins, as people realized during 2017 that the Trump administration wasn't going to cut capital-gains taxes and was raising the marginal federal-state rate for some people starting in 2018. Capital gains income is heavily concentrated among the top sliver of taxpayers and they often have significant flexibility on when they choose to take it. That makes capital gains particularly sensitive to changes in tax rates and political decisions. Long-term capital gains, or profits from sales of investments in assets such as stocks, are taxed at preferential rates that top out at 23.8%.

CLASSROOM APPLICATION: This article is appropriate for individual tax classes for coverage of capital gains and tax planning.

QUESTIONS:

1. (Advanced) What are capital gains? How are they taxed? How are they taxed differently from ordinary income? Why are they taxed differently?

2. (Introductory) What are the statistics reported in the article for capital gains in 2017 vs. 2016?

3. (Introductory) When was the Tax Cuts and Jobs Act enacted? When did it take effect? When did taxpayers begin planning for the changes?

4. (Advanced) How did the Tax Cuts and Jobs Act affect the taxation of capital gains? How could these changes have affected the capital-gains income in 2017? What other conditions could have affected capital gain in 2017?

READ THE ARTICLE

Reviewed By: Linda Christiansen, Indiana University Southeast

"Capital Gains Jumped in Final Year Before Tax Cut Started," by Richard Rubin, The Wall Street Journal, March 1, 2019 ---

https://www.wsj.com/articles/capital-gains-jumped-in-final-year-before-tax-cut-started-11551367384

Market growth, tax-related timing moves may have spurred investors to realize gains

WASHINGTON—U.S. taxpayers reported 33.5% more in net capital-gains income in 2017 than in 2016, according to new IRS data that provide the first look at the final year before the Tax Cuts and Jobs Act took effect.

The strong economy and stock market in a year when the S&P 500 index rose 19% drove many asset sales, accountants and tax experts said. But the changing tax law itself may have also affected the numbers at the margins, as people realized during 2017 that the Trump administration wasn’t going to cut capital-gains taxes and was raising the marginal federal-state rate for some people starting in 2018.

Capital gains income is heavily concentrated among the top sliver of taxpayers and they often have significant flexibility on when they choose to take it. That makes capital gains particularly sensitive to changes in tax rates and political decisions. Long-term capital gains, or profits from sales of investments in assets such as stocks, are taxed at preferential rates that top out at 23.8%.

Capital-gains realizations rose in 2012 before a 2013 tax hike took effect and dropped in 2016, partly in anticipation of a potential tax cut. But Congress’s attempt to repeal a 3.8% investment-income tax as part of health-care legislation fell flat in 2017 and the tax law that passed in December didn’t touch federal capital-gains tax rates.

“Some taxpayers may have delayed gains in the hope of further reductions—but it became apparent in the summer there would be no further reductions in the TCJA,” Steve Rosenthal, a senior fellow at the Tax Policy Center, said in an email. “And there have been a lot of built-up gains in the stock market over the last few years, so maybe they just took them.”

For some very high-income taxpayers, capital-gains rates went up in early 2018 because the federal rate didn’t change and they could no longer deduct their state capital-gains taxes up to California’s 13.3% rate on their federal returns. Some fund managers could also have generated carried-interest income before new restrictions took effect.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 8, 2019

Tesla Makes Record $920 Million Payment for Convertible Bond

By Akane Otani and Sam Goldfarb | Mar 02, 2019

TOPICS: Bonds, Convertible Bonds, Debt, Financial Accounting

SUMMARY: Tesla Inc. had issued $920 million in convertible, senior notes five years ago, a period when rapid growth and optimism around its Model S electric car drove a furious rally in Tesla shares. Reflecting that, the strike price for the notes, or the level at which the notes would be fulfilled by a conversion into Tesla stock, was $359.87 a share, or 42.5% above the level at that time. Yet because shares traded below that level recently, Tesla had to make good on its obligation using cash. Convertible bonds, which give investors the right to exchange their debt for equity if share prices hit a predetermined level, have become an increasingly popular way for technology companies to raise capital, since the securities carry lower coupons than traditional corporate bonds and don't immediately dilute shareholders.

CLASSROOM APPLICATION: This article would be appropriate for coverage of convertible bonds.

QUESTIONS:

1. (Advanced) What is a convertible bond? Why are they attractive to investors? Why are they attractive to companies? What are the possible disadvantages?

2. (Introductory) What are the facts regarding Tesla's convertible bonds? What did the company do about those bonds recently?

3. (Advanced) What is Tesla's current financial condition? What are the bright spots? What are the troublesome areas?

4. (Advanced) How does the payment of this debt affect the companies financial statements? How are its financial ratios and analysis affected?

5. (Advanced) Were investors likely to convert any of these bonds? Why or why not?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"Tesla Makes Record $920 Million Payment for Convertible Bond,"by Akane Otani and Sam Goldfarb, The Wall Street Journal, March 2, 2019
https://www.wsj.com/articles/tesla-faces-record-920-million-payment-for-convertible-bond-11551440050

Debt payment likely used up nearly a quarter of Tesla’s cash

Tesla Inc. delivered its largest-ever bond payment Friday, a move that likely used up nearly a quarter of its cash at a time when the company faces increasing scrutiny from regulators and investors.

The electric car maker had issued $920 million in convertible, senior notes five years ago, a period when rapid growth and optimism around its Model S electric car drove a furious rally in Tesla shares. Reflecting that, the strike price for the notes, or the level at which the notes would be fulfilled by a conversion into Tesla stock, was $359.87 a share, or 42.5% above the level at that time.

Yet because shares traded below that level recently, Tesla had to make good on its obligation using cash. That likely wiped out a substantial portion of the $3.69 billion in unrestricted cash and equivalents the company reported at the end of 2018.

“This is the latest nightmare for the company,” said David Kudla, chief executive officer of Mainstay Capital Management, which has been shorting Tesla shares, or betting that they will decline in value. “Their ability to raise capital in the markets is getting more and more limited.”

Back in January, Mr. Musk told shareholders in a letter that the company had “sufficient cash on hand” to cover the debt. A Tesla spokesman confirmed Friday that the company had made the payment.

On Thursday, though, Tesla said it would begin shutting stores and move to selling vehicles only over the internet, an extraordinary step aimed at cutting costs so the company can offer its Model 3 compact at a long-awaited starting price of $35,000. Mr. Musk added that he didn’t expect Tesla to be profitable in the first quarter. Shares fell in after-hours trading and extended their slide Friday, ending down 7.8% at $294.79.

One upside: By making the debt payment, Tesla defied some skeptics who argued last year that it could do so only by issuing more debt or equity given its long history of burning through cash. Tesla has generated positive free cash flow for the past two quarters.

Still, the payment highlights the risk companies face in leaning on convertible bonds, which give investors the right to exchange their debt for equity if share prices hit a predetermined level. They have become an increasingly popular way for technology companies to raise capital, since the securities carry lower coupons than traditional corporate bonds and don’t immediately dilute shareholders.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 8, 2019

Warren Buffett, by the Book

By Sopencer Jakab | Feb 27, 2019

TOPICS: Book Value, Financial Accounting, Market Value

SUMMARY: Warren Buffett's announcement in his annual letter that Berkshire Hathaway would no longer report its remarkable record of wealth creation in terms of book value caused a stir. Berkshire Hathaway, an ailing textile company that Mr. Buffett transformed into an investment vehicle, is now largely a conglomerate of operating businesses. Mr. Buffett has noted that back in 1965 when he took over, Berkshire's $19.46 in book value per share overstated its intrinsic value. Less than 20 years later he decided the opposite was the case. Now, though, at $212,503, that book value increasingly represents entire companies bought years ago.

CLASSROOM APPLICATION: This article can be used when covering book value and market value.

QUESTIONS:

1. (Introductory) What is Berkshire Hathaway? Who is Warren Buffett?

2. (Advanced) What is book value? How is it calculated? What information does it offer about a company?

3. (Advanced) How was Mr. Buffett using book value? Why? What other options does he have for the same or similar purposes?

4. (Advanced) The article states Mr. Buffett is ending his use of book value. Why is he doing that? What will he be doing instead? How is this a good move? In what ways might it not be a good decision?

5. (Advanced) The article compares book value to intrinsic value. What is intrinsic value? What information does it provide? How has the difference between book value and intrinsic value changed over the years? What could be some reasons for those changes?

6. (Advanced) Do you agree with Mr. Buffett's decision? Why or why not?

READ THE ARTICLE

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Are Stocks Worth Their Price?
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Reviewed By: Linda Christiansen, Indiana University Southeast

"Warren Buffett, by the Book," by Sopencer Jakab |, The Wall Street Journal, February 27, 2019
https://www.wsj.com/articles/warren-buffett-by-the-book-11551184380

What Berkshire Hathaway embracing market value means, and what it doesn’t

Old habits die hard, even for the Oracle of Omaha. But sometimes they die for a reason.

Warren Buffett’s announcement in his annual letter that Berkshire Hathaway BRK.B -1.01% would no longer report its remarkable record of wealth creation in terms of book value caused a stir.

While it might seem natural to tout cumulative share-price gains of well over 2 million percent as opposed to accounting gains of a mere 1 million percent, the shift isn’t about accentuating the positive. More significantly, it doesn’t mean that Mr. Buffett has any more respect for “Mr. Market” than before.

Berkshire Hathaway, an ailing textile company that Mr. Buffett transformed into an investment vehicle, is now largely a conglomerate of operating businesses. Mr. Buffett has noted that back in 1965 when he took over, Berkshire’s $19.46 in book value per share overstated its intrinsic value. Less than 20 years later he reckoned the opposite was the case. Now, though, at $212,503, that book value increasingly represents entire companies bought years ago.

When Mr. Buffett chooses to use some of Berkshire’s enormous cash pile to buy back a share now fetching $303,300, as he has been recently, he widens the gap between market and book value even more quickly. His shift isn’t an acknowledgment that the market is suddenly good at valuing stocks, including Berkshire’s, though. The same mispricing that helped him outperform the S&P 500 16-fold persists and he has said that he sees few businesses worth buying at today’s prices.

The one conclusion to make is hardly new: While Mr. Buffett no longer sees Berkshire’s book value as a reasonable stab at its shares’ intrinsic value, he still thinks he has a better notion of what their value is than the market does. If he keeps buying them, maybe you should, too.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 8, 2019

Kraft Heinz Said Probe Delayed Financial Report

By Annie Gasparro | Mar 01, 2019

TOPICS: 10-K, Financial Accounting, Internal Controls, Materiality, SEC

SUMMARY: Kraft Heinz Co. said it would be late in filing its 10-K annual report with securities regulators as it concludes an internal investigation into its procurement department. Kraft Heinz said its internal investigation found that the company should have reported $25 million in costs in prior quarters, which it logged in the fourth quarter of 2018. That compares to about $11 billion that it spends on procurement annually. While $25 million isn't financially material, it begs the question of how robust the company's internal control systems are. According to regulatory rules, the company had a deadline to file a form notifying investors of the delay. Doing so gives the food maker an automatic grace period of 15 days to file the annual report.

CLASSROOM APPLICATION: This article could be used for coverage of 10-Ks and materiality, as well as another article and topic to add to a case study of the Kraft Heinz situation.

QUESTIONS:

1. (Advanced) What is a 10-K? Who must file them? What is its purpose? What value and information does it provide? Who uses 10-Ks?

2. (Introductory) What is Kraft Heinz's financial position? What challenges is the company facing?

3. (Advanced) What is materiality? How is it determined? Was the error Kraft Heinz found material or immaterial? Why?

4. (Advanced) The article mentions possible issues regarding Kraft Heinz's internal controls. What are internal controls? What are the purposes of internal controls? Why is there some concern about the company's internal controls?

READ THE ARTICLE

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by Annie Gasparro
Nov 01, 2018
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Reviewed By: Linda Christiansen, Indiana University Southeast

"Kraft Heinz Said Probe Delayed Financial Report," by Annie Gasparro , The Wall Street Journal, March 1, 2019
https://www.wsj.com/articles/kraft-heinz-said-probe-delayed-financial-report-11551403383

Food maker’s procurement department investigated internally and by securities regulators

Kraft Heinz Co. KHC +0.28% said Thursday it would be late in filing its annual report with securities regulators as it concludes an internal investigation into its procurement department.

Last week, the food giant said it had been notified by the Securities and Exchange Commission in October that regulators were investigating accounting practices of that department, and that it had conducted its own investigation with the help of outside legal and accounting advisers.

“We are working toward filing our 10-K in the next few weeks once we have finalized our investigation,” said spokesman Michael Mullen, referring to the company’s annual report.

He reiterated that the company doesn’t expect matters related to the investigation affect its financial statements.

Kraft Heinz said its internal investigation found that the company should have reported $25 million in costs in prior quarters, which it logged in the fourth quarter of last year. That compares to about $11 billion that it spends on procurement annually.

Bernstein analyst Alexia Howard said that while $25 million isn’t financially material, it still “begs the question of how robust the company’s internal control systems are.”

On a conference call last week, Kraft Heinz’s Chief Financial Officer David Knopf said the company implemented several improvements to internal controls and took remedial measures.

Kraft Heinz’s annual report was due on Wednesday. According to regulatory rules, the company had until Thursday to file a form notifying investors of the delay. Doing so gives the food maker an automatic grace period of 15 days to file the annual report.

Shares of Kraft Heinz were inactive in after-hours trading Thursday. The stock has already shed about a third of its market value over the past week. That plunge followed the company’s disclosure of a quarterly loss due to a $15.4 billion write-down that included a loss in value by some of its key brands Kraft and Oscar Mayer. The food maker’s aggressive cost-cutting strategy and its 2015 merger have come under scrutiny amid the devaluation.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 8, 2019

PG&E Says Its Equipment Was Probable 'Ignition Point' of Camp Fire, Takes $11.5 Billion in Charges

By Katherine Blunt and Russell Gold | Mar 01, 2019

TOPICS: Bankruptcy, Charges, Contingent Liability, Definitely Determinable Liability, Estimated Liability, Financial Accounting, Going Concern, Liabilities

SUMMARY: PG&E Corp. said it is probable its equipment sparked the deadliest wildfire in California history as it recorded $11.5 billion in charges related to fires over the past two years. The bankrupt utility also sounded a warning about its future, saying it may not be able to continue as a going concern, while reporting a $6.9 billion earnings loss in 2018 compared with $1.6 billion in profits in 2017. PG&E is experiencing extreme financial duress in the wake of a series of wildfires that have led credit agencies to strip the company of its investment-grade rating and exposed it to what it estimates as more than $30 billion in potential liability costs. The company has recorded $14 billion in wildfire-related charges so far, a total that exceeds its current market capitalization.

CLASSROOM APPLICATION: This article is appropriate for coverage of the concept of going concern, as well as bankruptcy and when to book liabilities.

QUESTIONS:

1. (Introductory) What are the facts of the California fire and PG&E's possible involvement?

2. (Advanced) In general, what does the accounting term "going concern" mean? What are the implications if a company may not be able to continue as a going concern? How can financial reporting be affected?

3. (Advanced) What are the three categories of liabilities? When must each type of liability be recorded? What type of liability are the wildfire liabilities in this case? Why?

4. (Advanced) What is the total PG&E has booked for wildfires? Is this amount significant for the company? How have these charges affected the financial condition of the company?

5. (Advanced) What is inverse condemnation? How does it affect PG&E's liability exposure? How could it affect the company's status as a going concern?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"PG&E Says Its Equipment Was Probable 'Ignition Point' of Camp Fire, Takes $11.5 Billion in Charges,"by Katherine Blunt and Russell Gold , The Wall Street Journal, March 1, 2019
https://www.wsj.com/articles/pg-e-records-10-5-billion-charge-related-to-camp-fire-11551363969

The utility, which has filed for bankruptcy protection, said it might not be able to continue as a going concern

PG&E Corp. PCG -0.42% said Thursday it is probable its equipment sparked the deadliest wildfire in California history as it recorded $11.5 billion in charges related to fires over the past two years.

The bankrupt utility also sounded a warning about its future, saying it may not be able to continue as a going concern, while reporting a $6.9 billion earnings loss last year, compared with $1.6 billion in profits in 2017.

PG&E is experiencing extreme financial duress in the wake of a series of wildfires that have led credit agencies to strip the company of its investment-grade rating and exposed it to what it estimates as more than $30 billion in potential liability costs.

California’s largest utility recorded a $10.5 billion charge related to the Camp Fire, which killed 85 people and destroyed the town of Paradise in November. It also took an additional $1 billion charge related to a series of wildfires in 2017 after recording a $2.5 billion charge last year. The company has to date recorded $14 billion in wildfire-related charges, a total that exceeds its current market capitalization. PG&E shares fell 4.3% Thursday to $17.03.

“We recognize that more must be done to adapt to and address the increasing threat of wildfires and extreme weather in order to keep our customers and communities safe,” said John Simon, who is serving as the company’s interim chief executive following the resignation of CEO Geisha Williams last month.

Analysts and experts say PG&E’s fate may now lie with California lawmakers and regulators, who will have to find a way to help all of the state’s utilities survive as wildfire risk grows throughout their service territories.

Unlike many private businesses, PG&E provides essential services, supplying more than 16 million customers with gas and electric service across a 70,000-square-mile territory, posing critical questions for the state.

“Their future and viability revolves around the political process,” said Paul Fremont, managing director at Mizuho Securities USA LLC. “What is necessary is a game plan.”

A California legal principle known as “inverse condemnation” renders utilities liable for property damage caused by their equipment, even if they aren’t found negligent in maintaining it.

In addition to PG&E, credit-ratings firms have questioned the long-term financial stability of Edison Internationa l’s Southern California Edison, and Sempra Energy ’s San Diego Gas & Electric if their liability risk remains unabated.

“This a statewide problem and not just a utility problem,” said analyst Jeff Cassella of Moody’s Investors Service, which recently withdrew its rating on PG&E’s debt after downgrading it to junk. “State leaders recognize that there is an inverse condemnation issue and that actions need to be taken.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 15, 2019

Sour Economic Outlook Weighs on CFO Spending, Expansion Plans, Survey Finds

By Tatyana Shumsky | Mar 07, 2019

TOPICS: Managerial Accounting

SUMMARY: The article discusses an AICPA survey with 844 respondents regarding economic prospects and U.S. corporate investment. Respondents are CPAs holding leadership roles at their companies.

CLASSROOM APPLICATION: The article may be used in a financial or managerial accounting course at any level including introductory. The issues raised in questions ask students to think about the function of CPAs in management accounting and leadership roles.

QUESTIONS:

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

2. (Introductory) Who responded to the survey?

3. (Advanced) Are you surprised at this organization conducting a survey related to management accounting topics such as capital expenditures and labor-force issues? Explain.

4. (Advanced) Summarize the findings of the survey regarding the outlook for the U.S. in general.

5. (Advanced) Summarize the findings of the survey about individual companies of the respondents.

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Sour Economic Outlook Weighs on CFO Spending, Expansion Plans, Survey Finds," by Tatyana Shumsky, The Wall Street Journal, March 7, 2019
https://www.wsj.com/articles/sour-economic-outlook-weighs-on-cfo-spending-expansion-plans-survey-finds-11551953208

Concerns about the U.S. economy are putting a chill on spending and expansion plans among U.S. executives, according to a first-quarter survey by the Association of International Certified Professionals Accountants (AICPA) released Thursday.

Fifty-seven percent of U.S. business leaders reported an optimistic outlook on the U.S. economy for the year ahead, down from 79% in the same period of 2018, according to a survey of 844 certified public accountants that hold various leadership roles at their companies, including chief financial officer or controller. And only 34% said they are optimistic about prospects for the global economy over the next year.

Only a third of respondents said their organization planned to expand in the next 12 months, down from 72% in the same period a year earlier.

Many CFOs are concerned that the nearly decadelong U.S. economic expansion will soon be over, said Joselin Martin, finance chief at plasterwork contractor Hayles & Howe Inc.

“Every conversation I’ve had hasn’t been are we going to have a recession, but when is it going to hit,” she said.

In recent months, those concerns have been compounded by uncertainty over U.S. trade policy, rising labor costs and the availability of skilled employees—factors that make it difficult for leaders to make strategic decisions about the future, she added.

“I think the uncertainty is causing the pessimism, they go hand in hand,” Ms. Martin said. “For planning purposes we need to know what our costs are going to be, we need to know where the economy is going and what the market is going to be.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 15, 2019

No-Deal Brexit Could Cause Cash-Flow Problems for U.K. Suppliers

By Nina Trentmann | Mar 11, 2019

TOPICS: Budgeting, Cash Flow, Supply Chains

SUMMARY: "If the U.K. leaves the European Union on March 29 without a withdrawal agreement, trade between the country and the bloc would transition overnight to World Trade Organization rules. That could require exporters and importers to fill out customs declarations, slowing the movement of goods." The potential slowdown is approximately 24 hours or more. According to a survey by the Chartered Institute of Procurement & Supply, that length of delay could result in requests for discounts by EU importers; 11% of responding U.K. suppliers expect contract cancellations due to such delays. In the event of lengthy delays extending "... to two or three weeks, 60% of EU businesses would seek to switch suppliers and end contracts with U.K. companies ahead of time....But only 44% of U.K. businesses said they would be able to switch to alternative suppliers outside the EU...."

CLASSROOM APPLICATION: The article can be used to tie uncertainty issues into the cash budgeting process.

QUESTIONS:

1. (Advanced) What is Brexit?

2. (Advanced) What is the impending possibility of a "no-deal Brexit" on March 29?

3. (Introductory) Describe the source for the information in this article.

4. (Introductory) Why would European Union (EU) companies be justified in asking for a discount from sales orders based on the possible impact of a "no-deal Brexit"?

5. (Introductory) What other actions besides asking for discounts might EU importers take as a result of delayed shipping times from the United Kingdom?

6. (Advanced) Suppose you are a CFO considering quarterly cash budgets for the remaining three calendar quarters of 2019. What uncertainty would be introduced into these budgets? What techniques might be used to cope with these uncertainties?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"No-Deal Brexit Could Cause Cash-Flow Problems for U.K. Suppliers," by Nina Trentmann, The Wall Street Journal, March 11, 2019
https://www.wsj.com/articles/no-deal-brexit-could-cause-cash-flow-problems-for-u-k-suppliers-11552276860

European companies plan to ask for discounts should goods be delayed

European businesses are expected to press U.K. suppliers for discounts, delay payments or search for alternative sources if border delays arise as a result of Brexit.

If the U.K. leaves the European Union on March 29 without a withdrawal agreement, trade between the country and the bloc would transition overnight to World Trade Organization rules. That could require exporters and importers to fill out customs declarations, slowing the movement of goods.

The 13,000 trucks that cross the English Channel through the Eurotunnel between Calais and Dover each day could face delays of 24 hours or more due to potential backlogs, economists at the Chartered Institute of Procurement & Supply predict.

If that happens, about 20% of EU companies with suppliers in the U.K. would ask for discounts on their orders, according to a CIPS survey released Monday. Eleven percent of U.K. exporters expect their contracts to be canceled by European clients in the event of delays. And one-quarter of European companies would postpone paying their U.K. suppliers until after the goods arrive, potentially causing a cash-flow problem for many British companies, CIPS said.

“The companies that will be hit hardest are the ones with low cash balances,” said John Glen, a CIPS economist. Executives at one in 10 U.K. companies said in September their businesses could go bankrupt if imports per truck faced 10- to 30-minute customs delays due to Brexit.

The terms under which the U.K. will exit the EU on March 29 haven’t been determined. Members of Parliament are set to vote again on the U.K. government’s Brexit deal on Tuesday.

Should delays at the border extend to two or three weeks, 60% of EU businesses would seek to switch suppliers and end contracts with U.K. companies ahead of time, CIPS said. But only 44% of U.K. businesses said they would be able to switch to alternative suppliers outside the EU if there was a two- or three-week-long delay in importing goods into the U.K.

Thirty-eight percent of EU companies have already changed suppliers because of Brexit, up from 18% in the fall, according to the CIPS survey. CIPS questioned 1,602 U.K. companies and 140 companies based in other EU countries for the survey.

The level of preparedness among U.K. companies for a no-deal Brexit is limited, Mr. Glen said. Only 40% of British companies said they could comply with the basic requirements for customs declarations at the EU border. They plan to hire 170,000 additional employees to comply with customs obligations, according to the survey.

Continued in article

Retailer posts $2.73 billion goodwill-impairment charge against value of Family Dollar chain
Teaching Case From The Wall Street Journal Weekly Accounting Review on March 15, 2019

Dollar Tree to Close or Rebrand Nearly 600 Family Dollar Stores

By Sarah Nassauer and Micah Maidenberg | Mar 07, 2019

TOPICS: business combinations, Goodwill Impairments

SUMMARY: Dollar Tree "beat out Dollar General" to acquire Family Dollar in 2015 "for nearly $9 billion in cash and stock." Dollar Tree's management is now "accelerating plans to close or renovate Family Dollar stores, responding to investor concerns that the merger isn't paying off. On Wednesday, [in its earnings press release and related conference call], Dollar Tree said it plans to close up to 390 Family Dollar stores this year and convert about 200 more to Dollar tree shops." They announced a $2.7 billion write-down related to the $9 billion acquisition. The Form 8-K related to the earnings announcement is available at https://www.sec.gov/Archives/edgar/data/935703/000093570319000016/ex991q4-18earningspressrel.htm

CLASSROOM APPLICATION: The article may be used when discussing business combinations or goodwill impairment testing.

QUESTIONS:

1. (Introductory) When did Dollar Tree acquire the Family Dollar chain of stores? How much did Dollar Tree pay for the acquisition?

2. (Introductory) Name at least one strategic reason for the acquisition. Cite your source for identifying names of strategic reasons for business combinations, from your textbook or otherwise.

3. (Advanced) What is a bidding war? Do you think a bidding war for the acquisition could have impacted the need to take a write-down of $2.73 billion in 2019? Explain your answer.

4. (Advanced) What is an impairment write-down? Summarize the process in determining the amount of such a write-down.

5. (Advanced) What factors identified in the article likely impact the calculations you describe in answer to question 4 above?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Dollar Tree to Close or Rebrand Nearly 600 Family Dollar Stores," by Sarah Nassauer and Micah Maidenberg, The Wall Street Journal, March 7, 2019
https://www.wsj.com/articles/dollar-tree-to-close-rebrand-nearly-600-family-dollar-stores-11551877482

Retailer posts $2.73 billion goodwill-impairment charge against value of Family Dollar chain

Dollar Tree Inc. DLTR -0.78% sharply marked down the value of its Family Dollar chain and announced plans to close hundreds of Family Dollar stores this year as the retailer struggles with a business it acquired over three years ago.

The company said Wednesday it booked a $2.73 billion charge in its fiscal fourth quarter to lower the value of Family Dollar, which it purchased in 2015 for nearly $9 billion in cash and stock.

The merger, after a bidding war, was supposed to revive Family Dollar and give it more heft to better compete with rivals Dollar General Corp. and Walmart Inc. Instead, sales at Family Dollar have lagged behind competitors, dragging down performance at Dollar Tree.

In January, activist investor Starboard Value LP revealed a stake in Dollar Tree and asked management to consider selling Family Dollar, even at a loss.

Family Dollar’s sales have lagged behind for years, hurt by neglected stores, poor product selection and unhappy workers, according to analysts. The problems date to before Dollar Tree beat out Dollar General to acquire the chain, and left Family Dollar unprepared to benefit from a decade of overall strength in the dollar-store segment as shoppers gravitated to low-cost goods in the wake of the recession.

Now Dollar Tree is accelerating plans to close or renovate Family Dollar stores, responding to investor concerns that the merger isn’t paying off. On Wednesday, Dollar Tree said it plans to close up to 390 Family Dollar stores this year and convert about 200 more to Dollar Tree shops. Executives have previously said Dollar Tree would renovate at least 1,000 Family Dollar stores this year. The company had around 8,200 Family Dollar stores and 7,000 Dollar Tree stores at the end of the latest quarter.

“I know it’s worth more to us than we are getting credit for and quite frankly it’s not worth that much to anyone else,” Dollar Tree CEO Gary Philbin said in an interview discussing Family Dollar’s future. “We are the ones committed to fixing and growing it.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 15, 2019

Broadcom: Follow the Money

By Dan Gallagher | Mar 13, 2019

TOPICS: business combinations, Segment Reporting

SUMMARY: Broadcom was thwarted in its attempted acquisition of Qualcomm in 2018 at least in part due to U.S. President Trump's citing of national security issues arising from the proposed business combination. Broadcom instead acquired CA Technologies in late 2018. CA focuses on enterprise software whereas Broadcom makes computer chips for smartphones such as Apple's iPhone, networking chips used in cloud service data centers, and controller chips used in data-storage systems. These varied businesses will now be combined into one operating segment in soon-to-be-released financial reports.

CLASSROOM APPLICATION: The article may be used when discussing business combinations, segment reporting, or free cash flow.

QUESTIONS:

1. (Advanced) What is segment reporting?

2. (Introductory) How does Broadcom plan to change its segment reporting in the first fiscal quarterly report after its business combination with CA Technologies?

3. (Advanced) What factors make it difficult to "grade the results" of Broadcom's acquisition and CA Technologies?

4. (Advanced) What is free cash flow?

5. (Introductory) Why will analysts closely watch Broadcom's free cash flow?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Broadcom: Follow the Money," by Dan Gallagher, The Wall Street Journal, March 13, 2019
https://www.wsj.com/articles/broadcom-follow-the-money-11552474800

Chip maker’s stock price has surged since buying CA Technologies, but grading its results will be tricky

As anniversaries go, Broadcom is probably happy to let this one pass unmarked.

It was just a year ago Tuesday that the hyperacquisitive chip company found itself in the unprecedented position of having its most ambitious deal to date quashed by executive-branch fiat. President Trump ordered then-Singapore-based Broadcom to back off its attempts to buy Qualcomm , citing national security. The administration’s sensitivity on that front mushroomed into a broader trade dispute between the U.S. and China—which in turn iced out the prospect for large-scale transnational semiconductor mergers, thus also curbing Broadcom’s preferred avenue of growth.

Broadcom licked its wounds and came back just four months later with a surprise: a plan to buy CA Technologies for nearly $19 billion. Its sharp pivot put the world’s third most valuable semiconductor company deep into the enterprise software market. The CA deal was completed in early November, just after the close of Broadcom’s last fiscal year. Its fiscal first-quarter report, due Thursday afternoon, will be the first to reflect the results of the combined company.

