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
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 ---
Jensen Comment
The time may be bettor for more modest changes to licensure.
In the accounting profession we've been through this before. The
AICPA even proposed a new professional designation that became the joke of the
20th Century ---- the professional certification of a Cognitor (later changed to
XYZ).
http://www.journalofaccountancy.com/Issues/2001/Oct/TheXyzCredential
Also see http://www.journalofaccountancy.com/Issues/2001/May/CpasSpeakUpOnNewGlobalCredential
Accountants are educated and trained to do what they learn in accounting
education programs. They are generally not trained to become experts in "innovation,
brand equity, customer loyalty, and key stakeholder relationships."
Unless they have a lot more education and training outside accountancy they are
not IT experts or valuation experts.
This takes me back to the days when Bob Elliott, eventually as
President of the AICPA, was proposing great changes in the profession, including
SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG
videos as starting points for discussion in my accounting theory course. Bob
relied heavily on the analogy of why the railroads that did not adapt to
innovations in transportation such as Interstate Highways and Jet Airliners went
downhill and not uphill. The railroads simply gave up new opportunities to
startup professions rather than adapt from railroading to transportation.
Bob’s underlying assumption was that CPA firms could
extend assurance services to non-traditional areas (where they were not experts
but could hire new kinds of experts) by leveraging the public image of
accountants as having high integrity and professional responsibility. That
public image was destroyed by the many auditing scandals, notably Enron and the
implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://faculty.trinity.edu/rjensen/Fraud001.htm
The AICPA commenced initiatives on such things as Systrust. To my
knowledge most of these initiatives bit the dust, although some CPA firms might
be making money by assuring Eldercare services.
The counter argument to Bob Elliot’s initiatives is that CPA
firms had no comparative advantages in expertise in their new ventures just as
railroads had few comparative advantages in trucking and airline transportation
industries, although the concept of piggy backing of truck trailers eventually
caught on.
I gave my copies of Bob's great lectures to the Accounting
History museum at the University of Mississippi. They've now been digitized, but
I think you have to physically visit this museum to view the lectures. Bob could
sell refrigerators to Eskimos.
Bob's theme before Enron, Worldcom, and the implosion of the
Andersen multinational CPA firm was that CPA firms could leverage their image of
integrity and professional competence when branching out into new services.
However, scandals like the shoddy audits of all the
large auditing firms (especially Andersen) tarnished that image ---
http://faculty.trinity.edu/rjensen/fraud001.htm
Example: There are a surprising number of accounting textbooks available
Jensen Comment
The problem with open textbooks is the lack of incentive to invest in high
quality end-of-chapter materials (cases and problems) along with the incentives
for multimedia supplements that accompany the top commercial textbooks (yeah, I
know that usually these aren't so great, but sometimes they're terrific). Much
depends on the activism of faculty users of open textbooks to contribute new
materials. Ideally open textbooks become a lot like Wikipedia. If they don't
catch on with active wiki-like additions and corrections, quality probably
varies alot by discipline. I suspect that math open textbooks are much more
enduring than financial accounting textbooks because rules of financial
accounting change so frequently (weekly) that even commercial textbooks are
obsolete when each new edition is announced. Unless they are wiki-like it's hard
to keep new open book editions rolling out annually.
The wonderful thing about free textbooks is that when
their quality improves commercial publishers must invest more to stay ahead of
the free textbooks available. This includes more frequent updated
editions, higher quality supplementary materials (like cases and problems), and
online services.
Extending the Insurance Model to Textbooks: The "Equitable Access"
Concept of Textbook Funding From a Chronicle of Higher Education newsletter (Edge) on June 18, 2019
. . .
UC-Davis is no stranger to textbook experiments. In 2014 it
pioneered the “inclusive access” model by getting several major publishers
to offer digital versions of their textbooks to all students at deeply
discounted prices. That model has now spread to hundreds of campuses, with
publishers promoting their own versions.
But inclusive access is more of a course-by-course solution.
“Equitable access” would extend the concept campuswide, so that all students
would pay a book fee to the university — the current goal is to make it
about $199 a term — and know that they were getting all the course materials
assigned for their classes because the university was cutting deals with
publishers to make it happen.
If that sounds a little like the way health insurance works,
it’s no accident. Jason Lorgan, the UC-Davis official who is the architect
of the idea, says both markets suffer from the same “principal-agent problem.”
That’s when the person assigning a book (or prescribing a medicine) isn’t
the one paying for it. Lorgan also says both markets could benefit by having
an intermediary (like an insurer or the campus store) step in to negotiate
for better prices.
The health-care model isn’t just an analogy. UC-Davis has
hired the same actuarial firm that now helps set its student-health-service
fee to advise it on whether $199 a term, with three terms a year, will
prevent the university from losing its shirt. Meanwhile, Lorgan says, the
university is asking publishers for “an unbelievably dramatic reduction in
price.”
For some students the fee would be more than the actual
costs; for others it would be far less. “In the book world, the healthy
patients are like the English majors,” Lorgan says. That might seem unfair,
but he notes that the university also charges the same tuition for all
classes, even though it costs more to offer some than others.
The “equitable access” business approach carries other risks
too. If professors require books that are not covered by whatever deals UC-Davis
cuts with publishers, that could add expenses to the program. Or as Lorgan
puts it, “That’s sort of like our flu epidemic.”
Crucial to the project’s success is getting price breaks from
publishers. UC-Davis has begun talks with the 10 biggest ones, which account
for 90 percent of its undergraduate book adoptions. “At first they laughed
at us,” Lorgan told me.
But the realities of the book market play into the
university’s favor. Today, even in courses whose professors haven’t switched
from textbooks to open educational resources, many students don’t buy new
books from publishers; they buy secondhand, they rent, or they use pirated
books from other sources. “That’s the biggest leverage that we have,” says
Lorgan.
So he and his colleagues showed each publisher an estimate of
how much revenue they’d make if every enrolled student was buying the
materials, even at a discounted price. “As soon as we did that, they stopped
laughing,” Lorgan says. Eight out of 10, he says, would make more under the
new model. He’s given them until mid-August to come back with pricing
proposals. The university hopes to begin the project in the fall of 2020.
Making market clout count.
In 2008 I wrote about how
the University of Phoenix used centralized book buying to cut costs,and ever since then I’ve
wondered why more colleges weren’t using their market clout in the textbook
arena for the benefit of students. Lorgan agrees, although he notes that
even five years ago, market conditions might not have made this as feasible
as he sees it today. He says he’s been inspired by the stand the University of California took
this year,
when it ended its subscription with the journal publisher Elsevier over
prices. And unlike the Phoenix model, UC-Davis doesn’t limit what professors
can assign. “Ours allows 100-percent academic freedom,” says Lorgan.
Continued in article
June 20, 2019 note from Tom Dyckman
Bob
Just a note to let you know My and Steve’s paper was just now published in
Econometrics Volume 7 Issue 2 June 2019
Jensen Comment
Econometrics is now an open-access free journal
A
great deal of the accounting research published in recent years has involved
statistical tests. Our paper proposes improvements to both the quality and
execution of such research. We address the following limitations in current
research that appear to us to be ignored[...]
Read more.
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:
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.
“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.”
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:
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.
“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.”
Jensen Comment
There are always issues of context when it comes to a very complicated issue
such as "ideological diversity." First there's always the context of the makeup
of a student body. Some universities (think UC Berkeley) have attracted both
student and non-student activists for decades since the Viet Nam war protesting
riots. Then there are contrasting student bodies (often in some but not all
private universities) where a majority of students come from conservative middle
class families that resist sending their children to liberal campus hotbeds. In
this context, some universities may be doing quite well supporting
ideological diversity under the circumstances.
Much depends on the courage of administrators and faculty to
commit to ideological diversity both in faculty hiring and in speaker
invitations.
Stylistically and
politically, Robert P. George and Cornel West don’t have much in common.
George, McCormick Professor of Jurisprudence and director of the James
Madison Program in American Ideals and Institutions at Princeton University,
is one of the country’s most prominent conservative intellectuals. West, a
professor of the practice of public philosophy and African and
African-American studies at Harvard University, is a self-described “radical
Democrat” who, in addition to many books, once released a spoken-word album.
So when George and West
agree on something and lend their names to it, people take notice -- as they
did this week, when the pair published
a statement in
support of “truth seeking, democracy and freedom of thought and expression.”
It’s a politely worded denunciation of what George and West call “campus
illiberalism,” or the brand of thinking that led to this month’s incident at
Middlebury College, where students prevented an invited speaker from talking
and a professor was physically attacked by some who were protesting the
invitation.
“It is all too
common these days for people to try to immunize from criticism opinions that
happen to be dominant in their particular communities,” reads the statement.
“Sometimes this is done by questioning the motives and thus stigmatizing
those who dissent from prevailing opinions; or by disrupting their
presentations; or by demanding that they be excluded from campus or, if they
have already been invited, disinvited.”
Sometimes, it
says, “students and faculty members turn their backs on speakers whose
opinions they don’t like or simply walk out and refuse to listen to those
whose convictions offend their values. Of course, the right to peacefully
protest, including on campuses, is sacrosanct. But before exercising that
right, each of us should ask: Might it not be better to listen respectfully
and try to learn from a speaker with whom I disagree? Might it better serve
the cause of truth seeking to engage the speaker in frank civil discussion?”
All of us “should
be willing -- even eager -- to engage with anyone who is prepared to do
business in the currency of truth-seeking discourse by offering reasons,
marshaling evidence and making arguments,” George and West wrote. “The more
important the subject under discussion, the more willing we should be to
listen and engage -- especially if the person with whom we are in
conversation will challenge our deeply held -- even our most cherished and
identity-forming -- beliefs.”
Such “an ethos,”
they conclude, “protects us against dogmatism and groupthink, both of which
are toxic to the health of academic communities and to the functioning of
democracies.”
George said in an
interview Wednesday that signatures for the statement were flowing in at
rate of several per minute, and that the names reflect all points of the
ideological spectrum. “We’re gratified,” he said, adding that the statement
aims to “encourage -- put the courage in -- people to stand up for
themselves” and for the values of the academy.
“The goal is a
heightened sense among faculty, administrators and students -- all three
categories -- that they must refuse to tolerate campus illiberalism,” George
said. “It’s a shared responsibility of everybody to not only refuse to
participate in it but to refuse to accept it. In order for colleges and
universities to fulfill their missions, there has to be an ethos, an
atmosphere, an environment, in which people feel free to speak their minds
-- where people are challenging each other, and thus learning.”
The immediate impetus for
the statement was indeed the
shouting down of Murray,
author of the controversial book The Bell
Curve, at Middlebury; the professor who was injured at the protest is
the next signatory, after George and West. But the authors say they’ve long
been concerned with a turning tide on colleges campuses that’s led to the
shouting down and disinvitation of invited speakers, and other forms of what
is arguably intellectual censorship. They’ve been trying to model the kind
of civil dialogue they’re advocating for several years, teaching and
speaking together publicly about the benefits of a liberal arts education --
including recently at the American Enterprise Institute.
Yet college
illiberalism continues to grow, in their view. Just recently, for example,
George said, Peter Singer, Ira W. DeCamp Professor of Bioethics at
Princeton, who has argued in favor of abortion and euthanasia for severely
disabled infants in some instances, was interrupted by disability rights
protesters throughout an appearance via Skype at the University of Victoria
in Canada.
George blamed the
phenomenon on a campus culture of rightful inclusion that has been somehow
“corrupted into the idea that people have the right to be free from hearing
positions they disagree with.” That’s exacerbated, he said, by an emergent
“consumer model” of education, in which colleges and universities competing
for enrollments don’t want to offend their “customers,” even if the product
-- higher education -- is supposed to be “challenging students’ deeply held
convictions and helping them to lead examined lives.”
Singer announced
on Twitter that he’d signed the petition. George pointed out that Mary Ann
Glendon, Learned Hand Professor of Law at Harvard University and former U.S.
ambassador to the Holy See, who is anti-abortion and in many ways Singer’s
ideological opposite, also signed on.
Continued in
article
Political Correctness Law of Higher Education
Writings should be judged on the political correctness of the author and not the
written words of the author --- this is the new standard for political
correctness on USA campuses.
Political Correctness on Campus
To be politically correct at the
University of Virginia students and faculty are encouraged to no longer quote
the Constitution of the State of Virginia or anything else Thomas Jefferson ever
wrote.
Are students in the Law School of
the University of Virginia banned from reading or citing the State Constitution?
Is this type of political correctness that will end historical scholarship?
Writings should be judged on the political correctness of the author and not the
written words of the author --- this is the new standard for political
correctness on USA campuses.
Oops: The Harvard Business Review just
violated the Political Correctness Law
For the past two
years, word salads have been the plat du jour
at the White House. A staple of our national conversation, our president’s
bursts of words, as dissimilar and disconnected from one another as the
items on a Denny’s salad and dessert bar, have been a source of debate for
linguists, ridicule for comedians, concern for psychologists, and despair
for translators.
But professors in
the humanities know Donald Trump does not have exclusive dibs on
all-you-can-read word salads. I, for one, spend my semesters picking through
the salads tossed and served up as papers by my students. Consider the
opening paragraph from a paper I received this semester. The student, who
chose to write on Ivan Turgenev’s novel Fathers and Sons,
begins: "Bazarov’s story is the tragic existence of a man who could not
exist. That statement is not finite. It only applies to Bazarov in the time
period he exists and to his maturity because Bazarov’s nihilism is
intermingled with passions."
This particular
paper — written by a senior majoring in English and journalism — is a tad
less coherent than others. Yet most of the papers are bedeviled by a host of
grammatical and analytical problems, as if they were composed from
word-salad bars that overflow with diced sentences and sliced syntax, stale
phrases and failed analogies, and dressings that cover the full range of
opinions (yet not a single serving of textual analysis). As for the staples
of paper writing, including the basic punctuation of sentences and the clear
organization of ideas, they are almost nowhere to be found.
Of course, this is hardly news. A
few years ago,
The Chronicle published a widely
commented essay
by Joseph R. Teller, a professor of English at the College of the Sequoias.
Despite the different pedagogical approaches he had tried over the years,
Teller found that students in his composition courses still couldn’t write a
"clear sentence to save their lives." He concluded that the only way to help
them save their lives, or at least write a clear sentence, was to focus on
form, not content. Though he would like "to teach my students to love
justice, be passionate about politics, and think deeply about the future of
humanity," he announced, "they are not legitimate outcomes of a writing
course."
While I share
Teller’s experiences and exasperation, I am in a rather different situation.
Like Teller, I am not in the business of teaching my students to love
justice or think deeply about the future of humanity. Instead, my job as a
historian is to teach students to trace the changing nature of justice and
think deeply about humanity’s past.
Unlike Teller,
though, I am not in the business of teaching composition. Or, at least, that
is what I long told myself. When I was a graduate student in European
history, I was not trained to teach this subject. (In fact, I was not
trained to teach at all, but that is another story.) As a tenure-track
professor, I was not encouraged to learn to teach writing skills. How would
I have been? My tenure, after all, depended not on editing student papers,
but on finding a publisher who would edit my manuscript for publication. Now
that I am a tenured professor, my professional status and salary are based
on … well, need I finish this sentence?
Jensen Comment
What's the main reason accounting became so complicated?
I think the main reason accounting becomes so complicated is that accountants
and lawyers are paid so much and so often to deviously circumvent much simpler
accounting and tax regulations. The unbelievably complicated FAS 133 became
necessary because in the 1980s derivatives instrument contracts were invented to
keep financial structures off the books. Newly-invented interest rate
swaps exploded to over $1 trillion before the FASB and IASB even had disclosure
standards for such swaps. And the beat goes on. The latest revenue standard is
horribly complicated because so many abuses were taking place with the previous
simpler standard. The latest lease accounting standard is a nightmare because
accountants and lawyers started writing lease contracts to keep debt off the
balance sheets.
And the beat goes on! The enemy is us. Physicians and
astronomers have it much easier because they study systems that are relatively
stable for centuries or longer. Accountants and computer scientists study
systems that weren't invented until yesterday.
TP-106: Taxes and the Canadian
Underground Economy (2001) by David E. A. Giles and Lindsay M. Tedds
Author:
David E.A. Giles and Lindsay M. Tedds
Publication Date:
2/1/2002
Publisher:
Canadian Tax Foundation
Format:
Softcover
Edition:
1st
Pages:
270
ISBN:
0-88808-171-5
In this volume we report the results of an extensive
empirical study into the size of the Canadian underground economy, its
development from the mid-1970's to the mid-1990's, and some of the linkages
between taxation policy and underground activity in this country. First, we
estimate that the Canadian Underground Economy grew from about 3.5% of
measured GDP in 1976, to almost 16% in 1995. The latter figure accords well
with recent evidence for Canada obtained by Schneider by totally different
means - he estimates that it averaged 14.8% in 1994/95 and 16.2% in 1997/98.