Broadcom’s stock price is up 15.2% for the past six months, outperforming most of its chip peers and implying high hopes for the company’s outlook. Grading its results will be tricky, though, as the company is doing away with its past segments and plans to simply report results for its combined chip business as well as software. And while software will consist primarily of CA, Broadcom’s chip side is a combination of many different businesses that are affected by many different markets, many of which aren’t thriving.

Those include smartphones, for which Broadcom makes radio-frequency chips. Matthew Ramsay of Cowen & Co. estimates that sales to Apple Inc. for use in the iPhone alone make up about half of that, and that device is in such a slump that even Apple has stopped reporting how many it sells. Broadcom also makes networking chips used in cloud-service data centers and controller chips used in data-storage systems—two markets heavily exposed to capital spending by large companies and cloud service operators, according to Mr. Ramsay. Intel Corp. and Nvidia both cited a slowdown in cloud capital spending in their most recent reports.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 15, 2019

Lyft's $864 Million Insurance Unit Shows Ride Hailing Is a Risky Business

By Tatyana Shumsky | Mar 13, 2019

TOPICS: Contingent Liabilities, Initial Public Offerings

SUMMARY: Ride-sharing company Lyft recently posted its prospectus with the U.S. Securities and Exchange Commission on March 1 in advance of a public offering of its securities. In it, the company7 disclosed it "has established an elaborate system through a subsidiary effectively allowing it to insure its own risk, thereby lowering its costs...." The draft S-1 registration statement is available at https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_11. Costs of revenue (akin to cost of goods sold) is primarily comprised of these insurance costs as disclosed on p. 91. Insurance reserves are described on p. 105

CLASSROOM APPLICATION: The article may be used to discuss initial public offerings, S-1 registration statements, contingent liabilities, self-insurance, and operations of new startup businesses based on disruptive technologies.

QUESTIONS:

1. (Advanced) What is an S-1 Registration Statement? Cite your source for this information, whether from your textbook or elsewhere.

2. (Introductory) Access the Lyft, Inc. registration statement filing on Form S-1 with the Securities and Exchange Commission at https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_11 Search for "Selected Consolidated Financial and Other Data." Describe the results of operations presented there. To begin, is the company profitable?

3. (Introductory) Refer again to the "Selected Consolidated Financial and Other Data." Specifically, consider Costs of Revenue. What portion of total revenues does this cost comprise? What are the other two most significant costs of operations for Lyft?

4. (Advanced) Proceed to the explanation of Lyft's Cost of Revenue on p. 92 of the draft registration statement. What costs primarily comprise this category?

5. (Introductory) What are captive insurance companies? Cite your source for this definition.

6. (Introductory) Search the Lyft registration for discussion of its captive insurance subsidiary described in the article. What steps has Lyft taken to determine the propriety of its recorded costs and liabilities for its insurance?

7. (Introductory) Given the issues discussed in this article and your answers to these discussion questions, what do you think are the risks of future performance by ride-sharing service Lyft?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Lyft's $864 Million Insurance Unit Shows Ride Hailing Is a Risky Business," by Tatyana Shumsky, The Wall Street Journal, March 13, 2019
https://www.wsj.com/articles/lyfts-864-million-insurance-unit-shows-ride-hailing-is-a-risky-business-11552406401

Ride-hailing company has socked away nearly a billion dollars in an insurance subsidiary to offset high cost of coverage from third-party insurers

A three-paragraph section buried in Lyft Inc.’s nearly-800-page public offering document sums up the challenges of insuring unfamiliar risks born from newer business models.

The ride-hailing company has established an elaborate system through a subsidiary effectively allowing it to insure its own risk, thereby lowering its costs, according to the stock-listing prospectus that Lyft filed March 1 with the U.S. Securities and Exchange Commission. Through the subsidiary, Lyft has set aside what it calls “restricted reinsurance trust investments” of $863.7 million.

The reason for the arrangement: The company assumes a wide range of risks—including bodily injury, property damage, uninsured and under-insured motorist liability—from the moment drivers become available on the Lyft app to the time passengers arrive at their destinations.

The cost of insuring such risks could be a hefty burden for a company such as Lyft. Contributing to the cost is the sheer volume of rides the company provides, logging in at about 2 million a day during the fourth quarter of 2018. Also to blame is the fact that ride-sharing doesn’t have much of a history for insurers to digest.

Insurers typically rely on decades of industry performance records to measure the likelihood of certain outcomes and adequately price insurance policies. With too little data, some insurers won’t issue a policy. Others will increase the price to hedge against the lack of information.

“Newer businesses that are moving into areas where you don’t have historical data on loss probability make it more challenging for a traditional insurance company to offer a product,” said Adam Klauber, partner and insurance industry analyst at William Blair & Co.

And while the insurance market is dynamic, with firms often developing new product lines such as cybersecurity coverage, an insurance company typically caps its coverage to an individual client at about $100 million, Mr. Klauber said.

By comparison, the massive size of Lyft’s so-called captive insurance unit highlights the challenge the company shares with others breaking new ground in their industries or disrupting old ways of doing business.

A spokeswoman for Lyft declined to comment.

Lyft’s ride-hailing rival Uber Technologies Inc. and home-sharing company Airbnb Inc. also have captive insurance subsidiaries. A spokesman from Uber declined to comment. Representatives from Airbnb didn’t immediately respond to requests for comment.

About one-third of S&P 500 companies had some form of captive insurance units in 2016, according to a study published in the Journal of Insurance Regulation.

Lyft has elected to reinsure substantially all of its auto-related risk since 2015 to mitigate the costs, the company said in its SEC filings.

As a first step, the San Francisco-based company buys auto insurance from third-party insurers. Then, through Pacific Valley Insurance Co.—its subsidiary—Lyft sells reinsurance policies to those insurers.

The arrangement allows Lyft to invest the premiums it collects from third-party insurers until those funds are needed to pay claims, while also allowing the insurers to offload the risk back to Lyft.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 22, 2019

Senators Want a Boost for the SEC's Financial Recovery Powers

By Dave Michaels | Mar 14, 2018

TOPICS: SEC, Securities and Exchange Commission

SUMMARY: On Thursday, March 14, 2019, U.S. Senate considers legislation to counteract a 2017 Supreme Court decision limiting the Securities and Exchange Commission's powers to obtain disgorgement of ill-gotten gains to a five-year statute of limitations. Introducing the legislation, Sens. John Kennedy (R., La.) and Mark Warner (D., Va.) said the bill would give the SEC more time to spot hard-to-detect financial crimes.

CLASSROOM APPLICATION: The article may be used in a financial reporting class discussing ethics or regulation in general.

QUESTIONS:

1. (Advanced) What is the purpose of the U.S. Securities and Exchange Commission (SEC)?

2. (Advanced) How does the SEC's ability to obtain "disgorgement" fit with that purpose? In your answer, define the term "disgorgement."

3. (Introductory) What is the difference between "disgorgement" and "restitution"?

4. (Introductory) What is the basis for arguing that the SEC should not face a five-year limitation on its ability to obtain disgorgement?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Senators Want a Boost for the SEC's Financial Recovery Powers," by Dave Michaels, The Wall Street Journal, March 14, 2019
https://www.wsj.com/articles/senators-want-a-boost-for-the-secs-financial-recovery-powers-11552557603

Lawmakers on the left and right have showed interest in giving the regulator more power to recover funds from wrongdoers

A bipartisan pair of U.S. senators want to give Wall Street’s top cop more power to recover funds for burned investors.

The legislation, to be introduced on Thursday, would allow the Securities and Exchange Commission to recover money for harmed investors based upon wrongdoing that occurred as much as a decade ago. The measure would help restore some of the muscle the SEC lost when the Supreme Court unanimously decided in 2017 that federal regulators are bound by a five-year statute of limitations.

Sens. John Kennedy (R., La.) and Mark Warner (D., Va.) said the bill would give the SEC more time to spot hard-to-detect financial crimes.

“Financial fraudsters can sometimes go on for years, even decades, before they finally get caught,” Mr. Warner said in a written statement. “They shouldn’t be able to rip off investors just because some arbitrary five-year window has expired.”

Last year, SEC Chairman Jay Clayton told a House committee that regulators should have the authority to seek restitution for harmed investors beyond the five-year window.

“The most well-concealed frauds may fall outside of that limitations period,” Mr. Clayton told the House Financial Services Committee in June. “The SEC should be in the business of getting money back for investors who are subject to that kind of fraud, a Ponzi scheme, whatnot.”

Legislation didn’t advance in the House last year, but lawmakers on the left and right showed interest in giving the SEC more power to recover funds from wrongdoers.

The Supreme Court decision, known as Kokesh v. SEC, narrowed the federal agency’s ability to use “disgorgement,” a remedy that claws back illegal profits from a person or entity found to have committed fraud or other misconduct. The SEC has had to forgo $900 million in disgorgement since the decision, officials say.

Disgorgement can be used to compensate victims, but the money often winds up in the U.S. government’s bank account, effectively functioning as a fine. Defendants in insider trading cases, for instance, are typically ordered to give up ill-gotten gains. Yet the money rarely goes to other investors who traded in the same securities.

The SEC obtained $2.5 billion in disgorgement in its 2018 fiscal year, compared with nearly $3 billion in 2017 and $2.8 billion in 2016.

The Senate legislation would maintain the five-year limit on disgorgement, but would give regulators 10 years to seek restitution, which refers to funds that must go to victims. Restitution would likely apply in fewer cases than disgorgement does. About 28% of $13 billion in disgorgement ordered in SEC cases from 2010 through 2018 was directed to investors, according to research by Georgetown University law professor Urska Velikonja.

“Restitution would be a very limited addition to the SEC’s authority,” Ms. Velikonja said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 22, 2019

How GE Built Up and Wrote Down $22 Billion in Assets

By Michael Rapoport | Mar 14, 2019

TOPICS: Goodwill, Goodwill Impairment Charge, Impairment

SUMMARY: The article discusses concerns about GE's recording of goodwill from its Alstom SA power unit acquisition. The acquisition cost just over $10 billion; GE initially recorded $13.5 billion in goodwill on the transaction. GE increased goodwill to $17.3 billion in 2016. The author concludes that "increasing goodwill had the effect of enabling GE to avoid costs that would have reduced its earnings" after discussions with both former SEC Chief Accountant Lynn Turner and an associate professor of accounting at Penn State University, J. Edward Ketz.

CLASSROOM APPLICATION: The article may be used to discuss initial recording of goodwill as well as goodwill impairment charges.

QUESTIONS:

1. (Advanced) "Goodwill...[i]n effect, ...is the $4 that squares up the balance sheet when a company spends $10 for something that will only add $6 to its net worth." Do you agree with that definition? Explain.

2. (Introductory) What is unusual about the goodwill recorded by GE in its accounting for its acquisition of Alstom SA's power business in 2015?

3. (Advanced) "Following the 2015 Alstom purchase, GE boosted the deal's goodwill further..." Explain what type of item might cause this increase to happen.

4. (Advanced) Lynn Turner, a former SEC Chief Accountant, states that GE should have taken a goodwill write-down, or impairment charge, long before it finally did so. What factors are assessed in deciding whether it is appropriate to take a goodwill impairment charge? Cite your source for this information.

5. (Advanced) "GE's unusual move didn't violate accounting rules..." acknowledges the author. Then what is the basis for the tone of the article? What are the overall concerns expressed?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"How GE Built Up and Wrote Down $22 Billion in Assets," by Michael Rapopor, The Wall Street Journal, March 14, 2019
https://www.wsj.com/articles/how-ge-built-up-and-wrote-down-22-billion-in-assets-11552469401

GE’s goodwill move enabled conglomerate to avoid costs that would have reduced its earnings

When General Electric Co. GE -2.82% bought Alstom SA’s ALO -2.20% power business in 2015, it cost it a little more than $10 billion.

But when GE put the acquisition on its books, something odd happened: The company recorded $13.5 billion in goodwill.

Goodwill is the excess amount that a buyer spends on a target above the accounting value of the things it paid for. In effect, it is the $4 that squares up the balance sheet when a company spends $10 for something that will only add $6 to its net worth. In recording goodwill that exceeded the cost of the acquired power business, GE was essentially telling investors that the Alstom assets it bought had a net worth less than zero.

GE’s unusual move didn’t violate accounting rules, but it is one of a number of puzzling decisions the company made in recent years regarding goodwill. The conglomerate stunned investors last fall when it erased $22 billion in goodwill from its books, and the Securities and Exchange Commission is investigating the write-down.

Following the 2015 Alstom purchase, GE boosted the deal’s goodwill further, to $17.3 billion in 2016. GE later held off on reducing the value of the goodwill as the deal soured and the unit that houses the assets struggled.

A GE spokeswoman said the company’s goodwill accounting has followed accounting rules and been properly disclosed. “We will continue to be transparent in our accounting,” she said.

The company plans to update its financial outlook Thursday.

Increasing goodwill had the effect of enabling GE to avoid costs that would have reduced its earnings. Not writing it down delayed investors’ realization of how deep the conglomerate’s problems ran.

“There should have been a write-down long before,” said Lynn Turner, a former SEC chief accountant.

Part of the reason for so much goodwill from the Alstom deal, GE said in a securities filing for 2016, was “estimated GE-specific synergies,” such as additional revenue from GE and Alstom product lines complementing each other.

J. Edward Ketz, a Penn State University associate professor of accounting, said that while GE’s accounting follows the rules, he couldn’t recall another case in which the goodwill a company recognized from a deal exceeded its cost. “The justification is on the aggressive side,” he said.

As GE raised goodwill, it effectively reduced the value it placed on the Alstom hard assets it acquired. Just before the sale, Alstom placed a net value of about $600 million on the tangible assets and liabilities it was selling to GE, excluding goodwill and other intangibles. But when GE added those items to its own balance sheet, net tangible value was about negative $6.2 billion.

Among the reasons for the changes, GE said, were revisions of some of its assumptions and valuations, additions of $990 million to legal reserves and the change from international to U.S. accounting standards.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 22, 2019

More Detail and Plain English: Auditors' Reports Get a Makeover

By Michael Rapoport | Mar 19, 2019

TOPICS: Audit Reports, PCAOB

SUMMARY: In 2017, the Public Company Accounting Oversight Board (PCAOB) adopted changes to the standard auditor's report for the first time since the 1940s. The changes are now being implemented into U.S. audit reports for the first time. "New reports will add information on "critical audit matters," or CAMs, the complex issues about an audit that "keep the auditors up at night," as auditors and PCAOB members have put it. Auditors will have to describe each such issue and explain how it was ultimately addressed in the audit."

CLASSROOM APPLICATION: The article may be used to discuss critical audit matters (CAMs) and the new audit report in an auditing class.

QUESTIONS:

1. (Introductory) What changes are about to be implemented in the report issued by auditors on companies' financial statements?

2. (Introductory) When will the new audit reports begin to be issued? When was the last time such a substantial change to audit reports was implemented?

3. (Advanced) Define the term "critical audit matters" (CAMs).

4. (Advanced) According to the article, what areas of accounting are likely to be identified as CAMs?

5. (Advanced) The new reporting form is not yet required. From where does the author of the article obtain the information about these areas expected to be highlighted in the new audit reports?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"More Detail and Plain English: Auditors' Reports Get a Makeover," by Michael Rapoport, The Wall Street Journal, March 19, 2019
https://www.wsj.com/articles/more-detail-and-plain-english-auditors-reports-get-a-makeover-11553012005

Investors can expect a report offering a glimpse at what the auditor considers the knottiest issues in a company’s financial statements

Coming soon: More insights for investors about the biggest concerns lurking in their companies’ financial results.

Auditors are gearing up to revamp and expand the yearly letter in which they bless a company’s financial statements. Starting later this year, those audit reports must tell investors more about what an auditor found most difficult or challenging when scrutinizing a company’s books.

The Public Company Accounting Oversight Board adopted the changes—the most substantial since the 1940s—in 2017. Auditors are required to submit expanded reports starting June 30, for bigger companies whose fiscal years end then; the rule kicks in for smaller companies in 2021.

Investors can expect a report offering a glimpse at what the auditor considers the knottiest issues in a company’s financial statements, ranging from investment valuations to tax decisions. It’ll be more individually tailored than the current report, which largely uses the same boilerplate language for everyone.

The shape of the new reports is starting to come into view. As they do their regular reports on the year-end 2018 audits of big clients, auditors have been preparing practice reports with the added information as if the new requirement already were in effect.

Big Four accounting firm Deloitte & Touche LLP even has a “vocabulary list”—examples of the technical language the firm has previously used in the report, along with guidance on how to reframe it more clearly.

Instead of saying the auditor performed a “retrospective review” of a company’s revenues and operating margins, for example, Deloitte will say the auditor “compared actual results to management’s historical forecasts” to evaluate a company’s forecasts of those measures.

“It’s a great opportunity for the auditor to be more transparent with investors about the more challenging parts of the audit,” said Dave Sullivan, Deloitte’s national managing partner for quality and professional practice.

The changes are aimed at making auditors’ reports more helpful to investors and telling them more about what’s going on inside companies. That could lead to investors learning more about areas of concern sooner that could lead to earnings restatements or other problems later.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 22, 2019

Trump Administration to Consider Expanding Penalty Reprieve to Taxpayers Adjusting to New Law

By Richard Rubin | Mar 15, 2019

TOPICS: Individual Taxation

SUMMARY: The U.S. Congress is considering legislation to lower the threshold for avoid penalties for late payment of taxes to 80%--that is, if 80% of a taxpayer's total tax owed is remitted with timely withholding and estimated tax payments, then no penalty is assessed upon paying the remainder by the filing deadline. This threshold was already lowered in 2018 to 85% from the usual 90% by the IRS. These issues are arising because, while most taxpayers are getting net tax cuts under the new tax law enacted in 2017, the IRS issued tax tables early in 2018 that left many without sufficient withholding.

CLASSROOM APPLICATION: The article may be used in an individual income tax class when discussing impacts of the new tax law, estimated and withholding taxes, and/or penalties for late payment.

QUESTIONS:

1. (Advanced) What factors are contributing to taxpayers facing surprising tax liabilities due on April 15, 2019?

2. (Advanced) What financial consequences arise for taxpayers who paid too little in tax through 2018 withholdings or estimated tax payments? In your answer, explain how the Internal Revenue Service determines whether "too little" was paid.

3. (Introductory) What action is the U.S. Congress taking to alleviate issues faced by these taxpayers?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Trump Administration to Consider Expanding Penalty Reprieve to Taxpayers Adjusting to New Law," by Richard Rubin, The Wall Street Journal, March 15, 2019
https://www.wsj.com/articles/trump-administration-to-consider-expanding-penalty-reprieve-to-taxpayers-adjusting-to-new-law-11552578910

Individuals’ refunds are varying more than usual, with some workers who got their tax cuts throughout the year now expected to owe

WASHINGTON—The Trump administration will consider expanding penalty relief for taxpayers who had too little income taxes withheld from their paychecks and will aim to make a decision within a week, Treasury Secretary Steven Mnuchin said Thursday.

Reps. Kenny Marchant (R., Texas) and Judy Chu (D., Calif.) urged Mr. Mnuchin to act, citing confusion among taxpayers in the first filing season under the new tax law Congress enacted at the end of 2017.

“We will review it very quickly,” Mr. Mnuchin said at a House Ways and Means Committee hearing.

Most taxpayers are getting net tax cuts because of the law, but the size of refunds for individual taxpayers is varying more than usual. That’s because the Internal Revenue Service changed the withholding tables early in 2018.

As a result, some workers got their tax cuts—and then some—throughout the year, leaving them in the position of owing taxes they hadn’t expected to pay now. Others owing money at tax-filing time may be among the minority whose tax bills went up.

Taxpayers can normally avoid penalties if they have paid 90% of the current year’s taxes owed. Many taxpayers can also avoid penalties if they paid an amount equal to 100% of the prior year’s taxes. Taxpayers who owe less than $1,000 can generally avoid penalties, too, according to the Internal Revenue Service.

In January, the IRS lowered that 90% threshold to 85%, so that someone with a $10,000 income tax bill for 2018 would owe no penalties if they had paid at least $8,500 through withholding or timely estimated tax payments.

Ms. Chu has urged the IRS to lower that threshold to 80%; she has introduced legislation that would do that.

“This is not a partisan issue,” she said. “People are filing now and we have only one month to go before April 15. Taxpayers need the certainty now.”

Mr. Mnuchin and House Democrats agreed at the hearing that they want to address infrastructure while disagreeing about the effects and benefits of the 2017 tax cut.

Democrats also pressed him to say how he would respond to the coming request for President Trump’s tax returns. Under the law, if Ways and Means Chairman Richard Neal (D., Mass.) asks for any taxpayer’s returns, the Treasury secretary “shall furnish” them. Mr. Neal has said he would request Mr. Trump’s returns, but he hasn’t done so yet, to the frustration of progressive groups.

Mr. Mnuchin echoed points that Treasury officials have previously made—that he hasn’t received any request and that he would review any request with Treasury lawyers.

“If you have a request for me today, I’m happy to accept it,” he said. “I can’t speculate on the request until I see it.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 22, 2019

KPMG Ex-Partner Convicted In 'Steal the Exam' Scandal

By Michael Rapoport | Mar 12, 2019

TOPICS: Audit Inspections, PCAOB

SUMMARY: Former national managing partner for audit quality and professional practice...at KPMG LLP [David Middendorf] was convicted on four of five counts, including conspiracy and wire fraud, in federal court in Manhattan....Also convicted was a co-defendant, Jeffrey Wada, a former employee of the Public Company Accounting Oversight Board...." As explained in the related article Mr. Middendorf led the audits of KPMG clients such as Home Depot Inc. and J.C. Penney Co. before he became the firm's national managing partner for audit quality and professional practice, where he was directly responsible for dealing with the PCAOB." In that role, Mr. Middendorf has been found guilty of a high-profile "steal the exam" scandal in which he "impproperaly obtained advance information about which of KPMG's audit the PCAOB planned to review in its annual inspections of the firm."

CLASSROOM APPLICATION: The article may be used to discuss ethics, and ethical lapses, in the auditing profession.

QUESTIONS:

1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? You may access its web site at https://pcaobus.org

2. (Introductory) What inspections does the PCAOB conduct?

3. (Introductory) Of what illegal actions have former KPMG LLP partners and PCAOB employees been convicted? State the names of the crimes as described in the article as well as summarizing your understanding of what happened.

4. (Advanced) Are you surprised that these ethical lapses in business practices are considered criminal? Explain your response.

5. (Advanced) How difficult is if for KPMG LLP to repair its professional reputation after this conviction? Discuss your view.

6. (Advanced) How does the value of a KPMG LLP audit opinion rest on ethical foundations? Discuss your understanding.

READ THE ARTICLE

RELATED ARTICLES:
KPMG Ex-Partner Goes on Trial in 'Steal the Exam' Scandal
by Michael Rapoport
Feb 11, 2019
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

"KPMG Ex-Partner Convicted In 'Steal the Exam' Scandal," by Michael Rapoport , The Wall Street Journal, March 12, 2019
https://www.wsj.com/articles/kpmg-ex-partner-convicted-in-steal-the-exam-scandal-11552340232

Ex-employee of Public Company Accounting Oversight Board also convicted

A former high-ranking partner at KPMG LLP was convicted Monday on accusations he was involved in a scheme to steal confidential information to help the Big Four accounting firm look better to its regulator, federal prosecutors said.

David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, was convicted on four of five counts, including conspiracy and wire fraud, in federal court in Manhattan.

Also convicted was a co-defendant, Jeffrey Wada, a former employee of the Public Company Accounting Oversight Board, which regulates the audit industry. Mr. Wada was convicted on three of four counts, including conspiracy and wire fraud, his attorney said.

Both men were charged in a high-profile “steal the exam” scandal in which partners at KPMG improperly obtained advance information about which of KPMG’s audits the PCAOB planned to review in its annual inspections of the firm. Prosecutors said the partners hoped to use the information to better prepare for and improve KPMG’s performance on the inspections, on which it had done poorly in the past.

Nelson Boxer, an attorney for Mr. Middendorf, said he was “very disappointed with the result.” What happened was not wire fraud, he said, and “we intend to continue to vigorously press that argument on appeal.”

Justin Weddle, an attorney for Mr. Wada, declined to comment.

KPMG fired Mr. Middendorf and other partners who were allegedly involved after learning of the scheme in 2017. Three other people, including another former KPMG partner, previously pleaded guilty to participating. A spokesman for KPMG declined to comment on the verdict.

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 29, 2019

U.S. Companies Cross the Atlantic for Bond Love

By Avantika Chilkoti | Mar 21, 2019

TOPICS: Debt, Foreign Currency Translation

SUMMARY: "Companies have returned in force to the bond market following one of the weakest stretches in years. One corner of the market-U.S. companies raising money in Europe-is on a particularly strong run." Factors leading to this trend of U.S. companies issuing euro-denominated bonds, known as "reverse Yankees," are discussed.

CLASSROOM APPLICATION: The article may be used when discussing debt issuance and/or foreign currency transactions.

QUESTIONS:

1. (Introductory) Refer to the related graph, Euro-denominated debt. Describe the trends you see there.

2. (Introductory) What factors are leading U.S. companies to issue debt denominated in euros?

3. (Advanced) What are the risks associated with a U.S. company issuing debt in a foreign currency?

4. (Advanced) In general, how must liabilities held in a foreign currency be presented on a U.S. company's balance sheet?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"U.S. Companies Cross the Atlantic for Bond Love," by Avantika Chilkoti, The Wall Street Journal, March 21, 2019
https://www.wsj.com/articles/u-s-companies-cross-the-atlantic-for-bond-love-11553079601

Companies are issuing bonds at a healthy clip again—and an active corner of the market is so-called ‘reverse Yankee’ bonds

Companies have returned in force to the bond market following one of the weakest stretches in years. One corner of the market—U.S. companies raising money in Europe—is on a particularly strong run.

U.S. companies have ramped up issuance of euro-denominated bonds, known as “reverse Yankees,” to a total of €28.46 billion ($32.31 billion) so far this year, according to data firm Dealogic, up from €6.71 billion in the same period of 2018.

Large deals include a €3.5 billion round of bonds issued by Coca-Cola Co., and €1 billion from toothpaste maker Colgate-Palmolive Co.

Driving these deals are lower borrowing costs in Europe, where benchmark rates are still negative and nearly 3 percentage points lower than in the U.S. One factor that held back reverse Yankee bond issuers last year despite that rate differential was elevated hedging costs. More recently, however, those costs have fallen, as seen in derivatives known as cross-currency basis swaps.

“With a shift in the macro outlook and newfound dovishness of central banks, Europe is again seen as a cheap funding market,” said Michal Jezek, a credit strategist at Deutsche Bank.

Another factor helping reverse Yankees: Because of the U.S. tax law overhaul passed in late 2017, U.S. companies are repatriating more profits, increasing the need to issue debt abroad to fund local operations.

In a sign of the strong demand from investors for these bonds, the average “new issue concession” on eurobonds—the extra yield issuers usually have to offer compared with debt already on the market—has ticked down to 0.05 percentage point in February from 0.14 percentage point in January and 0.13 percentage point last year as a 12-month rolling average.

An increased willingness by investors to accept lower returns on corporate bonds is helping this. ICE Bank of America Merrill Lynch bond indexes show the difference between the effective yield on corporate bonds and supersafe 10-year Treasurys has dropped to 1.26 percentage points Wednesday, from 1.62 percentage points at the beginning of the year. Meanwhile, the spread for European corporate bonds over 10-year German bunds has dropped to 0.82 percentage point from 1.07 percentage points.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 29, 2019

Lyft to Price Shares Above Targeted Range of $62 to $68 in IPO

By Corrie Driebusch and Maureen Farrell | Mar 26, 2019

TOPICS: Initial Public Offerings

SUMMARY: As of the time this article was written, Lyft was "...conducting a roadshow to market the shares...[and the company has] told some investors that it is likely to price the stock above its previously targeted range of between $62 and $68 a share, according to people familiar with the deal. While it is unclear what level it will pick when the shares are priced late Thursday, it is unlikely to be as high as $80 and is more likely to be in the low $70s, some of the people said."

CLASSROOM APPLICATION: The article can be used to discuss the process of a roadshow leading up to an IPO and the difference between valuation and preparing historical cost financial statements.

QUESTIONS:

1. (Introductory) Based on gleaning information from the article, describe the purpose and process of a "roadshow" leading up to an initial public offering of stock.

2. (Advanced) Define the term "valuation."

3. (Advanced) How does the process of valuation differ from the process of preparing financial statements?

4. (Introductory) What happened with the Lyft Inc. valuation as the IPO roadshow was conducted? What factors have led to this change?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Lyft to Price Shares Above Targeted Range of $62 to $68 in IPO," by Corrie Driebusch and Maureen Farrell , The Wall Street Journal, March 26, 2019
https://www.wsj.com/articles/lyft-to-price-shares-above-targeted-range-of-62-to-68-in-ipo-11553614735?mod=hp_lead_pos1

Ride-hailing service to price shares Thursday ahead of trading debut Friday

Lyft Inc. is expected to price its shares above the targeted range for its initial public offering, in a sign of strong investor demand ahead of the ride-hailing service’s imminent debut.

Lyft, which is currently conducting a roadshow to market the shares, has told some investors that it is likely to price the stock above its previously targeted range of between $62 and $68 a share, according to people familiar with the deal. While it is unclear what level it will pick when the shares are priced late Thursday, it is unlikely to be as high as $80 and is more likely to be in the low $70s, some of the people said.

That means that Lyft would be valued at more than $23 billion on a fully diluted basis, which was the top end of the range. The shares are to begin trading Friday.

But in a sign of robust investor interest, Lyft has attracted standing-room-only crowds throughout its roadshow that started last Monday.

Investors who attended expressed concerns about the company’s path to profitability, given that Lyft’s $911 million loss last year was the biggest of any other U.S. startup in the 12 months preceding its IPO, according to S&P Global Market Intelligence

The company has worked to assuage these worries by emphasizing how it is working to get costs down, some people said. One way it plans to do so in the near-term is by lowering insurance costs—currently one of the biggest expenses for Lyft—as it gains greater scale, the company’s executives told investors in presentations. Lyft executives also outlined that longer-term, the adoption of autonomous vehicles could be a boon to its bottom line.

Unlike most sizable private technology companies, Lyft has relatively few mutual funds, with the exception of Fidelity Investments, among its investor base. Other big funds are expected to buy shares for the first time in the IPO, pushing up demand and, potentially, the price of the stock.

So far, the excitement about Lyft is a good sign for the other highly valued technology companies looking to follow it into the public markets in what is expected to be the biggest year on record by dollars raised.

Pinterest Inc., which made its IPO paperwork public on Friday, is on pace to begin trading in mid-April, and Uber Technologies Inc. is expected to kick off its IPO process in the coming weeks.

With low volatility and major stock indexes trading near record highs after a late-2018 market swoon, Lyft could kick off life as a public company with a near-perfect backdrop. The tech-heavy Nasdaq Composite is up about 16% so far this year.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 29, 2019

The Right Way to Choose a College

By Denise Pope | Mar 23, 2019

TOPICS: Accounting Careers

SUMMARY: The title might make it seem that discussing this article--when students have already chosen their universities and are enrolled in college-is too late. But the sub-title says it all: "What students do at college matters much more than where they go. The key to success is engagement, inside the classroom and out." Six factors of engagement in college are strongly associated with satisfaction and well-being in work and life after college. The article notes that "research does suggest" that first-generation students attending elite colleges and universities obtain a financial advantage from that opportunity. But there is more difference in the range of top and bottom wage-earners graduating from elite schools than there is when comparing average earnings of graduates from elite institutions with those from less-selective schools, including community colleges. The article is based on a report issued by a senior lecturer at Stanford who operates an organization, Challenge Success, which "works with K-12 schools across the country to increase student well-being and engagement with learning."

CLASSROOM APPLICATION: The article is useful for discussing the recent college-admission scandal and students' engagement in their college experience.

QUESTIONS:

1. (Introductory) Who wrote this article? On what report is it based?

2. (Introductory) What college-related factors are associated with employees feelings of fulfillment in work and thriving in life after college?

3. (Advanced) Have you had an internship experience? If so, describe it. If not, describe how you might still have that experience.

4. (Advanced) What your internship a positive experience? If so, explain. If not, did you learn something from the experience (e.g., that you want to try another avenue for a career path)?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"The Right Way to Choose a College By Denise Pope, The Wall Street Journal, March 23, 2019
https://www.wsj.com/articles/the-right-way-to-choose-a-college-11553266896

What students do at college matters much more than where they go. The key is engagement, inside the classroom and out.

Does the brand name of the college you attend actually matter? The best research on the question suggests that, for most students, it doesn’t.

Challenge Success, the research and advocacy group that I cofounded at Stanford’s Graduate School of Education, conducted an extensive review of the academic literature on the subject. We found that a school’s selectivity (as typically measured by students’ SAT or ACT scores, high school GPA and class rank, and the school’s acceptance rate) is not a reliable predictor of outcomes, particularly when it comes to learning. As common sense would suggest, the students who study hard at college are the ones that end up learning the most, regardless of whether they attend an Ivy League school or a local community college.

Similarly, the 2014 Gallup-Purdue Index, a study of over 30,000 graduates, found no correlation between college selectivity and future job satisfaction or well-being. The study showed that graduates were just as likely to score high (or low) on a scale measuring their “thriving” whether they attended community colleges, regional colleges or highly selective private and public universities.

Research does suggest that there is a modest financial gain from attending a highly selective school if students are the first in their families to attend college or come from underserved communities. But the difference in financial outcomes between the low-earning and high-earning graduates of top-ranked schools is greater than the difference between students from such highly selective schools and graduates of non-selective schools, including community colleges. As Greg Ip noted in The Wall Street Journal earlier this week, “The fact that smart, ambitious children who attend elite colleges also do well in life doesn’t mean the first caused the second.”

Would such findings have mattered to the parents involved in the college admissions scandal that has unfolded over the past two weeks? Probably not. In a society that is hyperfocused on achievement, credentials and status, it isn’t surprising that some parents are willing to sacrifice just about anything, including their integrity, to get their child into a top-ranked school. Unfortunately, many high school students also have a “cheat or be cheated” mentality when it comes to getting the grades and test scores that they believe they need for future success. More than 80% of students at high-achieving schools cheat in one way or another, according to surveys of over 145,000 students conducted in recent years by Challenge Success.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 29, 2019

Samsung Cuts U.S. Staffers After Probe

By Alexandra Bruell and Suzanne Vranica | Mar 22, 2019

TOPICS: Internal Audit

SUMMARY: Though the company declines to confirm this statement, this article reports that "Samsung Electronics Co. audited its U.S. marketing operation to investigate whether employees violated company policies in their dealings with business partners.,..The company also conducted a months-long audit of its ad-agency partners...The audit included an investigation into agency operations and practices...." The article claims that recent staffing changes are based on the internal audits and notes that "the company faces headwinds as smartphone sales have fallen in recent quarters...."

CLASSROOM APPLICATION: The article may be used to discuss the purpose of an internal audit.

QUESTIONS:

1. (Advanced) In general, what is the purpose of an internal audit?

2. (Introductory) What was the purpose of Samsung Electronics Co. internal audit of its marketing function?

3. (Advanced) Based on the information in the article, state your understanding of the business efficiency question that was the focus of Samsung's internal audit of its marketing function.

4. (Introductory) What staffing changes have occurred at Samsung?

5. (Advanced) Samsung has "declined to comment on whether it has carried out an internal audit." Then what was the basis for this WSJ article?

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"Samsung Cuts U.S. Staffers After Probe," by Alexandra Bruell and Suzanne Vranica , The Wall Street Journal, March 22, 2019
https://www.wsj.com/articles/samsung-probed-u-s-marketing-operation-over-dealings-with-business-partners-11553199923

Company laid off number of staff amid broader realignment and executive turnover

Samsung Electronics Co. audited its U.S. marketing operation to investigate whether employees violated company policies in their dealings with business partners, resulting in layoffs of several staffers, according to people familiar with the situation.

The layoffs and the internal probe come amid broader changes at the company, including the recent departure of top U.S. marketing executives, as well as other senior executives outside the marketing group.

Samsung’s internal audit looked, in part, at dealings between its marketing staff and business partners such as media companies and ad agencies, according to the people familiar with the matter. It is common for marketers to accompany such partners to entertainment events they are sponsoring, like the Super Bowl or the Oscars or to let vendors who are vying for their business pay for perks during meetings such as a nice lunch or a workout class.

But such dealings can pose a conflict of interest that calls into question whether marketers are steering resources to the best-performing marketing channels, industry executives say.

Samsung declined to comment on whether it has carried out an internal audit.

“Recently, organization changes have been made to our marketing division,” the company said in an emailed statement. “We have a strong management team in the U.S. who remains focused on continuing to provide our customers in North America with the products and experiences they have come to expect of the Samsung brand.”

It is unclear how many workers were cut or which incidents or activities by staff drew scrutiny from Samsung. Samsung’s U.S. total workforce is more than 18,000.

Some Samsung staffers were told on March 15 that they were let go for cause and without severance following the audit, according to the people familiar with the matter. Some employees who were fired said that they have been treated unfairly, and that Samsung’s findings in some cases were trivial and didn’t merit its actions.

The company also conducted a monthslong audit of its ad-agency partners, including Interpublic Group of Cos’s PMK-BNC and R/GA, independent PR agency Edelman and Publicis Groupe SA’s media agency, according to the people. The audit included an investigation into agency operations and practices, such as funding and management of some projects.

Samsung conducts routine audits of its various internal departments and agencies, according to people close to the company.

The recent changes at Samsung’s U.S. operation included the exit of Marc Mathieu, the U.S. marketing chief, and Jay Altschuler, vice president of media and partnerships, according to the people familiar with the matter. Samsung declined to comment on whether those moves were linked to its audit.

“Marc has left Samsung Electronics America to pursue opportunities outside of the company,” a company spokeswoman said last week.

At the time, Mr. Mathieu said, “I have been privileged to lead a talented team of marketers, which has led to incredible brand growth during my tenure at the company.”

The shifts come amid a broader realignment at Samsung. In recent months, Samsung appointed a new global marketing head, Stephanie Choi, at its mobile division.

Outside of the marketing group, there have been other significant executive exits in the U.S., according to the people familiar with the matter. Samsung declined to comment on moves of the other executives.

Tim Baxter, president and chief executive of Samsung Electronics North America, also announced plans two months ago to retire in June.

In the U.S., which is a significant market for the company’s phones, consumer appliances and chips, Samsung Electronics America spent $583 million on media in 2018, according to Kantar Media, a data and measurement firm. The Kantar figure doesn’t include all digital spending.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on March 29, 2019

GM to Build New Electric Vehicle in U.S.

By Adrienne Roberts and Kimberly Chin | Mar 23, 2019

TOPICS: Capital Budgeting

SUMMARY: General Motors Co. CEO Mary Barra announced Friday, March 23, 2019, that the company will invest $300 million to manufacture a new electric vehicle at its Orion Township, Michigan plant. The company had previously announced closures of five other plants, four in the U.S. and one in Canada. "Within the last week, [President Trump] has taken to Twitter to press GM and...Mary Barra to keep open a plant in Lordstown, Ohio...." CEO Mary Barra acknowledged considering the tariffs under the new pact that is expected to replace NAFTA in this decision-making.

CLASSROOM APPLICATION: The article may be used to discuss quantifiable and other factors entering into capital budgeting decisions.

QUESTIONS:

1. (Introductory) Several capital budgeting decisions are discussed in this article. Name them.

2. (Introductory) According to the article, what factors were considered by GM in deciding where to locate production of a new electric vehicle?

3. (Advanced) What quantifiable items, whether or not discussed in the article, do you think GM considered in making this decision? List the major items you can think of and explain how they be presented in a capital budgeting analysis.

4. (Advanced) Do you think that the decision on where to locate this new manufacturing was based solely on these quantifiable factors included in a capital budgeting analysis? Explain your reasoning.

READ THE ARTICLE

Reviewed By: Judy Beckman, University of Rhode Island

"GM to Build New Electric Vehicle in U.S.," by Adrienne Roberts and Kimberly Chin, The Wall Street Journal, March 23, 2019
https://www.wsj.com/articles/gm-to-invest-300-million-plans-new-electric-vehicle-at-michigan-plant-11553266522

Announcement is reversal from earlier plans to produce new Chevrolet vehicle outside of U.S.

General Motors Co. GM 0.11% said Friday it will invest $300 million to build a new electric car domestically rather than outside the country, a decision that comes as President Trump has blasted the Detroit auto maker for its plans to close four U.S. factories.

The planned investment in an existing Michigan plant, GM said, is part of a broader commitment to spend $1.8 billion at its U.S. manufacturing operations, adding 700 jobs in several states over the next three years.

Within the last week, Mr. Trump has taken to Twitter to press GM and its chief executive, Mary Barra, to keep open a plant in Lordstown, Ohio, criticizing the company and the United Auto Workers union for not securing the plant’s future.

Ms. Barra, speaking to reporters Friday, declined to comment directly on Mr. Trump’s recent tweets. In a conversation with the president over the weekend, she said she emphasized that the company needs to remain strong to preserve its jobs and manufacturing base in the U.S. “And that’s what we’re working on,” she said, after announcing the Michigan investment.

GM and Ms. Barra have repeatedly defended five plant closures disclosed in November—four in the U.S. and one in Canada—saying the auto maker needs to improve profits and prepare for an expected downturn in the U.S. market. However, that has done little to mollify the president, who latched onto the Lordstown plant closure at a recent at a recent campaign rally.

Ms. Barra said the company’s reversal of earlier plans to build its newest electric car outside the U.S. was influenced in part by a new free-trade deal struck last year by the Trump administration for North America.

The new pact, which aims to replace the North American Free Trade Agreement, requires a greater portion of a car be built in the region to escape tariffs—a rule that favors GM and other car makers already making most of their U.S.-sold cars in North America.

Continued in article

Humor for March 2019

Airline Humor --- https://www.jborden.com/airline-humor/

Finding Humor in the Admissions Scandal ---
http://www.insidehighered.com/admissions/article/2019/03/14/admissions-scandal-attracts-much-attention-including-humorists?utm_source=Inside+Higher+Ed&utm_campaign=abb54478bd-WNU_COPY_01&utm_medium=email&utm_term=0_1fcbc04421-abb54478bd-197565045&mc_cid=abb54478bd&mc_eid=1e78f7c952

John Cleese --- https://en.wikipedia.org/wiki/John_Cleese
John Cleese Revisits His 20 Years as an Ivy League Professor in His New Book, Professor at Large: The Cornell Years ---
http://www.openculture.com/2019/03/john-cleese-revisits-his-20-years-as-an-ivy-league-professor-in-his-new-book.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Video: Trump and Jobs --- https://www.youtube.com/watch?v=_h1ooyyFkF0

Ig Nobel Prizes --- https://www.improbable.com/ig/winners/#ig2017

And the Winner for Best (Worst) Puns and One Liners Is… Eye Roll Please ---
https://www.jborden.com/and-the-winner-for-best-worst-puns-and-one-liners-is-eye-roll-please/

Forwarded by Glen Gray
47 tips to keep you out of the emergency room ---
https://www.radajonesmd.com/47-tips-to-keep-you-away-from-my-er/?fbclid=IwAR0RY9CpCkRWoeEuRFNQDYat2GMJINyYcvoptCSrazjv64CkjDx4tXSxYp8

Five Funny Books --- Click Here

Church Signs --- https://expo.nj.com/news/g66l-2019/01/91161c614f6936/these-hilarious-church-signs-in-nj-will-have-you-praying-for-more.html

The Cringe-Inducing Humor of The Office Explained with Philosophical Theories of Mind ---
https://mail.google.com/mail/u/0/?tab=mm#inbox/FMfcgxwBVztVpLfCBpngCwDsbKJRhzdK

Forwarded by Paula

NUMBER 1:
If you ever testify in court, you might wish you could have been as sharp as this policeman. He was being cross-examined by a defense attorney during a felony trial. The lawyer was trying to undermine the police officer’s credibility. Q: 'Officer --- did you see my client fleeing the scene?' A: 'No, sir. But I subsequently observed a person matching the description of the offender, running several blocks away.' Q: 'Officer, who provided this description?' A: 'The officer who responded to the scene.'
Q: 'A fellow officer provided the description of this so-called offender. Do you trust your fellow officers?'
A: 'Yes, sir. With my life.'
Q: 'With your life? Let me ask you this then officer. Do you have a room where you change your clothes in preparation for your daily duties?' A: 'Yes sir, we do!' Q: 'And do you have a locker in the room?'
A: 'Yes, sir, I do.'
Q: 'And do you have a lock on your locker?'
A: 'Yes, sir.'
Q: 'Now, why is it, officer, if you trust your fellow officers with your life, you find it necessary to lock your locker in a room you share with these same officers?'
A: 'You see, sir, we share the building with the court complex, and sometimes lawyers have been known to walk through that room.’
The courtroom EXPLODED with laughter, and a prompt recess was called.
The officer on the stand has been nominated for this year's 'Best Comeback' line -- and we think he'll win.

NUMBER 2:
Now We Know Why He Was a General -----

In an interview, General Norman Schwarzkopf was asked if he thought there was room for forgiveness toward the people who have harbored and abetted the terrorists who perpetrated the 9/11 attacks on America. His answer was classic Schwarzkopf. The General said, "I believe that forgiving them is God's function. OUR job is to arrange the meeting."

NUMBER 3:

Dana Perino (FOX News) describing an interview she recently had with a Navy SEAL. After discussing all the countries that he had been sent to, she asked if they had to learn several languages? "Oh, no ma'am. We don't go there to talk."

NUMBER 4:
Conversation overheard on the VHF Guard (emergency) frequency 121.5 MHz while flying from Europe to Dubai. Iranian
Air Defense Site: 'Unknown aircraft, you are in Iranian airspace. Identify yourself.'
Aircraft: 'This is a United States aircraft. I am in Iraqi airspace.'
Air Defense Site: 'You are in Iranian airspace. If you do not depart our airspace, we will launch interceptor aircraft!'
Aircraft: 'This is a United States Marine Corps FA-18 Fighter.
Send 'em up, I'll wait!' Air Defense Site:
(... Total silence)

A Final Thought…
The guys at the golf course asked me to name an actress I would like to be stuck in an elevator with.
I told them: the one who knows how to fix elevators.
...I'm old, I'm tired, and I have to pee a lot.

Humor March 2019--- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0319.htm

Humor February 2019--- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0219.htm

Humor January 2019-- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0118.htm

Humor December 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1218.htm

Humor November 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1118.htm

Humor October 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1018.htm

Humor September 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0918.htm

Humor August 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0818.htm

Humor July 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0718.htm

Humor June 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0618.htm

Humor May 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0518.htm

Humor April 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0418.htm

Humor March 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0318.htm

Humor February 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0218.htm

Humor January 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0118.htm

Tidbits Archives --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm

And that's the way it was on March 31, 2019 with a little help from my friends.

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://faculty.trinity.edu/rjensen/threads.htm

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://faculty.trinity.edu/rjensen/resume.htm#Presentations

Free Online Textbooks, Videos, and Tutorials --- http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://faculty.trinity.edu/rjensen/Resume.htm

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html

February 2019

Bob Jensen's New Additions to Bookmarks

February 2019

Bob Jensen at Trinity University

USA Debt Clock --- http://www.usdebtclock.org/ ubl

How Your Federal Tax Dollars are Spent ---
http://taxprof.typepad.com/.a/6a00d8341c4eab53ef01b7c8ee6392970b-popup

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Google Scholar --- https://scholar.google.com/

Wikipedia --- https://www.wikipedia.org/

Bob Jensen's search helpers --- http://faculty.trinity.edu/rjensen/searchh.htm

Bob Jensen's World Library --- http://faculty.trinity.edu/rjensen/Bookbob2.htm

Bob Jensen's CPA Exam Helpers ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

Find a corporate home page quite easily by going to
https://en.wikipedia.org/wiki/List_of_companies_of_the_United_States

Bob Jensen's search helpers ---
http://faculty.trinity.edu/rjensen/searchh.htm

MAAW's Accounting Index Updated (great accounting literature guide) ---
https://maaw.info/AccountingForArticlesByTopic.htm

Academy of Accounting Historians (AAH) Section Webinar: Generating Accounting Theory from Accounting History

· Friday, February 22, 2019 from 11:00 am - 1:00 pm (Eastern)

· Friday, March 1, 2019 from 11:00 am - 1:00 pm (Eastern)

Earn 2.4 hours CPE credit in the field of Accounting.

http://aaahq.org/Education/Webinars/2-22-19-AAH-Generating-Accounting-Theory-from-Accounting

Bob Jensen's threads on accountancy history and theory ---
http://faculty.trinity.edu/rjensen/theory01.htm

A Historical Study of the First 30 Years of Accounting Horizons

Stephen A. Zeff and Thomas R. Dyckman (2018) A Historical Study of the First 30 Years of Accounting Horizons. Accounting Historians Journal: June 2018, Vol. 45, No. 1, pp. 115-131.

https://doi.org/10.2308/aahj-10582

Stephen A. Zeff
Rice University

Thomas R. Dyckman
Cornell University

ABSTRACT

In this paper, we undertake a historical study of the first 30 years of the American Accounting Association's journal, Accounting Horizons. The journal was initially intended to bridge academe and practice. We review the founding of the journal and then trace the development of both the Commentaries and Main Articles sections. One of our principal findings is that there was a steep increase in the percentage of Main Articles using regression analysis-statistical tests during the 30 years, eventually exceeding that in The Accounting Review. Our analysis of the likely reasons for this trend leads us to conclude that foundational changes in the culture of the public accounting profession and in accounting academe had a profound impact on the content of Horizons during our period of study. We conclude with some suggestions for the journal moving forward.

Keywords: Accounting Horizons, journals, academics, practitioners

Article Citation:

Diane H. Roberts (2018) An Analysis of Contributors, Institutions, and Content of Accounting and the Public Interest 2001–2015. Accounting and the Public Interest: December 2018, Vol. 18, No. 1, pp. 129-151.

https://doi.org/10.2308/apin-52245

ARTICLES

An Analysis of Contributors, Institutions, and Content of Accounting and the Public Interest 2001–2015

Diane H. Roberts

University of San Francisco

ABSTRACT

This paper explores the contribution of the AAA Public Interest Section academic journal, Accounting and the Public Interest, to socially responsive and responsible accounting scholarship. Contributors, their doctoral-granting schools, institutional affiliation at time of publication, and their research topics in the first 15 volumes were analyzed. Source literature is explored through analysis of references. Citation analysis performed using Google Scholar's advanced search function revealed strong citation of papers published in API, both in terms of numbers of citations and quality of citing journals. Overall the study results indicate API is a high-quality publication and the journal is fulfilling its mission to provide an outlet for innovative research through use of alternative theories and methodologies.

Keywords: citation analysis, public interest, accounting research rankings, research productivity, accounting research topical areas, source literature

Former Enron CEO Jeffrey Skilling released from federal custody ---
https://www.businessinsider.com/r-former-enron-ceo-jeffrey-skilling-released-from-federal-custody-2019-2

Bob Jensen's threads on the famous Enron fraud (that among other things helped to destroy the huge 85,000 employee Andersen auditing firm) ---
http://faculty.trinity.edu/rjensen/FraudEnron.htm
Especially note the Timeline and the Enron Quiz

Warren Buffett's Annual Letter ---
http://www.berkshirehathaway.com/letters/2018ltr.pdf
Thank you Denny Beresford for the heads up

Here are the biggest takeaways from Warren Buffett's annual letter ---
https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-letter-biggest-themes-2019-2-1027976996

Venture Capital --- https://en.wikipedia.org/wiki/Venture_capital

History of Venture Capital in the USA ---
https://marginalrevolution.com/marginalrevolution/2019/02/vc-an-american-history-by-tom-nicholas.html

Did anybody happen to notice that the AAA's Journal of Financial Reporting either seems to have died or the missing body has not been reported to officials?
https://aaajournals.org/loi/jfir
Jensen Comment
This is a little disappointing because one of the missions of the JFR was to publish replications, something that's shunned by other AAA journals.

February 11, reply from Bob Jensen to an inquiry by Jagdish Gangolly about the mission of JFR

Hi Jagdish,

The very first JFR edition's lead article discusses the mission of JFR in considerable detail.

Catherine M. Schrand (2016) Journal of Financial Reporting Inaugural Issue: Defining Our Content. Journal of Financial Reporting: Spring 2016, Vol. 1, No. 1, pp. 1-13.

https://doi.org/10.2308/jfir-51406

This is a very small quote from that entire article:

. . .

JFR's mission is to be an outlet for scholarly research targeted at an academic audience and thus to publish research at all stages of the process that, when taken together, generates reliable evidence about issues of practical relevance. JFR does not intend to be an outlet for articles that aggregate and communicate research in a way that is most suited to practitioners' interests. While communicating to practitioners is an important (essential) element of a research program, JFR takes the position that there should be distinct publication outlets dedicated to practitioners. A journal that tries to serve both academic and practitioner audiences serves neither well. Manuscripts meant for academic researchers need to contain sufficient discussion of the study's methods to be useful to other researchers who want to evaluate and even replicate the analysis. JFR does not want authors to avoid rigorous discussion in an attempt to make the manuscript more attractive to practitioners. Practitioners deserve their own publications with manuscripts that effectively summarize the research in an accessible manner and build a context for understanding what researchers have learned about an issue of practical importance.8 That being said, the onus is on authors to explain how their analytical model can inform a question of practical relevance.

Jensen Comment
I think the founders of JFR had a delightfully unrealistic dream (a dream that I promote) that accountics scientists are going to tackle problems of great interest to practitioners and teachers like engineering professors muck around with their engineering professionals and try to solve problems of greatest interest to practitioners and teachers.

Accountics scientists are and probably always will be more interested in methodology and mathematics and esoteric economic theory than things of great interest to accounting practitioners and teachers.

If I had to guess why JFR seems to have stopped publishing since 2017 it's the dearth of manuscripts being submitted by accountics scientists that take aim at a practitioner and teacher readership.

I suspect JFR is open for business just like Maytag Washing Machine Service Centers are open for business with zero cars ever in front of the store. (Younger folks probably don't remember those Maytag Repairman TV commercials). The Editors of JFR could take a long snooze if they weren't so busy writing their own articles for TAR, JAR, and JAE.

Thanks,
Bob

No Textbooks, No Lectures, and No Right Answers. Is This What Higher Education Needs? ---
https://www.chronicle.com/article/No-Textbooks-No-Lectures-and/245640?cid=at&utm_source=at&utm_medium=en&elqTrackId=02b4d978089246a5b07289a5bd21d08e&elq=7fed17495dd04cc4b000e596f418eaa5&elqaid=22223&elqat=1&elqCampaignId=10920

Jensen Comment
Having no textbooks or right answers does not seem to be appropriate in prerequisite courses, especially large courses with multiple sections. Courses that follow have scattered base to build on in subsequent courses. My example is the first two principles of accounting courses that are prerequisites for intermediate and advanced accounting courses that follow. There are right answers in principles of accounting, many of them bookkeeping rules for differing types of common contracts in business such as mortgage contracts. There are standard accrual procedures such as depreciation and amortization.

Beyond introductory courses not having textbooks or right answers may be an ideal way for metacognitive learning. Well known BAM experiments in this regard were conducted intermediate and managerial accounting at the University of Virginia, Villanova, and elsewhere. Metacognitive learning was greatly improved by having no textbooks and by making students search for answers on their own ---
http://faculty.trinity.edu/rjensen/265wp.htm
The theory is that students remember best when they learn on their own. BAM outcomes were highly successful in terms of metacognitive learning.

The problem was that both students and teachers burned out in the rigorous BAM experiments. Teachers did not particularly like "not teaching." And students hated the blood, sweat, and tears of having to learn on their own. Teachers that use the BAM type pedagogy put their teaching evaluation performances at great risk. Students prefer being spoon fed, and their teaching evaluations often reward the best spoon feeders.

Is Your Auditor Being Investigated? New Law May Expose Misdeeds ---
https://www.bloomberg.com/news/articles/2019-02-04/is-your-auditor-being-investigated-new-law-may-expose-misdeeds
Thank you Denny Beresford for the heads up

Jensen Comment
What surprises me the most is that this directive comes from the Defense Department rather than the SEC or the PCAOB. Even though the DOD controls the military, in terms of accounting fraud its record is that of a sleeping pussy cat. The SEC, in particular, has a better record of using its claws to combat accounting fraud.

What will be interesting is to see what the accounting lobbyists come up with to fight this new law.

We could use a change. I hope the DOD gets some new ideas to improve auditing. The PCAOB findings of lousy auditing just seem to be ignored by the big auditing firms, except in the case of KPMG that got caught bribing the PCAOB. And in 2018 the PCAOB gave failing marks to KPMG that it will probably just, as it has done in prior years, not change its bad auditing practices.

How to Mislead With Statistics
Dividends and Buybacks --- http://aswathdamodaran.blogspot.com/2019/02/january-2019-data-update-8-dividends.html
Jensen Comment
Not only should accounting students know how to account for dividends and buybacks, they should know how the two ways of getting cash to shareholders are different and yet related.
I like this article as a quick and easy way to teach students about this complicated issue.

Most of the political articles on buybacks are misleading, and voters are easily misled by those political articles.

This, like a lot of academic articles, falls among those articles that politicians would like to hide from the public. That's not very hard to do since voters are not much interested in our research and messaging.

How to Mislead With Statistics
Compensation Watch ’19: Internal Auditors ---
https://goingconcern.com/compensation-watch-19-internal-auditors/

Jensen Comment
Salary studies like this mislead due averaging (neans or medians) across many things, including company size, office location, public versus private sector, fringe benefits (especially retirement plans), opportunities for growth, technical expertice, and on and on and on. One can hardly compare the salrary of an internal auditor on Wall Street working for a huge investment bank with an internal auditor working for a small agricultural products company in Ames, Iowa. One can hardly compare an internal auditor trained primarily in traditional accounting with an internal auditor highly proficient in blockchain and artificial intelligence.

Averages, especially means, are misleading if standard deviations and skewness (kurtosis) are not revealed. When Bill Gates walks onto a college campus everybody on campus at that time becomes a millionaire.

How to Mislead With Statistics
How Much Accountants And Tax Preparers Earn In Every State ---
https://taxprof.typepad.com/taxprof_blog/2019/02/how-much-accountants-and-tax-preparers-earn-in-every-state.html

Jensen Comment
I could make my usual criticisms such as cost of living differences and state taxation differences that overwhelm the supposed earning differences by state.
I could also criticize the BLS mean statistics as not being accompanied with data on variances and skewness.
Averages get distorted by wages of newly-hired college graduates mixed in with employees having years of experience.
In tax season a whole lot of overtime gets paid to accountants who are tax preparers where not so much overtime gets paid to accountants who don't work in tax.

But mostly I will focus on the vagueness of what is a "an accountant and tax preparer." Some are entrepreneurs and partnerships (including LLC corporations), those equity owners of accounting firms. And accounting firms vary in size from no employees to thousands of employees. And those firms most likely mix revenues from tax preparation to systems consulting to auditing to whatever. It would be misleading merge what partners make with the salaries they pay their employee "accountants and tax preparers." And those salaries paid to employees probably have a lot of benefits not picked up in the BLS data such as profit sharing and bonuses and fringe benefits such as expensive training and day care subsidies.

My basic point is that "owners" of accounting firms are still doing a lot of the accounting, auditing, consulting, and tax work alongside their employees. Public accounting (and law) firms are not like NFL teams where owners are in the luxury boxes and not getting knocked around on the playing fields. What is paid to an employee in "salary" is typically only paid for the first 5-10 years until employees either become part owners of the firm or are moved out of public accounting into business firms or government (think FBI).

You just cannot compare what public accountants make in "salaries" with what accountants make in business firms and government where accountants spend their entire careers living on "salaries." Most public accountants are only on "salaries" for the first 5-10 years of their careers. After that they're working owners and no longer "public accountants working for owners."

And now we get to the most important reason the salaries in the above article are so low. The problem is definitional. CPAs having masters degrees are mixed in with "accountants and tax preparers" who might've never graduated from high school. The non-CPAs' low salaries drag down the BLS mean averages. Most candidates for the CPA exam have masters degrees since they have to have 150 or more college credits to even sit for the CPA exam.

How to Mislead With Statistics
Study finds no relationship between pay for public university presidents and money brought in from state appropriations or fund-raising ---
https://muse.jhu.edu/article/712610

Jensen Comment
Not only is this study misleading, it can possibly lead to behavior of university presidents that is well known and horribly wrong with CEOs of business firms. The problem is lag between efforts to increase funding and when those increases come to fruition years later. In business basing executive compensation based upon short time results can lead to disaster in terms of long-term performance. I think a case can be made today that the recent burnout of General Electric (GE) in part is due to too much focus on short-term variables (think yearly earnings changes) that left GE unprepared to sustain itself for the long haul.

WSJ: The Story of a Burned Out GE ---
https://www.wsj.com/articles/ge-powered-the-american-centurythen-it-burned-out-11544796010?mod=djcm_013019sm_us

. . .