Second, when the implications of an underground economy of this size are
explored in terms of the amount of tax revenue that is lost, we find that
the size of this "tax-gap" varied from approximately $2 billion in 1976 to
almost $44 billion in 1995, in current-dollar terms. Third, we establish a
clear and positive empirical relationship between the aggregate effective
tax rate and the (relative) size of the underground economy. We have shown
that there is significant statistical evidence of two-way Granger causality,
both from the effective tax rate, to the underground economy; and also from
the underground economy to the effective tax rate.
Jensen Comment
Data on any underground economy is dubious due to the fact that the transactions
are underground such as when you pay cash the kid who mows your lawn and your
housecleaner for spending four hours each week inside your house. The
underground economy is a really big deal when thousands of workers line up on
San Antonio street corners to work on such jobs as roofing, landscaping,
construction, crop picking, house cleaning, etc. It's a big deal when
professionals (think dentists) give huge cash discounts. The newspaper USA Today
once wrote that in the USA the underground economy aggregates to over $2
trillion per year, but nobody really knows.
We know that authorities often look the other way when it
comes to law enforcement. It would be relatively easy to arrest employers who
pick up underground workers on the streets of our cities. But to do so in a
large city like Houston or Los Angeles would result in a lot of children going
hungry, especially children of illegal immigrants.
We know that a major component of the underground economy
is for criminal transactions such as narcotics buying and selling and money
laundering.
We know that tax avoidance is a major driver of the
underground economy. People are not just avoiding income taxes. Employers are
avoiding such taxes as payroll taxes and VAT taxes.
Tax increases almost always oil the moving parts of the
underground economy.
Book Review Financial Statement Analysis and Earnings Forecasting, Foundations and
Trends® in Accounting
STEVEN J. MONAHAN, (author)
(Hanover, MA: now Publishers Inc., 2018, Vol. 12, No., 2, pp. 105–215)
https://aaajournals.org/doi/full/10.2308/accr-10647
. . .
The book proceeds in a logical,
step-by-step fashion. After an introduction in Chapter 1, Chapter 2
motivates the role of earnings in valuation, the crucial issue underlying
the entire monograph. Although earnings' efficacy is something accounting
researchers take for granted, establishing it is important because valuation
models in finance are based on discounted dividends or discounted cash flows
(DCF). However, under the famous Miller
and Modigliani (1961) dividend
policy irrelevance (DPI) theorem, equity value is independent of when
dividends will be paid, so forecasting dividends is meaningless.
Earnings become important for either of
two reasons. First, earnings provide information about the firm's future
dividend-paying or cash-flow-generating ability (the information
perspective). Second, accounting-based valuation models actually do represent
valuation in terms of accounting earnings. Although earnings is an arbitrary
construct (it can be measured in many ways, more aggressively or
conservatively, depending on the accounting rules employed), these models
focus not on earnings per se, but on a measure of abnormal or residual earnings
(or its growth). For example, Ohlson
and Juettner-Nauroth (2005; OJ
model) express their model in terms of abnormal earnings (earnings minus
dividends) growth. If current dividends are high (low), there will be less
(more) reinvestment, so future earnings will low (high). Thus, near-term
high (low) abnormal earnings is offset by long-term low (high) abnormal
earnings. Similarly, in the residual income valuation (RIV) model of Ohlson
(1995) and Feltham
and Ohlson (1995), valuation is expressed
in terms of the growth of residual income (earnings minus the required rate
of return on book value), so whether accounting is aggressive or
conservative does not matter: more aggressive (conservative) accounting
results in higher (lower) book value and less (more) future residual income.
The key points are that valuation is expressed in terms of earnings, and DPI
holds.
However, as the author points out, the
OJ and RIV models are essentially equivalent to DCF valuation (and the OJ
and RIV models are almost equivalent to each other), so while there may be a
priori reasons to prefer accrual accounting to cash accounting,4 it
is an empirical question as to whether an earnings- or cash-flow-based model
yields more accurate valuation. On this issue, the evidence is quite clear:
accrual earnings are more informative about value than either cash flows or
dividends (Penman
and Sougiannis 1998). In summary, both
analytical and empirical evidence is consistent with earnings being the
fundamental valuation variable.
Once the role of earnings is
established, the need for earnings forecasts is obvious. The researcher must
then choose the specific earnings metric, so Chapter 3 discusses the pros
and cons of different earnings metrics, such as comprehensive income versus
net income versus abnormal or residual income, or raw versus deflated (i.e.,
rates of return) variables. The essential point is that there is no absolute
right choice; all metrics have their pluses and minuses. For example, rates
of return control for size, so forecast errors are not a function of size,
but value is a function of size, so abstracting from size may be both good
and bad. Thus, the forecasting context (i.e., the specific research
question) determines the best choice.
Once the metric is chosen, the
next step is to choose a forecasting model. Chapter 4 contains a short
philosophical discussion about the role of econometric modeling of earnings.
While I found this discussion enjoyable, the reader can skip it without loss
of content.
Chapters 5 and 6 then discuss
firm-specific forecasting models: time-series (ARIMA) models in Chapter 5,
and panel data (pooled cross-sectional, time-series) models in Chapter 6.
Given the wide choice of firm-specific time-series models or panel data
methods, which is the most subtle part of the job in my opinion, this is the
part of the book that I found to be most interesting. While the typical
reader will have familiarity with these models, the discussion is very
clearly and cogently organized, with just enough detail to be informative,
but not so much to be overly technical.
As the author points out, a consistent
result in modeling firm-specific earnings series is that the RW model
forecasts one-year-ahead earnings better than other ARIMA models, and almost
as well as panel data models. Given the simplicity of the RW model, this
seems surprising at first, but perhaps it is not. More sophisticated ARIMA
models are vulnerable to over-fitting the data. In addition, these models
require lengthy time-series. The underlying dynamics of firms' earnings
series may change over time, so even if a model perfectly described history,
it might not be good for forecasting.5 This
begs the question of why study ARIMA models for earnings at all, and I like
the author's explanation that, at the very least, they provide a benchmark
for evaluating the accuracy of other forecasts. But, there is an additional
reason that the author does not mention that is even more compelling: if we
can know the “correct” ARIMA model, it should be able to forecast better
than the RW model. To find this ARIMA model, however, the selection criteria
should be based not on within-sample fit, or even on holdout sample
forecasting accuracy, but on a priori economic analysis. The fact
that ARIMA models have not fared so well is likely due to the fact that the
choice of correct model has not paid enough attention to the underlying
economics. What is needed is more research like that of Lev
(1983), who uses economic theory to model
the time-series properties of firm-level earnings.
The relatively poor performance
of ARIMA models leads naturally to a discussion of panel data models.
Compared to ARIMA models, panel data models have the advantage in that they
can be based on both a large sample of firms and a large set of forecasting
variables. Thus, they can use a short time-series and do not have to rely on
older, “stale” observations. Despite these advantages, as the author points
out, to date they too have not been shown to be clearly superior to the RW
model (for forecasting year-ahead earnings). In the author's opinion (and
mine) applying more economic, accounting, and statistical analysis to panel
approaches has the most potential for improvement.
While many panel approaches are ad
hoc and not based on theory, of particular interest to readers will be
the discussion of accounting-based valuation models (Section 6.3.3) because
these are based on an underlying valuation construct, and are not just
data-driven. Excellent examples of studies using accounting based models
are Nissim
and Penman (2001, 2003), Fairfield
and Yohn (2001), and Soliman
(2008), who base their tests on the famous
DuPont decomposition, which is taught in many M.B.A. Financial Statement
Analysis classes. Evidence in favor of such a model shows that academic
research can be fruitfully combined with real world practice.
The author then discusses the important
issue of choosing an estimation sample based on the tradeoff between size
and homogeneity (Section 6.5). He cites Fairfield,
Ramnath, and Yohn (2009), who find
that forecasts of growth and profitability from industry-level samples are
not more accurate than forecasts from economy-wide samples. This result is
surprising and disconcerting, because most financial analysis and earnings
forecasting is practiced and taught with an industry focus.
The answer to this conundrum may lie in
the absence of ex ante theory used to derive the empirical models. In
this regard, two papers that the author does not discuss, but that I believe
provide a fruitful template for researchers, are Lev
(1983), mentioned above, and Dickinson
(2011). Dickinson uses life cycle analysis
to model firms' cash flow patterns, and she shows that such patterns can be
used to identify homogenous groupings (for example, growth, mature, or
decline firms). Although neither Lev
(1983) nor Dickinson
(2011) conducts a forecasting “horse race”
to show the efficacy of their approach, it is easy to imagine adopting their
methods for forecasting. Specifically, firms of similar economic
characteristics or life cycle stage can be pooled together to get the
advantage of large, homogenous samples, which leads to more statistical
power and improved forecasting. Note that in this approach, homogeneity is
not defined by industry identification per se (which might be part of
the definition), but by reference to other observable characteristics.
Perhaps most important, in this chapter
(Section 6.3.1) the author discusses statistical learning methods for
choosing the best set of predictors. He cites Ou
(1990) as an example of a paper that
starts out with a large set of potential forecasters, and then uses a
criterion (such as statistical significance in a simple regression model) to
choose the best set of forecasters.6 The
author makes a great point here about recent advances in statistical
learnings methods, but does not go far enough. Given recent advances in Big
Data and machine learning, this is the part of the book that could have most
helped the reader, and I wish had been more developed. I suspect that it is
by the application of such techniques, more than by any other methodological
change, that earnings forecasting will significantly improve in large
samples.
The author concludes this
chapter with the observation that the lack of success of both ARIMA and
panel data models in out-forecasting the RW model, despite accounting theory
and practice, means that there are promising research opportunities. I would
be more specific and suggest that using state-of-the-art data methods and
more economic theory are fruitful paths.
Next, the author discusses
accounting measurement—specifically, the role of accruals and accounting
conservatism. Although not emphasized by the author, I see this section as
integrally related to the panel data issue. That is, two of the most
important firm characteristics that researchers can use to group firms are
characteristics of their accruals and the degree of their accounting
conservatism. For example, a well-known result is that extreme accruals mean
revert, which can be used to group firms for earnings forecasting. Another
related issue that the author does not discuss is the distinction between
unconditional conservatism (such as accelerated depreciation, expensing of
R&D, or LIFO), which does not depend on the occurrence of specific events,
versus conditional conservatism, which depends on certain events, such as
declines in asset values (necessitating write-downs). The distinction is
important for forecasting, because conditional conservatism causes near-term
mean reversion (earnings are depressed in a write-down year and will likely
improve the next year), while unconditional conservatism causes near-term
persistence in earnings (earnings stay low as long as the firm continues to
invest in PPE, intangible assets, or inventory), but long-term mean
reversion (earnings will increase when the firm slows its investments, but
this could be many years away).
Finally, the author discusses
forecasting earnings' higher moments, such as variance or kurtosis, an area
in which very little research has been done. Higher moments are important,
because forecasted values must be discounted, which requires estimates of
risk, such as variance or covariance. The central result in this research is
that models that “put risk in the numerator” (by subtracting a risk term
from expected earnings, and discounting by the risk-free rate), are more
accurate than models that “put risk in the denominator” (discount by a risk
adjusted rate). Importantly, we do not know why this is so, so much work
needs to be done.
Overall, the author has put
together a well-crafted manuscript that does an excellent job of summarizing
the literature on earnings forecasting and equity-valuation models.
Accounting researchers and teachers who work in this area will find this
book to be a valuable reference guide, and hopefully the book will encourage
new research.
Jensen Comment
I suspect that lobbying against SFAS 123(R) on expensing of stock options was
more extensive and contentious of lobbying relative to any other FASB standard
ever issued. Companies, especially formative tech companies low on cash and high
on hype, wanted to keep paying employees in stock options rather than cash.
Employees did not seem to mind since in the 1990s virtually all stock prices for
technology companies just kept going up and up and up. Denny Beresford was
Chairman of the FASB at the time. Both he and his board member expert Jim
Leisenring were taking a lot of heat. To their credit they did not cave in to
the lobbying pressures coming from business and Congress.
A Quote from FAS 123 History (1993)
Dennis R. Beresford and James J. Leisenring came to the Red Lion Inn on a hot
August morning with a simple goal: to explain a change in an accounting rule.
Before it was over they were lucky to have escaped the first lynching in San
Jose in a half-century. Measuring out the rope were 300 seriously pissed off
Silicon Valley CEOs and other senior execs who could see the ruin of their
lives' work because some glorified bean counters in Washington had decided to
count sacrifice flies as home runs.
Michael S. Malone, Upside
Today,
November 1, 1993 --- http://www.upside.com/texis/mvm/story?id=34712c0a45
We examine the contributions of CEOs and company-affiliated
political action committees (PACs) to members of Congress who supported a
moratorium on the Financial Accounting Standards Board's 2003 proposed
standard to require firms to expense stock-based compensation at fair value.
Our evidence—based on a sample of firms targeted by shareholder proposals to
voluntarily expense employee stock options—indicates that CEOs and PACs had
different motivations for lobbying on this policy issue. Specifically, we
find that opposition to shareholder proposals varies positively with CEOs'
contributions to the moratorium co-sponsors. However, opposition varies
positively with PAC contributions to co-sponsors only when the targeted CEO
contributes to the PAC. These results suggest that CEO lobbying relates more
to executives' interests to preserve excessive pay, whereas PAC lobbying
relates more to interests in preserving the level of earnings.
. . .
V. CONCLUSION
In 2003, 133 congressional members supported a moratorium on
the FASB's proposal to expense ESOs. We examine whether campaign
contributions from CEOs and PACs to co-sponsors of this moratorium are
positively associated with their opposition to expensing ESOs. Measuring
opposition to ESO expensing as the responses of 78 firms to a shareholder
proposal to voluntarily expense ESOs, we find that CEOs and PACs of firms
that did not comply with the shareholder proposal exhibit a greater change
in their campaign contributions to co-sponsors of the FASB moratorium than
CEOs and PACs of firms that did comply with the shareholder proposal.
However, the PACs of opposing firms only increase their contributions when
the CEO contributes to the PAC. Our results reveal that CEOs, and PACs
influenced by CEOs, lobby against SFAS No. 123(R) in a manner consistent
with their opposition to the proposed rule, but also in a manner
inconsistent with the shareholder interests reflected in the shareholder
proposal.
Our sample-wide analysis indicates that the change in
campaign contributions from CEOs to co-sponsors, but not from PACs to
co-sponsors, is positively associated with excessive CEO compensation. We
also find that the change in campaign contributions from PACs to
co-sponsors, but not from CEOs to co-sponsors, is positively associated with
the earnings effect of expensing options. Our findings suggest that CEO
campaign contributions are more reflective of executive-level interests,
whereas PAC campaign contributions are more reflective of firm-wide
interests, which may inform future accounting research on how firms lobby
the standard-setting process.
Other findings highlight the fact that CEO stock option
awards become costlier after firms begin recognizing ESO expense. Compared
to firms that comply with an ESO expensing proposal, opposing firms exhibit
a smaller reduction in their use of CEO stock option awards after being
targeted, but a greater reduction after SFAS No. 123(R) goes into effect. It
appears firms that originally opposed expensing ESOs take other nonlobbying
actions to lower the costs of expensing ESOs.
University of Alberta -
Department of Accounting, Operations & Information Systems
Date Written: April 4, 2019
Abstract
We examine the
impact of biases in managerial judgment and in accounting reports
on the disclosure of unverifiable private managerial information for stewardship
purposes. We show that any biased managerial judgment in interpreting private
information, and negatively biased accounting (conservatism),
reduce timely disclosure of private managerial information by firms. Only
positively biased (less conservative) accountingincreases
such disclosure by firms. Contrary to conventional wisdom, negative accounting biases,
instead of counteracting positive managerial bias, act to further reduce
disclosure, and thus the supply of timely infor-mation to capital markets.
Consequently, we find that freedom from bias, both in managerial judgment and
in accounting,
more likely results in firms making timely disclosures.
We revisit the
literature on using accounting earnings
to estimate firm-level systematic risk. We use macroeconomic indicators to
measure undiversifiable aggregate risk; conventional listed-firm indexes reflect
an unrepresentative subset of aggregate assets and are expected to substantially
mismeasure risk (Roll, 1977). Earnings and macroeconomic indicators are realized
annual outcomes that are well aligned for capturing the contemporaneous
co-movements that underlie systematic risk, whereas stock returns incorporate
changes in expected future outcomes. The macroeconomic indicators we use reflect
changes in aggregate supply and demand, providing a parsimonious model
incorporating the two fundamental determinants of aggregate outcomes. We find
that firms' earnings-based sensitivities (betas) to aggregate supply and demand
shocks are negatively correlated, and explain twice the cross-section of returns
as conventional "index" betas. They are correlated with firm characteristics
employed in empirical asset pricing models, and explain one third of the
explanatory power of those characteristics, suggesting that at least part of
firm characteristics' predictive ability is due to their correlation with
systematic risk. These results provide a theory-based equivalent to the
empirically-based Ball, Sadka and Sadka (2009) results that principal components
of earnings are correlated with principal components of returns, and explain a
significant portion of the returns cross-section.
Using a large
database of the US institutional investors’ trades, this paper revisits the
question of anomalies-based portfolio transaction costs. The real costs paid by
large investors to implement the well-identified size, value, and momentum
anomalies are lower than what has been documented in the previous studies. We
find that the average investor pays an annual transaction cost of 17bps for
size, 24bps for value, and 274bps for momentum. The three strategies generate
statistically significant returns of respectively 5.21%, 2.79% and 2.77% after accounting for
transaction costs. When the market impact is taken into account, transaction
costs reduce substantially the profitability of the well-known anomalies for
large portfolios, however, these anomalies remain profitable for average size
portfolios. The break-even capacities in terms of fund size are $ 206 billion
for size, $ 16.1 billion for value and $ 310 million for momentum.
Hoover Institution;
National Bureau of Economic Research (NBER); University of Chicago - Booth
School of Business
There
are 2 versions of this paper
Date Written: April 28, 2019
Abstract
Unexpected
inflation devalues nominal government bonds. This change in value must
correspond to a change in expected future surpluses, a change in their discount
rates, or a contemporaneous change in nominal bond returns.
I develop a linearized version of the government debt valuation equation, and I
measure each component via a vector autoregression. I find that discount rate
variation is important. Unexpected inflation corresponds entirely to a rise in
discount rates, with no change in the sum of expected future surpluses. A
recession shock, which lowers inflation and output, signals persistent deficits,
but also lower interest rates, which raise the value of debt and account fully
for the lower inflation. A monetary policy shock, defined here as a rise in
interest rates with no change in expected future surpluses, raises inflation
immediately and persistently. Nominal rates rise more than real rates, raising
the discount factor and thus accounting for
the inflation.
In these calculations, the present value of surpluses changes by more than
current inflation. Persistently higher inflation and nominal interest rates
cause current long term bonds to fall in value, soaking up variation in the
present value of surpluses. By this mechanism monetary policy spreads fiscal
shocks to persistent inflation rather than price level jumps.
I also decompose the value of government debt. Half of the value of debt
corresponds to forecasts of future primary surpluses, and half to discount
rates, driven by variation in bond expected returns.
Keywords: Inflation, fiscal theory of the price level, monetary policy
University of Nevada, Las
Vegas - Department of Finance
Date Written: June 8, 2010
Abstract
Financial
institutions and academic researchers utilize bankruptcy prediction models to
assess distress risk. However, predicting default can be problematic since (i)
few firms actually experience default in any one year, (ii) the lag between
practical and actual default can vary significantly, (iii) firms can
strategically default, (iv) firms can rework their obligations outside of
bankruptcy, and (v) default frequency varies significantly over economic life
cycles. Thus, relying on bankruptcy data alone to calibrate and validate these
models can be problematic. We take a simpler approach by relying on the firm’s
cost of debt as a market proxy for distress risk. We then assess the validity of
four widely used bankruptcy models including two accounting-based
models (Altman’s, 1968; Ohlson’s, 1980), one reduced form model (Campbell,
Hilscher, and Szilagyi, 2010) and one structural distance to default model
(Merton, 1974). We find dramatically different assessment of risk based on the
models used. The Campbell, Hilscher, and Szilagyi (2010) model has the most
explanatory power on the cost of debt followed by the Merton model. The accounting based
approaches of Altman (1968)’s Z-Score and Ohlson (1980)’s O-Score are highly
ineffective. We caution researchers when using Z- and O-Scores and recommend the
use of Campbell, Hilscher, and Szilagyi model to measure distress risk. We also
demonstrate the problems of not controlling for industry and time variation in
any of these measures.
Keywords: Bankruptcy prediction models, cost of debt financing, distress
risk
JEL Classification: C52, G13, G33, M41
************************************************
The Impact of Equity Misvaluation on Predictive Accuracy of
Bankruptcy Models
This paper
examines the impact of equity misvaluation on the predictive accuracy of
bankruptcy models. We find that structural bankruptcy prediction models are not
affected by misvaluation. However, for hazard models, forecasting accuracy for
properly-valued firms is greater than for misvalued firms and model forecasting
accuracy improves significantly if model coefficients vary with misvaluation.
Our results show the importance of taking stock market misvaluation into account
when forecasting bankruptcies using hazard models.
Keywords: bankruptcy prediction, market efficiency, accounting information
relevance
JEL Classification: G33, G14, M41
Maintaining a Reputation for Consistently Beating Earnings
Expectations and the Slippery Slope to Earnings Manipulation
This paper
investigates whether maintaining a reputation for consistently beating analysts’
earnings expectations can motivate executives to move from “within GAAP”
earnings management to “outside of GAAP” earnings manipulation. We analyze firms
subject to SEC enforcement actions and find that these firms consistently beat
analysts’ quarterly earnings forecasts in the three years prior to the
manipulation period and continue to do so by smaller “beats” during the
manipulation period. We find that manipulating firms beat expectations around 86
percent of the time in the twelve quarters prior to the manipulation period
(versus 75 percent for control firms) and that manipulation often ends with a
miss in expectations. We document that executives of manipulating firms face
strong stock market and CEO pressure to perform. Prior to the manipulation
period, these firms have high analyst optimism, growing institutional interest,
and high market valuations, along with powerful CEOs. Further, we find that
maintaining a reputation for beating expectations is more important than CEO
overconfidence and is incremental to CEO equity incentives for explaining
manipulation. Our results suggest that pressure to maintain a reputation for
beating analysts’ expectations can encourage aggressive accounting and,
ultimately, earnings manipulation.
Keywords: earnings manipulation, consecutively beating earnings
expectations, market pressure, CEO overconfidence, CEO power, reputation, goals,
reference-dependent preferences, analysts’ forecasts and recommendations,
institutional investors, overvaluation
Following its
purchase of Westinghouse and subsequent macroeconomic events, Toshiba faced
declining profits. In response, Toshiba engaged in earnings management through
two accounting treatments.
First, it delayed the recognition of losses under long-term contracts. Secondly,
it inappropriately applied price masking to account for transfers of components
between itself and contract manufactures. Students using this case will assess
how business risks and corporate culture relate to audit risk, and how accounting for
price masking transactions can lead to increased fraud risk. Students will also
research aspects of auditing standards related to fraud and accounting estimates.
The case is designed for auditing courses and capstone courses with an auditing
component.
A firm's book
equity is a measure of the value held by a firm's ordinary shareholders.
Increasingly, it is being reported as a negative number. Since the firm's
limited liability structure means that shareholders' value cannot be negative
value, negative book equity has no obvious interpretation. Consequently, both
practitioners and academics typically omit such stocks. While these stocks are
small in number they are disproportionately represented in extreme value/growth
sectors, and therefore can have an impact on applications where value is defined
in terms of book equity. We propose a new approach that classifies negative book
equity stocks across the value/growth spectrum by considering how close their
returns correspond to stocks that fit more obviously into these classifications.
We find that this new value factor, which includes negative book equity stock,
is economically and statistically different from the old value factor that
excludes such stocks. Although we illustrate how this approach can be used to
classify negative book equity stock, the approach is quite general and may be
used whenever particular accounting data
are unavailable or otherwise suspect.
Keywords: Negative book value, value factor, generalized style
classification
Share
repurchases have grown rapidly in recent years, frequently exceeding total cash
dividends since 1997. Some analysts have argued that incorporating repurchases
into a discounted cash flow framework leads to higher equity valuations and
expected return estimates and, further, that traditional dividend discount
models (DDMs) may be obsolete. We disagree. We demonstrate that the objection to
the DDM is based on a logical error in which the analyst is not accurately accounting for
the effect of share repurchases on investors' future cash flows. We compare a
traditional DDM and a correctly specified discounted total cash flow model (TCFM)
and show that for either a constant-growth type model or a more general
framework, the valuations and rates of return are the same. Importantly, a TCFM
can be used instead of, or in addition to, a DDM, and the selection of model can
be based on the quality of theinformation applicable to a particular situation.
Keywords: share repurchases, stock valuation models, discounted dividend
model
The credit
valuation adjustment (CVA) of OTC derivatives is an important part of the Basel
III credit risk capital requirements and current accounting rules.
Its calculation is not an easy task - not only it is necessary to model the
future value of the derivative, but also the probability of default of a
counterparty. Another complication arises in the calculation when the exposure
to a counterparty is adversely correlated with the credit quality of that
counterparty, i.e. when it is needed to incorporate the wrong-way risk. A
semi-analytical CVA formula simplifying the interest rate swap (IRS) valuation
with the counterparty credit risk including the wrong-way risk is derived and
analyzed in the paper. The formula is based on the fact that the CVA of an IRS
can be expressed using swaption prices. The link between the interest rates and
the default time is represented by a Gaussian copula with constant correlation
coefficient.Finally, the results of the semi-analytical approach are compared
with the results of a complex simulation study.
This paper
examines the roles comparability and transparency play in the relation between
IFRS adoption and foreign direct investment (FDI). In this study, I disentangle
the impact of transparency and comparability through the use of a natural
experiment resulting from Mexico’s adoption of IFRS in 2012. Greater
comparability (adoption of IFRS by both domestic and foreign parties),
controlling for transparency (adoption of IFRS by Mexico), increases FDI inflows
as reported in column 5 in Table 4. Individually, greater transparency and
comparability have been associated with increases in investment activity.
However, it is unclear from the existing literature how transparency and
comparability interact in the FDI setting. Consistent with prior findings, I
find the adoption of IFRS is associated with increases in inbound foreign direct
investment. This paper contributes to the literature on IFRS and FDI,
specifically with respect to the role of common financial standards in
increasing foreign investment activity.
University of Miami; Miami
Business School; University of Miami - Behavioral Decision Making Cluster
Date Written: May 2019
Abstract
We test the
theoretical prediction that blockchain trustworthiness and transaction benefits
determine cryptocurrency prices. Measuring these fundamentals with computing
power and adoption levels, we find a significant long-run relationship between
them and the prices of five prominent cryptocurrencies. Conducting factor
analysis, we find that the returns of the five cryptocurrencies are exposed to
aggregate fundamental-based factors related to computing power and adoption
levels, even after accounting for
Bitcoin returns and cryptocurrency momentum. These factors have positive risk
premia and Sharpe ratios comparable to those of the U.S. equity market. They
further explain return variation in an out-of-sample set of cryptocurrencies.
Yale School of Management; National Bureau of Economic Research (NBER)
There
are 2 versions of this paper
Date Written: July 2018
Abstract
Richard Thaler was awarded the 2017 Sveriges Riksbank Prize in Economic Sciences
in Memory of Alfred Nobel for his contributions to behavioral economics. In this
article, I review and discuss these contributions.
Keywords: Endowment
effect, mental accounting,
nudge, prospect theory
From the CFO Journal's Morning Ledger on June 28 2019
Good morning. Artificial
intelligence has long carried the promise of reducing costs across an
organization—the kind of thing finance chiefs fantasize about. Vodafone
Group PLC
is using it to wring costs out of its global procurement process, CFO
Journal’s Tatyana Shumsky reports.
The British telecommunications giant's cost
per purchase order currently is €2.36 ($2.68), down from €2.70 before it
built a supply-chain-analytics control center. The savings are significant,
given Vodafone’s procurement unit issues about
800,000 purchase orders
and receives around 5 million invoices a year to requisition
everything from magazine advertising to antennas. But the team isn’t resting
on its laurels and aims to get the cost per purchase order below €1 by April
2021, said Ninian Wilson, chief executive of Vodafone Procurement
Co.
Accuracy has improved as well.
In the year through June 27, 96% of Vodafone’s purchase orders were perfect,
requiring no adjustments or rework to move through the system. Before the
upgrade, the company had a perfect purchase order rate of roughly 73%, Mr.
Wilson said.
The new system helps identify
potential bottlenecks in the procurement process, allowing his team to apply
additional standardization and automation when necessary to accelerate the
process. That specificity helps the team uncover process inefficiencies
that, once resolved, reduce time to market by 20% and cut procurement
process costs by 11%.
“We have a very granular view of
the data, which we just couldn’t get to before we implemented this
capability,” Mr. Wilson said.
From the CFO Journal's Morning Ledger on June 27 2019
Employees of Wayfair
Inc.
walked out
of the company’s Boston headquarters in protest of the online retailer’s
plan to sell furniture to a border facility for migrant children seeking
asylum in the U.S.
Those employees would rather have the children playing
and sleeping on the floor.
From the CFO Journal's Morning Ledger on June 27 2019
Good morning.
As U.S. President Donald Trump and China’s President Xi Jinping are gearing
up for their trade meeting in Osaka, Japan on Saturday—where tariffs will be
a central point of discussion—U.S. businesses are warning that new 25%
duties on $300 billion a year of Chinese goods will wreak widespread direct
and collateral damage.
The risks are
clear:
shuttered factories and job losses
both in the U.S. and overseas. Retailers say Chinese rivals could undercut
them by shipping goods directly to U.S. consumers by mail, evading tariffs.
Port operators say cranes and other equipment to load cargo largely comes
from China, raising their operational costs.
Mr. Xi plans
to present Mr. Trump with
a set of termsthe U.S. should
meet before Beijing is ready to settle the confrontation between the two
countries, Chinese officials with knowledge of the plan said.
Meanwhile,
billions of dollars worth of China-made goods subject to tariffs by the
Trump administration are dodging the China levies
by entering the U.S. via other countries in Asia, especially Vietnam,
according to trade data and overseas officials.
Jensen Comment
At the same time China is paying a heavy price in this trade war. It means
either going without a lot of food produced in the USA (think soy beans) or
paying duties on imported food. Not all Chinese exports via other nations like
Viet Nam are being transshipped. Viet Nam is gearing up factories to replace
Chinese factories, thereby, creating permanent job losses in China. Apple is
moving a lot of production from China back into the USA. Clearly both sides
suffer in a trade war. Personally I think China in previous years has taken a
lot of advantage of the USA in ways that are blatantly unfair.
From the CFO Journal's Morning Ledger on June 26 2019
A U.K. jury convicted a former UBS
Group
AG compliance officer and a wealthy trader of insider trading. The pairwere found guilty
of insider trading on three of the charges they faced in the trial.
From the CFO Journal's Morning Ledger on June 21 2019
Sealed Air Fires CFO, Citing SEC Investigation
Sealed Air
Corp.
fired Chief Financial Officer Bill Stiehlin relation to a
yearlong investigation of the company by the Securities and
Exchange Commission, the company said.
Mr.
Stiehl was named CFO of the Charlotte, N.C., company roughly
a year ago, but had been at the company since 2013.
The
decision to oust him comes after Sealed Air’s audit committee
conducted an internal review that followed a new subpoena
last month from the SEC, the company said. Mr. Stiehl
couldn’t be reached for comment.
From the CFO Journal's Morning Ledger on June 21 2019
Slack Technologies
Inc. on Thursday
became only the second major
company ever to enter public markets through a
direct listing. Slack’s shares shares surged 49% above the
so-called reference price of $26 to close their first
trading day on the New York Stock Exchange at $38.62 a
share. Spotify Technology SA went public
through a direct listing
last year.
CFO Journal’s Mark Maurer spoke with Chris Clapp, managing
director at consulting firm MorganFranklin Consulting
LLC, about the unusual method to go public.
What will it take for direct listings to become a
common route to public markets?
Spotify did it and that was very unique. And the
performance has been sort of flat. The reality is,
if Spotify had done it, and their stock price
skyrocketed, and everyone thought they’re doing
really great, you’d probably see more companies
following suit and looking to do it too. In some
regards, I think the performance of the direct
listing of Slack specifically, and how Slack does
during year one, is going to perhaps help either
drive this to be a recurring trend or keep it as a
fringe activity.
What stumbling blocks might CFOs face, particularly
from the Securities and Exchange Commission?
When you do a direct listing, you’re forging a bit
of a new path there. And there’s different
consequences there. When you think back to Spotify,
the SEC had to take fresh looks at things associated
with the direct listing because it just hadn't been
looking at those on a regular basis. The SEC is very
comfortable issuing comment letters on a typical S-1
[form]. But when you bring in a direct listing, it’s
just different. Every person there has to take a
fresh look at it.