The leadership meeting usually left executives refreshed, reassured that the foundation of GE’s success was not the power turbines or the jet engines so much as the people in that room, managers groomed in Crotonville who believed they could enter any industry, anywhere and dominate it.

Now, as they shuffled out after Bornstein’s talk, many felt shock and confusion. The reckoning had been a long time coming, and it was far from over. GE had defined and outlived the American Century, deftly navigating the shoals of depression, world war and the globalization of business. Even when things were at their worst, its belief in its history and its prowess made it feel titanic and impregnable. And, yet, unsinkable GE was taking on water fast.

This article is based on scores of interviews with dozens of people directly involved in these events. They include current and former board members, senior executives and employees at GE headquarters and in its various business units, as well as bankers and advisers employed by the company, investors in its stock, customers for its products and corporate analysts who evaluated its performance.
The reporting also reflects internal GE communications and documents, including emails, slide presentations and videos. Publicly available securities filings, court records, transcripts of meetings and previous Journal articles were also used. The Journal reached out to the individuals in this article and offered them the opportunity to comment.
Continued in a very long, depressing article

Jensen Added Comment
The problem in business is that investors are myopically focused on annual changes in revenues and reported profits. Executive compensation, in turn, is often disastrously based on short-term performance. To make matters worse, a longer-term focus on product development and investment in infrastructure hurts short-term performance metrics and may even leave

Short-term myopia is not always the case, especially when a company is doing something exciting that changes the short-term focus of investors. For years investors tolerated year after year of reported losses of Amazon because those investors sensed something big was going to happen over the long term --- and it did! For years investors tolerated Tesla year after year of reported losses in Tesla --- and nothing really big has happened yet.

But for companies like GE (that could've crushed Tesla in the early years) and Sears (that could've crushed Amazon in the early years) managements were more focused on short-term earnings and short-term revenues. And now we are staring forlorn at the rotting carcasses of GE and Sears.

My point here is that if we're going to pay a university CEO for short-term fund raising then it might be a disaster in terms of what that university president might otherwise be trying to accomplish for longer-term growth and sustainability.

Thus, I despise studies like the one focusing on short-tern fund raising at
https://muse.jhu.edu/article/712610

Let your university president be a Jeff Bezos rather than a Jeff Immelt ---
https://en.wikipedia.org/wiki/Jeff_Immelt

Beyond that there are all sorts of statistical inference questions I would raise about the study reported at
https://muse.jhu.edu/article/712610

"Lack of correlation" does not mean there were not any number of anecdotal successes of dogged high paid university presidents who worked under difficult circumstances to eventually bring home remarkable new funding and sustenance.

No competent statistician is going to conclude that we should not longer pay university presidents high salaries because this particular study concludes they cannot possibly be worth their high salaries.

I say garbage to the conclusions of the above study!

I was on the faculty of Trinity University (Texas) for 24 years, an institution with a remarkable endowment --- a university ranked Number 1 or 2 (by US News) for several decades among liberal arts universities in the West. I've witnessed time and time again where a current TU president obtained huge gifts due primarily to the efforts of former TU presidents. And efforts of the current TU president may not bear fruit until a succession of newer TU presidents have taken over the reins.

Trinity University should do whatever it takes ethically to sustain its Number 1 or 2 US News ranking, and this entails a lot more than fund raising in the short term ---
https://www.usnews.com/best-colleges/rankings/regional-universities-west

As a Result of Breaking SEC Rules, Deloitte Japan Is $2 Million Lighter In the Wallet ---
https://goingconcern.com/as-a-result-of-breaking-sec-rules-deloitte-japan-is-2-million-lighter-in-the-wallet/

Bob Jensen's threads on Deloitte's woes are at
http://faculty.trinity.edu/rjensen/fraud001.htm

General Electric is making an accounting change that'll make its one biggest problems look less severe (GE) ---
https://markets.businessinsider.com/news/stocks/general-electric-stock-price-accounting-change-cash-flow-problem-less-severe-2019-2-1027924478

General Electric's cash problem will look better in 2019 after an accounting change takes effect, an accounting professor says.

For reporting periods beginning after December 15, 2018, all public US companies should apply a new accounting standard that requires them to recognize financing-lease assets and operating-lease assets on their balance sheets. The previous accounting term only required companies to recognized capital lease-assets.

With the financing-lease assets and operating-lease assets now being counted as capital expenditures (CAPEX), companies' free cash flow (operating cash flow minus capital expenditure) will look different than they used to, Charles Mulford, professor of accounting at Georgia Institute of Technology, told Markets Insider. Companies that are not growing their fixed assets quickly, or are reducing them, such as General Electric, will see a positive adjustment in their free cash flow, and vice versa, he added.

According to Mulford, a simple scenario for a capital lease is taking out a loan and spending that money on new equipment. Under the previous accounting standard, the equipment gained through this lease shows up as a CAPEX on the financial statement.

In the case of using a finance lease, companies negotiate terms with a bank, which wires the money directly to the equipment lender. As companies didn't really touch the money, though still purchased the equipment, the equipment was not reported on the financial statement and only showed up in the footnote. But the new accounting standard sees it as little different than a capital lease, and thus requires it to be recognized as a CAPEX.

Operating leases do not transfer ownership of the new equipment, and payments are made for usage of the asset. A simple scenario is when leasing new equipment from a lender, the lessee makes payments periodically for the right to use the equipment — but does not gain equity in the equipment itself and will not own the equipment at the end of the lease. This type of asset is now required to be recognized on the balance sheet under the new accounting term.

Since companies' 2019 financial statements are not out yet, Mulford did the math on his own.

Finance-lease assets, in his eyes, can be viewed as non-cash CAPEX showed in the financial statements' footnotes. Therefore, by adding the non-cash CAPEX to CAPEX, companies that disclosed non-cash CAPEX, such as Amazon, would see their free cash flow lower. General Electric didn't post any non-cash CAPEX in its footnotes — at least from 2015 to 2017 — thus it was not affected at this level of adjustment.

Operating-lease assets should be recognized by their capitalized value, which represents what these assets would cost if they were purchased for cash, according to Mulford. He calculated the capitalized value of companies' operating-lease assets by applying a multiple to their annualized rent expense changes. He also added back the rent expense that year in the operating cash flow to avoid double accounting — since rent expense was already subtracted in the previous term. At this level, GE's free cash flow was adjusted higher because GE's rent expenditure that he added back is higher than the increase in GE's capitalized value of operating leases.

Companies like GE that are limiting their fixed assets will see the same phenomenon, with the adjustment being a positive one, raising adjusted free cash flow above the reported amount, said Mulford. He added that his calculation is just for reference, and when companies' 2019 financial results are reported later, they are required to recognize the two lease assets on their balance sheets. Based on GE's 2017 financial statement, its most recently disclosed annual statement, Mulford sees GE's free cash flow improving by about 2.4% under the new accounting term.

Recently, General Electric has sped up efforts to reduce debt and free up cash. In June, General Electric announced a massive reorganization, saying it would spin-off its healthcare business and split from the oil giant Baker Hughes. The conglomerate also said it would reduce its debt by $25 billion in an effort to shore up its balance sheet.

Last October, GE announced it was taking a $23 billion write-down on its power business, which it was also splitting in two, and slashing the company's dividend to a penny.

And last Thursday, the company said GE Capital sold off $8 billion of assets in the fourth quarter and brought its debt load down by $21 billion. GE also announced that it reached an agreement in principal for a $1.5 billion settlement with the Department of Justice over WMC, its defunct subprime-mortgage business.

GE was up 28% this year through Monday.

Now read:

General Electric is surging after report says the buyout firm Apollo is eyeing a bid for its jet-leasing business (GE)

GE slashes its dividend to a penny, says the SEC and the DOJ are investigating its power-business charge

General Electric's new CEO should 'put a floor in the stock,' RBC says

General Electric jumps after reportedly filing a confidential IPO for its healthcare unit

CEOs profit from issuing negative news releases ahead of stock option grant dates ---
https://phys.org/news/2019-02-ceos-profit-issuing-negative-news.html

Some CEOs are profiting from releasing more negative news releases leading up to their executive stock option grant date, according to new research from the University of Notre Dame.

The move depresses the stock price and lowers the guaranteed "strike price," which allows the CEO to exercise their stock option to buy a specified number of shares below market value. Should the stock price go up, the executive can then sell the shares at market price and keep the difference as profit.

"Unintended Consequences: Information Releases and CEO Stock Option Grants," forthcoming in the Academy of Management Journal by Tim Hubbard, assistant professor of management in Notre Dame's Mendoza College of Business, finds that the stock prices are significantly lower than expected during these periods, leading to major gains for CEOs—between $143,500 and $839,000, depending on the assumptions.

The study looked at option grants of U.S. publicly traded companies from 2009 to 2013, examining the cumulative abnormal returns before option grant dates. The researchers collected all news releases from each firm during the period and used this data to understand whether firms release more negative news releases in this time frame and the type of negative news.

How to compensate CEOs in a way that encourages them to act in the best interest of their firms has been the topic of much research and regulation. Still, problems remain. For example, the options backdating scandal, with cases first emerging in 2006, ensnared dozens of executives over allegations that the dates of stock-option awards had been manipulated to enrich recipients.

There were regulation changes in the wake of the scandal, though Hubbard says some CEOs continue trying to manipulate the system.

"Incentive contracts are supposed to push an executive to increase the share price for stockholders," Hubbard says. "However, stock options have a unique period right before the grant date where CEOs are encouraged to lower their firm's share price—this is the action that will create the most value for them personally. When we examine which CEOs are most likely to try to use this mechanism to lower their stock price, we see that CEOs that are underpaid compared to their peers and those with significant discretion are more likely to release negative news during the period before the grant date, which lowers the stock price."

The study points to a key example from 2011 and 2012—years after the options backdating scandal and a decade after the passage of the Sarbanes-Oxley Act of 2002, which was enacted in response to a series of high-profile financial scandals including Enron and WorldCom in an effort to improve corporate governance and accountability.

"The CEO of a large logistics firm received options on nearly 200,000 shares," Hubbard says. "One month earlier, the stock traded about 5 percent higher than on the grant date. A month after, the stock price returned to pre-grant levels. The same pattern occurred the prior year even though the stock price shifted little during that year.

Continued article

Functional Finance --- https://en.wikipedia.org/wiki/Functional_finance

Printing Money: What’s Wrong With Abba Lerner's Functional Finance? ---
https://www.nytimes.com/2019/02/12/opinion/whats-wrong-with-functional-finance-wonkish.html
This article may not be free much longer

Jensen Comment
Abba Lerner had in mine printing money to create money. Most nations do not create money in this manner. For example, the USA Treasury printed the greenbacks in your wallet. But the USA Treasury as a rule does not create money in the USA money supply. Commercial banks create money in the money supply. Suppose you go to the bank to get a $10,000 loan for a new swimming pool. When the bank credits your checking account for $10,000 the bank has created money. You can spend that money without ever converting it into greenbacks. You can simply write checks to the people who build your pool. Those people can in turn deposit your checks into their accounts and spend it without ever converting that $10,000 into greenbacks. But suppose the company that built your pool needed $100 in petty cash. That company could've converted $100 its checking account into $100 in greenbacks. In economics we say that the company simply has made a $100 liquidity preference decision.

My point is that the USA Treasury prints money to satisfy liquidity preferences regarding money that was created previously by commercial banks.

But commercial banks cannot go wild like Zimbabwe when creating money ---
https://en.wikipedia.org/wiki/Money_supply

Quantitative easing is a controversial exception that I won't go into here ---
https://en.wikipedia.org/wiki/Quantitative_easing

Abba Lerner's theoretical "Functional Finance" is an entirely different way of creating money and a very risky way for governments to create money ---
https://en.wikipedia.org/wiki/Functional_finance

Blockchain --- https://en.wikipedia.org/wiki/Blockchain

Once hailed as unhackable, blockchains are now getting hacked ---
https://www.technologyreview.com/s/612974/once-hailed-as-unhackable-blockchains-are-now-getting-hacked/

Beyond Bitcoin: Here are some of the new use cases for distributed ledger technology ---
https://www.businessinsider.com/beyond-bitcoin-report-2018-3

Blockchain Success Stories Show Valuable Opportunities ---
https://readwrite.com/2019/02/05/blockchain-success-stories-show-valuable-opportunities/

Blockchain is still waiting for its killer app ---
https://qz.com/1542143/blockchain-is-still-waiting-for-its-killer-app/

Blockchain Success Stories Show Valuable Opportunities ---
https://readwrite.com/2019/02/05/blockchain-success-stories-show-valuable-opportunities/

What do we mean when we talk about blockchain, anyway? ---
https://qz.com/1538524/what-do-we-mean-when-we-talk-about-blockchain-anyway/

Harvard University and the apparel company Levi Strauss will work together to create a blockchain-based system for auditing factory health and safety with self-reports from workers ---
Click Here

Tangem, a startup that makes “blockchain smart card wallets,” says it will make “physical banknotes” for new digital currency the government of the Marshall Islands is creating ---
Click Here

Cryptocurrency --- https://en.wikipedia.org/wiki/Cryptocurrency

How Cryptocurrency Investors Can Prevent Tax Audits ---
https://www.accountingweb.com/aa/auditing/will-cryptocurrency-tax-returns-stand-up-to-irs-audits

Hackers have stolen nearly $2 billion in cryptocurrency since the start of 2017 ---
Click Here

J.P. Morgan Chase will be the first major bank to introduce its own cryptocurrency, called JPM Coin. Each JPM Coin will be redeemable for exactly $1, like a so-called stablecoin.

A college student charged with stealing $5 million in cryptocurrency by hijacking phone numbers—called SIM swapping—has pled guilty and will go to jail for 10 years ---
Click Here

January 2019 Issue The Taxation of Cryptocurrency ---
https://www.cpajournal.com/2019/01/24/the-taxation-of-cryptocurrency/

How do companies report Cryptocurrency under USA GAAP?
Hint: Think Intangibles
If you have access go to the FASB's ASC 350

Iran plans to launch a state-backed cryptocurrency this year It’s part of efforts to work around US sanctions ---
Click Here

Jerry, Marge, and the Rolldown Lottery ---
https://www.independent.co.uk/news/world/americas/lottery-code-state-name-of-couple-michigan-win-movie-a8751046.html

Jensen Comment
This article still does not put Jerry's legal strategy into Jerry's algebraic equations, but it does give one of the best summaries of how his strategy works. It depends heavily on not having more Jerrys in the game.

Jerry formed a corporation to use this strategy in Michigan and Massachusetts. Only his closest local friends were shareholders.

Note that although the corporation's winnings were $26 million, the expense was $18 million in tons of lottery tickets such that the profits were under $8 million. It was also a lot of work buying and sorting through all those tickets. Jerry also worried that other Jerrys would enter the game. Sometimes you can get too much of a good thing in life.

On the AECM a claim was made that the some vendors of the tickets violated the law when selling Jerry and Marge so many tickets. I've not seen any support for that claim.

U.S. appeals court reverses ruling on Puerto Rico bonds ---
https://www.statedatalab.org/news/detail/us-appeals-court-reverses-ruling-on-puerto-rico-bonds

Is California’s pension system already underwater?
https://www.statedatalab.org/news/detail/is-californias-pension-system-already-underwater

Illinois lawmakers want to go after corporate profits in tax havens
Several states have similar taxing structures
Oregon’s worldwide reporting law was repealed in 2018 after lawmakers found diminishing returns and raised concerns about lawsuits ---
https://www.mdjonline.com/neighbor_newspapers/extra/news/illinois-lawmakers-want-to-go-after-corporate-profits-in-tax/article_6194e8d4-49b4-533b-b08f-fe262b536858.html

Do Investors Care At All About Audits Anymore?
http://retheauditors.com/2019/01/24/do-investors-care-at-all-about-audits-anymore/

. . .

Theranos was a wolf at the door, looking for pigs, that the accounting profession is, for now, ignoring.

Given that most investors seem to be just fine with buying and selling trillions of private and public company shares based on unaudited earnings information filled with unaudited non-GAAP metrics, is it only a matter of time before the wolf —complete relief from all audit-related regulatory burden and expense — blows the whole house down? m

Jensen Comment
Cynics might contend that when companies go bankrupt the external auditors are the only parties with deep pockets left to sue.

Legal and professional fees in divorce case not deductible as business expenses ---
https://www.thetaxadviser.com/issues/2019/feb/legal-professional-fees-divorce-case-not-deductible-business-expenses.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=20Feb2019

The Status of the ‘Marriage Penalty’: An Update from the Tax Cuts and Jobs Act ---
https://www.cpajournal.com/2019/02/04/the-status-of-the-marriage-penalty-an-update-from-the-tax-cuts-and-jobs-act/

If the Shoe Fits: Reasons Why Some of You May Want to Delay Filing Your 2018 Tax Return (not beyond April 15 of course unless you want to file for extended time) ---
https://www.cnbc.com/2019/02/06/congress-has-yet-to-approve-these-valuable-tax-breaks-for-2018.html
Jensen Comment
Chances of getting these breaks are probably lower given the election outcome of 2018 giving rise to legislators that want more taxes rather than less taxes.

Tidbits for Minimizing Taxes (know your recent court decisions where loopholes are created) ---
https://www.accountingweb.com/tax/individuals/talking-taxes-with-clients-part-one?source=tx020419

TCJA Impact Examining the 2017–2018 Tax Law Changes ---
https://www.cpajournal.com/2019/01/22/examining-the-2017-2018-tax-law-changes/

How to Get Tax Benefits Out of Interest Expenses ---
https://www.accountingweb.com/tax/individuals/how-to-get-tax-benefits-out-of-interest-expenses?source=ei013019

Apple has agreed to cough up $571 million in back taxes to France It failed to pay its full tax bill for a period of 10 years---
Click Here

Big box stores (think Home Depot or Walmart) lower their property taxes through a surreal trick called “dark store theory.” States are finally fighting back ---
https://slate.com/business/2019/02/dark-store-theory-big-box-stores-property-taxes.html
Jensen Comment
There are interesting problems with taxing big box stores in this era of online competition Certainly a case can be made for taxing them for services they receive such as police and fire protection, and if you stretch it they even benefit from schools to the extent they hire local graduates. However, think a bit about the debate issue for you college students when the local Walmart competes with a local catalog store (Sears if there are any such stores left) versus Amazon. Perhaps the online stores pay some property taxes where they have warehouses and offices, but they perhaps made tremendous deals for property tax relief before they elected to build a warehouse.

For debate purposes suppose that a Brand X lawn tractor available from a Home Depot in Concord, NH can also be purchased online from Amazon. The tractors are identical. The Home Depot store in Concord pays local property taxes. Assume that due to a deal made in on its Ohio warehouse that Amazon pays no property taxes for storing and selling its lawn tractor. It would seem that Home Depot is eating a loss for the property taxes paid that are not paid by Amazon. If the price is identical under either option with no shipping costs added to John Smith's invoice then it begins to look like Amazon has an unfair tax advantage. We might argue that Amazon does not need Concord police and fire protection and is not hiring any local high school graduates. We might also that Concord is getting more benefits from Home Depot than Amazon due to the extent that employees of Home Depot live in Concord.

I don't have an answer to the above taxing debate issue, but debating this issue may help students understand the complications of tax equity.

Excel: How to Find the Percentage of Difference Between Values in Excel ---
https://www.howtogeek.com/405548/how-to-find-the-percentage-of-difference-between-values-in-excel/

Excel: How to Excel with past, present and future data (trend analysis)

Excel: How to Sort Values in Microsoft Excel ---
https://www.howtogeek.com/400679/how-to-sort-values-in-microsoft-excel/

Excel: Upgrade to the Latest Excel Features ---
https://www.journalofaccountancy.com/issues/2019/feb/microsoft-office-insider.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=15Feb2019

Excel (from PC World): Cell Styles and Smart Art, Drawing, Graphics, Picture and Chart Tools ---
https://www.pcworld.com/article/3300744/microsoft-office/excel-stylesheets-cell-styles-and-smart-art-drawing-graphics-picture-and-chart-tools.html

Excel: Tips for Excel-based financial reports ---
https://www.journalofaccountancy.com/issues/2019/feb/excel-based-financial-reports.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Feb2019

Ex-Walmart exec says theft helped kill Walmart's cashierless checkout technology ---
https://www.businessinsider.com/ex-walmart-exec-says-theft-helped-kill-walmarts-cashierless-tech-2019-2

. . .

"You think that the theft is bad on self-checkouts? Wait until you try Scan & Go, where nobody is watching the customers out in the aisles," said Joel Larson, a former Walmart senior manager who led Scan & Go as the head of checkout innovation before leaving the company in October.

Walmart representatives have previously discussed the decision to end the program and cited problems such as low customer-adoption rates and various errors.

"We found too many errors in the process ... making sure people were scanning things right, multiple quantities, that sort of thing," Walmart chief technology officer Jeremy King said during a conference last month.

Continued in article

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

A four-year-old trucking startup achieved a major victory in fixing one of transportation’s biggest inefficiencies — and it’s a huge win for truck drivers ---
https://www.businessinsider.com/convoy-has-totally-automated-freight-matching-2019-2

Jensen Comment
I hope this technology spreads like wildfire. I have a friend who, as an independent, drove his own 18-wheel refrigerated truck for nearly a decade. He eventually got out of this business because of extortion. He says the shippers controlling trailer loads demanded serious bribes or they would not load the trucks.

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

NPR: New York City will reimburse the Federal Emergency Management Agency $5.3 million after defrauding the agency in the aftermath of 2012’s Hurricane Sandy ---
https://www.npr.org/2019/02/21/696517319/new-york-city-admits-defrauding-fema-out-of-millions-after-superstorm-sandy
For example, many vehicles reported damaged by the storm really were damaged before the storm.

What happens when a company loses $12.6 billion in one quarter?
https://www.theatlas.com/charts/SygJohTHE
Kraft Heinz shares took a dive after it revealed Securities and Exchange Commission subpoena over its accounting practices ---
https://www.businessinsider.com/kraft-heinz-shares-drop-subpoena-securities-exchange-commission-2019-2

AICPA quiz on combating contract and procurement fraud ---
https://www.journalofaccountancy.com/issues/2019/feb/contract-and-procurement-fraud.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=18Feb2019

Four Nordic countries are among seven countries with the lowest level of public-sector corruption, according to a report. The USA plummeted out of the top 20.---
https://www.fm-magazine.com/news/2019/feb/countries-with-cleanest-reputations-201920564.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=18Feb2019

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Accounting firms are vulnerable to whaling scams, where cybercriminals impersonate a senior executive. ---
https://www.intheblack.com/articles/2019/02/12/tips-to-foil-whaling-scam

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

From David Giles --- https://davegiles.blogspot.com/2019/02/february-reading.html

February 2019 Readings in Econometrics

Now that Groundhog Day is behind us, perhaps we can focus on catching up on our reading?

·                     Deboulets, L. D. D., 2018. A review on variable selection in regression. Econometrics, 6(4), 45.

·                     Efron, B. & C. Morris, 1977. Stein's paradox in statistics. Scientific American, 236(5), 119-127.

·                     Khan, W. M. & A. u I. Khan, 2018. Most stringent test of independence for time series. Communications in Statistics - Simulation and Computation, online.

·                     Pedroni, P., 2018. Panel cointegration techniques and open challenges. Forthcoming in Panel Data Econometrics, Vol. 1: Theory, Elsevier.

·                     Steel, M. F., J., 2018. Model averaging and its use in economics. MPRA Paper No. 90110.

·                     Tay, A. S. & K. F. Wallis, 2000. Density forecasting: A survey. Journal of Forecasting, 19, 235-254.

P-value --- https://en.wikipedia.org/wiki/P-value

How to Mislead With Statistics
P-values can be misleading when hypotheses are incorrect

February 6, 2019 Message from Tom Dyckman (now retired from Cornell University)

Bob: Here is a new paper you might want to alert your readers too along with Dave's blog today.

Greenland, S., S. J. Senn, K. R. Rothman, J. B. Carlin, C. Poole, S. N. Goodman, & D. G. Altman, 2016. Statistical tests, p values, confidence intervals, and power: A guide to misinterpretations. European Journal of Epidemiology, 31, 337-350.
https://fermatslibrary.com/s/statistical-tests-p-values-confidence-intervals-and-power-a-guide-to-misinterpretations

Abstract
Misinterpretation and abuse of statistical tests, conﬁdence intervals, and statistical power have been decried for decades, yet remain rampant. A key problem is that there are no interpretations of these concepts that are at once simple, intuitive, correct, and foolproof. Instead, correct use and interpretation of these statistics requires an attention to detail which seems to tax the patience of working scientists. This high cognitive demand has led to an epidemic of shortcut deﬁnitions and interpretations that are simply wrong, sometimes disastrously so—and yet these misinterpretations dominate much of the scientiﬁc literature. In light of this problem, we provide deﬁnitions and a discussion of basic statistics that are more general and critical than typically found in traditional introductory expositions. Our goal is to provide a resource for instructors, researchers, and consumers of statistics whose knowledge of statistical theory and technique may be limited but who wish to avoid and spot misinterpretations. We emphasize how violation of often unstated analysis protocols (such as selecting analyses for presentation based on the P values they produce) can lead to small P values even if the declared test hypothesis is correct, and can lead to large P values even if that hypothesis is incorrect. We then provide an explanatory list of 25 misinterpretations of P values, conﬁdence intervals, and power. We conclude with guidelines for improving statistical interpretation and reporting.

Continued in article

How Many Ways Can You Misinterpret p-Values, Confidence Intervals, Statistical Tests, and Power? 25
https://replicationnetwork.com/2019/02/09/how-many-ways-can-you-misinterpret-p-values-confidence-intervals-statistical-tests-and-power-25/

Jensen Comment
The sad thing is that journal editors of leading accounting research journals seem to not care --- they're addicted to P-values

Why aren't our leading accounting research journals providing warning labels on p-values common to virtually all published empirical studies in accounting?

p-value --- https://en.wikipedia.org/wiki/P-value

In science p-values have fallen from grace, and leading scientists are recommending something tantamount to warning labels on tables of p-values in virtually all statistical inference presentations ---
Scroll down below

But our editors of leading accounting research journals seem to be totally oblivious to what scientists now recommend regarding warning labels for p-values.

Is there any accounting research journal policy statement that even acknowledges the need for warning labels on p-values published in articles?

Is there any accounting research article having a table of p-values with a warning label?

My Exhibit A today is the following recent article published authors who are our discipline's leading accountics science researchers. I read this article and, in particular, was interested in finding warning labels for the p-values published in the article. I find no such warning labels. Nothing is provided with respect to p-value warnings that are becoming increasingly common in scientific papers.

Where are the P-value warnings?
The JOBS Act and Information Uncertainty in IPO Firms

The Accounting Review
Volume 92, Issue 6 (November 2017)
http://aaajournals.org/doi/abs/10.2308/accr-51721

Mary E. Barth
Stanford University

Wayne R. Landsman
The University of North Carolina at Chapel Hill

Daniel J. Taylor
University of Pennsylvania

Supplemental material can be accessed by clicking the link in Appendix A.

ABSTRACT:

This study examines the effect of the Jumpstart Our Business Startups Act (JOBS Act) on information uncertainty in IPO firms. The JOBS Act creates a new category of issuer, the Emerging Growth Company (EGC), and exempts EGCs from several disclosures required for non-EGCs. Our findings are consistent with proprietary cost concerns motivating EGCs to eliminate some of the previously mandatory disclosures, which increases information uncertainty in the IPO market, attracts investors who rely more on private information, and leads EGCs to provide additional post-IPO disclosures to mitigate the increased information uncertainty. Our results also are consistent with agency explanations, whereby EGCs exploit the JOBS Act provisions to avoid compensation-related disclosures, which results in larger IPO underpricing for such firms. Overall, we provide evidence on how reduced mandatory disclosure affects the IPO market.

Keywords: JOBS Act, mandatory disclosure, voluntary disclosure, proprietary costs, information uncertainty, underpricing, volatility

The “New Statistics” and Nullifying the Null: Twelve Actions for Improving Quantitative Accounting Research Quality and Integrity
By Dan N. Stone
Accounting Horizons: March 2018, Vol. 32, No. 1, pp. 105-120.
https://doi.org/10.2308/acch-51949
An earlier draft of this manuscript received the “Best Theoretical Research Award” at the 2016 21st Annual Ethics Research Symposium.

Leveraging accounting scholars' expertise in the integrity of information and evidence, and in managers' self-interested discretion in information collection and reporting, offers the possibility of accounting scholars creating, promoting, and adapting methods to ensure that accounting research is of exemplary integrity and quality. This manuscript uses the six principles from the recent American Statistical Association (ASA) report on p-values as an organizing framework, and considers some implications of these principles for quantitative accounting research. It also proposes 12 actions, in three categories (community actions, redefining research quality, and ranking academic accounting journals) for improving quantitative accounting research quality and integrity. It concludes with a clarion call to our community to create, adopt, and promote scholarship practices and policies that lead in scholarly integrity.

. . .

Dyckman (2016, Abstract) observes: “Accounting as an empirical research discipline appears to be the last of the research communities to face up to the inherent problems of significance test use and abuse.”

The recent American Statistical Association (ASA) statement on the appropriate use of NHST and p-values (Wasserstein and Lazar 2016) offers a starting point for considering the limited potential for NHST and p-values to contribute to quantitative accounting research. I initially describe the six principles and, following this, link their continued use to the future of accounting research. The ASA statement begins by observing that the continued use of NHST and p-values, despite common knowledge of their deep flaws, likely results from a cultural circularity: statisticians teach NHST because that is what scholars and journal editors use. And scholars and journal editors use NHST because that is what statisticians teach. Sound familiar? I have been teaching the introductory Ph.D. class in accountancy research for about 25 years. As a former AAA journal editor, I am (mostly) guilty as charged. For 25 years I have reviewed NHST in my introductory class (although, for the past ten years I have also discussed its deep flaws and substantial limits). As a journal editor, I expected authors to use NHST methods. However, for at least ten years, I have recommended, at a minimum, the supplemental reporting procedures that I discuss herein, often to resistant editors and authors.

Table 1 presents the six ASA principles. The first acknowledges the common use of p-values and their embeddedness, typically, in NHST. Specifically, p-values allow one to opine on the extent to which data adhere to a “null” hypothesis of no difference (i.e., when applied to comparing two or more groups) or no relationship (i.e., when applied to relations between two or more variables). When the assumptions of the model hold, smaller p-values provide less support for the no difference hypothesis, while larger p-values provide greater support for the no difference hypothesis. The second principle states what a p-value is not, by refuting two common misconceptions about p-values, i.e., that a p-value tests whether a tested hypothesis is “true,” and “the probability that the data were produced by random chance alone.”

. . .