From the CFO Journal's Morning Ledger on June 21 2019
Good morning. The
auditing standards board of the American Institute of Certified Public
Accountants on Thursday proposed an overhaul of the rules governing audit
evidence for private companies to better define the role of new technologies
in audits.
The
organization, which sets the standards for audits of private companies in
the U.S.,
proposed expanding the framework auditors usewhen gathering
and assessing evidence used to form their opinions of financial statements.
Current standards focus on the accuracy and completeness of that
information. But as new technologies expand auditors’ ability to gather
evidence, auditors can and should view that information with a more critical
lens.
Under the new rules, auditors should assess the risk of bias associated with
the information they use to substantiate their audit opinion and consider
the authenticity of the information being gathered, the AICPA said.
From the CFO Journal's Morning Ledger on June 20 2019
Good morning. The
Financial Accounting Standards Board on Wednesday took a major step toward
removing a potentially costly accounting burden facing companies and
organizations affected by global reference rate reforms, including a planned
shift away from the London interbank offered rate.
FASB tentatively decided that changes in a contract’s
reference rate, such as Libor,
would be accounted for as a continuation of that contract,
provided it met certain criteria. As a result, many companies won’t need to
go through a complex evaluation process or costly administrative adjustments
to change how they account for the shift to a new reference rate, such as
the Secured Overnight Financing Rate, which is the benchmark preferred by
the Federal Reserve.
Companies currently must assess whether a contract modification such as
shifting to a new reference rate will change future cash flows of that
contract by 10% or more, and, in that case, account for it as if it were a
new contract.
The board’s decision would apply to loans, debt, leases and other
arrangements. It must still be incorporated in a proposal to amend existing
rules, which would undergo a public comment period before being finalized
and approved. FASB expects to change the rule in time for the transition
away from the Libor at the end of 2021.
From the CFO Journal's Morning Ledger on June 18 2019
Good morning. Finance
chiefs are responsible for keeping tight control over costs. But when
natural disasters strike, shareholder fears can pummel a stock long before
any increased costs show up on the bottom line.
That’s the case for
U.S. meat producers,
whose shares slumpedMonday amid fears that persistent flooding
in the Midwest will see millions of farm acres go unplanted with corn or
soybeans, crops they rely on for feed. The shortage threatens to increase
costs for meat producers such as Tyson Foods Inc., Sanderson Farms
Inc. and Pilgrim’s Pride Corp., which rely on those crops to feed the
chickens used for their products.
A U.S. Department of
Agriculture report released on Monday showed that through June 16, fewer
acres of corn and soybeans have been planted than at this time last year.
The likely shortage in planting has driven up corn and soybean futures. Corn
futures are up 6.6% this month, while soybean futures are 3.8% higher,
according to Dow Jones Market Data.
Risk management programs can
offset the expected hit on the bottom line. Tyson Foods finance chief
Stewart Glendinning told the audience at an investor conference last month
that the company uses commodities hedging to lock in a portion of its feed
prices and temper the sting of a sudden price surge. “But understand, as
prices move up generally, you’re going to follow them. And as prices move
down generally, you will follow them. It’s a matter of a lag,” he said,
according to a transcript by S&P Global Market Intelligence.
The delay in planting
has impacted more than just meat producers. Nitrogen fertilizer maker CF
Industries Holdings Inc. also is
navigating uncertainty. Its products are used to fertilize corn.
Jensen Comment
Last night I had a telephone conversation with my cousin
Don. Don is now retired but still lives on a farm in northern Iowa. Don says
a lot of farmers in Iowa still have standing water in fields that would
normally have nearly knee-high corn this time of year. This late in the
season it's too late to plant corn or soy beans in those water-logged
fields. Crop growth in the planted fields is delayed by cool weather. Unlike
me here in the mountains Don is hoping for hot weather.
From the CFO Journal's Morning Ledger on June 17 2019
Quicken Loans
Inc. agreed to pay
$32.5 million
to resolve a yearslong lawsuit with the U.S. government, a
court-appointed mediator said Friday.
From the CFO Journal's Morning Ledger on June 14 2019
From the CFO Journal's Morning Ledger on June 13 2019
The U.S. budget gap widened last month as
government spending outpaced tax collection,
boosting the deficit 39%
during the first eight months of the fiscal year.
From the CFO Journal's Morning Ledger on June 11 2019
The number of job openings
exceeded the number of unemployed Americans
by
the largest margin on record in April, signaling difficulty for employers to
find workers in a historically tight market.
From the CFO Journal's Morning Ledger on June 11 2019
Canon
Inc. and
Toshiba
Corp. on Monday agreed to pay $2.5 million each to settle charges the
companies
violated U.S. antitrust laws
by failing to notify authorities before a deal made for Toshiba’s medical
device business.
From the CFO Journal's Morning Ledger on June 6 2019
Australia isexperiencing an energy crisis
so severe that the country, one of the world’s biggest exporters of
liquefied natural gas, is considering imports to shore up supplies for
manufacturers and avoid possible blackouts.
Jensen Comment
With PG&E in bankruptcy and California fast tracking to carbon-free sources,
this could be California in a few years after the State owns PG&E.
From the CFO Journal's Morning Ledger on June 6 2019
Professional-services firm
PricewaterhouseCoopers LLP on Wednesday announced various measures
aimed at overhauling its U.K. audit business, amid growing regulatory
concerns about the quality of the country’s audit sector, CFO Journal’s Nina
Trentmann reports.
PwC
is splitting its current U.K. assurance practice into
two distinct businesses, effective July 1. The audit practice will
focus on external audit and audit-related services, while the company’s risk
assurance practice will conduct internal audits and work on issues such as
cybersecurity and technology risk, PwC said.
The U.K. audit sector has
come under pressure in the past year and a half amid several high-profile
corporate collapses and various investigations by the Financial Reporting
Council, Britain’s audit and accounting regulator. The Competition and
Markets Authority—the country’s competition watchdog—in May recommended an
operational split between the audit and consulting businesses of the Big
Four accounting firms, a group that also includes Deloitte LLP,
Ernst & Young LLP and KPMG LLP.
PwC’s move to split its
assurance practice isn’t the type of operational split that regulators have
proposed, a spokesman for PwC said. “PwC’s announcement represents further
evidence of the pressure under which the Big Four are coming to separate
their audit and advisory practices,” said Edward Haigh, a director at
professional-services consulting firm Source Global Research.
From the CFO Journal's Morning Ledger on June 5, 2019
Ernst & Young
LLPresigned as the
auditor
for Bank of Jinzhou
Co., adding to concerns about the health of China's regional banks following
a government takeover of a troubled small bank last month.
From the CFO Journal's Morning Ledger on June 5, 2019
Millions of farm acres are set to go
unplanted with corn this spring as persistent wet weather leaves U.S.
farmers facing an agonizing choice: whether or not to risk trying to
raise a crop.
From the CFO Journal's Morning Ledger on June 1, 2019
From the CFO Journal's Morning Ledger on June 1, 2019
FASB Streamlines Goodwill, Intangible
Assets Accounting for Not-For-Profits
The Financial Accounting Standards Board
on Thursday updated the rules governing how not-for-profit
organizations account for goodwill and certain identifiable
intangible assets.
Not-for-profit organizations will now be
allowed to account for goodwill in a more cost effective
manner and recognize fewer items as separate intangible
assets in acquisitions, FASB said.
A not-for-profit organization now can
elect to amortize the goodwill over 10 years or less on a
straight-line basis, test for impairment upon a triggering
event and test for impairment at the entity level. FASB
previously required not-for-profits to test goodwill for
impairment each year at the reporting unit level.
Following its
purchase of Westinghouse and subsequent macroeconomic events, Toshiba faced
declining profits. In response, Toshiba engaged in earnings management through
two accounting treatments.
First, it delayed the recognition of losses under long-term contracts. Secondly,
it inappropriately applied price masking to account for transfers of components
between itself and contract manufactures. Students using this case will assess
how business risks and corporate culture relate to audit risk, and how accounting for
price masking transactions can lead to increased fraud risk. Students will also
research aspects of auditing standards related to fraud and accounting estimates.
The case is designed for auditing courses and capstone courses with an auditing
component.
SUMMARY: "Robert
C. Morgan amassed an empire of 140 properties and more than 34,000 units
across 14 states, according to the website of his firm, Morgan
Management...The U.S. Securities and Exchange Commission has filed civil
charges...[and] the Justice Department also unveiled criminal charges
accusing Mr. Morgan of conspiracy to commit bank fraud, wire fraud and money
laundering...." Fannie Mae, Freddie Mac, and securitization are discussed in
the article as these entities are impacted in this case.
CLASSROOM APPLICATION: The
article may be used when discussed either fraud or internal controls in an
auditing or accounting systems class.
QUESTIONS:
1. (Advanced) What is a Ponzi Scheme? Cite your source for
this information if you obtain it from outside the article.
2. (Introductory) How do the facts related to the case of
Robert C. Morgan resemble a Ponzi scheme?
3. (Advanced) Of what other fraudulent acts besides operating
a Ponzi scheme is Mr. Morgan accused?
4. (Advanced) What is the meaning of the term securitization?
Again, cite your source.
5. (Advanced) What are Fannie Mae and Freddie Mac?
6. (Advanced) Name one control procedure that could be
implemented by entities involved in securitization such as Fannie
Mae and Freddie Mac to "sufficiently ensure buyers of multifamily
apartment buildings aren't misstating incomes...."
Justice Department also files criminal fraud
charges against Robert Morgan, three others
The
federal government accused one of the nation’s largest landlords of running
a “Ponzi scheme-like” effort using cash from small investors and of
misleading banks to obtain bigger loans by using fake loan documents.
The
Securities and Exchange Commission filed civil charges against Robert C.
Morgan, who amassed an empire of more than 140 properties and 34,000 units
across 14 states, according to the website of his firm, Morgan Management.
On Wednesday, the Justice Department also unveiled criminal charges accusing
Mr. Morgan of conspiracy to commit bank fraud, wire fraud and money
laundering.
The
SEC said Mr. Morgan raised $110 million from more than 200 mostly small
investors beginning in 2013, promising them a target return of 11%. Morgan
used most of the cash as a “fraudulent slush fund” to pay previous
investors, the SEC said. In one instance, the SEC said cash was used to pay
off an $11 million loan that Morgan allegedly obtained by falsifying
financial information on a property in Pennsylvania.
Mr.
Morgan couldn’t be reached for comment. He has previously denied any
wrongdoing.
The Morgan case is being followed closely
by the real-estate industry because many of Mr. Morgan’s apartment loans
flowed through government mortgage giants Fannie
Mae andFreddie
Mac, which
bought and repackaged them into securities purchased by investors. That has
raised questions whether Fannie Mae and Freddie Mac sufficiently ensure
buyers of multifamily apartment buildings aren’t misstating incomes—a common
problem that plagued single-family housing before the 2008 crisis.
“The
excesses that happened in single-family are now being transferred to
multifamily,” said Greg Michaud, director of real estate at Voya Investment
Management in Atlanta, which lends to multifamily and other commercial
properties.
The
SEC said investors are still owed $63 million, but funds through which Mr.
Morgan raised money from investors have “few if any assets” available to
repay them. Mr. Morgan used the funds to make “Ponzi scheme-like redemptions
of earlier investors and to repay nonperforming, maturing loans made by
earlier-formed Notes Funds,” the SEC said. About three dozen people used
retirement accounts to make investments, and one local union pension fund
also invested, the SEC said.
Mr.
Morgan was personally involved in the fundraising, the SEC said. In one 2015
email exchange detailed by the SEC, Mr. Morgan told a colleague to “push as
hard as you can” and “put the hammer down and raise more funds” from
investors. In an effort to help repay investors, the agency also is seeking
to freeze Mr. Morgan’s assets.
In the
separate criminal indictment, U.S. Attorney James P. Kennedy Jr. accused Mr.
Morgan, his son, a mortgage broker and a former Morgan Management executive
of conspiring to defraud banks and Fannie Mae and Freddie Mac by using
falsified financial records to obtain bigger loans than lenders otherwise
would have made. Mr. Kennedy said at news conference on Wednesday that the
size of the alleged fraud now exceeds $500 million. Mr. Kennedy’s office is
seeking forfeiture of $267.3 million from the defendants. All four of the
defendants, including Mr. Morgan, pleaded not guilty to the charges.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 31, 2019
SUMMARY: The
article discusses logistics issues facing companies trying to source
products from Southeast Asian countries outside of China. Infrastructure
issues such as crowded ports and minimal rail transportation are discussed.
Questions ask students to describe how these factors increase the cost of
inventory.
CLASSROOM APPLICATION: The
article may be used in a managerial or financial accounting class discussing
inventory.
QUESTIONS:
1. (Introductory) Why are companies looking for new suppliers
outside of China?
2. (Advanced) What is a supply chain? Cite your source for
this definition.
3. (Introductory) As described in the article, what supply
chain factors in Southeast Asian countries are raising product costs
for items sourced from there?
4. (Advanced) Describe how these issues add to inventory cost
for wholesale or retail entities purchasing finished products.
Firms looking to shift some
production to other parts of Asia face poor infrastructure, shipping delays
and increased costs
Companies looking to move some production from China to other Asian
countries to avoid mounting U.S. tariffs on Chinese imports face significant
bumps in the road.
Manufacturers and supply-chain experts say logistics infrastructure in
Southeast Asia, where many goods-makers are scouting for new production
sites, remains far less developed than China’s long-established connections
between factories, suppliers and customers around the world.
Poor
roads, sparse rail lines and congested ports in Vietnam, Thailand, the
Philippines, Cambodia and other potential manufacturing destinations in
Southeast Asia have stretched out delivery schedules and raised shipping
costs, according to manufacturing and transportation company executives,
even as companies have migrated some factory work to the region in the past
decade in search of lower labor costs.
Those
bottlenecks are coming under fresh scrutiny as more multinational companies
look to shift some production as Washington and China load up a new round of
tariffs that could alter the direction of significant volumes of global
trade.
Infrastructure investment in Southeast Asia ports has “simply not kept
pace,” said Andrea Shaw Resnick, interim chief financial officer of New
York-based Tapestry Inc., the owner of premium fashion brands Coach, Kate
Spade and Stuart Weitzman, during an investor conference call this month.
Tapestry sources some of its handbags, apparel and shoes from suppliers in
Vietnam, the Philippines and India, who send them to the U.S. and other
markets on container ships. Ms. Resnick said logistics gridlock has led to
“longer lead times, with more inventory in the water at any given time.”
Hong
Kong-listed VTech Holdings, which owns educational toy company Leapfrog and
other makers of products for children, has been considering expansion of its
existing facilities in Malaysia to take over some Chinese manufacturing.
VTech
Chairman Allan Wong said factory capacity in the country is far behind that
of China and can’t quickly catch up because of the sheer scale of China’s
large workforce. “There’s no way you can move everything out of China,” Mr.
Wong said.
Even
before U.S. tariffs, factory work in Southeast Asia has been growing as
companies have sought lower costs while wages and other expenses in China
have increased. That manufacturing migration has taken on more urgency for
some producers as the trade conflict between the U.S. and Washington has
heated up, with a new round of back-and-forth tariffs this spring and
threats of higher levies this summer.
Japanese copier maker Ricoh Inc. said this
month it would shift some production
for the North American market away from China to avoid potential losses of
tens of millions of dollars from the U.S. levies.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 31, 2019
SUMMARY: Intelsat
SA's first quarter results for 2019 are available through SEC Filing on Form
6K at
https://www.sec.gov/Archives/edgar/data/1525773/000119312519127020/0001193125-19-127020-index.htm
Exhibit 99.1 contains the news release discussed in this article. The
company is reporting increasing losses and plans to sell part of the
spectrum it controls amid challenging financial circumstances. U.S. demand
for satellite cable transmission is waning due to the "declining number of
cable TV channels and the advance of fiber internet." EBITDA and other
financial metrics are used in the article to compare Intelsat's performance
to competitors.
CLASSROOM APPLICATION: The
article may be used when discussing financial statement ratios and/or non-GAAP
reporting.
2. (Introductory) What was Intelsat's performance on the
basis of generally accepted accounting principles? How did that
performance compare with prior periods?
3. (Introductory) What financial ratios are discussed in the
article? As described in the article, how do those metrics compare
to Intelsat's competitors' performance?
4. (Advanced) What responsibilities face Intelsat's new chief
financial officer (CFO)? Define each function listed in the article.
5. (Advanced) What business challenges does Intelsat SA face?
How do the new CFO's responsibilities help to address these
challenges?
Satellite operator has been
struggling with high debt and challenging market conditions
IntelsatSA
appointed a new finance chief as the satellite operator seeks to shore up
its finances and evolve technologically amid waning demand across the
sector.
The
Luxembourg-based company Tuesday named David M. Tolley as executive vice
president and chief financial officer. Mr. Tolley, who will start his new
role Monday, will be responsible for Intelsat’s finance, accounting and
reporting duties, as well as tax, treasury, internal audit and investor
relations.
Mr. Tolley most recently served as CFO of
OneWeb Ltd., another broadband venture, for about a year, ending in fall
2018. He previously worked for Blackstone Group
LP’s private-equity business and in investment banking at Morgan Stanley.
Compensation details for Mr. Tolley weren’t disclosed.
He
will succeed departing Intelsat finance chief Jacques Kerrest, who in
January said he intended to step down. Mr. Kerrest became Intelsat’s CFO in
February 2016.
Mr.
Tolley will be charged with improving Intelsat’s balance sheet while
shepherding a new generation of satellites and overseeing a plan to sell a
portion of an important satellite frequency to make room for 5G internet
traffic.
“The
company’s underlying business is facing a very challenging market
environment, with demand and pricing pressure,” said James Ratcliffe, an
analyst at Evercore ISI. A declining number of cable TV channels in the U.S.
and the advance of fiber internet is sapping demand for satellite
communication, he said.
Intelsat reported a loss of $120.6 million in the first quarter, compared
with a loss of $66.8 million during the prior-year period. The recent loss
of a satellite is expected to result in an impairment charge of about $400
million in the second quarter, the company said in its earnings release.
Intelsat’s debt levels, meanwhile, stood at
$14.3 billion, or 9.4 times adjusted earnings before interest, taxes,
depreciation and amortization at the end of March. By comparison, competitor
SES SA reported a ratio for net debt to Ebitda of 3.4 times at the end of
March. Eutelsat CommunicationsSA, another
competitor, this month said it targets a ratio of net debt to Ebitda below
3.0.
Mr.
Tolley’s priorities will include improving Intelsat’s market position and
maintaining cash-flow discipline, according to a company spokeswoman.
“His
expertise will prove invaluable as we build upon the progress that we have
made with our capital structure, support the company’s growth initiatives
and transformation, particularly as we look to bring the next generation of
satellites to market,” Intelsat said in a statement.
The
new software-defined satellites can be updated from the ground, enhancing
flexibility and usability, the Intelsat spokeswoman said. Intelsat, which
has about 50 satellites in operation, has five new satellites in the works,
two of which are in the design and manufacturing phase. The company intends
to launch them starting in 2022.
Intelsat plans $250 million to $300 million in capital expenditures this
year. Some of that will go toward new satellites, the company said.
Intelsat also is awaiting a decision by the U.S. Federal Communications
Commission on how the radio spectrum should be allotted, which could affect
its U.S. operations.
The
company is among those controlling virtually all of the satellite C-band
spectrum in the U.S., a swath of airwaves in the middle of the broader radio
spectrum that is used for beaming video content to cable companies.
Intelsat has proposed reallocating and
selling a portion of the spectrum to make room
for high-speed 5G internet. Such a decision could affect Intelsat’s equity
valuation, Mr. Ratcliffe said. It also would bring additional costs of about
$2 billion for the industry as a whole, as companies would need to install
more satellites to make better use of the remaining part of the spectrum.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April May 31, 2019
SUMMARY: "A
U.K. regulator [the Financial Reporting Council (FRC)] announced a flurry of
actions aimed at improving the quality of audit and financial reporting in
Britain following a number of high-profile corporate collapses." This action
follows a series of proposals that have been covered in this review
including the related article from December 2018. The FRC on Thursday, May
23, 2019, "...said it plans to increase the number of reviews and
investigations it conducts, hire more staff and raise its budget."
CLASSROOM APPLICATION: The
article may be used in an auditing class to discuss the challenges facing
the audit profession to increase audit quality in an international setting
but with the possibility of ties to the U.S. as well.
QUESTIONS:
1. (Advanced) Based on the discussion in the article, explain
your understanding of the roles of the United Kingdom's Financial
Reporting Council and its Competition and Markets Authority.
2. (Introductory) What proposals have been made by each of
these entities?
3. (Introductory) What role does the U.K. government play in
these proposals?
4. (Advanced) Do you think these U.K. proposals could impact
the U.S. auditing profession? Explain your answer.
Financial Reporting Council
plans more reviews and investigations, additional staff and a higher budget
A U.K.
regulator announced a flurry of actions aimed at improving the quality of
audit and financial reporting in Britain following a number of high-profile
corporate collapses.
The
U.K. Financial Reporting Council, the country’s watchdog for audit and
accounting, on Thursday said it plans to increase the number of reviews and
investigations it conducts, hire more staff and raise its budget.
The
changes come amid increased scrutiny from other regulators and lawmakers
over the quality of audit and accounting services in the U.K.
The Competition and Markets Authority, the
country’s competition regulator, in April recommended
the “Big Four” auditing firms—Deloitte LLP, Ernst & Young LLP, KPMG LLP and
PricewaterhouseCoopers LLP—should operationally split their audit and
consulting businesses. Those recommendations echoed earlier calls
from a parliamentary committee to legally separate the audit and consulting
businesses of the Big Four.
The
U.K. government has yet to respond to these proposals.
U.K. Business Secretary Greg Clark in March
announced plans to fold the FRC into a new oversight body
with extended powers, called the Audit, Reporting and Governance Authority.
This would require new legislation and the FRC will continue its work
unchanged for now, a spokesman for the FRC said.
“The
FRC’s Plan sets out a clear pathway towards the establishment of an enhanced
authority, with stronger powers and greater resources, as quickly and
effectively as possible,” FRC Chief Executive Stephen Haddrill said in an
email.
The
FRC, under its new expanded remit, intends to scrutinize audit firms in
areas such as leadership and governance, behavior, risk management and
control. This includes closer monitoring of appraisals, remuneration and
promotions at large U.K. audit firms.
The
regulator also plans to inspect the quality of more audits, specifically in
critical sectors such as financial services, retail and construction, and
expand the review of overseas audits. The number of audit quality reviews
rose to 160 in the most recent fiscal year, up from 126 four years earlier.
Reports on audit inspections will be anonymized, the watchdog said.
On the
corporate side, the regulator will broaden its review of annual reports and
of financial and nonfinancial reporting practices, and more closely
scrutinize corporate governance. “We aim to challenge existing thinking
about corporate reporting and consider how companies could better meet the
information needs of shareholders and other stakeholders,” the regulator
said in a statement.
The
FRC said its budget will increase to £37.8 million ($48 million) in the next
fiscal year, up 4% from the prior year. A bigger budget will enable the
regulator, which sets its own spending limits, to grow its enforcement team,
adding 80 people to its existing workforce of around 200.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April May 31, 2019
By Khadeeja Safdar and Aisha Al-Muslim | May 24, 2019
TOPICS: CFO,
Profitability
SUMMARY: Best
Buy has reported increasing profit in the quarter ended May 4, 2019, over
the previous year's comparable period though total revenues remained
constant. The company is still in midst of a long term transformation
process as describe by CEO Hubert Joly. Specific strategies to improve
revenues are discussed in the article and are the focus of the questions in
this review. Also discussed in the article is the incoming female CEO who
will leave her role as chief financial officer to make this move in June
2019.
CLASSROOM APPLICATION: The
article may be used in a financial reporting class discussing revenues.
QUESTIONS:
1. (Introductory) What changes have been made at Best Buy
over the last five years to improve financial performance?
2. (Advanced) How have those changes impacted different types
of revenues earned by Best Buy? State at least two types of revenues
discussed in the article.
3. (Advanced) What is unusual about the incoming chief
executive officer of Best Buy?
CEO says chain will press
Trump to keep consumer electronics off Chinese tariff lists
Best Buy Co.’s BBY -3.60%
profit rose in the latest quarter as growing online sales of appliances and
electronics offset flat sales in its stores. The company said Thursday
comparable sales increased 1.1% in the first quarter ended May 4, slower
than previous periods but the ninth consecutive quarter of growth. “We’re
still in the midst of this multiyear transformation, but we like where we
are and where we’re going,” Chief Executive Hubert Joly said on an earnings
call.
Best
Buy shares fell nearly 5% on Thursday. Executives kept their financial
forecasts for the full year unchanged in part because of uncertainty around
tariffs.
Mr. Joly recently announced he would step aside
and hand over the CEO job to finance chief Corie Barry, who is 44, in June,
making her one of the youngest CEOs of an S&P 500 company and one of the few
women. He will serve as executive chairman and sit in an office across the
hall from her to offer input on matters like strategy and acquisitions.
Results from retailers have been mixed so
far this spring. Amazon.comInc. and
TargetCorp.
posted strong sales in the recent quarter, while Kohl’sCorp. and
J.C. PenneyCo.clouded the outlook
for the sector. Many retailers are also bracing for an increase in tariffs
on goods imported from China.
Mr. Joly reassured investors about Best
Buy’s ability to mitigate the impact of the tariffs and said the company
plans to press the Trump administration to limit the inclusion of consumer
products on the next list of tariffs on Chinese imports. So far, many
electronics, from AppleInc.’s
smartwatches to Lenovo computers, have been largely spared.
“While
we understand the list as proposed is comprised of many consumer items,
including many electronics, we think it’s premature to speculate on the
impact of further tariffs,” he said.
Best
Buy shares fell nearly 5% on Thursday. Executives kept their financial
forecasts for the full year unchanged in part because of uncertainty around
tariffs.
Mr. Joly recently announced he would step aside
and hand over the CEO job to finance chief Corie Barry, who is 44, in June,
making her one of the youngest CEOs of an S&P 500 company and one of the few
women. He will serve as executive chairman and sit in an office across the
hall from her to offer input on matters like strategy and acquisitions.
Results from retailers have been mixed so
far this spring. Amazon.comInc. and
TargetCorp.
posted strong sales in the recent quarter, while Kohl’sCorp. and
J.C. PenneyCo.clouded the outlook
for the sector. Many retailers are also bracing for an increase in tariffs
on goods imported from China.
Mr. Joly reassured investors about Best
Buy’s ability to mitigate the impact of the tariffs and said the company
plans to press the Trump administration to limit the inclusion of consumer
products on the next list of tariffs on Chinese imports. So far, many
electronics, from AppleInc.’s
smartwatches to Lenovo computers, have been largely spared.
“While
we understand the list as proposed is comprised of many consumer items,
including many electronics, we think it’s premature to speculate on the
impact of further tariffs,” he said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 7, 2019
SUMMARY: The
Securities and Exchange Commission said chief accountant Wesley Bricker will
leave the regulator in June 2019. Current deputy chief accountant overseeing
accounting practice by publicly traded firms, Sagar Teotia, will become the
acting chief accountant. Questions take students outside of the article to
the SEC web site and the specific site for its Office of the Chief
Accountant.
CLASSROOM APPLICATION: The
article may be used whenever introducing regulation of financial reporting
by publicly traded entities in an accounting or auditing class.
QUESTIONS:
1. (Advanced) What is the role of the U.S. Securities and
Exchange Commission (hint: access the web page at
www.sec.gov)?
2. (Advanced) What is the role of the chief accountant?
(Hint: access
www.sec.gov, then click on
Divisions & Offices, then Office of the Chief Accountant under SEC
Offices Homepages (or proceed directly to
https://www.sec.gov/page/oca-landing).
3. (Introductory) From what background did the current,
departing chief accountant, Wes Bricker, enter into the Securities
and Exchange Commission? What is the background of the interim chief
accountant?
4. (Introductory) What accomplishments is Mr. Bricker noted
to have made?
5. (Introductory) What personal qualities does SEC Chairman
Jay Clayton note in Mr. Bricker?
U.S. securities regulator
names Sagar Teotia as acting chief accountant to succeed Wesley Bricker
The
Securities and Exchange Commission said chief accountant Wesley Bricker will
leave the regulator in June and Sagar Teotia will take over as acting chief
accountant.
Mr.
Bricker has been chief accountant since November 2016 and previously served
as deputy chief accountant at the SEC. He joined the securities regulator in
2015 from PricewaterhouseCoopers LLP, where he had been an audit partner
dealing with the banking capital markets, financial technology and
investment management sectors.
During
his tenure at the SEC, Mr. Bricker oversaw the implementation of new
accounting standards such as revenue recognition and leasing, emphasized the
role of audit committees in financial reporting and oversight, and worked
with the audit regulator to advance the most substantial changes in the
auditor’s report in more than seven decades, the SEC said.
“From
the first day I met Wes, I was impressed by the depth of his knowledge and
his commitment to high quality standards for the benefit of our markets and
our investors,” SEC Chairman Jay Clayton said in a statement.
An SEC
spokeswoman declined to comment beyond the press releases announcing the
changes.
Mr.
Teotia has served as deputy chief accountant since 2017, when he joined the
agency from Deloitte LLP’s national office, where he was a partner providing
consulting on accounting matters.
Mr.
Teotia is one of Mr. Bricker’s three deputies, and had led the accounting
group that consults with companies, auditors and SEC staff on the
application of accounting standards and financial disclosure requirements.
Julie Erhardt is deputy chief accountant for technology and innovation,
while Marc Panucci leads the office’s professional practice group, focusing
on auditors and audit committees.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 7, 2019
SUMMARY: PwC
has announced overhauling its U.K. audit business effective July 1. Changes
include separating its U.K. assurance practice into two divisions: (1)
external audits and related services and (2) risk assurance which includes
internal audits and work on cybersecurity and technology risk. The firm also
describes ways it will spend an additional £30 million to improve its audit
business.
CLASSROOM APPLICATION: The
article may be used in an auditing class to discuss regulation of the
profession, structure of accounting firms, and ensuring audit quality. The
related article was covered in last week's review.
QUESTIONS:
1. (Advanced) What is driving public accounting firm
PricewaterhouseCoopers to implement changes aimed at improving its
audit practice? You may refer to the related article to help with
this answer.
2. (Introductory) What specific steps will the firm take in
order to improve its practice? Name all that you find described in
the article.
3. (Advanced) Select one of the specific items you gave in
answer to question 2. Describe clearly how you think this step will
improve PwC's audit practice and overall audit quality.
The Big Four accounting firms
have come under pressure from regulators
Professional-services firm PricewaterhouseCoopers LLP on Wednesday announced
various measures aimed at overhauling its U.K. audit business, amid growing
regulatory concerns about the quality of the country’s audit sector.
PwC,
one of the Big Four accounting firms that also include Deloitte LLP, Ernst &
Young LLP and KPMG LLP, said it is splitting its current U.K. assurance
practice into two distinct businesses, effective July 1.
The
audit practice will focus on external audit and audit-related services,
while the company’s risk assurance practice will conduct internal audits and
work on issues such as cybersecurity and technology risk, PwC said.
PwC
said it would spend an additional £30 million ($38.1 million) a year to
improve its audit business. As part of the changes, the company plans to set
up a new national digital audit team and hire more than 500 auditors in
addition to the 5,500 it already employs. Auditors will get more
face-to-face training, PwC said.
“These
actions will ensure more consistent audit quality and increased transparency
while at the same time strengthening our market resilience,” said Hemione
Hudson, head of audit at PwC U.K.
The
U.K. audit sector has come under pressure in the past year and a half amid
several high-profile corporate collapses and various investigations by the
Financial Reporting Council, Britain’s audit and accounting regulator.
The Competition and Markets Authority—the
country’s competition watchdog—in May recommended an operational split
between the Big Four’s audit and consulting businesses. The regulator also
proposed that large accounting firms participate in joint audits with
smaller audit firms, and for corporate audit committees to be held
accountable for their choice of auditor.
The
recommendations by the CMA would require the audit and consulting businesses
at Big Four firms to have separate chief executives and boards, as well as
separate financial statements.
The BEIS Select Committee, formed of U.K.
lawmakers, in April suggested a structural breakup
of the Big Four accounting firms in Britain.
PwC’s
move to split its assurance practice isn’t the type of operational split
that regulators have proposed, a spokesman for PwC said.
“These
changes are something we’ve been working on for some time, not about
operational separation, and are about changes which align our business to
strengthen audit quality,” the spokesman said.
PwC competitor KPMG in May announced it
would increase the oversight
of its U.K. audit arm but stopped short of splitting its audit and
consulting businesses. The company said it would create a new audit
executive committee responsible for managing performance, risks and controls
at the audit business, effective June 1.