When It Is Not an “Empirical Question”—The Criticality of Triangulated Methods and Diverse Scholars to Knowledge Production

Within accounting research, the misuse of p-values as arbiters of truth is often found in the regrettable bromide, “it's an empirical question,” used in relation to a research question that is tested using only NHST and p-values. Such a formulation, when operationalized in NHST and p-values, is exactly the misuse identified in Principle No. 2 of the ASA. Specifically, “it's an empirical question” implies that the NHST enterprise produces truth—that the method resolves the uncertainty regarding a real-world question; it does not, for reasons articulated in the ASA statement (Principle No. 2 of the ASA, p. 131):

Researchers often wish to turn a p-value into a statement about the truth of a null hypothesis, or about the probability that random chance produced the observed data. The p-value is neither. It is a statement about data in relation to a specified hypothetical explanation, and is not a statement about the explanation itself.

Stated differently, NHST examines the extent to which the observed data are consistent with an odd, often irrelevant (null) hypothesis. In a strict sense, the null hypothesis can never be true, since differences always exist between two groups, and there is always some relationship between two variables. Hence, the relevant pragmatic question, which is unrecognized in NHST, is how big the difference is between two groups, and how big the relationship is between two variables. Pragmatically, p-values heavily depend on sample sizes and statistical power, i.e., ceteris paribus, p-values decrease as statistical power (and sample size) increases (Cohen 1992).³ Hence, with the “Big Data” (i.e., very large) samples that are increasingly common in much archival accounting research, small p-values often obtain since the statistical power of tests usually approaches 1.0. Nevertheless, the relevant practical questions that matter in an applied discipline are not answered by a p-value. And if the research method and reporting stops with a p-value, the relevant practical question remains uninvestigated. As Cohen (1990) states, “the primary product of a research inquiry is one or more measures of effect size, not p values” (see also Ellis 2010).

As with all quantitative research methods, the NHST depends upon a set of epistemological (about truth), ontological (about reality), and statistical (about the data) assumptions (cf. Chua 1986). In a few cases, a p-value is one potentially useful bit of evidence that bears on a research question, but this exercise, in isolation, never produces “truth” or provides much insight into a practical question. To claim otherwise is to misunderstand the weak validity of single study, mono-method, and mono-measure research (Shadish, Cook, and Campbell 2002). One implication of the failings of NHST—in isolation—to produce truth is the necessity of “triangulated” methods to scientific scholarship (Jick 1979). The form of method triangulation considered herein is the use of multiple methods (e.g., an experiment and archival data or a survey and interviews) in investigating a critical research question. This approach to method triangulation helps ensure that the observed variation in a phenomenon results from true variation in the phenomenon and related data, and not from the idiosyncratic properties of a single measure or method (Campbell and Fiske 1959). For example, accounting scholars, in applying triangulation, might investigate the use (and misuse) of discretion by corporate managers through archival investigation, experiments, surveys, and interviews. Our confidence in the results increases to the extent that multiple methods and results, and differing investigators, produce similar conclusions.

But the trend in accounting scholarship is the exact opposite; i.e., toward a single research method, i.e., large-sample evidence using general linear models (GLMs) and standardized financial and auditing databases (Tuttle and Dillard 2007). This trend contradicts a shared goal of producing a cumulative body of scientific evidence that bears on critical accounting questions. Any single method, i.e., a scientific “monoculture,” produces procrustean “truths” about a phenomenon just as a “monoculture” ecological environment fails to represent the scientific diversity of an environmental ecology because of its, usually artificial, domination by a single species. A community of scholars seeking to generate science must, necessarily, be a methodologically diverse community not due to “political correctness” (i.e., diversity for its own sake), but because its ability to understand a complex phenomenon, and generate accurate descriptions of it, requires diverse methods and data (Weick 1983). Following Weick (1983), imagine a camera lens that has only one setting. Such a camera will capture, with clarity, objects at exactly the distance setting of the lens. All other objects will be out of focus. Similarly, a scientific community with only one methodological tool, e.g., financial, archival research using standardized datasets, will be constrained to studying only a fraction of the richness of the ecology of accounting information. Capturing a richer ecological space requires richer methods and questions.

. . .

Research on the tragic deaths of firefighters notes a curious paradox. Firefighters who are near safety will often retain their tools and perish in the growing flames, rather than drop their now-useless tools and flee to safety (e.g., Weick 1996). Why do firefighters hold onto their (useless) tools and die? Although the reasons are varied and complex, one crucial factor is the experience of vu jade, i.e., of experiencing that which one has never seen before, that for which one is under trained, and that which calls for actions that contradict deeply learned behavior. Partly, firefighters retain useless tools and perish because, to drop one's long-held tools and run is to admit defeat, to admit that familiar, long-used technologies are now useless, and to admit a profound misjudgment of relevant risks.
Sound familiar? Scholarship, and accounting scholarship, is now in a vu jade world. We retain our familiar but now antiquated tools to the demise of our credibility, relevance, and legitimacy. p-values and NHST are now the metaphoric equivalent of the tools that firefighters, who facing immediate death, kept, rather than admitting the tools' obsolescence in the face of new, unfamiliar risks. In short, it is time to drop our familiar tools and quickly learn their replacements, which are adapted to the emerging “Big Data,” “big computing” world

Bob Jensen's threads on what went wrong in accountics science ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Review of “The Unappreciated Heterogeneity of Effect Sizes:Implications for Power, Precision, Planning of Research, and Replication” by David Kenny and Charles Judd, posted at Open Science Framework (OSF)] ---
https://replicationnetwork.com/2019/01/29/what-if-there-isnt-a-single-effect-size-implications-for-power-calculations-hypothesis-testing-confidence-intervals-and-replications/

“The goal of this article is to examine the implications of effect size heterogeneity for power analysis, the precision of effect estimation, and the planning of both original and replication research.”

“…given effect heterogeneity, the power in testing an effect in any particular study is different from what conventional power analyses suggest, and the extent to which this is true depends on the magnitude of the heterogeneity. Whenever a conventional power analyses yields a power value less than .50, an estimate that allows for heterogeneity is greater; and when a conventional analysis yields a power value greater than .50, the estimate given heterogeneity is less.”

“…given some heterogeneity and a small to moderate average effect size, there is a non-trivial chance of finding a significant effect in the opposite direction from the average effect size reported in the literature. …This probability increases as N increases.”

“Many analysts recommend what might be called a one-basket strategy. They put all their eggs in the one basket of a very large N study. … such a strategy is misguided … given the same total N and heterogeneity, multiple studies are better than a single study.”

“In the presence of heterogeneity, our results show that power is not nearly as high as it would seem and that even large N studies may have a non-trivial chance of finding a result in the opposite direction from the original study. This makes us question the wisdom of placing a great deal of faith in a single replication study. The presence of heterogeneity implies that there are a variety of true effects that could be produced.”

Continued in article

GDP Deflator --- https://en.wikipedia.org/wiki/GDP_deflator

If the gdp deflator is off, which financial investments should you make? ---
https://marginalrevolution.com/marginalrevolution/2019/02/if-the-gdp-deflator-is-off-which-financial-investments-should-you-make.html

Bayesian Inference --- https://en.wikipedia.org/wiki/Bayesian_inference

Book: Accounting Theory as a Bayesian Discipline by David Johnstone

Suggested Citation: David Johnstone (2018), “Accounting Theory as a Bayesian Discipline”, Foundations and Trends R in Accounting: Vol. 13, No. 1-2, pp 1–266.
DOI: 10.1561/1400000056.
https://www.nowpublishers.com/article/Details/ACC-056

Table of contents:
1. Introduction
2. Bayesianism Early in Accounting Theory
3. Survey of Bayesian Fundamentals
4. Case Study: Using All the Evidence
5. Is Accounting Bayesian or Frequentist?
6. Decision Support Role of Accounting Information
7. Demski's (1973) Impossibility Result
8. Does Information Reduce Uncertainty
9. How Information Combines
10. Ex Ante Effect of Greater Risk/Uncertainty
11. Ex Post Decision Outcomes 12. Information Uncertainty
13. Conditioning Beliefs and the Cost of Capital
14. Reliance on the Normal-Normal Model
15. Bayesian Subjective Beta
16. Other Bayesian Points of Interest
17. Conclusion
Acknowledgements
References

Abstract

The Bayesian logic of probability, evidence and decision is the presumed rule of reasoning in analytical models of accounting disclosure. Any rational explication of the decades-old accounting notions of "information content", "value relevance", "decision useful", and possibly conservatism, is inevitably Bayesian. By raising some of the probability principles, paradoxes and surprises in Bayesian theory, intuition in accounting theory about information, and its value, can be tested and enhanced. Of all the branches of the social sciences, accounting information theory begs Bayesian insights. This monograph lays out the main logical constructs and principles of Bayesianism, and relates them to important contributions in the theoretical accounting literature. The approach taken is essentially "old-fashioned" normative statistics, building on the expositions of Demski, Ijiri, Feltham and other early accounting theorists who brought Bayesian theory to accounting theory. Some history of this nexus, and the role of business schools in the development of Bayesian statistics in the 1950–1970s, is described. Later developments in accounting, especially noisy rational expectations models under which the information reported by firms is endogenous, rather than unaffected or "drawn from nature", make the task of Bayesian inference more difficult yet no different in principle. The information user must still revise beliefs based on what is reported. The extra complexity is that users must allow for the firm's perceived disclosure motives and other relevant background knowledge in their Bayesian models. A known strength of Bayesian modelling is that subjective considerations are admitted and formally incorporated. Allowances for perceived self-interest or biased reporting, along with any other apparent signal defects or "information uncertainty", are part and parcel of Bayesian information theory. DOI:10.1561/1400000056

Selected Quotation from Chapter 1

Chapter 1

This monograph introduces Bayesian theory and its role in statistical accounting information theory. Its intended audience includes accounting PhD students and researchers. The Bayesian statistical logic of probability, evidence and decision lies at the historical and modern epicenter of accounting thought and research. It is not only the presumed rule of reasoning in analytical models of accounting disclosure but also the default position for empiricists when hypothesizing about how the users of financial statements think:

Based on Bayesian decision theory research (e.g. DeGroot, 1970) that shows that loss-minimizing investors place less weight on noisier (i.e. more uncertain) information, we expect to observe more muted initial market reactions to unexpected earnings signals that have higher information uncertainty. (Francis et al., 2007, p. 408)

Bayesian logic comes to light throughout accounting research. It is the soul of most strategic disclosure models, for the reason that any other model of investor behavior implies an incoherence or inconsistency in beliefs and actions by which the investor will overall surely lose to a more coherent market or opponent:

In theory-based, economic analyses, reliance on Bayes rule is so routinized an assumption as rarely to warrant any justification. The compelling feature of Bayes rule is that it implies the most efficient use of information. Consequently, in market settings, investors who use information more efficiently (i.e. Bayesians) should be able to exploit and dominate their less efficient counterparts. (Verrecchia, 2001, p. 123)

Bayesianism is similarly a large part of the stated and unstated motivation of empirical studies of how market prices and their implied costs of capital react to better financial disclosure. Investors are taken to impose discount rates or costs of capital consistent with their best possible (i.e. most rational) probability assessments. Summarizing their philosophical position, Chen and Schipper (2016) argued for theory to play a greater part in accounting PhD programs and in empirical research designs. Their view of accounting is overtly Bayesian. They highlight the role of accounting measurements as information for fundamental analysis, which is understood as the formation of beliefs about the firm’s cash flows and risks, culminating in financial investment decisions:

Analyses of different accounting measurement attributes (for example, fair value and historical cost) illustrate the potential benefit of using theory to discipline empirical analysis. A general question that accounting researchers are interested in is whether accounting measurements matter, in the sense of whether different accounting measurement attributes for the same item lead to differences in investors’ assessment of firms’ fundamentals and therefore affect investors’ decision-making. (Chen and Schipper, 2016)

Similarly, Barth (2006b) notes an array of market effects that are indicative of accounting information having met its objective, namely to alter investors’ beliefs and thus actions:

Some [empirical research] designs use capital market metrics, other than equity market value, such as trading volume, cost of capital estimates, and bond ratings. These studies help to provide insights into the role of accounting in capital markets. Beaver (1968) is the seminal paper in this literature and shows that accounting information changes investors’ beliefs by showing that trading volume increases at earnings announcement dates. (Barth, 2006b, p. 95)

It could be argued that using information for decision-making — and hence logical (i.e. Bayesian) reasoning — all goes without saying. The retrospective provided by Chen and Schipper suggests otherwise. They explain that even theoretically formal and rigorous valuation models, like the Ohlson residual income model, are essentially non-Bayesian, because they feed accounting information into a finance-based valuation model rather than feeding Bayes theorem. Any implicit belief revision upon the Ohlson framework is not brought to light:

This valuation approach does not model how investors use accounting information to update their beliefs about firms’ future dividends. Therefore, the value relevance literature circumvents what some might view as a basic question to be asked about differences in accounting measurement attributes, namely, do the different measurements indeed result in differences in information used by investors. Fur- thermore, because the valuation model is silent on what “information content” and “value relevance” mean and how they are affected by different measurements, it has limited ability to guide research designs and to help researchers draw meaningful inferences. Consequently, much of the existing literature has relied on ad hoc specifications, and focused on assessments of explanatory power and assessments of regression coefficients linking accounting outcomes such as earnings to market outcomes such as price or return. Absent a theory or at least an analytical structure explicitly considering investors’ use of information (e.g., investors’ prior, Bayes updating), the interpretations of these results must of necessity be ad hoc. . . .We are not implying that the residual income frameworks revived by Ohlson (1995) and others have no value. In fact, we believe this research provides useful insights on the role of accounting measurement. Our point is that this research is not suitable to answer questions related to how investors use accounting data to update their assessments of estimates of future cash flows. (Chen and Schipper, 2016)

Any attempt to explicate the decades-old accounting notions of “information content”, “value relevance”, “decision useful” and the like, is inevitably a Bayesian task. It is fair to say that in the human logic of reasoning under uncertainty, probability theory (and thus Bayes’ theorem) is the only candidate (we would not draw balls from an urn, and make inferences about its contents, on any formal understanding other than the laws of probability).

Frequentist or “classical” statistics, which we have probably all studied, refuses to play that game. It is not permitted under frequentist statistical theory to put a probability of any description on a proposition or “hypothesis”. We can write f(data|hypothesis), provided that we interpret f as frequency, but we cannot write f(hypothesis|data) on any interpretation of f. So, for example, we cannot use accounting data to come to an assessed probability of a firm going bankrupt, which of course means that we cannot revise that probability when new accounting data arrives.

Subjectivist Bayesian inference supports inferences drawn from accounting “measurements” or “numbers” and does not need input observations/signals to have any substantive meaning other than as merely a “signal”. Just as we can use a barometer to give an “indicator” of what weather to expect, while not necessarily giving that reading of barometric pressure any deeper scientific interpretation, Bayesian theory shows that extensibly “meaning-free” or merely “hard to interpret” accounting disclosures (and non-disclosures) can be decision-useful indicators of economic fundamentals. That understanding of Bayesian belief revision and decision-making was brought to accounting theory by Feltham, Demski and others in the 1960s and 1970s, and mirrored the rise of neo-Bayesianism in other fields in the 1950s–1960s, which in turn followed a burst of statistical work in decision theory, operations research and code breaking during WWII. The approach taken in this monograph is a Demski-like treatment of “accounting numbers” as “signals” rather than as “measurements”.

It should be of course that “good” measurements like “quality earnings” reports make generally better signals. However, to be useful for decision- making under uncertainty, accounting measurements need to have more

than established accounting measurement virtues, of the types that early theorists like Paton, Bell and Sterling might have advocated, and which recently resurfaced in the 1960s/1970s-like normative discussion in Hodder et al. (2014) and Dechow et al. (2010). Chen and Schipper’s view is that accounting measurements need to possess enough technical Bayesian information attributes to materially influence users’ beliefs and consequent investments. This monograph is really about explaining what those Bayesian information attributes are, where they come from in Bayesian theory, and how they apply in statistical accounting information theory.

Continued in Chapter 1

Selected Quotation from Chapter 4

Chapter 4

This case study re-examines Burgstahler’s (1987) method for drawing Bayesian inferences from frequentist empirical test results. The findings apply not only to the original application of interpreting the results in empirical research studies, but also far more generally to interpreting any ill-defined or incomplete signal or statement of evidence.

The following analysis reveals how Bayesian interpretations of data, or of the translation of data that is actually reported to the user, are not merely subjective, but are also often highly sensitive to the Bayesian user’s probability model, background knowledge or basic assumptions. In general, the more subjective the analysis, the wider its range of possible inferences, yet the more realistic its approach. The antidote to subjectivity is usually “get more data”, but often there is a decision to make that cannot wait, or there is no possibility of more data, or other researchers want a conclusion.

That limitation is deeply understood in the information economics models used in accounting theory. Accounting, of all applications, will often leave the information user with a less than complete report, and yet needing to act or form beliefs on what is reported, despite its perceived weaknesses. In the “worst” cases, the user is left to act in the face of no express report at all, and to interpret that non-report for what it implies. See for example Dye (2017), Dye and Hughes (2018) and the corresponding analysis set out later in this monograph.

4.1 Interpreting “p-level ≤ α”

The Bayesian theory of experimental design applies to the ex ante planning of experiments or “signal design”. It is recognized however that often the user or decision maker does not design the signal, nor know all about how it was produced, yet must still interpret it as best possible. Even a signal which is known to be imprecise or biased can still change rational Bayesian beliefs, sometimes substantially, and can still be highly informative. The following case study based on Burgstahler (1987) illustrates how a given statistical signal can have quite contrary interpretations under different levels of Bayesian conditioning, or essentially under different levels of subjectivity.

The inference problem raised by Burgstahler (1987) is to use the pub- lished report “significant at α” to revise belief in the null hypothesis H0 against alternative H1. Without introducing an alternative hypothesis it is not possible to calculate the probability of H0, because there exists only one half of the likelihood ratio.1 The idea of Burgstahler’s analysis is to help empirical researchers interpret classical (i.e. frequentist) statistical evidence in a Bayesian way, so as ultimately to assess the probability of the null hypothesis, which is theoretically disallowed in Neyman–Pearson classical statistics. Burgstahler correctly notes that the usual non-Bayesian way of calculating and interpreting significance levels does not admit any statement about the probability of H0. 2

There are at least three possible meanings to “significant at α”. If all three are plausible, the Bayesian posterior belief is a mixture or probability-weighted average of the three corresponding posterior ...

Continued in Chapter 4

Selected Quotations from Chapter 17

Issues of how information affects beliefs, certainty, decisions and rational risk premia have been the subject of Bayesian theory since the 1950s when the founding Bayesians wrote the first textbooks on Bayesian business decision-making under uncertainty. That connection between Bayesian theory and financial decision-making was cemented in the early literature on Bayesian portfolio optimization, where fundamental Bayesian insights such as the use of predictive distributions were applied to decision problems characterized by innate parameter uncertainty.

Although avowedly Bayesian in principle, accounting theory after Demski, Feltham and others largely detached itself from the source Bayesian literature, and even from the Bayesian finance literature. This monograph is intended to assist PhD students and researchers to re-make that connection.

A traditional understanding of accounting information under efficient markets theory says that better information alters investors beliefs and trades and tends to have a stronger influence, up or down, on the stockmarket. Even confirmatory evidence fits that description, because it tightens investors’ belief distributions around the same mean.

By the traditional view, accounting information serves investors in the same way as the sports pages serve gamblers on football games. Investors qua gamblers use the information available to revise their probability assessments. Their new assessments may not prove to be more successful in all cases, but on average they assist towards more profitable betting or investment outcomes.

An appealing viewpoint, underlying much contemporary empirical accounting research, suggests that better information, such as higher quality earnings, reduces uncertainty and hence also reduces the risk premium or market cost of capital. On that understanding, financial reporting standards are evaluated by whether firms disclosing “more” or “more precise” information seem to be “charged” a lower cost of capital. The older and less idealistic Bayesian view is that information which raises new doubts about an asset’s future viability and payoff, and causes its ex ante discount rate to increase, is desirable in the sense that “it is always better to know”.

Bayes fits

Critics of Bayesian inference traditionally balked at the subjectivity of the prior belief, usually overlooking the innate subjectivity of any model. The Bayesian response is that all beliefs have a starting point and are subjective, so why not express that subjectivity openly and use it advantageously to incorporate factors in the inference and decision that would otherwise be relegated to afterthoughts, and possibly go financially unhedged. As a conceptual framework for understanding uncertain inference in markets and the value and limitations of information, textbook subjectivist Bayesian theory is as good an ideal as exists.

Starting with Demski and Feltham, Bayesian logic has been shown to fit elegantly with the idea of accounting as information for decision- making under uncertainty. The rules of Bayesian logic are nothing but the probability calculus, part of which is Bayes theorem. A Bayesian in the mathematical sense is merely someone who applies the laws of probability, to revise and reconcile beliefs.

Continued in Chapter 17

Jensen Comment
I just received a copy of this book from David this morning and have not had a chance to digest it let alone review it.

First and foremost I want to congratulate David on the tremendous effort put into what appears to be a valuable contribution to accountics science, and I do have a huge respect for the monumental contributions of accountics science in general. Keep in mind that the book is addressed to Ph.D. students and not to the International Accounting Standards Board that faces issues that do not neatly into any type of quantitative analysis.

Readers of this book may want to explore the entire subject of "Naive Bayes" which is intended for real world (especially machine learning) applicatiosn of Bayesian reasoning ---
https://www.amazon.com/seribu-bintang-Naive-Bayes-Tutorial/dp/B075H7FM5Q/ref=sr_1_15?ie=UTF8&qid=1549543905&sr=8-15&keywords=naive+bayes (Free Download)
Also enter the phrase "Naive Bayes" in Amazon books

If I were to do a critique of the work I would commence with the critique of Baysian statistics of prominent statisticians.

Here's a sampling:

"An Intuitive Explanation of Bayes': Theorem: Bayes' Theorem for the curious and bewildered; an excruciatingly gentle introduction," by Eliezer S., Yudkowsky, August 2009 --- http://yudkowsky.net/rational/bayes

I think a case can be made that the IASB is becoming more Bayesian as tests of credit risk of cash flow impairments become weighted by subjective probability distributions. Hence we have to dredge up more of the old Bayesian theory for students if the IASB heads full bore into using subjective probability distributions for credit impairment, fair value, etc. Reverend Bayes may be smiling down on the FASB. I am not so enthusiastic about how it will help investors to add this subjectivity to financial reporting ---
http://www.iasplus.com/dttletr/1007amortcost.pdf

"Beyond Bayes: causality vs correlation," by Steve Hsu Professor of physics at the University of Oregon, Information Processing, July 10, 2010 ---
http://infoproc.blogspot.com/2010/07/beyond-bayes-causality-vs-correlation.html

A draft paper by Harvard graduate student James Lee (student of Steve Pinker; I'd love to post the paper here but don't know yet if that's OK) got me interested in the work of statistical learning pioneer Judea Pearl. I found the essay Bayesianism and Causality, or, why I am only a half-Bayesian (excerpted below) a concise, and provocative, introduction to his ideas.

Pearl is correct to say that humans think in terms of causal models, rather than in terms of correlation. Our brains favor simple, linear narratives. The effectiveness of physics is a consequence of the fact that descriptions of natural phenomena are compressible into simple causal models. (Or, perhaps it just looks that way to us ;-)

Judea Pearl: I turned Bayesian in 1971, as soon as I began reading Savage’s monograph The Foundations of Statistical Inference [Savage, 1962]. The arguments were unassailable: (i) It is plain silly to ignore what we know, (ii) It is natural and useful to cast what we know in the language of probabilities, and (iii) If our subjective probabilities are erroneous, their impact will get washed out in due time, as the number of observations increases.

Thirty years later, I am still a devout Bayesian in the sense of (i), but I now doubt the wisdom of (ii) and I know that, in general, (iii) is false. Like most Bayesians, I believe that the knowledge we carry in our skulls, be its origin experience, schooling or hearsay, is an invaluable resource in all human activity, and that combining this knowledge with empirical data is the key to scientific enquiry and intelligent behavior. Thus, in this broad sense, I am a still Bayesian. However, in order to be combined with data, our knowledge must first be cast in some formal language, and what I have come to realize in the past ten years is that the language of probability is not suitable for the task; the bulk of human knowledge is organized around causal, not probabilistic relationships, and the grammar of probability calculus is insufficient for capturing those relationships. Specifically, the building blocks of our scientific and everyday knowledge are elementary facts such as “mud does not cause rain” and “symptoms do not cause disease” and those facts, strangely enough, cannot be expressed in the vocabulary of probability calculus. It is for this reason that I consider myself only a half-Bayesian. ...

"You Might Already Know This ... ," by Benedict Carey, The New York Times, January 10, 2011 ---
http://www.nytimes.com/2011/01/11/science/11esp.html?_r=1&src=me&ref=general

. . .

The critics have been crying foul for half that time. In the 1960s, a team of statisticians led by Leonard Savage at the University of Michigan showed that the classical approach could overstate the significance of the finding by a factor of 10 or more. By that time, a growing number of statisticians were developing methods based on the ideas of the 18th-century English mathematician Thomas Bayes.

Bayes devised a way to update the probability for a hypothesis as new evidence comes in.

So in evaluating the strength of a given finding, Bayesian (pronounced BAYZ-ee-un) analysis incorporates known probabilities, if available, from outside the study.

It might be called the “Yeah, right” effect. If a study finds that kumquats reduce the risk of heart disease by 90 percent, that a treatment cures alcohol addiction in a week, that sensitive parents are twice as likely to give birth to a girl as to a boy, the Bayesian response matches that of the native skeptic: Yeah, right. The study findings are weighed against what is observable out in the world.

In at least one area of medicine — diagnostic screening tests — researchers already use known probabilities to evaluate new findings. For instance, a new lie-detection test may be 90 percent accurate, correctly flagging 9 out of 10 liars. But if it is given to a population of 100 people already known to include 10 liars, the test is a lot less impressive.

It correctly identifies 9 of the 10 liars and misses one; but it incorrectly identifies 9 of the other 90 as lying. Dividing the so-called true positives (9) by the total number of people the test flagged (18) gives an accuracy rate of 50 percent. The “false positives” and “false negatives” depend on the known rates in the population.

Continued in article

Bayes Factors Versus P-Values ---
https://replicationnetwork.com/2017/03/22/bayes-factors-versus-p-values/

In a recent article in PLOS One, Don van Ravenzwaaij and John Ioannidis argue that Bayes factors should be preferred to significance testing (p-values) when assessing the effectiveness of new drugs. At his blogsite The 20% Statistician, Daniel Lakens argues that Bayes factors suffer from the same problems as p-values. Namely, the combination of small effect sizes and sample sizes leads to inconclusive conclusions no matter whether one uses p-values or Bayes factors. The real challenge facing decision-making from statistical studies comes from publication bias and underpowered studies. Both significance testing and Bayes factors are relatively powerless (pun intended) to overcome these more fundamental problems. To read more, click here.

If the American Statistical Association Warns About p-Values, and Nobody Hears It, Does It Make a Sound? ---
https://replicationnetwork.com/category/news-events/

Statisticians Are Ringing the Death Knell for P-Values: It will be much harder to call new findings ‘significant’ if this team gets its way ---
http://www.sciencemag.org/news/2017/07/it-will-be-much-harder-call-new-findings-significant-if-team-gets-its-way?utm_source=MIT+Technology+Review&utm_campaign=33147f2854-The_Download&utm_medium=email&utm_term=0_997ed6f472-33147f2854-153727301

Academic psychology and medical testing are both dogged by unreliability. The reason is clear: we got probability wrong ---
https://aeon.co/essays/it-s-time-for-science-to-abandon-the-term-statistically-significant?utm_source=Aeon+Newsletter&utm_campaign=b8fc3425d2-Weekly_Newsletter_14_October_201610_14_2016&utm_medium=email&utm_term=0_411a82e59d-b8fc3425d2-68951505

Jensen Comment
Especially note the many replies to this article

. . .

David Colquhoun
https://aeon.co/conversations/what-should-be-done-to-improve-statistical-literacy#
I think that it’s quite hard to find a really good practical guide to Bayesian analysis. By really good, I mean on that is critical about priors and explains exactly what assumptions are being made. I fear that one reason for this is that Bayesians often seem to have an evangelical tendency that leads to them brushing the assumptions under the carpet. I agree that Alexander Etz is a good place to start. but I do wonder how much it will help when your faced with a particular set of observations to analyze.

Henning Strandin ---
https://aeon.co/users/henning-strandin
Thank you for a good and useful article on the pitfalls of ignoring the baseline. I have a couple of comments.
Bayes didn’t resolve the problem of induction, even in principle. The problem of induction is the problem of knowing that the observations you have made are relevant to some set of (perhaps as-yet) unobserved events. In his Essay on Probabilities, Laplace illustrated the problem in the same paragraph in which he suggests . . .

Karl Young
Nice article; as a Bayesian who was forced to quote p values in a couple of medical physics papers for which the journal would have nothing else, I appreciate the points made here. But even as a Bayesian one has to acknowledge that there are a number of open problems besides just how to estimate priors. E.g. what one really wants to know is given some observations, how one’s hypothesis fares against as complete a list of alternative hypothesis as can be mustered. Even assuming that one could come up with such a list, calculating the probability that one’s hypothesis best fits the observations in that case requires calculation of a quantity called the evidence that is generally extremely difficult (the reason that the diagnostic examples mentioned in the piece lead to reasonable calculations is that calculating the evidence for the set of proposed hypotheses, that either someone in the population has a disease or doesn’t, is straightforward). So while I think Bayes is the philosophically most coherent approach to analyzing data (doesn’t solve the problem of induction but tries to at least manage it) there are still a number of issues preventing it

Comments Continued at
https://aeon.co/conversations/what-should-be-done-to-improve-statistical-literacy

"Not Even Scientists Can Easily Explain P-values," by Christie Aschwanden, Nate Silver's 5:38 Blog, November 30, 2015 ---
http://fivethirtyeight.com/features/not-even-scientists-can-easily-explain-p-values/

P-values have taken quite a beating lately. These widely used and commonly misapplied statistics have been blamed for giving a veneer of legitimacy to dodgy study results, encouraging bad research practices and promoting false-positive study results.

But after writing about p-values again and again, and recently issuing a correction on a nearly year-old story over some erroneous information regarding a study’s p-value (which I’d taken from the scientists themselves and their report), I’ve come to think that the most fundamental problem with p-values is that no one can really say what they are.

Last week, I attended the inaugural METRICS conference at Stanford, which brought together some of the world’s leading experts on meta-science, or the study of studies. I figured that if anyone could explain p-values in plain English, these folks could. I was wrong.

Continued in article

Jensen Comment
Why all the fuss? Accountics scientists have a perfectly logical explanation. P-values are numbers that are pumped out of statistical analysis software (mostly multiple regression software) that accounting research journal editors think indicate the degree of causality or at least suggest the degree of causality to readers. But the joke is on the editors, because there aren't any readers.

November 30, 2015 reply from David Johnstone

Dear Bob, thankyou for this interesting stuff.

A big part of the acceptance of P-values is that they easily give the look of something having been found. So it’s an agency problem, where the researchers do what makes their research outcomes easier and better looking.

There is a lot more to it of course. I note with young staff that they face enough hurdles in the need to get papers written and published without thinking that the very techniques that they are trying to emulate might be flawed. Rightfully, they say, “it’s not my job to question everything that I have been shown and to get nowhere as a result”, nor can most believe that something so established and revered can be wrong, that is just too unthinkable and depressing. So the bandwagon goes on, and, as Bob says, no one cares outside as no one much reads it.

I do however get annoyed every time I hear decision makers carry on about “evidence based” policy, as if no one can have a clue or form a vision or strategy without first having the backing of some junk science by a sociologist or educationist or accounting researcher who was just twisting the world whichever way to get significant p-values and a good “story”. This kind of cargo-culting, which is everywhere, does great harm to good or sincere science, as it makes it hard for an outsider to tell the difference.

One thing that does not get much of a hearing is that the statisticians themselves must take a lot of blame. They had the chance to vote off P values decades ago when they had to choose between frequentist and Bayesian logic. They split into two camps with the frequentists in the great majority but holding the weakest ground intellectually. The numbers are moving now, as people that were not born when de Finetti, Savage, Lindley, Kadane and others first said that p-values were ill-conceived logically. Accounting, of course, being largely ignorant of there being any issue, and ultimately just political, will not be leading the battle of ideas.

January 28, 2016 reply from Paul Williams

Bob,

Thank you for this. In accounting the problem is even worse because at least in other fields it is plausible that one can have "scientific" concepts and categories. Archival research in accounting can only deal with interpretive concepts and the "scientific" categories are often constructed for the one study in question. We make a lot of s... up so that the results are consistent with the narrative (always a neoclassical economic one) that informs the study. Measurement? Doesn't exist. How can one seriously believe they are engaged in scientific research when their "measurements" are the result of GAAP? Abe Briloff described our most prestigious research (which Greg Waymire claimed in his AAA presidential white paper "...threatens the discipline with extinction."). as simply "low level financial statement analysis." Any research activity that is reduced to a template (in JAE the table numbers are nearly the same from paper to paper) you know you are in trouble. What is the scientific value of 50 control variables, two focus independent variables (correlated with the controls), and one dependent variable that is always different from study to study? This one variable at a time approach can go on into infinity with the only result being a huge pile of anecdotes that no one can organize into any coherent explanation of what is going on. As you have so eloquently and relentlessly pointed out accountants never replicate anything. In archival research it is not even possible to replicate since the researcher is unable to provide (like any good scientist in physics, chemistry, biology, etc.) a log book providing the detailed recipe it would take to actually replicate what the researcher has done. Without the ability to independently replicate the exact study, the status of that study is merely an anecdote. Given the Hunton affair, perhaps we should not be so sanguine about trusting our colleagues. This is particularly so since the leading U.S. journals have a clear ideological bias -- if your results aren't consistent with the received wisdom they won't be published.

Paul

And the beat goes on!

The Impact of Fair Value Measurement for Bank Assets on Information Asymmetry and the Moderating Effect of Own Credit Risk Gains and Losses

The Accounting Review
Article Volume 93, Issue 6 (November 2018) N
https://aaajournals.org/doi/full/10.2308/accr-52070

Joana C. Fontes
UCP–Catolica Lisbon School of Business and Economics

Argyro Panaretou

Kenneth V. Peasnell
Lancaster University

ABSTRACT

We examine whether the use of fair value measurement (FVM) for bank assets reduces information asymmetry among equity investors (bid-ask spread) and how this is affected by the recognition of own credit risk gains and losses (OCR). Our findings show that FVM of assets is associated with noticeably lower information asymmetry, and that this reduction is more than twice as large when banks also recognize OCR. In addition, we find that the bid-ask spread is incrementally lower for banks that provide more detailed narrative disclosures on OCR. The findings also indicate that the effects of asset FVM and OCR recognition on the bid-ask spread do not simply capture the differences in the characteristics of the banks and the quality of their information environments.

Data Availability: All data are available from public sources.

Keywords: mixed-attribute model, own credit risk, fair value option, financial instruments, IAS 39, banks

Does Fair Value Accounting Provide More Useful Financial Statements than Current GAAP for Banks?

The Accounting Review
Article Volume 93, Issue 6 (November 2018)
https://aaajournals.org/doi/full/10.2308/accr-52007

John M. McInnis

Yong Yu
The University of Texas at Austin

Christopher G. Yust
Texas A&M University

ABSTRACT

Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more value-relevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.

Keywords: fair value, historical cost, financial instrument, bank, value relevance

Accounting History Research Topics—An Analysis of Leading Journals, 2006–2015
Accounting Historians Journal
Article Volume 45, Issue 1 (June 2018)
https://aaajournals.org/doi/full/10.2308/aahj-10567

Gary P. Spraakman
York University

Martin Quinn
Dublin City University

ABSTRACT

This paper analyzes and categorizes published research papers in three specialist accounting history journals—Accounting History, The Accounting Historians Journal, and Accounting History Review. A key objective is to highlight under-represented areas for future research. We inductively derive a categorization system, and classify over four hundred papers from 2006–2015 according to twelve categories. The results show some rather under-researched areas, namely religion and accounting education. Using statistical analysis techniques, we note similarities and differences across the three journals and suggest avenues for future researchers.

Keywords: accounting history, journals, categories, under-represented

Using Online Tutorials to Teach the Accounting Cycle

SSRN
25 Pages Posted: 12 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3327139

Tracey Chunqi Zhang

Singapore Management University - School of Accountancy

Lay-Chin Low

Singapore Management University - School of Accountancy

Poh-Sun Seow

Singapore Management University - School of Accountancy

Date Written: February 1, 2019

Abstract

The accounting cycle is an important yet difficult topic for introductory financial accounting students to learn. These students often lack the business context to understand the accounting cycle and find the traditional teaching approach dry. This problem motivates the authors to examine whether a blended learning approach via online tutorials can improve students’ perceived knowledge of the accounting cycle for the undergraduate introductory financial accounting course. The authors developed four innovative online tutorials with a coherent storyline to enable students to learn the accounting cycle and to supplement in-class learning. To test the effectiveness of online tutorials, an independent survey was conducted by the Centre of Teaching Excellence at the authors’ University. The survey results suggest that the accounting cycle online tutorials substantially improve students’ perceived knowledge of the topic (an increase of 59.8% in the perceived knowledge) and the improvement is statistically significant. Meanwhile, the results indicate that the online tutorials are valued by students for the enjoyable learning experience. Students credited the online tutorials for increasing their interest in the course and providing the business context to understand the accounting cycle, which enhanced their learning. Given the positive impact reported by students, the paper recommends instructors for introductory financial accounting course to use these accounting cycle online tutorials to supplement in-class learning as there is only minimum cost of implementation. One caveat of the paper is that students’ perceived knowledge may not reflect the actual knowledge of the accounting cycle.

Keywords: accounting cycle, introductory financial accounting, online tutorial, e-learning, blended learning

Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used Against You

SSRN
33 Pages Posted: 10 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3325545

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: April 2, 2018

Abstract

In order to analyze firm value, investment analysts require information on potential losses from contingent liabilities such as litigation damages. However, revelation of the firm’s private estimates of the probability of loss and possible legal damages can be detrimental to the firm by increasing the costs of settlement. That is, opposing counsel may utilize the firm’s financial disclosures about contingent litigation costs to drive settlement demands. Thus, firms choose to shirk their responsibilities to disclose material litigation liabilities in their financial disclosures. Financial disclosures thereby contain insufficient information about the monetary value of potential litigation damages even for large cases with material litigation risks. This outcome is harmful to investors and management alike.

I propose an accounting regulatory disclosure model that uses publicly-available data to provide noisy, but useful estimates of class action securities litigation damages in fraud on the market cases that does not require full disclosure of sensitive private information about the firm’s internal assessment of litigation merits. However, a collective action constraint prevents firms from voluntarily utilizing this information-enhancing solution without regulation to coordinate accounting disclosure requirements. I show that accounting requirements could be revised to induce mutually beneficial information disclosures that would improve the information content in financial statements with regard to contingent litigation liabilities in fraud on the market suits.

Keywords: Contingent Liabilities, Litigation Damages, Accounting Disclosure

JEL Classification: M41, K41, G30

The Impact of Auditor Industry Specialization on the Retention and Growth of Audit Clients

Accounting though Journal Ain-Shams University, Faculty of Commerce. Volume No.1, year 20, ISSN: 2356-8402.

SSRN
Posted: 9 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3325528

Mohamed Samy Eldeeb

MSA University

Mohamed A. Hegazy

Department of Accounting, The American University in Cairo

Date Written: January 29, 2016

Abstract

The effect of the economic financial crisis worldwide has increased the need for auditors to provide a high quality services to their clients. An important element considered by clients for selecting their auditors is whether the audit firm has specialization in particular industry. Audit firm industry specialization provides clients with value for money services to help management achieve efficiency and effectiveness in their operations. Other benefits for audit firms may include increased market share, audit tenure, better financial reporting and less earnings management, audit quality with less restatements of financial information, appropriate audit fees, less exposure to litigation risk, less enforceable action by supervisory bodies and ability to compete in highly competitive environment. Specialization was also seen as critical for the survival of the auditing profession.

This research analyzes the effects of audit firm industry specialization on the retention of the audit firm and growth in its business. Factors such as whether the firm is a big 4, with international affiliation, local firm, type of industry and growth were also studied for audit firm retention and growth. The sample studied includes the top 100 publicly held companies’ annual reports in the Egyptian stock market during the period 2007-2011 which are analyzed to determine the audit firms’ retention and growth. The results support that industry specialization has an important effect on the auditor’s retention especially for industry where capital investment is significant such as building, construction, financial services and housing and real estate. Big 4 audit firms retained their clients due to their industry specialization and brand name. The findings provided evidence that good knowledge of accounting & auditing standards resulted in audit firms with international affiliation competing with big 4 for clients’ retention & growth in business. The result also showed some evidence that the auditing profession in Egypt is dominated by the big 4 and the Central Audit Organization.

Cloud Business and Closing the Gap Between Accounting Theory and Practice: A Case Study of Accountingpod

SSRN
15 Pages Posted: 9 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3317955

Judith Cambridge

Accounting and Finance Association of Australia and New Zealand

Date Written: October 3, 2018

Abstract

Wells (2018) called for accounting education practitioners to use textbook and teaching material which better reflects “the wider context . . . and the influence of technology on accounting process as currently practiced” (pg. 40). The business sector has adopted cloud technologies and needs appropriately skilled knowledge workers. Using data from a ‘proof of concept’ online competition and university ‘content as a service’ [CAAS] delivery, this paper reports on how cloud technology facilitated educator and student connection to current practice and enabled innovative pedagogies for accounting education. The findings show that when accounting students were exposed to real-world data, context and real-time business technologies, they saw the connections to their future work or entrepreneurship. Cloud learning solutions across cloud business platforms bridged this gap for them between accounting theory and practice. The dynamic online accounting teaching tool will be explored during this presentation in light of these findings.

Keywords: Accounting Education, Cloud Accounting, Cloud Business, Innovating Pedagogies, Learn by Doing, Work Based Learning, Accounting Technology, Digital Business, Business Technology, Learning Technology, Future of Work, Entrepreneurship, Student Engagement

EVA --- https://en.wikipedia.org/wiki/Economic_value_added

Eva and Divisional Performance Measurement: Capturing Synergies and Other Issues

Journal of Applied Corporate Finance, Vol. 10, Issue 2, pp. 98-109, 1997

SSRN ($10)
14 Pages Posted: 8 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329488

Jerold L. Zimmerman

University of Rochester - Simon Business School

Date Written: Summer 1997

Abstract

This article makes three basic points about divisional performance measurement that managers should keep in mind when attempting to choose between EVA and more conventional, accounting‐based measures. First, no divisional performance measure, whether it be EVA, divisional net income, or ROA, is capable of capturing synergies among divisions—those shared benefits or costs that make the sum of the parts worth more than the whole. And EVA is neither more nor less effective than more conventional financial measures in deterring divisional managers from taking actions that increase divisional profits at the expense of corporate value. Thus, there is a fundamental contradiction in the very attempt to evaluate the divisions of a multi—divisional firm as if they were independent companies. If there are synergies, divisional performance measures—even those employing transfer prices—are likely to prove inadequate in some respects (and this article recommends some methods for encouraging synergies that might be used to supplement if not replace divisional measures). But if there are no synergies, then top managers should re‐examine their business strategy and consider selling or spinning off divisions. Second, a given performance measure's degree of correlation with stock returns should not be management's sole, or even its most important, criterion in choosing to adopt a given performance measure. A better method for evaluating performance measures is to weigh the behavioral or incentive benefits of a given measure against all direct and indirect costs associated with its implementation. In making such a costbenefit analysis, the incentive benefits from the tighter linkage of rewards to share prices provided by more market‐based measures should be traded off against the greater market risk and exposure to other uncontrollables imposed by such measures as well as the costs involved in changing the firm's internal accounting and reporting systems. Third, the EVA practice of “decoupling” performance measures from GAAP accounting, while having have potentially significant incentive benefits, also has potential costs in the form of increased auditing requirements and the possibility of litigation.

EVA --- https://en.wikipedia.org/wiki/Economic_value_added

Eva and Total Quality Management

Journal of Applied Corporate Finance, Vol. 10, Issue 2, pp. 81-89, 1997

SSRN ($10)
11 Pages Posted: 8 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329486

Jeffrey M. Bacidore

University of Michigan at Ann Arbor

John Boquist

Indiana University - Kelley School of Business - Department of Finance

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: Summer 1997

Abstract

Both TQM and EVA can be viewed as organizational innovations designed to reduce “agency costs”—that is, reductions in firm value that stem from conflicts of interest between various corporate constituencies. This article views TQM programs as corporate investments designed to increase value by reducing potential conflicts among non‐investor stakeholders such as managers, employees, customers, and suppliers. EVA, by contrast, focuses on reducing conflicts between managers and shareholders by aligning the incentives of the two groups. Besides encouraging managers to make the most efficient possible use of investor capital, EVA reinforces the goal of shareholder value maximization in two other ways: (1) by eliminating the incentive for corporate overinvestment provided by more conventional accounting measures such as EPS and earnings growth; and (2) by reducing the incentive for corporate underinvestment provided by ROE and other rate‐of‐return measures. At a superficial level, EVA and TQM seem to be in direct conflict with each other. Because of its focus on multiple, non‐investor stakeholders, TQM does not address the issue of how to make value‐maximizing trade‐offs among different stakeholder groups. It fails to provide answers to questions such as: What is the value to shareholders of the increase in employees' human capital created by corporate investments in quality‐training programs? And, given that a higherquality product generally costs more to produce, what is the value‐maximizing quality‐cost combination for the company? The failure of TQM to address such questions may be one of the main reasons why the adoption of TQM does not necessarily lead to improvements in EVA. Because a financial management tool like EVA has the ability to guide managers in making trade‐offs among different corporate stakeholders, it can be used to complement and reinforce a TQM program. By subjecting TQM to the discipline of EVA, management is in a better position to ensure that its investment in TQM is translating into increased shareholder value. At the same time, a TQM program tempered by EVA can help managers ensure that they are not under investing in their non‐shareholder stakeholders.

CEO/CFO Resignations and the Market’s Reaction to Violations of the Foreign Corruption Practices Act

Journal of International Accounting Research, Forthcoming

SSRN (free download)
47 Pages Posted: 8 Feb 2019

Jui-Chin Chang

Texas A&M International University

Date Written: January 24, 2019

Abstract

I examine CEOs’ and CFOs’ forced resignations after violations of the Foreign Corruption Practices Act (FCPA). My findings show that firms that adhere to the FCPA (FCPA firms) discipline CEOs and CFOs after violations of the act. Further, CEOs and CFOs are likely to resign after the SEC identifies them as perpetrators in these violations, and the SEC bars more CEOs and CFOs of firms that commit accounting fraud (FRAUD firms) than those of FCPA firms. And, fewer CEOs than CFOs find a new position within five years after their resignation. Further, the market reacts significantly to the FCPA firms’ announcements of bribery violations but does not react to the 8-K resignations of their CEOs or CFOs. In comparison, the magnitudes of the reactions to FRAUD firms’ announcements of accounting fraud and the CEOs’ or CFOs’ 8-K resignations are higher than those of FCPA firms.

Keywords: Foreign Corruption Practices Act, FCPA, CEO/CFO Resignations, Market

JEL Classification: M41, M48, G34, G14

Towards Strengthening Scientific Accounting Information: Focus on Environment Accounting System in Hungary

Journal of Financial Management and Analysis, Vol 31:2018-2019

SSRN
Posted: 7 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3322844

M. R. K. Swamy

Om Sai Ram Centre for Financial Management Research

Date Written: January 10, 2019

Abstract

The accounting system currently in operation in several developing countries, though imported, cannot be completely written off. There are areas where it needs modification and others where more emphasis has to be placed. Taking into account the dominance of small and private (family) business and over-dependence on multinational corporations, emphasis should be placed on formulating an efficient meaningful and workable system of accounting reporting for these types of businesses, taking the peculiar circumstance, of the developing countries into consideration. Also, the conduct of professionals within the system has a lot of influence on the quality and fairness of financial accounting response. Some of these professionals mortgage their integrity and engage in misconduct which tends to falsify accounting information prepared honestly from their meticulously kept records. Thus the need arises for scientific financial analysis, designed to provide data for decision making models such as portfolio selection, bank lending and corporate financial management as imperfect knowledge of decision-makers behaviour and informational needs hinders the progress of rational financial analysis. The uniquely developed accounting system in Hungary will serve in a guide to other countries to aid prudent/judicious financial decision-making.

Keywords: Scientific Financial Analysis; Hungary Accountancy (Accounting) System

JEL Classification: C81; E61; M41; O52

China's Attitude to the International Legal Order in the Xi Era: The Case of South China Sea Arbitration

Sydney Law School Research Paper No. 19/04

SSRN
22 Pages Posted: 6 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329614

Bing Ling

Sydney Law School

Date Written: February 5, 2019

Abstract

The paper reviews China's attitude to the international legal order under the Xi Jinping administration through the prism of her engagement with the international law and process regarding the maritime disputes in the South China Sea. Whilst accounting for China's widely-maligned position over the South China Sea Arbitration, the paper suggests that whilst China increasingly integrates the use of international law in the implementation of its foreign policy, China’s engagement with international rule of law remains deeply ambivalent and problematic.

Keywords: China; South China Sea, UNCLOS, law of the sea, non-appearance

JEL Classification: K10, K30, K3

Auditor Industry Specialization and Accounting Estimates: Evidence from Asset Impairments

Auditing: A Journal of Practice & Theory (Forthcoming)

SSRN
58 Pages Posted: 6 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324498

Sarah E. Stein

Virginia Tech

Date Written: August 20, 2018

Abstract

This study examines whether auditor competencies developed through industry specialization play a role in monitoring client firms’ accounting estimates. Specifically, I focus on asset impairment decisions as a key accounting estimate given managers incentives to hide these losses and the PCAOB’s criticisms of auditors’ testing in this area. Impairments examined in this study relate to goodwill and intangibles, other long-lived assets, and investment securities. Using the portfolio share approach to measure office-level specialization, I find that client firms engaging industry specialist auditors exhibit a greater propensity to record, and record larger, impairments relative to client firms engaging auditors with less specialization. The results also demonstrate that impairments recognized by clients of specialist auditors are more positively associated with concurrent bad news signals, suggesting that these losses are recognized on a more timely basis. Collectively, this evidence enhances our understanding of the factors affecting auditors’ ability to evaluate complex accounting estimates.

Keywords: accounting estimates, asset impairments, auditor competencies, auditor industry specialization

JEL Classification: M42, M41

Inside the Black Box of IASB Standard Setting: Evidence from Board Meeting Audio Playbacks on the Amendment of IAS 19 (2011)

Forthcoming, 'Accounting in Europe', A journal of the European Accounting Association DOI: 10.1080/17449480.2018.1501502

57 Pages Posted: 4 Feb 2019

Malte Klein

University of Bayreuth

Rolf Uwe Fuelbier

University of Bayreuth

Date Written: July 1, 2018

Abstract

We provide evidence on the little researched internal sphere of private IASB standard setting, more specifically, on the dynamic of board discussions and the respective impact of exogenous input such as comment letters, the array of arguments evoked in IASB debates, individual board member contribution and board-staff relations. We conduct a content analysis of audio recordings of 14 IASB meetings on the amendment of IAS 19 Employee Benefits (2011) between November 2008 and February 2010. Our main findings comprise the argument-based handling of comment letters not being conditioned by the political or economic importance of the senders, the gatekeeper role of staff members in channeling exogenous input and their equal role in board discussions and the dominant reference to conceptual arguments there. We also point to the heterogeneous involvement of board members, their different attribution to key issues and to further observations regarding the meeting governance, board’s discussion culture and etiquette. Our paper adds to the literature on private IASB standard setting, pension accounting and group decision making.

Keywords: Due Process, Board Meetings, IASB, IAS 19, Group Decisions, Lobbying, Pensions, Standard Setting, Comment Letter, Staff, Audio Files

JEL Classification: D72, K20, M41

Swaps

SSRN
7 Pages Posted: 4 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3320476

Regina Laurens

Atma Jaya Makassar University

elika ruslim

Atma Jaya Makassar University

Date Written: January 22, 2019

Abstract

An interest rate swap in its most basic form, often called a plain vanilla swap, is a financial contract in which two parties agree to simultaneously lend from, and borrow to, each other a certain amount of money in the same currency for the same duration but using different interest rates, generally a fixed rate and a floating rate. The nominal amount for each of these two parts to the swap, called legs, are not exchanged in that basic form as this would result in both parties paying and receiving an identical amount of money at the start and the end of the swap. The only cash flows which actually take place during the normal life of a vanilla swap are interest payments which are due periodically. If the interest payments on both legs occur at the same dates, they are often netted. That means that both due payments are compared and only the difference is paid by the party which owes the higher amount. At swap initiation, the fixed rate is typically chosen in such a way as to make the present value of cash flows equal between the two counterparties. This fixed rate is referred to as the swap rate.

Keywords: swaps, financial accounting

Bob Jensen's threads on how to value interest rate swaps ---
http://faculty.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

Bob Jensen's Free Tutorials on Accounting for Derivative Financial Instruments and Hedge Accounting ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

Presentation Slides for 'The Psychological Attraction Approach to Accounting and Disclosure Policy'

SSRN
59 Pages Posted: 4 Feb 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3323570

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: November 2008

Abstract

These slides summarize a paper which offers the psychological attraction approach to accounting and disclosure rules, regulation, and policy as a program for positive accounting research. We suggest that psychological forces have shaped and continue to shape rules and policies in two different ways. (1) Good Rules for Bad Users: rules and policies that provide information in a form that is useful for users who are subject to bias and cognitive processing constraints. (2) Bad Rules: superfluous or even pernicious rules and policies that result from psychological bias on the part of the 'designers' (managers, users, auditors, regulators, politicians, or voters). We offer some initial ideas about psychological sources of the use of historical costs, conservatism, aggregation, and a focus on downside outcomes in risk disclosures. We also suggest that psychological forces cause informal shifts in reporting and disclosure regulation and policy, which can exacerbate boom/bust patterns in financial markets.

The working paper version of the paper is available at https://ssrn.com/abstract=1359967.

Keywords: psychological attraction, accounting policy, disclosure, financial regulation, behavioral accounting, behavioral finance

JEL Classification: G00, G28, G38, H10, K22, M4, M44

What Auditors Talk About When They Talk About Public-Private Partnerships

SSRN
18 Pages Posted: 31 Jan 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3318356

Brent White

Mount Allison University

Date Written: January 18, 2019

Abstract

This paper examines how a legislative auditor inserted the audit function into the accountability framework governing Public-Private Partnerships (PPP, 3P) in the education sector in New Brunswick, a small Canadian province. By examining two separate case studies of public-private partnerships separated by 13 years, this research offers a rare chance to track the evolution of the Auditor General’s audit practices, and, also, of the management accounting techniques employed inside the Government of New Brunswick. The findings of the Auditor General in both instances challenged the credibility of government’s Value-for-Money assertions for its public-private partnership arrangements. In doing so, the Auditor General cast serious doubt on the notion that all public-private partnerships are value-creating. This study also represents a somewhat rare academic study of the involvement of a Canadian legislative auditor in the analysis of a public-private partnership. Further, it outlines a number of areas for future study.

Audit within the Corporate Governance Paradigm: A Cornerstone Built on Shifting Sand?

British Journal of Management, Vol. 30, Issue 1, pp. 90-105, 2019

SSRN
16 Pages Posted: 30 Jan 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3326035

Richard Fairchild

Ulster University at Jordanstown - School of Management

David Gwilliam Gwilliam

University of Exeter

Oliver Marnet

University of Southampton

Date Written: January 2019

Abstract

This paper is a case study‐based investigation of aspects of the current paradigmatic approach to ‘good’ corporate governance, with its focus on the interlinked roles of internal control and risk management procedures, internal audit and external audit, overseen and coordinated by a formal structure of board committees, in particular the audit committee. The evidence that we adduce from the study of four high‐profile cases of perceived accounting and governance failure provides limited assurance that this approach will in fact be cost‐effective or efficient in preventing further such cases of accounting and governance failure. Specifically, issues as to remuneration and fee dependence, lack of relevant knowledge and expertise, social and psychological dependence upon executive management appear to have significantly and negatively affected the quality of decision‐making of governance gatekeepers. This suggests that further consideration of relevant economic, institutional and cognitive/behavioural factors beyond the rational choice model of traditional economics should underpin future developments in required modes and structures of governance.

Intangible Assets and the Book‐To‐Market Effect

European Financial Management, Vol. 25, Issue 1, pp. 207-236, 2019

SSRN
30 Pages Posted: 30 Jan 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3326050

Hyuna Park

Brooklyn College - CUNY

Date Written: January 2019

Abstract

The book‐to‐market effect is well known but prior research does not analyze the impact of goodwill and related transformations in accounting rules that may bring significant changes to the effect. This paper analyzes the impact of SFAS 142, Goodwill and Other Intangible Assets, issued in 2001. I find that the book‐to‐market effect is weaker in the post‐SFAS 142 period, especially in firms that have goodwill, impairment loss, or risk. The book‐to‐market effect is stronger for subsamples of firms that do not have goodwill. These findings are robust to size groups, different factor models, and test methods.

Keywords: fair value accounting, goodwill impairment, R&D valuation, value premium

Zorba: Is Project Management the Next Frontier for AI?
https://zorba-research.blogspot.com/2019/02/is-project-management-next-frontier-for.html

Zorba: The Challenges of AI ---
https://zorba-research.blogspot.com/2019/01/the-challenges-of-ai-ai-capability-has.html
Jensen Comment
One of the biggest worries is what to do with increasingly larger and larger numbers of workers being replaced by machines. Need I mention the film years ago that showed humans frolicking joyfully in fields while they were being grown for food by the evil master race in dark shadows.

EY: FASB seeks input on measurement of contract liabilities assumed in a business combination ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_05628-191US_Issue18-A_15February2019/$FILE/TothePoint_05628-191US_Issue18-A_15February2019.pdf

EY: FASB issues ITC and proposal on contract liabilities acquired in a business combination ---
https://www.fasb.org/cs/Satellite?c=Document_C&cid=1176172107470&pagename=FASB%2FDocument_C%2FDocumentPage

EY: 2019 Updated US GAAP/IFRS accounting differences identifier tool and US GAAP versus IFRS – The basics ---
https://www.ey.com/Publication/vwLUAssetsAL/USGAAPIFRSAccountingDifferencesIdentifierTool_05534-191US_31January2019/$FILE/USGAAPIFRSAccountingDifferencesIdentifierTool_05534-191US_31January2019.pdf
Also see Bob Jensen's threads at
http://faculty.trinity.edu/rjensen/theory01.htm#FASBvsIASB

EY: Misc. 2019 Updates

Consultation paper on Proposed Strategy for 2020–2023 and Work Plan for 2020–2021

In the Proposed Strategy for 2020–2023 and Work Plan for 2020–2021, the IAASB puts forth a way forward that it believes meets stakeholders’ evolving needs, and is in the public interest. Enhancing processes, including using technology and appropriate resourcing, are included in the strategy and are crucial to success. These enhancements will also maximize the impact of activities, thereby enabling more timely responses to global trends and needs. The Work Plan highlights the board’s commitment to completing significant projects currently underway, while balancing the needs of different stakeholders. Comments are requested by 4 June 2019.

IPSAS 42, Social benefits

The International Public Sector Accounting Standards Board (IPSASB) published IPSAS 42, Social Benefits, provides guidance on accounting for social benefits expenditure. It defines social benefits as cash transfers paid to specific individuals and/or households to mitigate the effect of social risk. Specific examples include state retirement benefits, disability benefits, income support and unemployment benefits. The new standard requires an entity to recognize an expense and a liability for the next social benefit payment. IPSAS 42 seeks to improve the relevance, faithful representativeness and comparability of the information that a reporting entity provides in its financial statements about social benefits.

Exposure Draft 67, Collective and individual services and emergency relief (Amendments to IPSAS 19)

The IPSASB released for comment, Exposure Draft (ED) 67, Collective and Individual Services and Emergency Relief (Amendments to IPSAS 19), to address transactions for collective and individual services and emergency relief. ED 67 forms part of the IPSASB’s broader non-exchange expenses project, proposing requirements for collective and individual services and emergency relief. Comments are due by 31 May 2019.

From the CFO Journal's Morning Ledger on February 26, 2019

German health-care firm Fresenius Medical Care AG said in a regulatory filing that it had reached an agreement in principle with U.S. authorities regarding a long-running foreign-bribery investigation that involved an anonymous whistleblower complaint.

In spite of being too tough for Intermediate Accounting textbooks, derivatives contracts are a huge deal in real-world financial accounting
From the CFO Journal's Morning Ledger on February 25, 2019

The U.K. and the U.S. said on Monday that their regulators are taking every action needed to ensure that trillions of dollars in derivatives contracts traded between the two countries will not be disrupted by any type of Brexit, Reuters reports.