“PwC’s
announcement represents further evidence of the pressure under which the Big
Four are coming to separate their audit and advisory practices,” said Edward
Haigh, a director at professional-services consulting firm Source Global
Research. “Like KPMG, which recently announced that it would cease all
advisory work for its audit clients, it has attempted to keep the regulators
at bay by going some of the way to a full separation, although PwC’s is
arguably the more significant of the two moves.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 7, 2019
SUMMARY: The
Bank of Jinzhou was "founded in 1997 in China's northeast region and lends
mostly to small and midsize enterprises." It has approximately $100 billion
in assets, its shares are publicly traded in Hong Kong, and it "also has
$1.5 billion in outstanding U.S. dollar perpetual securities." Its former
auditor EY resigned from the audit engagement after finding indications that
the use of proceeds from some of the bank's loans to institutions wasn't
consistent with their stated purpose."
CLASSROOM APPLICATION: The
article may be used in an auditing class to discuss the sufficiency of audit
evidence and/or disclaiming audit opinions.
QUESTIONS:
1. (Introductory) According to the article, what event or
events led EY to resign from auditing Bank of Jinzhou Co.?
2. (Introductory) In what document did EY explain this reason
for its resignation? In your answer, comment on where shares of the
Bank of Jinzhou Co. are traded.
3. (Advanced) What has been the impact on Bank of Jinzhou Co
from this auditor resignation?
4. (Advanced) The insert to the print version of this article
highlights the statement that "investors have been on the lookout
for signs of vulnerability in the banking sector." How does an
auditor's withdrawal from an engagement add to evidence implying
possible "vulnerability" of this banking sector in China?
Resignation adds to
concerns about the health of China’s regional banks
Ernst & Young LLP resigned as the auditor
for a Chinese commercial bank, the bank said, adding to concerns about the
health of the country’s regional banks following a government takeover of a
troubled small bank
last month.
Bank of Jinzhou Co., a city bank with roughly $100 billion in
assets, said in a stock-exchange filing on Friday night that its auditors
relinquished their role a year after being hired to review its accounts.
According to the filing, Ernst & Young and its Chinese joint
venture said in their resignation letter that they had requested information
about certain loans the bank made but were unable to get enough documents to
resolve their questions and complete their audit.
The accounting firm had come across indications that the use
of proceeds from some of the bank’s loans to institutions wasn’t consistent
with their stated purpose, according to Bank of Jinzhou’s filing. Ernst &
Young in turn asked for documents to help it ascertain whether the debt
could be repaid or recovered but couldn’t reach an agreement with the bank
on the issue.
Bank of Jinzhou—which was founded in 1997 in China’s
northeast region and lends mostly to small and midsize enterprises—is among
more than a dozen Chinese commercial banks that have delayed the release of
their 2018 annual reports. It has hired a Hong Kong-based accounting firm,
Crowe (HK) CPA Ltd., as its new auditor and expects to release its annual
results by the end of August.
The Hong Kong-listed bank’s shares have been suspended since
April 1. The firm also has $1.5 billion in outstanding U.S. dollar perpetual
securities. They fell sharply Monday, losing close to a fifth of their value
to trade at about 65 cents on the dollar, according to Bloomberg data,
yielding close to 20%. That implies elevated default risk, said Owen
Gallimore, head of credit strategy and research at ANZ. Bond yields rise as
prices fall.
There was limited fallout elsewhere. A finance subindex of
Hong Kong’s Hang Seng Index fell 0.8% Monday, while a Shanghai index made up
of 22 bank stocks gained 0.49%.
Investors have been on the lookout for signs of vulnerability
in China’s banking sector. On May 24, Chinese banking regulators seized
control of Baoshang Bank Co., a bank based in Inner Mongolia, citing severe
credit risk. It was the first takeover of a Chinese bank by national
authorities since 1998 and was followed by an increase in interbank lending
rates on the mainland last week.
Since last year, many small and midsize banks in China have
reported higher nonperforming-loan ratios after the country’s banking
regulator told lenders to classify all loans that were more than 90 days
overdue as nonperforming.
Bank of Jinzhou disclosed a nonperforming loan ratio of 1.26%
last June. Its special-mention loans, or loans at risk of defaulting, stood
at 8.3 billion yuan ($1.2 billion), or 3.3% of its total loans, up sharply
from the beginning of 2018.
On Sunday, China’s central bank said the
takeover of Baoshang Bank was an isolated incident. According to the
People’s Bank of China, close to 89% of Baoshang’s stock was owned by
Tomorrow Group, a company linked to missing financier
Xiao Jianhua. The bank had previously reported a capital shortage.
Advising the public to look at the case “objectively and
calmly,” the central bank said that there is sufficient liquidity in the
financial markets and that risks in the financial system are under control.
Still, a detail in the central bank’s statement sparked
worries among some market participants. Regulators said they would fully
protect the interests of Baoshang Bank’s individual depositors and
wealth-management customers. They will also guarantee the banks’ liabilities
of up to 50 million yuan to individual corporate and financial institutions.
However, institutions that are owed more than 50 million yuan may benefit
from only partial guarantees of at least 80%.
“That means some financial institutions in the interbank
market will suffer losses, which will drive up funding costs of small banks
and, therefore, slow credit growth, especially loans to small private
enterprises,” said Shujin Chen, a banking analyst with Huatai Financial
Holdings.
Ms. Chen estimated Baoshang Bank’s nonperforming-loan ratio
at around 30%, well above the reported industry average of 1.8%. Baoshang
Bank hasn’t released financial results since the third quarter of 2017.
The central bank’s statement was meant to demonstrate that
Baoshang’s issue wasn’t a sign of broader problems, said Duncan Innes-Ker,
regional director for Asia at the Economist Intelligence Unit. Still, he
noted that Bank of Jinzhou’s auditor change was a red flag and added: “I
think there is certainly a degree of nervousness in the financial sector
about what’s going on at the moment.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 7, 2019
By Brent Kendall and John D. McKinnon | Jun 03, 2019
TOPICS: Accounting
Theory, Justice Department
SUMMARY: The
Federal Trade Commission (FTC), the Justice Department, and Congress "...are
poised to scrutinize the nation's largest technology companies for potential
anticompetitive practices, bringing a new regulatory focus to the vast
markets for digital services and a new level of concern for investors." This
development is tied to predictions by positive accounting theorists that the
companies will choose conservative accounting practices as they increase in
size. Questions ask students to tie areas of accounting policy choice to
areas that might be scrutinized by regulators.
CLASSROOM APPLICATION: The
article may be used in an advanced level financial reporting class to
discuss positive accounting theory, particularly the association between
size of the firm and conservative accounting choices.
QUESTIONS:
1. (Advanced) One theory behind the use of accounting
practices is known as the positive theory of accounting. Research a
definition of this theory. Cite your source for this definition.
2. (Introductory) One factor often cited in positive
accounting theory is that the size of a firm might drive more
conservative accounting choices. Define the term "conservatism" in
accounting.
3. (Introductory) Under positive accounting theory, the risk
of outside inquiry increasing with the size of a company is one
factor explaining the choice of more conservative accounting
policies. Explain how this risk is made evident in the article about
Google, Facebook, and Amazon.
4. (Advanced) Name one area of reporting that involves
accounting choice. How might a conservative accounting approach help
companies as "antitrust authorities...look in places there might be
significant market power, to ensure that such firms compete on the
merits..."?
5. (Introductory) The Federal Trade Commission (FTC) and the
Justice Department are described in the article as navigating their
jurisdictions in the digital realm. How are the two regulators
approaching this division of responsibility?
Federal antitrust enforcers
and lawmakers are poised to scrutinize the largest technology companies for
anticompetitive practices
WASHINGTON—Federal antitrust enforcers and
lawmakers are poised to scrutinize
the nation’s largest technology companies for potential anticompetitive
practices, bringing a new regulatory focus to the vast markets for digital
services and a new level of concern for investors.
After
years when the government took a broadly laissez-faire attitude toward the
regulation of Silicon Valley, antitrust officials at the Justice Department
and Federal Trade Commission are choosing lanes with a view to studying the
practices of at least four of the world’s largest and highest-profile tech
companies.
Under a series of arrangements between the
two agencies, the Justice Department now has authority over any potential
antitrust investigation into AlphabetInc.’s
GOOG
2.08%Google and
AppleInc., while
the FTC has oversight of Facebook Inc. and Amazon.comInc.
AMZN
2.83%Google and Facebook appear to be closest to
being in the agencies’ investigative crosshairs, according to people
familiar with the matter.
Separately, the House Judiciary Committee made public its own investigation
Monday into competition in digital markets, which will include multiple
hearings along with requests for information to the major businesses, the
panel said. In addition to any competitive problems in digital markets, the
probe will look at whether current antitrust laws and enforcement efforts
have kept pace with technological change.
The
moves among government enforcers and lawmakers over the same broad issues,
and the prospect of prolonged scrutiny, rattled investors in the companies,
which are all among the biggest in the world by market value.
Facebook shares slid 7.5% Monday while Alphabet lost 6.1%. The selling
pulled the Nasdaq Composite Index into correction territory, or 10% below
its May record close.
It is
too early to assess whether these early moves in Washington will
fundamentally alter the companies. But they mark a new level of concern over
a sector that prided itself in the past in staying out of the political
spotlight.
“The
open internet has delivered enormous benefits to Americans,” said Rep.
Jerrold Nadler (D., N.Y.), chairman of the Judiciary Committee. “But there
is growing evidence that a handful of gatekeepers have come to capture
control over key arteries of online commerce, content and communications.”
The Wall Street Journal
reported Friday
that the Justice Department was gearing up for a probe of Google and on
Monday that the FTC is in the driver’s seat for scrutiny of Facebook, the
result of a recently brokered deal between the two agencies. It couldn’t be
determined whether the allocations of Apple and Amazon were related to the
same agreement; these companies may be a less urgent focus of the agencies,
according to people familiar with the matter.
The
big technology companies have ramped up dramatically in Washington with
lawyers and lobbyists to handle a moment that has been brewing for some
time.
The
internet industry—Google, Facebook and Amazon in particular—poured money
into lobbying in the capital at a record pace in 2018. The industry total
reached $77.9 million, compared with $16.4 million a decade earlier,
according to the nonpartisan Center for Responsive Politics. Google parent
Alphabet alone spent $21.7 million in 2018, while Amazon came in at $14.4
million and Facebook at $12.6 million.
Tech
industry investments in think tanks and other nonprofits in the antitrust
space also have ticked up in recent years. Google recently funded more than
30 nonprofit groups that have a voice in the public debate over antitrust,
according to Google’s transparency report. Those groups include major think
tanks on the left and center left, as well as numerous conservative and
libertarian groups and institutions. Amazon funds many of the same groups,
according to its investment list.
The
FTC already had been increasing its scrutiny of the tech companies in recent
months, including with a task force, announced in February, to examine
competition issues in the technology marketplace. FTC officials have said
that, among other things, the task force would re-evaluate past government
decisions that allowed major tech companies to acquire smaller companies
that potentially could have been future competitors.
Among
prior deals on the FTC’s radar are Facebook’s acquisitions of messaging
service WhatsApp and photo-sharing app Instagram, people familiar with the
matter said.
The
FTC’s actions come as consumer advocates—as well as some politicians—have
begun urging that big tech companies, including Facebook, be broken up.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 7, 2019
SUMMARY: SVMK
Inc. (parent of SurveyMonkey) has hired Ms. Debbie Clifford as chief
financial officer. She will leave her position as vice president of
financial planning and analysis at Autodesk Inc. to succeed Timoth Maly who
retired in March 2019 after at least 10 years in that position. According to
the SVMK profile on the WSJ page (linked to the article at the company
name), the current chief executive, Zander Lurie, has filled the CFO role
since March.
CLASSROOM APPLICATION: The
article may be used to discuss the function of a CFO versus Ms. Clifford's
previous role as vice president of financial planning and analysis.
QUESTIONS:
1. (Introductory) What is SVMK Inc.? Have you ever used its
services? (Hint: to learn about the company, you may click on the
live link in the WSJ article, then look to the right-hand side of
the page for "Profile.")
2. (Introductory) What was Ms. Debbie Clifford's career
progression to chief financial officer? Explain your understanding
of the responsibilities of her previous position at Autodesk, Inc.
3. (Advanced) Explain your understanding of the role of the
chief financial officer of a publicly traded company. If you use an
outside source, properly cite your source for the information.
4. (Advanced) Consider the description in the article of the
challenges facing SVMK and Ms. Clifford's responsibilities. Are the
challenges particularly related to accounting or to other areas?
Explain your answer.
The newly public company
named a new finance chief as it aims for ambitious expansion
SVMKInc., the
parent of online-survey company SurveyMonkey, has tapped as chief financial
officer a finance executive from a software maker as it gears up for its
next chapter as a public company.
Debbie Clifford will join SVMK on July 8
from design software company AutodeskInc., where
she served as vice president of financial planning and analysis.
She succeeds Timothy Maly, who retired
in March after overseeing the company’s finances and operations for a decade
and steering it through an initial public offering last year.
Ms.
Clifford comes to SVMK as the company aims to double business over the next
three to four years and expand its free cash flow, or the amount of cash the
company has on hand after paying expenses. SVMK is targeting revenue of $298
million to $304 million for 2019, up from $254 million in 2018.
Driving that growth is the company’s planned transformation from a
self-service platform into one build on premium-priced enterprise accounts.
The San Mateo, Calif.-based company has ramped up its account verification
process, essentially cracking down on account sharing.
As of
March 31, SVMK had more than 670,000 paying users, up nearly 10% from a year
earlier, and made an average $423 for each paying user, up from $390 a year
earlier.
Ms.
Clifford was one of the key architects of Autodesk’s transition to the cloud
and her experience and skills complements SVMK’s executive team, Chief
Executive Zander Lurie told CFO Journal in an interview on Monday.
Company officials see significant growth potential from international
markets. Roughly 36% of SVMK’s sales came from overseas in 2018, and the
market accounts for an outsize slice of its more than 17 million active
users. The company built a dedicated sales team in Europe as part of its
international expansion.
To
facilitate teamwork and steer customers into premium accounts, SVMK last
year launched SurveyMonkey Teams, which Mr. Lurie called the Google Doc for
surveys.
Given
Ms. Clifford’s experience running and expanding a much larger finance
organization, she will be instrumental in helping SVMK achieve its ambitious
growth targets, said Stephens Inc. analyst James Rutherford.
Fast-growing companies such as SVMK must consider whether they have the
right skill set to support the kind of expansion they’re trying to navigate,
said Peter Crist, chairman of executive recruitment firm Crist|Kolder
Associates. “Revenue hides a lot of sins,” he said.
The
addition of Ms. Clifford brings both the operational skills a company like
SVMK needs as well as the imprint of a company whose finance leader and
performance is well regarded, Mr. Crist said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 14, 2019
SUMMARY: United
Technologies Corp. (UTC) and Raytheon will merge to form "...the world's
second-largest aerospace-and-defense company by sales behind Boeing Co." The
combined company will "make everything from engines and seats for jetliners
and F-35 jet fighters, to Patriot missile launchers and space suits for
astronauts." Analysts say that "the deal isn't expected to attract
significant antitrust scrutiny...." The business combination is billed as a
merger of equals: "the new company will be named Raytheon Technologies
Corp....UTC shareholders will own 57% of the shares and UTC will appoint
eight of the 15 new directors....UTC's current leader, Greg Hayes, will
serve as CEO of the merged company, with Raytheon CEO Tom Kennedy as
executive chairman for two years."
CLASSROOM APPLICATION: The
article may be used to discuss strategies for business combination
transactions and the requirement to identify an acquirer in acquisition
accounting for business combination transactions.
QUESTIONS:
1. (Advanced) "The new company will be named Raytheon
Technologies Corp., and executives on Sunday called the deal...a
merger of equals." Will the accounting for the business transaction
reflect this viewpoint? Explain your answer.
2. (Advanced) State the factors that are used to identify
which entity will be considered to be the acquirer in this business
combination transaction. Cite your source for this information even
if it is from your accounting textbook.
3. (Introductory) Which entity, Raytheon Corp. or United
Technologies Corp., do you think will meet the criteria to be
defined as the acquirer in this transaction? Support your answer.
4. (Introductory) What benefits do the two companies'
management teams expect to glean from the combination of UTC and
Raytheon? List all that you can find in the article.
5. (Introductory) What concerns about the merger are listed
in the article? Cite all that you find and state who is expressing
these concerns.
Combination creates No. 2
aerospace-defense company making everything from F-35 engines to Patriot
missile systems
United TechnologiesCorp.
doubled down on the aerospace market with an all-stock deal to merge with
defense contractor RaytheonCo.RTN
+0.71%, after UTC
executives earlier chose to exit the escalator and air-conditioner
businesses.
The combined company, valued at more than
$100 billion after planned spinoffs, would be the world’s second-largest
aerospace-and-defense company by sales behind BoeingCo.BA
+2.29%, with
annual revenue of about $74 billion this year. It will make everything from
engines and seats for jetliners and F-35 jet fighters, to Patriot missile
launchers and space suits for astronauts.