From the CFO Journal's Morning Ledger on February 25, 2019

Kraft Heinz’s Goodwill Charge Tops Consumer-Staples Record

The $7.3 billion goodwill impairment Kraft Heinz Co. announced this week is the largest such write-down in the U.S. consumer staples industry in at least a decade, according to valuation firm Duff & Phelps LLC.

The size of the hit, disclosed Thursday, is unusual for the sector, which recorded 88 such write-downs between 2013 and 2017 totaling $9.6 billion, according to Duff & Phelps. “This goodwill impairment alone is greater than that entire sector over the last three years,” said Carla Nunes, a managing director at Duff & Phelps.

Companies record goodwill on their books when they buy a business for more than the value of its hard assets, such as property and equipment. The buyer must test the fair value of its reporting units each year and, if that figure is less than the amount on the balance sheet, impair the goodwill, reports CFO Journal's Tatyana Shumsky.

Kraft Heinz’s charge reduced the company’s overall goodwill balance by nearly 17% to $36.2 billion as of Dec. 29, according to regulatory filings. It was part of a total impairment of $15.9 billion for 2018 that included an $8.7 billion write-down to its intangible assets, particularly the Kraft and Oscar Mayer brands.

From the CFO Journal's Morning Ledger on February 21, 2019

U.S. securities regulators have joined a long list of authorities investigating Danish lender Danske Bank AS over a massive money-laundering scandal at its Estonian branch.

From the CFO Journal's Morning Ledger on February 21, 2019

Brazilian President Jair Bolsonaro unveiled his long-awaited proposal for overhauling the country’s insolvent pension system, setting up a major political test as he attempts to avert a financial crisis in Latin America’s biggest economy.

From the CFO Journal's Morning Ledger on February 21, 2019

Deutsche Bank AG racked up a loss of $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought in the runup to the 2008 financial crisis, and failed to confront head-on even as markets were upended and regulations tightened.

Jensen Comment
In my opinion high frequency trading in most any markets (stocks, commodities, or bonds, including muni bonds) is risky business. My own personal Vanguard long-term insured tax-exempt fund has been relatively stable since before the 2007 market crash. There's an enormous difference in risk between buy and hold versus buy and trade strategies. The buy and hold strategy in enormous (think trillion-dollar) portfolio funds misses short-term trading opportunities for gains and losses, but the relatively high tax-exempt dividends plowed back into the fund just keep growing and growing tax-free in value. There are capital gains taxes on withdrawal check writing. And there is inflation risk in most any bond investments. That's why older folks lean more toward municipal bond funds than younger investors --- there's not much inflation risk in what remains of my wonderful life.

From the CFO Journal's Morning Ledger on February 20, 2019

McKinsey & Co. agreed to pay $15 million to settle U.S. Justice Department allegations that the large consulting firm failed to make required disclosures of potential conflicts in three chapter 11 cases it had advised on in recent years.

From the CFO Journal's Morning Ledger on February 19, 2019

The European Union is lagging behind the U.S. and U.K. in efforts to switch to new benchmarks underpinning financial contracts, pressuring treasurers at eurozone companies, CFO Journal reports.

Libor, let's move on: Regulators want financial markets around the world to stop referencing interest rates derived from bank estimates. The move is spurred by a manipulation scandal involving the London interbank offered rate used in hundreds of trillions of dollars worth of contracts, including mortgages and corporate loans. Instead of the so-called Libor, banks and companies are supposed to use benchmarks calculated with overnight transaction data.

Race against time: In the eurozone, a tight transition schedule is complicating the changeover for treasurers. Both the euro interbank offered rate, known as Euribor, and the euro overnight index average, Eonia, have to be overhauled or replaced by January 2020 to meet regulatory requirements. Any delay could slow the issuance of corporate debt in Europe, as companies might decide to wait as they lack a reference rate to calculate the interest cost of future bonds.

Wait and see: Finnish industrial firm Wärtsilä Oyi is among the companies that have expressed concern about the lack of progress around the benchmark. “Euribor is by far the most important benchmark for us,” says Anu Hämäläinen, the company’s treasurer. “It’s a worry that the replacement process is so delayed.”

From the CFO Journal's Morning Ledger on February 15, 2019

General Electric Co. is scaling back its planned Boston headquarters, including selling the property and dropping plans to add hundreds of jobs, because the shrinking conglomerate no longer needs the facilities.

From the CFO Journal's Morning Ledger on February 13, 2019

A former Apple Inc. senior lawyer has been accused by the U.S. Securities and Exchange Commission of exploiting his position to illegally trade shares in the company ahead of Apple’s financial reports, according to court documents.

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

From the CFO Journal's Morning Ledger on February 13, 2019

Hello. The high number of job openings relative to those available to take them points to an extremely tight U.S. labor market. Job vacancies in the U.S. rose in December to the highest level since 2000, The Wall Street Journal reports.

Buddy, can you spare a worker? In December, openings exceeded the unemployed—people without a job but actively seeking work—by more than 1.04 million. Before March 2018, job openings had never exceeded unemployed workers in 18 years of monthly records. The unemployment rate was 3.9% in December, just above a 49-year low. The rate edged up to 4% in January.

Take this job and... Tuesday’s report showed the rate at which Americans quit their job—as a sign of confidence in the job market—held steady for the third straight month in December. The rate was down slightly from the 17-year high touched last summer.

...hold on to it. The rate of quits holding steady despite extremely low unemployment could suggest that American workers are growing a bit more cautious about the labor market even though employers are moving ahead with hiring plans, said Josh Wright, chief economist at iCIMS Inc., a maker of employee-recruiting software.

From the CFO Journal's Morning Ledger on February 12, 2019

A criminal trial starting this week may shed more light on a high-profile scandal at KPMG LLP: an effort to help the Big Four accounting firm look better to its regulator that prosecutors say broke the law.

Six ex-accountants at the KPMG and the PCAOB were accused of arranging to obtain and misuse confidential information about plans to inspect audits ---
https://www.wsj.com/articles/former-kpmg-executives-charged-with-conspiracy-1516640050

Six accountants, including former partners at KPMG LLP, were arrested and charged with conspiring to defraud securities regulators and misuse of confidential auditing information.

Federal prosecutors in Manhattan alleged in a criminal indictment unsealed Monday that KPMG executives recruited employees from the Public Company Accounting Oversight Board to join the accounting firm, who then shared confidential information about the PCAOB’s plans to audit the firm.

KPMG couldn’t immediately be reached for comment.

Five KPMG LLP partners, including the head of its audit practice, were fired last year after the firm improperly obtained information about which audits its regulator planned to inspect, the company said.

Continued in article

Bob Jensen's threads on KPMG ---
http://faculty.trinity.edu/rjensen/fraud001.htm#KPMG

What Tesla Never Reveals to Prospective Electric Vehicle Buyers: Book a Hotel Room in Advance
From the CFO Journal's Morning Ledger on February 11, 2019

Owners of Tesla Inc.’s Model 3 cars face unusually long waits for repairs, a drawback to being a customer of an upstart company that has built a coveted luxury brand but is still learning some of the basics.

Jensen Comment
To compound the irritation Tesla owners often have to drive hundreds of miles to find a shop that repairs Teslas. If you get AAA's premium plan you can get 150 miles of free towing (I think). But you maybe should book a hotel for the number of nights you will be waiting for the repairs.

From the CFO Journal's Morning Ledger on February 11, 2019

More companies are splitting the annual financial audit into two segments—data gathering and analysis—a move that could enable companies to more easily outsource portions of the audit process to technology companies.

Already underway. One-third of executives already are breaking down the audit process to some extent, while 44% are weighing making such changes, according to a report released Monday by Source Global Research.

Better controls. Dividing the work could pave the way for companies to automate elements of the audit process, allowing them to free up human resources to focus on improving controls and preventing fraud. “When clients decide to split a professional service, it paves the way for change in the competitive landscape, and that’s what’s happening in audit at the moment,” said Fiona Czerniawska, co-founder of Source Global.

No more sampling? Auditors now have the ability to test entire data sets, rather than just relying on small samples. In the past, auditors would select a group of transactions to examine the documentation and controls. Digital documentation and automated record-keeping are allowing auditors to cast a wider net without spending more time and effort

From the CFO Journal's Morning Ledger on February 7, 2019

Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade, a Wall Street Journal review of federal data shows. Trade disputes over agriculture are adding pain to low commodity prices that have been grinding down American farmers for years.

Jensen Comment
Farmers are mainly in trouble because of leveraged debt. Those that own the land have mortgage debt. Those that farm the land borrow enormous amounts of money for crops (think seed and chemicals), equipment (giant tractors, combines, etc.) and feed (if they are into containment feeding of thousands of animals). Add to this the high cost of crop insurance (think hail, floods, tornados, and droughts). Farmers are also tempted to extend hedging investments (for ungrown crops) into risky speculations beyond commodities they produce. Nobody but the Amish farm like what it was like in the olden days without so much debt. The good news here is that interest rates are still relatively low and probably will remain low for decades given the spendthrift policies of Washington DC. We've reached a critical juncture where the Federal government cannot afford higher interest rates because of its own 20+ trillion in debt.

Of course the current trade wars are hurting farmers dependent upon exports. There' s some relief such as rents from electric power windmills --- I think Iowa has more windmills than any other state. The good news is that you can farm the land around windmills. And rain has been b better recently in the Midwest, South, and West. Congress is still farmer friendly with subsidies (think price subsidies and food needed for food stamps and school meals) and continued dumb regulations requiring ethanol in our gas tanks.

From the CFO Journal's Morning Ledger on February 7, 2019

FASB Proposes Update to Loan Losses Rules

The Financial Accounting Standards Board on Wednesday proposed an accounting standards update to ease the transition to new loan-loss accounting rules.

The new credit losses standard, issued in 2016, will require companies to record all losses they project over the lifetime of their loans as soon as those loans are made. It also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis.

The proposed update would allow companies to measure certain types of assets at fair value. This option would remove the need to pursue dual measurement methods that would arise in certain circumstances under the new rules.

The FASB asked for public comment by March 8, 2019.

Also see
https://www.journalofaccountancy.com/news/2019/feb/fasb-transition-relief-for-credit-loss-standard-201920588.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Feb2019

From the CFO Journal's Morning Ledger on February 6, 2019

Revenue Recognition Costs Higher Than Expected, Companies Say

The majority of U.S. companies spent more than expected to comply with new rules for revenue accounting, but they also expect to reap savings from compliance efforts over the longer term, according to a survey by Ernst & Young LLP, CFO Journal’s Tatyana Shumsky reports.

Three-quarters of the 300 chief financial officers and chief information officers surveyed by the professional-services firm said the costs of complying with the new rules have increased since they launched the effort.

Public and private companies estimate the transition to the new rules will cost, on average, $3.3 million per company, according to the survey, which was conducted last October and November. That’s up from a forecast of $1 million by 55% of finance and IT professionals EY surveyed in 2017.

From the CFO Journal's Morning Ledger on February 6, 2019

Good day. Earnings are overrated. As we reach the halfway point in the S&P 500’s fourth-quarter earnings season, investors are obsessing over financial reports and downgraded profit forecasts from Wall Street analysts. But this doesn’t matter nearly as much as people think, The Wall Street Journal’s James Mackintosh writes.

What—me worry? Start with the reasons for concern. Estimates for U.S. earnings this year have come down sharply, and the first-quarter S&P 500 estimate is for just 0.5% year-over-year growth, the worst performance since early 2016, when profits fell, according to data from Refinitiv. Stock analysts have been downgrading profit forecasts for the year ahead far more than they’ve been upgrading them, both in the U.S. and globally. And U.S. companies have been lowering their guidance on future earnings, with 30 negative and only 12 positive so far this quarter.

When earnings go low, stocks go high. In practice, stocks often move in the opposite direction of earnings. This year is far from unusual. Estimates for 2019 S&P 500 earnings have dropped 2% since the end of December; global earnings estimates are up 1% this year, but still down 6% since mid-October. Yet U.S. stocks have just completed their best January since 1987 and global markets had their best month in eight years.

Focus on the future. The stream of all future earnings is far more important than the latest quarter. Information about growth prospects outweighs the number of U.S. dollars per share a company delivered in the previous three months, or how much it will deliver in the next 12 months.

From the CFO Journal's Morning Ledger on February 1, 2019

The U.S. and China moved closer to settling their trade dispute, with President Trump saying he expects to meet again with Chinese President Xi Jinping to resolve the conflict that has rattled the global economy.

Teaching Cases:

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 1, 2019

Pension Losses Could Hit Companies Like AT&T and Verizon Hard

By Michael Rapoport | Jan 26, 2019

TOPICS: Earnings, Financial Accounting, Pension Accounting

SUMMARY: The stock-market tumble at the end of 2018 could punish earnings at some companies because of how they account for fluctuations in their pension plans. Those companies count gains and losses in their pensions and retiree-benefit plans in the same year that they occur, as opposed to spreading them out over a number of years. Some companies were on track for much of 2018 to get an earnings boost until markets swooned in the fourth quarter. Now, they may report pension losses that will weigh on their bottom lines, or pension gains will be far lower than would have been expected earlier in the year. Many other companies with defined-benefit plans could see their earnings in 2019 and beyond hit by the markets' stumbles, though the effect will be more gradual and harder to notice. Use of the mark-to-market approach records changes more immediately than the other option, in which companies still "smooth" their plans' results into earnings over a period of years. Mark-to-market can make companies' earnings more volatile, but it is simpler and more transparent for investors. Until last fall, mark-to-market companies stood to record pension gains for 2018. The S&P 500 was up 9% for the year through September, helping to raise the value of pension plans' assets. Interest rates had risen, thus reducing the current value of the plans' future pension payments to retirees. Those twin developments make a pension plan healthier and better-funded, and those improvements can benefit a company's earnings.

CLASSROOM APPLICATION: This article is appropriate for coverage of pension accounting.

QUESTIONS:

1. (Advanced) How are pension gains and losses calculated for financial statement purposes?

2. (Introductory) What was the status of the stock market at the end of 2018? How was the market doing before the fall of 2018?

3. (Advanced) How are companies' pension calculations affected by the status of the stock market at the end of the year? What is the mark-to-market approach? How are companies using that approach affected?

4. (Advanced) What is the other option for pension accounting? How are those companies affected by the stock market?

5. (Advanced) Why would companies use the mark-to-market approach? Why would a company choose to use the other option? What are the benefits and drawbacks of each?

READ THE ARTICLE

Reviewed By: Linda Christiansen, Indiana University Southeast

"Pension Losses Could Hit Companies Like AT&T and Verizon Hard," by Michael Rapoport , The Wall Street Journal, January 26, 2019 ---
https://www.wsj.com/articles/pension-losses-could-hit-companies-like-at-t-and-verizon-hard-11548428400?=wsj_AcctW2A1

Late-2018 market plunge could weigh on bottom lines of the telecom giants and others because of how they account for pension plans

The stock-market tumble late last year could punish earnings at companies such as Verizon Communications VZ -0.93% Inc. and AT&T Inc. T -0.20% because of how they account for fluctuations in their pension plans.

These companies and others count gains and losses in their pensions and retiree-benefit plans in the same year that they occur, as opposed to spreading them out over a number of years. They were on track for much of 2018 to get an earnings boost until markets swooned in the fourth quarter.

Now, they may report pension losses that will weigh on their bottom lines, or pension gains will be far lower than would have been expected earlier in the year. In fact, many other companies with defined-benefit plans could see their earnings in 2019 and beyond hit by the markets’ stumbles, pension analysts say, though the effect will be more gradual and harder to notice.

“For many, it could serve as a bit of an overhang,” said Royce Kosoff, a managing director at consulting firm Willis Towers Watson.

One company already feeling the impact: Ford Motor Co. The auto maker’s fourth-quarter earnings, announced Wednesday, included an $877 million pretax loss from a pension adjustment. The loss was due to “adverse financial market conditions that occurred late in the year,” Chief Financial Officer Bob Shanks said on Ford’s conference call. The company didn’t provide further comment.

Ford uses the same pension-accounting method as Verizon, AT&T and dozens of others: a mark-to-market approach that records changes more immediately than most companies which still “smooth” their plans’ results into earnings over a period of years. That can make companies’ earnings more volatile, but it is simpler and more transparent for investors.

Until last fall, these companies stood to record pension gains for 2018. The S&P 500 was up 9% for the year through September, helping to raise the value of pension plans’ assets. Interest rates had risen, thus reducing the current value of the plans’ future pension payments to retirees. Those twin developments make a pension plan healthier and better-funded, and those improvements can benefit a company’s earnings.

Indeed, both Verizon and AT&T recorded pension gains earlier in 2018—$454 million and $2.7 billion, respectively, for the first nine months of the year—when special circumstances prompted them to make additional pension adjustments to earnings beyond the annual fourth-quarter move.

But while interest rates ended the fourth quarter about where they began, the stock market got crushed. The S&P 500 plunged 14% during the quarter, dragging the index to a 6% loss for 2018. Other asset classes lost ground also.

That could erase pension gains or cause pension losses at Verizon and AT&T when the companies report earnings—Verizon on Tuesday and AT&T on Wednesday. AT&T said in its annual report last year that because it makes yearly mark-to-market adjustments, any market declines “will have a negative effect on our operating results.”

Verizon and AT&T declined to comment.

While the impact of the market’s tumble is clearest at mark-to-market companies, ultimately it will affect earnings at many others with defined-benefit plans. Plans whose assets declined in value in 2018 because of the market slump could see that show up in their 2019 pension costs, which are counted as part of overall earnings.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 1, 2019

KPMG Gets Poor Marks From PCAOB

By Michael Rapoport | Jan 26, 2019

TOPICS: Auditing, KPMG, PCAOB

SUMMARY: In what amounted to a public rebuke, the Public Company Accounting Oversight Board released a report regarding serious audit deficiencies and unsealed some harsh criticisms of KPMG it had made in the past, in which the regulator suggested the Big Four accounting firm had been less committed to audit quality than it had claimed to be. Audit regulators found serious deficiencies in nearly half the KPMG LLP audits they scrutinized in their last two years of inspections. The long-delayed reports from the PCAOB shed new light on a KPMG information-leaking scandal that erupted in 2017 and led to the firing and indictment of some KPMG partners. The partners allegedly took steps to improperly learn in advance which of the firm's audits the PCAOB planned to examine during its annual inspections. Prosecutors have said the "steal the exam" scheme was motivated by a desire to help KPMG better prepare for the PCAOB's inspections - closely watched assessments of the firm's performance on which it had previously fared poorly.

CLASSROOM APPLICATION: This article is appropriate for coverage of auditing and the PCAOB.

QUESTIONS:

1. (Advanced) What is the PCAOB? What are its areas of responsibility and authority?

2. (Advanced) What is KPMG? What did the PCAOB report regarding KPMG? Why is this concerning? What parties should be concerned about this report?

3. (Introductory) What are the facts of the cases of the individuals involved? What were the outcomes?

4. (Advanced) Why were there cases against both the firm and people employed by the firm? In what situations can sanctions and civil and criminal implications be levied against both businesses and the people they employ? How does that affect what you are willing to do for your employer?

5. (Advanced) How has KPMG responded to the PCAOB's report? What can the firm do to remedy these issues? What should it do to rebuild its reputation and goodwill in the business world and with government regulators?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"KPMG Gets Poor Marks From PCAOB," by Michael Rapoport, The Wall Street Journal, January 26, 2019
https://www.wsj.com/articles/kpmg-gets-poor-marks-from-audit-regulator-11548460081?=wsj_AcctW2A2

Regulator unseals sharp criticism of Big Four accounting firm’s audit quality during period spanning leak scandal

Audit regulators found serious deficiencies in nearly half the KPMG LLP audits they scrutinized in their last two years of inspections, according to reports issued Friday.

In what amounted to a public rebuke, the Public Company Accounting Oversight Board also unsealed some harsh criticisms of KPMG it had made in the past, in which the regulator suggested the Big Four accounting firm had been less committed to audit quality than it had claimed to be.

The long-delayed reports from the PCAOB shed new light on a KPMG information-leaking scandal that erupted in 2017 and led to the firing and indictment of some KPMG partners. The partners allegedly took steps to improperly learn in advance which of the firm’s audits the PCAOB planned to examine during its annual inspections. Prosecutors have said the “steal the exam” scheme was motivated by a desire to help KPMG better prepare for the PCAOB’s inspections—closely watched assessments of the firm’s performance on which it had previously fared poorly.

In a statement Friday, KPMG said audit quality “has been and continues to be a top priority across all levels of KPMG.” The firm said it was “committed to improving our performance and our system of audit quality control” and was making “significant investments in our people, technology and governance” toward that end.

PCAOB inspectors found significant deficiencies in 22 of the 51 KPMG audits they reviewed in the 2016 inspection cycle, and 26 of the 52 they reviewed in the 2017 cycle.

The leaks came to light when the PCAOB’s 2016 inspection report was pending and its 2017 inspection was being planned; the regulator said in Friday’s reports that KPMG partners’ “improper advance notice” of which audits the PCAOB would review had compromised its plans. In the 2016 cycle, that led the board to replace 11 of the audits it had initially reviewed with 10 new ones. The PCAOB said it found nine of the 10 newly added audits to have deficiencies, compared with three of the 11 original audits—illustrating the extent to which advance knowledge of the PCAOB’s plans could have helped KPMG.

In its 2017 inspection, the PCAOB selected 51 new audits to review after it learned that KPMG had obtained advance word of those that the board had initially selected.

The PCAOB also made public some criticism of KPMG it had previously made confidentially. In an inspection report initially issued in 2015, for instance, the PCAOB said KPMG’s failure to implement a structured process for assessing its partners’ audit quality “may suggest that the firm is not as committed to promoting and rewarding good audit quality, and discouraging and addressing poor audit quality, as its formal communications may suggest.”

The criticisms were in sealed portions of the PCAOB inspection reports evaluating KPMG’s quality controls. Those portions are kept sealed permanently if a firm addresses any criticisms to the PCAOB’s satisfaction within 12 months, but the board decided KPMG hadn’t done so.

In a written response to the PCAOB’s move included with the unsealed criticisms, KPMG said part of the problem was that its efforts to address the issues the PCAOB had cited were overseen in part by the same people involved in the leaking scandal. Their conduct was “contrary to the firm’s Code of Conduct, what we expect and demand of our people, and intolerable,” KPMG said, adding that it had since overhauled its leadership and internal processes.

No further regulatory action has been taken against KPMG, and it isn’t known whether the PCAOB plans any. A PCAOB spokeswoman declined to comment.

Three people, including a former KPMG partner, have pleaded guilty to criminal charges in the matter. Two others, including David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, are scheduled to stand trial in federal court in New York next month. Another KPMG partner charged in the case is scheduled to go on trial in October. Mr. Middendorf’s attorney couldn’t immediately be reached for comment.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 1, 2019

Trump Administration Sets Final Rules for New Business Tax Deduction

By Richard Rubin and Ruth Simon | Jan 19, 2019

TOPICS: Deduction, Pass-Through Entities, Tax Cut and Jobs Act, Taxation

SUMMARY: The Treasury Department set final rules for a new deduction that will provide significant savings for many business owners, providing more clarity for real-estate owners and service-industry businesses. Congress created the pass-through deduction as part of the sweeping 2017 tax overhaul to give a rate cut to businesses that wouldn't benefit from the cut in the top corporate tax rate. The 20% deduction lowered the top rate on business income that qualifies for the break to 29.6%, down from the 37% top rate that applies to individuals' wage income. The 2017 tax law reduced the top corporate tax rate to 21% from 35%. The final rules make some changes from proposed regulations released in 2018, and they will guide business owners and tax preparers in determining what income qualifies for the deduction. Each case will be different, and lawyers expect frequent disputes between the IRS and business owners over who is eligible.

CLASSROOM APPLICATION: This article is appropriate for coverage of taxation of pass-through entities.

QUESTIONS:

1. (Advanced) In general, why was the new 20% deduction created? In what law is it included? Is this a good and fair feature of tax law? Why or why not?

2. (Introductory) What are the details of the new rules issued by the Treasury Department? Why were they issued?

3. (Advanced) What types of taxpayers are eligible to take the deduction? Why were they included? Who is not eligible? Why were those taxpayers excluded?

4. (Advanced) Even in situations in which the 20% deduction applies, how could it be limited? Why were those restrictions imposed?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"Trump Administration Sets Final Rules for New Business Tax Deduction," by Richard Rubin and Ruth Simon, The Wall Street Journal, January 19, 2019 ---
https://www.wsj.com/articles/trump-administration-sets-final-rules-for-new-business-tax-deduction-11547839824?=wsj_AcctW2A3

Treasury rejected requests from real-estate settlement agents, Major League Baseball team owners, writers and physical therapists, who all wanted more favorable rules

The Trump administration set final rules for a new deduction that will provide significant savings for many business owners, providing more clarity for real-estate owners and service-industry businesses.

The government also offered a cushion for many owners of rental real estate to claim the deduction if they meet certain tests, but declined to allow the looser definitions some wanted.

The Treasury Department rejected requests from real-estate settlement agents, Major League Baseball team owners, writers and physical therapists, who all wanted more favorable rules for their specific industries.

The rules for the new 20% deduction for so-called pass-through businesses—which include partnerships, S corporations and sole proprietorships—will be crucial as business owners begin filing their first returns under the new system in coming months. Citing that urgency, the government released the rules during a partial government shutdown affecting Treasury and the Internal Revenue Service.

Congress created the pass-through deduction as part of the sweeping 2017 tax overhaul to give a rate cut to businesses that wouldn’t benefit from the cut in the top corporate tax rate.

The 20% deduction lowered the top rate on business income that qualifies for the break to 29.6%, down from the 37% top rate that applies to individuals’ wage income. The 2017 tax law reduced the top corporate tax rate to 21% from 35%.

The final rules make some changes from proposed regulations released last year, and they will guide business owners and tax preparers in determining what income qualifies for the deduction. Each case will be different, and lawyers expect frequent disputes between the IRS and business owners over who is eligible.

Typical corporations pay corporate taxes and then a second layer of tax on dividends. For pass-through businesses, by contrast, the net income flows directly to the owners’ personal returns and is only taxed once, at the owners’ individual rates. Many pass-through businesses are small, but some large closely held businesses use this structure, too.

Democrats and some tax experts have warned that the pass-through deduction will distort business decisions, add complexity and help high-income households. More than half of the benefit of the deduction goes to the top 1% of households, according to a Tax Policy Center estimate.

Not every owner of a pass-through business can claim the deduction. Once income reaches $157,500 for individuals and $315,000 for married couples, some restrictions apply. For instance, above those levels, certain service businesses—including those in medicine, law, athletics and consulting—start losing the break. That restriction was designed partly to prevent people from turning higher-taxed labor income into lower-taxed business income. Businesses that don’t meet specified levels for assets and wages paid can also lose the break.

When it passed the 2017 tax law, Congress didn’t directly answer many questions about the deduction, including whether all owners of rental real estate could qualify.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 1, 2019

Expecting a Big Tax Refund? Don't Be So Sure

By Richard Rubin | Jan 28, 2019

TOPICS: Income Taxation, Tax Cuts and Jobs Act, Tax Refunds, Tax Withholding

SUMMARY: On average, refunds under the first tax-filing season under the 2017 tax law will be larger than usual. But results will vary, and for individuals, refund size is unusually uncertain because of the changes to what Americans owe and to what taxes came out of their paychecks during the year. Most households got tax cuts under the law. But tax cuts and tax refunds aren't the same thing. The tax cut is the change in what people owed for 2018 compared with what they would have owed if Congress had done nothing. The refund is what happens when the IRS sends back any extra money people paid during 2018 or delivers any refundable tax credits. Many households already have received the bulk of their tax cuts. That is because the IRS changed the default rules for calculating how much is withheld from paychecks for taxes. Those changes took effect in February, though some taxpayers manually adjusted their withholding with their 2019 refunds in mind. The IRS says it expects more people than usual to owe taxes and penalties, including from people who usually get refunds. Those most at risk of underwithholding are people who used to itemize deductions but now don't, households with two wage earners and people with complex situations.

CLASSROOM APPLICATION: This article is appropriate for coverage of individual taxation.

QUESTIONS:

1. (Introductory) How did the tax law change in 2017? What was the name of the law?

2. (Advanced) The article mentions the difference between a tax cut and a tax refund. What are the differences? Why are there differences?

3. (Advanced) What is withholding? How did the IRS change withholding in 2018? Why?

4. (Advanced) Why did some taxpayers adjust their withholding? What benefits could the adjustment offer? What problems or issues could it cause?

5. (Advanced) What changes did the new tax law bring? How did those changes affect tax liabilities for most taxpayers?

6. (Advanced) What are the advantages of receiving a large tax refund? What are the disadvantages? How can taxpayers manage the size of refunds? What challenges can exist?

READ THE ARTICLE

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The Wall Street Journal Guide to the New Tax Law
by Journal Reports
Feb 13, 2018
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Reviewed By: Linda Christiansen, Indiana University Southeast

"Expecting a Big Tax Refund? Don't Be So Sure," by Richard Rubin, The Wall Street Journal, January 28, 2019 ---
https://www.wsj.com/articles/expecting-a-big-tax-refund-dont-be-so-sure-11548594000?=wsj_AcctW2A4

In the first tax-filing season under the new law, the size of your refund is more uncertain than ever

WASHINGTON—The first tax-filing season under the 2017 tax law opened Monday, and there’s a crucial unknown for most Americans: Just how big will their refunds be?

On average, refunds will be larger than usual. But results will vary, and for individuals, refund size is unusually uncertain because of the changes to what Americans owe and to what taxes came out of their paychecks during the year. The partial government shutdown, which left the Internal Revenue Service understaffed as it prepared for filing season, added to the confusion. The IRS said this week that it expects refunds to start going out in early February.

Most households got tax cuts under the law. But tax cuts and tax refunds aren’t the same thing. The tax cut is the change in what people owed for 2018 compared with what they would have owed if Congress had done nothing. The refund is what happens when the IRS sends back any extra money people paid during 2018 or delivers any refundable tax credits.

“The real question that we can’t answer today is: What will their refunds look like vis a vis last year?” said David Williams, chief tax officer at Intuit Inc., maker of TurboTax, which handled about 35 million tax returns last year.

About two-thirds of households are getting tax cuts, paying less in 2018 individual income taxes than they would have under the old system. Many, but not all, will get larger refunds than they typically do.

Many households already have received the bulk of their tax cuts. That is because the IRS changed the default rules for calculating how much is withheld from paychecks for taxes. Those changes took effect in February, though some taxpayers manually adjusted their withholding with their 2019 refunds in mind.

Overall, because of withholding changes, taxpayers already have received most of the law’s $180 billion in individual tax cuts for 2018, but $70 billion to $75 billion will show up in larger refunds or smaller payments this year, according to an estimate by Evercore ISI, a macroeconomic and equity-research firm. That’s an average of $420 per household.

“In terms of individual taxpayers, it will be very specific to each person’s situation,” said Ernie Tedeschi, a former Treasury Department economist who did the Evercore analysis.

Starting in tax year 2018, Congress replaced the personal exemption—a per-person deduction of more than $4,000—with larger standard deductions and increased child tax credits. The law also lowered tax rates for individuals and closely held businesses. Congress eliminated or curbed some tax breaks, such as the deductions for moving expenses, unreimbursed employee costs and state and local taxes.

About 65% of households will get tax cuts averaging $2,180, according to the Tax Policy Center, a Washington group run by a former Obama administration official. Meanwhile, about 6% will see a tax increase averaging $2,760.

But taxpayers won’t necessarily see that effect if they compare their spring 2018 refund and their spring 2019 refund. Taxpayers can only see those changes if they compare their 2017 return to their 2018 return—if their income, family size and major expenses didn’t change.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 1, 2019

PG&E Shares Jump After California Clears Company in 2017 Blaze

By Katherine Blunt | Jan 25, 2019

TOPICS: Bankruptcy, Contingent Liabilities, Financial Accounting, Financial Reporting, Liabilities, Stock Price Effects

SUMMARY: PG&E Corp. shares surged after California fire investigators said the utility didn't cause the deadliest in a series of 2017 state wildfires. Shares in PG&E, which said it was planning to seek bankruptcy protection in response to wildfire-related liability costs, rose by 75% to close at $13.95. PG&E has said it could face as much as $30 billion in potential liability costs related to the 2017 and 2018 wildfires. A hedge fund that recently raised its stake in PG&E questioned the utility's plan to seek bankruptcy protection, arguing that the company isn't yet insolvent and that its ultimate liabilities from fires remain unclear.

CLASSROOM APPLICATION: This article updating the PG&E situation is appropriate for coverage of how and when to book liabilities, and their effects on the financial statements. It can be used when covering types of liabilities, as well as the impact of bankruptcy on financial statements.

QUESTIONS:

1. (Introductory) What are the details of the California wildfire? How could PG&E have been involved in the fire?

2. (Advanced) What are the types or categories of liabilities? Please define each. What type of liability is this one likely to be? Why? What are the accounting rules regarding recording that type of liability?

3. (Advanced) The article discusses the potential liability PG&E could have for fire damage. What is the possible total liability? Why isn't the total determined yet? Why can it be challenging to determine total liability?

4. (Advanced) Should this liability be recorded in PG&E's records now? If so, why should it, and how would it calculated and recorded? If not, why not and when might it be recorded?

5. (Advanced) How could bankruptcy affect each of the company's financial statements? Please consider all possible aspect of a bankruptcy.

6. (Advanced) How has this liability and bankruptcy filing affected the company's stock price? Why does it? How effects could occur in the future? How could the stock price affect financial reporting?

READ THE ARTICLE

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"PG&E Shares Jump After California Clears Company in 2017 Blaze," by Katherine Blunt, The Wall Street Journal, January 25, 2019 ---
https://www.wsj.com/articles/pg-e-shares-jump-after-california-clears-company-in-2017-fire-11548365332?=wsj_AcctW2A5

Investigators said the Tubbs Fire was caused by a private electrical system, not PG&E equipment

PG&E Corp. PCG 0.62% shares surged after California fire investigators said the utility didn’t cause the deadliest in a series of 2017 state wildfires.

California fire investigators said the Tubbs Fire, which killed 22 people and destroyed nearly 37,000 acres mainly in Napa and Sonoma counties, was caused by a private electrical system near a residential structure, ending speculation that PG&E might have been liable for the blaze.

Shares in PG&E, which said last week that it was planning to seek bankruptcy protection by month’s end in response to wildfire-related liability costs, rose Thursday by 75% to close at $13.95.

The California Department of Forestry and Fire Protection said it found no evidence of violations of state law related to the cause of the Tubbs Fire. It has previously found that PG&E equipment helped spark 18 other wildfires during a spate of deadly fires that hit the state in 2017.

State officials have yet to determine whether PG&E equipment helped cause the Camp Fire, the state’s deadliest fire to date, which killed 86 people last year. PG&E has disclosed that a high-voltage line malfunctioned in the region where the Camp Fire began, failing some 15 minutes before the start of the blaze was reported in November.

Even after Thursday’s jump, the company’s shares are still down 41% this month and on track for their worst monthly decline since November, when PG&E fell 43%.

PG&E has said it could face as much as $30 billion in potential liability costs related to the 2017 and 2018 wildfires. That estimate, however, included the possibility it could be found liable for the Tubbs Fire. A company spokeswoman didn’t immediately offer a revised estimate and said its liability costs could still exceed that number.

“Regardless of today’s announcement, PG&E still faces extensive litigation, significant potential liabilities and a deteriorating financial situation, which was further impaired by the recent credit agency downgrades to below investment grade,” the company said in a written statement.

PG&E faces substantial challenges in grappling with the fallout from the spate of wildfires, which have called into question the safety of its electric grid and the effectiveness of its risk-mitigation practices. The California Public Utilities Commission has expanded an existing probe into the company’s safety practices and is considering whether the company should be broken up.

PG&E is shaking up its board of directors as part of a plan to improve its safety practices. The company has said it also plans to invest billions of dollars to reduce fire risk within its 70,000-mile service territory by installing weather stations and cameras and enhancing inspections and tree-trimming practices, among other things.

BlueMountain Capital Management LLC, a hedge fund that recently raised its stake in PG&E, has questioned the utility’s plan to seek bankruptcy protection, arguing that the company isn’t yet insolvent and that its ultimate liabilities from fires remain unclear. On Thursday, the hedge fund said it would mount an effort to replace PG&E’s 10-member board during its meeting in May and encouraged other shareholders to support a proxy fight.

“The news from Cal Fire that PG&E did not cause the devastating 2017 Tubbs fire is yet another example of why the company shouldn’t be rushing to file for bankruptcy, which would be totally unnecessary and bad for all stakeholders,” BlueMountain Capital said in a written statement.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 7, 2019

High-Wire Audit Looms as Regulators Scrutinize KPMG and GE

By David Benoit | Jan 31, 2019

TOPICS: Asset Valuation, Auditing, Auditor Independence, GE, KPMG, PCAOB, Revenue Recognition

SUMMARY: Big Four accounting firm KPMG has been blessing the books of General Electric Co. for 110 years, but the audit currently under way holds significant risks for both companies. KPMG is under fire for a string of audit failures and scandals, highlighted again in a set of scathing reports by the PCAOB, which is demanding KPMG increase its skepticism and improve the quality of work, particularly at big, complicated clients like GE. A tough audit is the last thing GE needs right now. More bad news could hamper efforts to turn around the company or could provide evidence for investigators from the Securities and Exchange Commission and the Justice Department, which are probing GE's accounting decisions. GE paid KPMG $142.9 million in 2017, the biggest total audit fee for any company regulated by the SEC. The GE audit was so important to KPMG that roughly 400 partners worked on it in 2018.

CLASSROOM APPLICATION: This article is appropriate for coverage of auditing and the PCAOB. It presents a comprehensive update to the PCAOB's investigation of KPMG, as well as some challenges GE is facing. The combination will make for an interesting audit this year.

QUESTIONS:

1. (Advanced) What is the PCAOB? What are its areas of responsibility and authority?

2. (Advanced) What is KPMG? Why did the PCAOB investigate KPMG and what did it report regarding the firm? Why is this information concerning? What parties should be concerned about this report?

3. (Introductory) What are the facts of GE's current financial condition and accounting situation? What challenges is the company facing? Why?

4. (Advanced) What is the SEC? What is its area of authority? Why is it investigating GE?

5. (Advanced) What are the revenue recognition issues present in this situation? What are the possible asset valuation problems? Could KPMG be sanctioned in either of these cases? Why or why not?

6. (Advanced) What is auditor Independence? Why is it so important? What are the auditor independence concerns in this situation? How could the facts of the situation indicate potential issues?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"High-Wire Audit Looms as Regulators Scrutinize KPMG and GE," by David Benoit, The Wall Street Journal, January 31, 2019
https://www.wsj.com/articles/kpmgs-high-wire-ge-audit-11548856801?=wsj_AcctW3A1

Year-end audits are usually routine affairs, but with GE under investigation and KPMG under scrutiny from regulators, this one could cause fireworks

Accounting giant KPMG LLP has been blessing the books of General Electric Co. GE -3.92% for 110 years, but the audit currently under way holds significant risks for both companies.

KPMG is under fire for a string of audit failures and scandals, highlighted again Friday in a set of scathing reports by the nation’s top accounting regulator, which is demanding KPMG increase its skepticism and improve the quality of work, particularly at big, complicated clients like GE.

A tough audit is the last thing GE needs right now. Investors have already been concerned about more unknowns bubbling up. The conglomerate is trying to increase cash, pare debt and return to growth. More bad news could hamper those efforts or provide evidence for investigators from the Securities and Exchange Commission and the Justice Department, which are probing GE’s accounting decisions.

GE is set to release its fourth-quarter numbers on Thursday. As with most quarterly earnings, those numbers won’t be officially audited. But, in one of the biggest and most lucrative audits of any company, hundreds of KPMG partners and staff are poring over GE’s books in preparation for the company’s annual audited results, likely released in late February.

KPMG hasn’t been named in the GE investigations, but the Public Company Accounting Oversight Board, or PCAOB, released several reports Friday calling into question KPMG’s work on similar issues.

The reports said PCAOB found problems in nearly half of the 103 KPMG audits it inspected from 2016 and 2017 and said improvements it ordered in prior years hadn’t been made. The regulator also disclosed new details on the impact of leaks from the PCAOB about what audits would be reviewed, which helped KPMG prepare for the annual inspections.

KPMG said in a letter to PCAOB that it has taken significant steps, including management and board changes, to improve its processes.

A spokesman said it couldn’t comment on GE specifically but that “We are confident that our audits and reviews were appropriately performed in accordance with applicable professional standards, and we stand behind our work.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 7, 2019

Nick Saban Wins Again in Baton Rouge - Over the IRS

By Richard Rubin and Rebecca Davis O'Brien | Feb 01, 2019

TOPICS: Bad Debt Deduction, Individual Taxation

SUMMARY: The U.S. Tax Court ruled a loan Alabama football coach Nick Saban transferred to a partnership is eligible for a bad-debt deduction by that partnership. Mr. Saban contributed a loan to a real-estate developer in exchange for 15% ownership in a real-estate partnership. The partnership, 2590 Associates, claimed a worthless debt deduction of $2.9 million for that loan, plus interest, in 2011. The IRS challenged that deduction, arguing in part that Mr. Saban's receipt of the stake in 2590 Associates satisfied and extinguished the loan. The court found that Mr. Saban entered into a legitimate debt with Perkins Rowe and transferred the debt to 2590 Associates. Mr. Saban's transfer of the debt to 2590 Associates did not negate the legitimacy of the debt.

CLASSROOM APPLICATION: This article is appropriate for coverage of bad debt deductions in tax courses. The court's opinion is posted in related articles.

QUESTIONS:

1. (Introductory) What are the facts of this case? Who are the parties involved?

2. (Advanced) What are the requirements for a bad debt deduction for tax purposes? Why are they sometimes denied?

3. (Introductory) What did the Tax Court decide? What was the reasoning for that decision?

4. (Advanced) What was the IRS's position in this case? What are the merits of its position?

5. (Advanced) In what cases might the debt have been considered extinguished when transferred?

READ THE ARTICLE

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"Nick Saban Wins Again in Baton Rouge - Over the IRS," by Richard Rubin and Rebecca Davis O'Brien , The Wall Street Journal, February 1, 2019 ---
https://www.wsj.com/articles/nick-saban-wins-again-in-baton-rougeover-the-irs-11548974097?=wsj_AcctW3A2

Alabama coach’s Louisiana real estate deduction gets Judge’s blessing

Alabama football coach Nick Saban racked up a win this month after all, prevailing over the Internal Revenue Service in court.

Mr. Saban, whose Crimson Tide lost the national championship game Jan. 7, will get to claim a bad-debt deduction that the government tried to deny, the U.S. Tax Court ruled on Thursday.

The deduction stems from a real-estate investment Mr. Saban made in Baton Rouge, La., through a property developer he met when he was head coach at Louisiana State University.

Mr. Saban loaned the developer, Joseph Spinosa, $2 million in 2006, for the construction of a shopping center and office complex in Baton Rouge.

The project ran into financial trouble, and Mr. Saban began asking Mr. Spinosa about a plan to repay the loan. Messrs. Spinosa and Saban agreed to contribute that debt so Mr. Saban could get a 15% stake in 2590 Associates, a partnership that owned a different real-estate venture in Baton Rouge.

“Mr. Saban did not want to directly own 2590 Associates because of privacy concerns,” Judge Joseph Goeke wrote in the opinion. “At the time he was the head football coach at the University of Alabama and felt there was negative public sentiment toward him in the Baton Rouge area because of his decision to leave LSU. He wanted to receive his interest through a business entity.”

2590 Associates claimed a worthless debt deduction of $2.9 million for that loan, plus interest, in 2011. The IRS challenged that deduction, arguing in part that Mr. Saban’s receipt of the stake in 2590 Associates satisfied the loan.

“While the transaction may not have been typical of a normal business relationship because of Mr. Spinosa’s personal relationship with Mr. Saban, it was a transfer of a legitimate debt,” Judge Goeke wrote.

Mr. Saban coached at LSU for five seasons before departing in 2004. His unpopularity in Louisiana is compounded by the fact that Alabama has won five of its six games at LSU since Mr. Saban took over the Crimson Tide in 2007.

Even as he has built a veritable football dynasty at Alabama, Mr. Saban has also quietly built a business empire off the field, a collection of investments and projects in multiple states, public records show. Those projects have included, in recent years, a collection of Mercedes-Benz dealerships, apartment complexes around Houston, an upscale residential development in Tuscaloosa, and a strip mall outside East Lansing, Mich.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 7, 2019

Lease Accounting: Six Questions for Final Implementation

By Deloitte Risk Editor | Jan 31, 2019

TOPICS: Accounting for Leases, FASB, Financial Accounting

SUMMARY: FASB's new standard on accounting for leases took effect for public companies on January 1, 2019. Designed to address off-balance-sheet financing concerns related to operating leases, the new standard requires that companies categorize leases as either operating or finance leases and brings virtually all leases exceeding one-year in length onto the balance sheet. For many companies with leasing activities, compliance with ASC 842 requires investment in new technology or modification of existing technology; extensive abstracting of existing lease agreements to capture new data points; and close coordination with senior leadership in corporate real estate, procurement, IT, and third-party advisors. The article lists and discusses six questions public-company CFOs should be addressing with their chief accountants: 1. Have we adequately tested our leasing solution? 2. Have we identified data gaps and developed a remediation plan? 3. Have we adjusted our business processes and behaviors? 4. Are we using the most effective model for our leasing activities? 5. Do we have the resources to do this work ourselves? 6. Have we reached out to our auditors?

CLASSROOM APPLICATION: This article is appropriate for coverage of lease accounting. It offers students a taste of the practical implications of implementing and managing new accounting rules.

QUESTIONS:

1. (Introductory) What are the requirements for the new lease accounting rules? When are companies required to comply with the new rules? Why were those rules implemented?

2. (Introductory) What is FASB? What is its area of authority? How is FASB involved in lease accounting? Why does the organization have the authority to make this change?

3. (Advanced) How were leases reported in the past? What is an operating lease? How were operating leases treated for financial accounting purposes? How will they be treated under the new rules?

4. (Advanced) How can the new lease accounting rules affect each of a company's financial statements? In general, will the change on the financial statements be positive or negative?

5. (Advanced) How could the new lease rules affect how companies manage leases? How could non-accounting functions be affected? How could this benefit the company?

6. (Advanced) Do these new rules simplify record-keeping or complicate it? Why?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"Lease Accounting: Six Questions for Final Implementation," by Deloitte Risk Editor, The Wall Street Journal, January 31, 2019
https://deloitte.wsj.com/riskandcompliance/2019/01/30/lease-accounting-six-questions-for-final-implementation/?=wsj_AcctW3A3

Technology concerns, the lease abstraction process, and the tug between centralized and decentralized lease accounting administration are some of the finance function considerations.

More than a decade in the making, FASB’s new standard on accounting for leases took effect for public companies on January 1, 2019 (and will apply to non-public companies in 2020). Designed to address off-balance-sheet financing concerns related to operating leases, the new standard requires that companies categorize leases as either operating or finance leases and brings virtually all leases exceeding one-year in length onto the balance sheet, with some exclusions.

For many companies with leasing activities, compliance with ASC 842 requires investment in new technology or modification of existing technology; extensive abstracting of existing lease agreements to capture new data points; and close coordination with senior leadership in corporate real estate, procurement, IT, and—where applicable—third-party advisors.

Bringing Leases Onto the Balance Sheet

With the compliance deadline here, following are six questions public-company CFOs should be addressing with their chief accountants, if they haven’t already:

1. Have we adequately tested our leasing solution?

The new lease accounting standard presents organizations with data collection and aggregation challenges across multiple locations, in multiple currencies and languages, and across various technology platforms, many of which are not able to easily share information. CFOs need to make sure their organizations have lease accounting software and systems in place that can store lease data from across the enterprise and perform the necessary lease accounting calculations. The more processes are automated using these systems, the less room there will be for mistakes—and the less CFOs will have to worry about errors in financial statements.

Importantly, systems designed to facilitate compliance need to have gone live, to enable quarterly reporting under the new standard by March 31, 2019. Accounting-only solutions are relatively inexpensive and allow for shorter implementation times. More robust lease administration packages can be much more costly, but typically can be integrated more easily with other enterprise systems, and—among other things—may be able to assist in lease-versus-buy decisions, manage lease payments and renewal options, and facilitate operating analysis of leased assets. Larger organizations may find these pricier packages a more sustainable, long-term solution. Unfortunately, implementation times for such packages can stretch out for six months to a year, meaning that any organization that hasn’t already started the process may need to consider a simpler solution in the interim.

2. Have we identified data gaps and developed a remediation plan?

Among the many quantitative data points that are required by ASC 842 are some that may have been managed manually, but haven’t regularly been tracked in existing lease management systems (such as the market value of a leased asset). Other data points haven’t always been captured technologically in a manner that facilitates calculations required by the new standard (such as the term of a lease, which now may include not only the initial term, but also any renewal options that are reasonably certain to be exercised). The new standard also requires lessees to establish a liability for each of their leases, including operating leases, and an accompanying right-of-use asset. But many organizations historically have not captured, at the required level of detail, the variables necessary to make these calculations.

To address these gaps, CFOs should consider whether their organizations have either designated an in-house lease accounting specialist to commission and oversee the lease abstraction process—including ensuring that all the necessary data points have been identified and are being entered into their lease accounting software — or that these responsibilities have been outsourced to a qualified third party. Companies whose lease portfolios are mostly homogeneous, may be able to utilize internal resources to handle the abstraction process. Companies whose portfolios are more varied, and may require challenging accounting determinations, may prefer to look outside for help.

It should be noted that some companies have been outsourcing their lease administration programs, especially those pertaining to real estate. And to minimize the cost of that activity, they’ve also been minimizing the number of data points, or fields, they track. To comply with the new accounting standard, these companies may now need to populate many new data fields with data previously not abstracted.

Moreover, there are contracts that don’t use the term “lease” (e.g., some service agreements) that nonetheless may be subject to the new accounting requirements. CFOs will want to assure that these contracts are identified and analyzed properly to determine if they are or contain a lease.

3. Have we adjusted our business processes and behaviors?

In the past, a business unit renewing a lease for, say, an office building, had little occasion to reach out to finance and accounting, which primarily cared only about how much the new rent payments would be. But the new standard has far-reaching implications on the tax, accounting, and reporting fronts. At the very least, lease accountants and the business units engaged in negotiating and renewing leases need to stay in close contact so the former can correctly assess the impact of leasing decisions on the balance sheet. Business units also need to factor new accounting realities into their leasing decisions. In the past, for example, many companies carefully structured lease arrangements, including sale leasebacks, so they could be considered operating leases and hence remain off the balance sheet. Under the new standard, most leases will be on the balance sheet regardless of how the transaction is structured, which means those transactions may make less financial sense.

4. Are we using the most effective model for our leasing activities?

Many larger organizations operate with a decentralized structure driven by tax considerations and defined by geographical borders, with lease approvals handled at the plant, local, or business-unit level. But many leading enterprises are shifting to a centralized model for lease administration and accounting. The benefits are expected to accrue not so much to finance, but to operations, giving companies an opportunity to be more strategic about their real estate and equipment leases using better, more complete data, and sophisticated data analytics, to generate economies of scale and negotiate more effectively with their vendors.

5. Do we have the resources to do this work ourselves?

While some organizations may have the in-house bandwidth and knowledge to oversee the migration to the new lease accounting standard, many will not — especially during the implementation phase, if only because the initial lift can be so daunting. CFOs will also want to understand if and how the company may be using external resources to assist in the adoption of the standard. Many companies are turning to third parties to handle lease abstraction activities, implement a new technology solution, and to manage their real estate portfolio. The quality and experience of these parties are critical to getting the accounting right. Of course, what resources need to be brought to bear is contingent on the size and complexity of your lease portfolio.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 7, 2019

Qualcomm Tax Move Will Save Firm $570 Million

By Richard Rubin | Jan 31, 2019

TOPICS: Base Erosion and Anti-Abuse Tax, Corporate Taxation, Global Intangible Low-Taxed Income, International Business, International Tax Planning, Tax Cuts and Jobs Act

SUMMARY: Qualcomm Inc. will save $570 million in taxes by reclassifying some of its foreign subsidiaries as branches of its domestic U.S. business, reducing its exposure to new tax-code provisions designed to prevent international tax avoidance. Before the 2017 tax revamp, many U.S. companies placed operations, intellectual property or profits in low-tax countries to avoid the 35% U.S. corporate tax. The U.S. lowered its own corporate tax rate to 21% and introduced new minimum taxes that were supposed to limit companies' ability to push profits out of the U.S. Qualcomm made what's known as a "check the box" election on its tax forms, reclassifying several subsidiaries from controlled foreign corporations into branches of the U.S. company.

CLASSROOM APPLICATION: This article is appropriate for coverage of corporate taxation and international business.

QUESTIONS:

1. (Introductory) When was the Tax Cuts and Jobs Act enacted? When did it take effect?

2. (Introductory) What are the facts of Qualcomm's tax changes? What were the reasons for the company's decision?

3. (Advanced) How did the Tax Cuts and Jobs Act affect international tax planning? What were companies doing before this law was passed? Why? How were they benefited by those actions?

4. (Advanced) Does Qualcomm's change affect the company's accounting? Does it affect the management of the business?

5. (Advanced) What is the Base Erosion and Anti-Abuse Tax? What is its purpose? How could it have affected Qualcomm's decision?

6. (Advanced) What is the Global Intangible Low-Taxed Income? What is its purpose? How could it have affected Qualcomm's decision?

READ THE ARTICLE

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"Qualcomm Tax Move Will Save Firm $570 Million," by Richard Rubin, The Wall Street Journal, January 31, 2019 ---
https://www.wsj.com/articles/qualcomm-tax-move-will-save-firm-570-million-11548886935?=wsj_AcctW3A4

Chip maker is reclassifying some foreign units as domestic branches of its U.S. business, reducing its exposure to new tax-code provisions

Qualcomm Inc. QCOM -1.08% will save $570 million in taxes by reclassifying some of its foreign subsidiaries as branches of its domestic U.S. business, reducing its exposure to new tax-code provisions designed to prevent international tax avoidance.

The move is among the first concrete steps disclosed by a large U.S. company to adapt to the revamped U.S. tax system. A major area of attention for U.S. corporations is managing overseas income and how they classify foreign operations.

Before the 2017 tax revamp, many U.S. companies placed operations, intellectual property or profits in low-tax countries to avoid the 35% U.S. corporate tax. The U.S. lowered its own corporate tax rate to 21% and introduced new minimum taxes that were supposed to limit companies’ ability to push profits out of the U.S.

Qualcomm’s tax savings shrink the impact of those new taxes and were generated without necessarily moving any actual operations. Qualcomm made what’s known as a “check the box” election on its tax forms, reclassifying several subsidiaries from controlled foreign corporations into branches of the U.S. company.

Qualcomm wouldn’t say whether the company moved any jobs or investments in conjunction with the shift. Tax strategies using check-the-box elections have been common for decades.

“You attach a one-page form to your tax return for each entity for each year,” said Reuven Avi-Yonah, a tax law professor at the University of Michigan. “That has nothing to do with jobs or investment at all.”

The company disclosed its plans for the maneuver last year and announced its completion Wednesday as it reported quarterly earnings. The one-time tax move represented about half of quarterly profits for the San Diego-based maker of semiconductors.

Qualcomm said in previous disclosures that it will account for the tax savings as a deferred tax asset, usable in the future for U.S. tax deductions.

The tax law signed in December 2017 reshuffled the international tax landscape. The old system provided clear incentives for companies to push profits into low-tax countries and leave them there.

The new rules altered those incentives, aiming to encourage domestic jobs and investment. Now, multinational corporations are analyzing, adjusting and considering ideas for international structures that would have made no sense two years ago.

Tax professionals say the newest iterations of international tax planning are just starting, and the strategies will depend heavily on a particular company’s situation and how it fits inside the new rules. Companies, accounting firms and lawyers have spent the past year building sophisticated models and waiting for Treasury Department regulations.

As the new rules become clearer, companies are beginning to unwind international structures built for the old law and establish new ones in their place. Many companies used similar check-the-box strategies over the past few decades for different purposes, to ensure they could book low-tax profits offshore where they could avoid U.S. taxes indefinitely.

Companies are making decisions based on two complex new provisions that accompany the corporate tax rate cut.

The first is the Base Erosion and Anti-abuse Tax, or BEAT. That is a minimum tax on large multinationals that is focused on cross-border transactions within companies.

The more payments the U.S. parent makes to foreign subsidiaries, the more likely it gets pinched by BEAT. Moves like Qualcomm’s, which make some foreign operations into branches that are extensions of the U.S. company, mean transactions among those entities don’t count toward the BEAT. That could keep a company out of the BEAT entirely. Qualcomm wouldn’t say how many subsidiaries are involved, what they do or where they are.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on February 7, 2019

Wells Fargo Breaks Down Internal Audit Silos to Fend Off Scandals

By Kristin Broughton | Feb 02, 2019

TOPICS: Auditing, Internal Audit, Risk Management

SUMMARY: Wells Fargo & Co.'s 103-page business-standards report addresses changes the bank has made in response to a string of scandals, revealing nuanced changes to the company's system of internal checks. The tweaks to the San Francisco company's internal auditing team - a unit known as the "third line of defense" in risk parlance - led to the creation of several new teams, including one that focuses exclusively on identifying inconsistent consumer practices. The changes illustrate how the portfolio of risks facing banks is expanding, and how auditors are being organized to manage them. The company consolidated its retail-banking auditing team under a centralized group in an effort to break down silos and have a broader view of risk across the business. Auditors in that group previously were assigned to niche areas.

CLASSROOM APPLICATION: This article provides excellent information for an auditing class, as well as for coverage of the internal audit function in any class.

QUESTIONS:

1. (Advanced) What is internal audit? What are the responsibilities and areas of authority of the internal audit function? How can the internal audit function be valuable?

2. (Introductory) What scandals has Wells Fargo been experiencing? What challenges have the scandals caused?

3. (Advanced) How can the internal audit function help in the fight against the activities that occurred at Wells Fargo? How is internal audit uniquely positioned and qualified to address these issues?

4. (Advanced) What other areas of a business can be used to prevent the improper activities? How could those other areas complement what internal audit is able to do?

READ THE ARTICLE

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Reviewed By: Linda Christiansen, Indiana University Southeast

"Wells Fargo Breaks Down Internal Audit Silos to Fend Off Scandals" by Kristin Broughton , The Wall Street Journal, February 2, 2019
https://www.wsj.com/articles/wells-fargo-breaks-down-internal-audit-silos-to-fend-off-scandals-11549061368?=wsj_AcctW3A5

Changes to the ‘third line of defense’ are meant to address previous gaps in oversight

Wells Fargo & Co.’s 103-page business-standards report, released this week to address changes the bank has made in response to a string of scandals, revealed nuanced changes to the company’s system of internal checks.

The tweaks to the San Francisco company’s internal auditing team—a unit known as the “third line of defense” in risk parlance—led to the creation of several new teams, including one that focuses exclusively on identifying inconsistent consumer practices.

The changes illustrate how the portfolio of risks facing banks is expanding, and how auditors are being organized to manage them.

Alterations within the company’s auditing division, in place for months but disclosed Wednesday, are part of a broader effort to improve risk management at Wells Fargo.

The lender has been fighting to improve its reputation following a string of regulatory investigations throughout the bank, including in retail banking, wealth management and foreign exchange.

The company in September 2016 paid $185 million to settle allegations that it created unauthorized customer accounts. Since then, it has disclosed that it previously overcharged auto and mortgage borrowers, among other problems, leading to billions in fines and the departure of several senior executives.

As a result, the company consolidated its retail-banking auditing team under a centralized group in an effort to break down silos and have a broader view of risk across the business, according to a company spokesman. Auditors in that group previously were assigned to niche areas, such as home lending.

The restructuring shows how the company is addressing gaps in the previous system, said Will Callender, a partner in the financial institutions division at management consulting firm A.T. Kearney. “They have organized themselves in a way that directly addresses some of the challenges they have had,” he said.

Wells Fargo also created new teams to focus on issues such as board-level governance and capital management. Additionally, it created an audit services division that specializes in testing and data analytics.

“Those functions existed, but they were part of other audit functions,” said Mark Folk, a company spokesman. “We broke those out to give them more attention.”

Over the past two years, the bank has increased head count within its auditing division by about one-third, to 1,350 employees, Mr. Folk said. And it changed the way it manages risks, including by adding more experienced directors to its board-level risk committee.

Companies that have survived a crisis, such as banks in the aftermath of the mortgage meltdown, often revamp risk-management priorities to account for the challenges they have previously faced, experts said. The challenge facing auditing divisions is finding a way to account for future threats.

“It is not uncommon that companies are always tending to organize to fight the last war,” said Richard Chambers, chief executive of the Institute of Internal Auditors, who said the changes at Wells Fargo are in line with industry standards.

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