The proposed deal intensifies the consolidation in the aerospace-and-defense
industry
as plane makers seek better terms from suppliers and the Pentagon puts more
pressure on contractors to cut costs and invest more of their own money in
new technologies, such as space systems and cybersecurity.
The
new company will be named Raytheon Technologies Corp., and executives on
Sunday called the deal, which doesn’t include a takeover premium, a merger
of equals. UTC shareholders will own 57% of the shares and UTC will appoint
eight of the 15 new directors. The Wall Street Journal reported Saturday
that the two sides were nearing a deal.
UTC’s
current leader, Greg Hayes, will serve as CEO of the merged company, with
Raytheon CEO Tom Kennedy as executive chairman for two years. Executives
said the merger would allow them to boost research spending and squeeze out
some $1 billion in annual costs from the marriage.
Raytheon shareholders will receive 2.3348 shares in the new company for
every share they currently own. The combined company will have about $26
billion in debt, with $24 billion coming from UTC. It will be based in the
Boston area.
The
combined entity would be split about 50/50 between commercial and defense
sales, though military is likely to shrink as a proportion as UTC’s Pratt &
Whitney division ramps up deliveries of its latest jetliner engines.
One-third of the two companies’ aerospace and defense revenue last year—some
$25 billion—came from the Pentagon.
“There
is some truth to the idea that bigger is better,” Jefferies analyst Sheila
Kahyaoglu wrote in a note to clients Sunday. “With common customers there is
some leverage to size and the supply chain.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 14, 2019
SUMMARY: The
summary of this article from the CFO Journal email states "The Trump
administration's tariff-heavy trade policy is putting a strain on working
capital." Craig Bailey, associate principal at consulting firm Hackett Group
Inc., estimates that about $3.4 trillion in working capital was locked up
across U.S. companies at the end of 2018, up from $2.7 trillion five years
ago.
CLASSROOM APPLICATION: The
article may be used when discussing working capital in a financial or a
managerial accounting class. It may also be used in any class discussing
tariffs to connect the concept of working capital with which students should
be familiar.
QUESTIONS:
1. (Advanced) Define the term working capital.
2. (Introductory) How have companies' responses to tariffs
being introduced by the Trump Administration led to changes in the
amount of working capital reported on consolidated balance sheets of
publicly traded companies?
3. (Advanced) What risks are associated with corporate
strategies to deal with import tariffs?
Inventories tie up cash as
companies rush to bring goods across the border ahead of higher duties
The
Trump administration’s tariff-heavy trade policy is putting a strain on
working capital.
Some
companies have run up inventories of raw materials or finished goods in a
bid to front-run higher costs, analysts and executives say. Others have
offered customers longer payment terms to help them adjust to the new policy
landscape.
Those
measures soak up cash—an unintended impact of the tariffs that poses a
threat to businesses’ financial health. As more money is absorbed by product
stockpiles or payments to suppliers, and less is received from customers,
companies are left with less available capital or cash to cover their
operations and any emergency expenses.
“There can be serious risks,” said Craig
Bailey, associate principal at consulting firm Hackett GroupInc., which
estimates that about $3.4 trillion in working capital was locked up across
U.S. companies at the end of 2018, up from $2.7 trillion five years ago.
That
buffer may be unnecessarily large. U.S. companies could free up nearly 40%
of that $3.4 trillion if they ran their businesses more efficiently, Mr.
Bailey said. “As interest rates go up and as tariffs hit, they’re going to
find that they have too much cash tied up in inventories which they can’t
quickly realize and liquidate.”
As companies face the possibility of
further tariffs, those risks aren’t going away. U.S. trade talks with China
continue,
and a new trade fight with Mexico was just narrowly averted.
Any new tariffs are expected to bring new complexities to operations and
prompt the need for more adjustments, raising the odds that working capital
will soak up more cash.
Arrow ElectronicsInc. knows
this dilemma well. A few months ago, customers of the Centennial,
Colo.-based electronics distributor were flummoxed by who was on the hook
for newly assessed tariffs on Chinese-made goods, according to the company’s
chief financial officer, Chris Stansbury.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 14, 2019
TOPICS: Cash,
International Taxation, Repatriated Profits
SUMMARY: "Companies
funneled record amounts of cash to stock buybacks, dividends, capital
spending and acquisitions last year. As a result, U.S. corporate cash
holdings fell to a three-year low of $1.685 trillion in 2018...." This is
the first drop in the amount of cash on U.S. corporate balance sheets since
a minor drop in 2015; the related graphic shows the long trend upward in
corporate cash balances from approximately $720 billion in 2008 to nearly $2
trillion in 2017. This trend may be beginning to reverse in 2018.
CLASSROOM APPLICATION: The
article may be used in discussing cash balances or international taxation
issues leading to these changes in cash balances. In discussing cash
balances, these issues may be related to another article this week which
addresses working capital changes. Discussing international taxation issues
requires having the students consider that corporate cash balances include
amounts held in foreign locations and repatriating to the U.S. is leading to
these cash distributions.
QUESTIONS:
1. (Introductory) What entity issued this report on the
amount of cash held by U.S. publicly traded companies?
2. (Introductory) What factors have led U.S. companies to
reduce their cash holdings?
3. (Introductory) What actions have companies taken to use
their available cash?
4. (Advanced) Consider the quotes from Bruce Bittles of R.W.
Baird &Co. In what ways should U.S. companies use their available
cash?
5. (Advanced) Specifically consider Mr. Bittles's comment
that "stock buybacks are short-term boosts." Short-term boosts to
what? What is a better way to create that "boost"? (Hint: in your
answer, consider the impact on the number of shares on the
calculation of earnings per share, or EPS.)
New tax law spurred more
companies to increase spending, repatriate foreign cash holdings
U.S.
corporate balance sheets continue to feel the impact of the 2017 U.S. tax
overhaul, as companies pivot their capital allocation strategies in response
to the new law.
Companies funneled record amounts of cash to stock buybacks, dividends,
capital spending and acquisitions last year. As a result, U.S. corporate
cash holdings fell to a three-year low of $1.685 trillion in 2018, according
to a report from Moody’s Investors Service Inc.
The
drop in corporate cash hoards, the first since 2015, came as companies
rushed to take advantage of lower taxes on foreign income.
AppleInc., again
the top cash holder, saw its cash pile drop 14% to $245 billion. Rounding up
the top five were: MicrosoftCorp. ,
AlphabetInc. and
newcomers Amazon.comInc. and
FacebookInc., which
replaced Cisco SystemsInc. and
OracleCorp. in
the top five.
Combined, the five companies held $564 billion, or 33% of the total
nonfinancial corporate cash balance, down from $675 billion, or 34% in 2017,
according to the report, which looked at 928 U.S.-based, nonfinancial
companies.
Representatives for Alphabet, Microsoft and Amazon declined to comment. The
other companies didn’t return requests for comment.
“These
cash holdings don’t impress me much,” said Bruce Bittles, chief investment
strategist at investment bank R.W. Baird & Co., adding he’d like chief
financial officers to direct more cash to capital investments rather than to
stock buybacks.
“If
you are looking for a long-term benefit for the economy and the stock,
capital investment is what is going to get you there, not stock buybacks,
which are short-term boosts,” he said.
Many
U.S. companies, particularly in the fast-growing technology sector, built up
massive hoards of cash offshore as they opted to keep profits earned in
foreign countries outside of the U.S. That strategy was largely motivated by
U.S. tax law, which levied a 35% corporate tax, net of taxes paid in foreign
jurisdictions, on money that companies chose to repatriate.
But since the 2017 tax-law overhaul, which
imposed a one-time tax on accumulated foreign profits, some companies have
shifted tactics, bringing some or all of that money home. Companies sent
$664.91 billion of their foreign earnings back to the U.S.
in the form of dividend payments in 2018, up from $155.08 billion the year
before, according to data from the U.S. Commerce Department.
Cisco, which was a top-five cash hoarder
last year, lost that billing in part because of such a strategy shift. The
company last year announced plans to repatriate $67 billion
of its foreign cash holdings, and deploy much of that cash on share
repurchases and dividends.
The
San Jose, Calif., company said it would continue to direct cash to deal
making along with stock buybacks and dividend payouts to shareholders. “We
are not a capital-intensive business,” a Cisco spokeswoman said in an email.
Moody’s analysts expect companies to
continue tapping into the cash piles in the coming years as they pay down
debt and boost returns to shareholders through dividend payouts and stock buybacks.
Apple, for example, has laid out plans to
become net cash neutral,
with an equal amount of cash and debt.
In
February, the iPhone maker began a $12 billion accelerated share-repurchase
program and has since boosted its dividend by 4 cents to 77 cents a share
and raised its share repurchase authorization by $75 billion to $175
billion.
“Our
priorities for cash have not changed over the year,” CFO Luca Maestri said
in a conference call in April, when the company released financial results
for the first half of its business year.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 14, 2019
TOPICS: Charitable
Contributions, Charitable Deduction, State and Local Taxes, Tax Law, Tax
Strategy
SUMMARY: NOTE
TO INSTRUCTORS: This summary essentially answers question 1. "Fourteen New
York municipalities have set up...charitable funds..." for which the state
grants tax credits. Since charitable deductions against federal income
aren't limited, the strategy offsets the impact of the new 2017 federal tax
limit on state and local income taxes. That limit most strongly impacts high
tax states such as New York and New Jersey. The strategy is modeled after
state laws in Georgia, Arizona, and Alabama that predate 2017 and were
designed to support donations to education and health-care programs or
institutions. The new Treasury Department regulations "block the relief
intended by New York lawmakers by requiring taxpayers to subtract the value
of the state credits from the amount of their donation."
CLASSROOM APPLICATION: The
article may be used in a tax class to discuss specific tax strategy
involving charitable contributions and deductibility of state and local
taxes, interaction between state and federal taxation in general, the impact
of the 2017 tax law change, and/or the process of challenging IRS tax
rulings.
QUESTIONS:
1. (Advanced) Summarize your understanding of the tax
strategy that has now been affected by new Treasury Department
regulations. You may refer also to the related article to help your
understanding.
2. (Introductory) Which states' laws have been nullified by
new Treasury Department regulations?
3. (Advanced) Are all of these states high tax states? Were
all of these states' laws passed in response to the 2017 tax law
change? Explain; again you may refer also to the related article to
help your understanding.
4. (Introductory) Describe the process of challenge to the
state laws that ultimately led to issuance of these Treasury
Department regulations.
Regulations effectively nullify laws passed in some states to skirt $10,000
cap
WASHINGTON—The
Treasury Department released final rules that shut down a tax-planning strategy
for residents of high-tax states, nixing a workaround that could have helped
New York, New Jersey and Connecticut residents skirt the new cap on state
and local tax deductions.
The regulations effectively nullify state laws passed in response to the
2017 tax law and pinch similar programs in Georgia, Arizona and elsewhere
that predate the federal tax changes and benefit private schools, rural
hospitals and other charities. The rules apply to contributions made after
Aug. 27, 2018, and generally prevent taxpayers from converting their
nondeductible state tax payments into deductible charitable contributions.
“This will stop both blue- and red-state programs, but when it comes to
actually filling out tax returns, the devil’s in the details, and you could
have to wait for future guidance,” said Andy Grewal, a law professor at the
University of Iowa.
The Treasury
Department specifically rejected
pleas for a delayed effective date and for specific carve-outs, including
exceptions for conservation easements, donations to nonstate entities and
programs that predate the 2017 law. It did allow limited use of the programs
under certain dollar limits.
Under the
Republican tax law enacted in 2017, individuals and married couples filing
jointly can deduct at most $10,000 of their state and local tax payments
from their federal taxable income. That change, combined with the rest of
the tax law, reduced the value of the state and local tax deduction by 87%,
according to the Tax Policy Center,
a Washington research group run by a former Obama administration official.
That cap generated revenue to reduce tax rates and hits the top sliver of
earners particularly hard. Republicans say the unlimited deduction gave an
unfair subsidy to residents of high-tax states.
Democrats argue that the cap was aimed directly at their states and hurts
their ability to raise revenue from high-income households, who now face the
full cost of state and local taxes and have larger incentives to move
themselves or their businesses. Democrats in Congress are trying to reverse
or soften the cap, but they stand little chance as long as Republicans
control the Senate or the White House.
That limit
hits hardest in high-tax states
such as New York, New Jersey, California and Connecticut. Despite the cap,
rate cuts and other changes mean that most households, even in those states,
received net tax cuts under the 2017 tax law. For instance, many high-income
taxpayers face the cap, but under the previous law, they were paying the
alternative minimum tax that already denied the state and local tax
deduction.
To counter the
federal law, state officials came up with several workarounds.
Among the most prominent was the credit-for-donation program, modeled after
existing incentives in states such as Georgia, Arizona and Alabama.
Under these programs, taxpayers who donate to a specified fund can claim a
charitable contribution on their federal taxes and get a credit against
their state taxes.
“The IRS has allowed these charitable funds for decades and is only now
banning them because states like New Jersey sought to utilize them and
establish its own,” said Sen. Bob Menendez (D., N.J.).
New York lawmakers created two charitable funds as part of the state budget
last year. Gov. Andrew Cuomo and other Democratic lawmakers say limiting the
SALT deduction has prompted high-income individuals to shift their
residences to other states with lower income taxes.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 14, 2019
SUMMARY: The
Wisconsin Economic Development Corp. is "a quasi-public entity [with the
authority to award] state tax credits to companies..." based on hiring and
other economic benefits. The independent Wisconsin Legislative Audit Bureau
has found that "only 35% of the jobs promised by companies from 2011 to 2018
were actually created, based on data from awards that had ended. "The
findings also raise questions about the WEDC's ability to monitor the
tax-incentive contract it negotiated with Foxconn [see the related
article]....The Foxconn project...was a controversial deal struck by
Republican Gov. Scott Walker...Foxconn promised to create 13,000 jobs for $3
billion in state tax incentives over 15 years, and the effort was pitched as
part of President Trump's plan to boost manufacturing jobs in the U.S." The
Foxconn project has been scaled back; the company informed the state it did
not create enough jobs to qualify for credits in 2018 though "the company
said in a statement it is still committed to hiring 13,000 and will build an
LCD manufacturing plant on the site." At a hearing in early June 2019, the
WEDC executive officer "said the WEDC interpreted statutes differently form
the audit bureau...."
CLASSROOM
APPLICATION: The article may be used in a tax class to discuss
incentives offered to support economic development. It may be used in an
audit class to discuss operational and other types of audits and audit
entities or in a governmental accounting class to discuss governmental audit
agencies. Finally, by connecting with the related article, it may also be
used in a managerial accounting class to discuss the impact of tax credits
on capital budgeting decisions.
QUESTIONS:
1. (Introductory) What are economic development tax
incentives?
2. (Advanced) What type of entity performed the audit
discussed in this article? What type of audit was performed?
3. (Advanced) Summarize the question or questions
investigated in the audit, the audit findings, and their
implications for the operation of the Wisconsin Economic Development
Corp. A good format for your response would be a table with three
column headings: audit question, audit findings, operational
implication.
4. (Introductory) Is there some disagreement about the
findings of this audit? Explain.
Economic development group
that helped bring Foxconn to Wisconsin awarded incentives to companies that
ultimately didn’t create jobs they had promised
The Wisconsin group that negotiated $3
billion in tax incentives for Foxconn Technology Group has problematic
oversight practices, a state audit has found,
raising fresh concerns about the costly incentives states use to attract
economic growth.
The
Wisconsin Economic Development Corp., a quasi-public entity, awarded state
tax credits to companies that ultimately didn’t create the number of jobs
they had promised, the independent Wisconsin Legislative Audit Bureau found
in a report released last month. It also paid companies using state tax
dollars for jobs created outside of Wisconsin, the report said. The audit
found that only 35% of the jobs promised by companies from 2011 until 2018
were actually created, based on data from awards that had ended.
The
findings also raise questions about the WEDC’s ability to monitor the
tax-incentive contract it negotiated with Foxconn—a major supplier to Apple
Inc.—on behalf of the state. In a controversial deal struck in 2017, the
state promised billions in economic incentives as part of a plan by the
Taiwanese electronics-maker to build a $10 billion liquid-crystal-display
plant that would employ as many as 13,000 people.
“Based
on their track record, they can’t handle the small stuff,” said Wisconsin
State Sen. Tim Carpenter, a Democrat and a critic of the Foxconn deal. “How
are they going to handle the big stuff?”
In one case, the audit found that WEDC paid
$462,000 in tax credits to Walgreens Boots Alliance, even
though the company had a total loss of 17 jobs instead of creating jobs.
WEDC didn’t revoke the credits and recoup the money, the report said,
although WEDC has since said it is working towards this.
“I
believe WEDC will be able to effectively monitor the Foxconn project to
ensure the required investments are made, jobs are created, and Wisconsin
taxpayers’ interests are protected,” said Mark Hogan, chief executive
officer of the WEDC, in a statement. At a hearing last week, Mr. Hogan said
the WEDC interpreted statutes differently from the audit bureau, and
believes the group can provide credits to companies who hire out-of-state
workers. He said the group is seeking clarity on the issue.
The
Foxconn project, which was announced at the White House in July 2017, was a
controversial deal struck by Republican Gov. Scott Walker, who lost his job
in the last election to Democrat Tony Evers.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 21, 2019
SUMMARY: The
article reports on discussion of budget spending to mitigate cybersecurity
risks at the Wall Street Journal's CFO Network Annual Meeting in Washington,
DC. "Strong relationships with the chief information security officer and
other IT managers can help finance chiefs find comfort on spending" is the
subtitle to this article. "The unpredictability of [malware] attacks can
lead to unexpected spending to shore up defenses. But not all finance chiefs
are equipped to swiftly advise on major technology expenditures-particularly
those CFOs who don't have existing expertise or the bandwidth to delve into
the intricacies of each spending decision.... CFOs who have had experience
running segments of the business may be better positioned to make confident
decisions on IT spending," said one conference attendant.
CLASSROOM APPLICATION: The
article may be used in a managerial accounting course when introducing
enterprise risk management, likely at the beginning of the class.
QUESTIONS:
1. (Introductory) According to the article, what factors make
it particularly challenging to determine the appropriate budget
investment for cyber-risk prevention?
2. (Advanced) According to the caption for the photo, one
presenter at the Wall Street Journal's CFO Network annual meeting
states that chief financial officers should use the same processes
for risk management applied to cyber-security risks as any other
risk-management evaluation. State another example in which companies
must apply enterprise risk management strategies.
3. (Introductory) State an example of a business control
which can be used to mitigate the risk you identify in answer to the
question above.
4. (Advanced) Why do you think that "...CFOs who have had
experience running segments of the business may be better positioned
to make confident decisions on IT spending"? Does it surprise you
that managerial expertise is helpful in a CFO role? Explain.
Strong relationships with the
chief information security officer and other IT managers can help finance
chiefs find comfort on spending
WASHINGTON—Cyber threats are pressuring finance chiefs to make more space in
their budgets for routine software and systems updates to protect sensitive
customer data.
But
figuring out just how much money to earmark for cybersecurity has become a
challenge, executives at The Wall Street Journal’s CFO Network Annual
Meeting told CFO Journal.
Information security officers who ask for
more resources have a compelling case: Malware attacks,
such as the massive WannaCry attack two years ago, have compromised systems
and disrupted businesses at major companies around the world.
The
unpredictability of such attacks can lead to unexpected spending to shore up
defenses. But not all finance chiefs are equipped to swiftly advise on major
technology expenditures—particularly those CFOs who don’t have existing
expertise or the bandwidth to delve into the intricacies of each spending
decision.
Finding comfort on cybersecurity spending comes down to developing strong
relationships with the chief information security officer and other
information technology managers, said Steve Priest, the CFO of JetBlue
Airways Corp. “You can’t do everything.” he said during an interview. “You
have to trust the subject matter experts to do the job that they’re paid to
do.”
Finance can help, though, by encouraging coordination between IT managers
and the teams purchasing equipment, and by requiring purchases go through a
competitive bidding process to ensure the company is getting the best deal,
he said.
CFOs
who have had experience running segments of the business may be better
positioned to make confident decisions on IT spending, said Mr. Priest, who
spent about half of his career in operational roles at airlines.
“When
the business is coming to you and saying, ‘I have a case for this,’ and ‘I
need to spend this’ or ‘there’s a return based on this investment,’ you’re
coming through it with a perspective,” Mr. Priest said.
Another cybersecurity budgeting challenge: the constantly changing threats,
said Judith Pinto, managing director at consulting firm Promontory Financial
Group.
Incidents related to business email hacks,
for instance, more than doubled in 2018 from a year earlier, according to a
March report by U.K.-based insurance company Beazley
PLC.
Companies should identify their biggest risks and spend enough to protect
against them—the same processes they would use in any risk-management
evaluation, Ms. Pinto said during a presentation at the CFO Network event.
CFOs will know they have spent enough when they feel comfortable with the
amount of risk their companies are assuming, she said.
“That’s when you know you’ve spent or invested the right amount of money,”
Ms. Pinto said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 21, 2019
TOPICS: Capital
Gains, Charitable Contributions, Wash Sales
SUMMARY: The
article describes in detail the tax rates applicable to capital gains, the
definition of a wash sale, and the interaction of investment and charitable
donations. The article culminates with the admonition to decide appropriate
investment strategies, then consider tax implications, but also to focus on
tax planning year-round, not just in December. That admonition is covered
also in the related article. The author is the WSJ's former Tax Report
columnist.
CLASSROOM APPLICATION: The
article may be used in an individual income tax class covering capital gains
taxes.
QUESTIONS:
1. (Introductory) What are capital gains? Be specific in the
criteria used to determine whether a gain is treated as a capital
gain and the tax implications of that treatment.
2. (Introductory) What tax rates may apply to capital gains
on individual tax returns?
3. (Advanced) Do you think these tax rules appear "fairly
straightforward"? Explain your answer.
4. (Advanced) Why should an investor who wants to make a
charitable donation do so with appreciated stock but not with stock
on which the investor has incurred a loss? What instead should the
investor do with stock that has declined in value?
5. (Introductory) What are wash sales? How does a wash sale
impact the tax treatment of losses on investments?
The law is a lot more complicated than
many people think
By tax-law standards, the rules on capital-gains taxes may
appear fairly straightforward, especially for taxpayers who qualify for a
zero-percent rate.
But many other taxpayers, especially upper-income investors,
“often find the tax law around capital gains is far more complicated than
they had expected,” says Jordan Barry, a law professor and co-director of
graduate tax programs at the University of San Diego Law School.
Here is an update on the brackets for this year and answers
to questions readers may have on how to avoid turning capital gains into
capital pains.
Who qualifies for the zero-percent rate?
For 2019, the zero rate applies to most singles with taxable
income of up to $39,375, or married couples filing jointly with taxable
income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15%
rate, which applies to most singles up to $434,550 and joint filers up to
$488,850. Then comes a top rate of 20%.
But don’t overlook a 3.8% surtax on “net investment income”
for joint filers with modified adjusted gross income of more than $250,000
and most singles above $200,000. That can affect people in both the 15% and
20% brackets. For those in the 20% bracket, that effectively raises their
top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for
high net-worth individuals,” says Steve Wittenberg, director of legacy
planning at SEI Private Wealth Management.
There are several other twists,
says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
Among them: a maximum of 28% on gains on art and collectibles. There are
also special rates for certain depreciable real estate and investors with
certain types of small-business stock. See IRS Publication 550
for details. There also are special rules when you sell your primary
residence.
State and local taxes can be important, too, especially in
high-tax areas such as New York City and California. This has become a much
bigger issue in many places, thanks to the 2017 tax overhaul that included a
limit on state and local tax deductions. As a result, many more filers are
claiming the standard deduction and thus can’t deduct state and local taxes.
But some states, including Florida, Texas, Nevada, Alaska and Washington,
don’t have a state income tax. Check with your state revenue department to
avoid nasty surprises.
How long do I typically have to hold stocks or bonds to
qualify for favorable long-term capital-gains tax treatment?
More than one year, says Alison Flores, principal tax
research analyst at The Tax Institute at H&R Block. Gains on securities held
one year or less typically are considered short-term and taxed at the same
rates as ordinary income, she says. The rules are “much more complex” for
investors using options, futures and other sophisticated strategies, says
Bob Gordon, president of Twenty-First Securities in New York City. IRS
Publication 550 has details, but investors may need to consult a tax pro.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 21 2019
SUMMARY: "WeWork's
lease obligations and its overall debt level could draw scrutiny during the
IPO process as the company meets with potential investors." The company
undertakes long-term lease obligations that have not been shown on its
balance sheet under previous lease accounting standards. A Sanford C.
Bernstein & Co. analyst wrote in a January 2019 note to clients that the
risk of this business model "is one of the biggest issues inestors have with
the WeWork concept....Some say the accounting change could help WeWork's
business..." if it leads "firms to opt for short-term deals with WeWork."
The obligations for leases less than 12 months long do not have to be shown
on balance sheet.
CLASSROOM APPLICATION: The
article may be used in a financial reporting course covering leases, at the
intermediate level or above.
QUESTIONS:
1. (Introductory) What accounting change impacting WeWork
(and others) in accounting for leases? By what entity or entities
was this change issued? In what worldwide locations must companies
change their accounting for leases to comply with the new
requirements?
2. (Advanced) Given your answers to the questions in 1 above,
do you agree with the article characterization of lease accounting
changes as "following a change in federal accounting rules"?
Explain.
3. (Advanced) "Under the previous rules, only so-called
capital leases that ended with the purchase of a building were
listed as liabilities" on corporation balance sheets. Do you agree
with this statement in general? Explain your answer.
4. (Advanced) Refer again to question 3. Do you think it
likely that real-estate leases would only be capitalized under the
circumstandces described in the article? Explain your answer.
5. (Advanced) The article states that WeWork must list the
current value of its lease obligations as liabilities on its balance
sheet. How is that "current value" determined?
6. (Advanced) Explain the statement that "not all of the $34
billion" in lease obligations held by WeWork "translate into
liabilities."
7. (Advanced) What is risky about the business model with
leasing used by WeWork? How might that operating model change after
implementation of the new lease accounting requirements?
Co-working firm faces scrutiny over $34
billion in lease obligations
As WeWork Cos. prepares for an initial public
offering,
it has accumulated a mounting pile of debt and financial obligations that
could concern potential investors.
The co-working firm had about $34 billion in lease
obligations at the end of 2018, up from $18.2 billion a year earlier,
according to people familiar with the company’s financials.
The New York company, which
recently rebranded as The We Company
and was valued at $47 billion,
confidentially filed for an IPO at the end of last year.
WeWork leases office space under long-term deals, adds
furniture and perks like fruit-infused water and Wi-Fi, and sublets the
space to tenants under short-term deals.
Following a change in federal accounting rules that went into
effect in January, the company will have to list the current value of its
lease obligations as liabilities on its balance sheet. Under the previous
rules, only so-called capital leases that ended with the purchase of a
building were listed as liabilities.
Since WeWork’s future rent payments count for less in today’s
dollars, not all of the $34 billion translates directly into liabilities.
WeWork declined to disclose its total debt.
The company had $2.4 billion in liabilities at the end of
2017, according to a filing reviewed by The Wall Street Journal, not
counting most of its leases or the $702 million in bonds it issued last
year.
WeWork’s lease obligations and its overall debt level could
draw scrutiny during the IPO process as the company meets with potential
investors.
“The risk of entering into long-term leases (supported by
short-term tenants) is one of the biggest issues investors have with the
WeWork concept,” analysts at Sanford C. Bernstein & Co. wrote in a January
note to clients.
WeWork’s debt level also highlights the risks associated with
the co-working model: An economic downturn could leave the company with
expensive long-term commitments and not enough revenue to cover them.
Some say that Regus PLC, which has a business model similar
to WeWork’s and changed its name to IWG PLC a few years ago, offers a
warning. The company’s U.S. arm filed for chapter 11 bankruptcy protection
in the wake of the dot-com crash in 2003, as its revenue fell but long-term
leases remained in place.
Others say WeWork is better insulated from an economic
downturn than its rival was back then because it has a broader range of
tenants who are distributed across the globe.
WeWork signs leases through special-purpose entities and the
parent company guarantees only about 11% of its lease obligations, according
to people familiar with the matter. The company would likely be able to
renegotiate leases in a downturn, and it has a more diverse mix of customers
than Regus had in the early 2000s, according to a person familiar with the
matter. WeWork has been signing more long-term agreements with corporate
office users, and the company said it had a committed revenue backlog of
$3.4 billion in the first quarter.
Not everyone agrees the accounting change poses a dilemma for
WeWork. Some say the accounting change could help its business if office
users become wary of adding long-term lease liabilities to their balance
sheets. That could lead more firms to opt for short-term deals with WeWork.
Leases with a term of less than 12 months don’t need to be listed as
liabilities under the new rules.
But some big property owners aren’t taking any chances. Their
executives have been asking WeWork for bigger guarantees on new leases.
Columbia Property Trust
negotiated that WeWork would guarantee the equivalent to 28 months of rent
payments when it leased a Manhattan office building to WeWork last year, the
company’s CEO Nelson Mills said during an October earnings call. That
compares with typical guarantees of six to 12 months that WeWork cited in a
2018 filing.
SUMMARY: "KPMG
LLP is preparing to pay as much as $50 million to settle civil claims
related to the conduct of former partners who learned which of their audits
would be subject to surprise regulatory examinations....The fine would be
the highest ever imposed on an auditor in a Securities and Exchange
Commission action." KPMG partners fired following the "steal the examination
scandal" include the partner who was vice chairman of the firm's audit
practice even though he was not charged with wrongdoing. Also fired was an
executive director who worked for one of the partners.
CLASSROOM APPLICATION: The
article may be used in an auditing or a business ethics class to discuss
PCAOB inspections, the importance of ethical practices, and the impact of
unethical practices on others.
QUESTIONS:
1. (Introductory) For what did the Securities and Exchange
Commission and prosecutors pursue civil and criminal charges against
five former KPMG officers and a former regulator?
2. (Advanced) Mr. Scott Marcello, "KPMG's vice chairman for
audit, was never charged with wrongdoing." Then why do you think he
was fired by KPMG along with five other individuals who were charged
with wrongdoing?
3. (Advanced) Are you surprised that the partners who
obtained advance information about PCAOB audit inspections are
facing criminal charges rather than only civil charges? Explain,
including your understanding of the difference between these two
types of charges.
Fine, stemming from a leak at
an audit regulator, would be one of the highest ever imposed by the SEC on
an auditor
WASHINGTON—KPMG LLP is preparing to pay as much as $50 million to settle
civil claims related to the conduct of former partners who learned which of
their audits would be subject to surprise regulatory examinations, according
to people familiar with the matter.
The
fine would be one of the highest ever imposed on an auditor in a Securities
and Exchange Commission action. The details could change as agency
commissioners debate the final details of the settlement.
The
SEC and prosecutors pursued civil and criminal charges against five former
KPMG officers and a former regulator in January 2018 for sharing
confidential information about which of the firm’s audits would be examined
by its primary regulator, the Public Company Accounting Oversight Board. The
regulator discovered a leak in February 2017, and KPMG fired the partners a
couple months later.
Congress created the accounting board to inspect the work of public-company
auditors after the accounting scandals that blew up Enron Corp. and
WorldCom. The SEC oversees the board’s work and retains the ability to
police auditors on its own.
A federal jury in March convicted the most-senior former
auditor
involved in the matter, David Middendorf, who was KPMG’s national managing
partner for audit quality. It also convicted a former board employee,
Jeffrey Wada, who gave KPMG officials a confidential list of audits to be
inspected. Mr. Wada referred to the inspections as “the grocery list,”
according to law-enforcement officials. Both criminal convictions included
conspiracy and wire fraud.
SEC
commissioners are expected to vote this month to approve the settlement,
which would include the $50 million fine and a requirement that KPMG retain
an independent compliance consultant for at least a year, the people said.
A
spokesman for the SEC declined to comment.
The
highest SEC penalty against an audit firm was levied against Deloitte &
Touche LLP in 2005. The firm paid $50 million to settle an SEC lawsuit over
work it did for Adelphia Communications Corp. The SEC said Deloitte, which
neither admitted nor denied the claims, failed to follow proper audit
procedures that could have detected a massive accounting fraud at the
cable-television company.
In the same year, KPMG paid $22.5 million
to settle an SEC lawsuit over work it did for XeroxCorp. The
SEC said KPMG, which neither admitted nor denied the claims, permitted Xerox
to file misleading financial results over four years that overstated the
company’s earnings by $1.5 billion.
In this case, the
Commissioners unanimously overruled a PCAOB enforcement finding against the
KPMG partner. The SEC found that separate allegations of negligence in
auditing the going concern consideration and other than temporarily impaired
securities did not represent "repeated instances of negligence" under SOX,
as they were so closely related. Further, the SEC analyzed in detail all of
the procedures that the PCAOB had challenged and concluded that they did not
represent clear cut indications of negligence.
This is a very interesting
case and all of those involved with auditing should read it closely. I'm not
sure how it will affect future PCAOB/SEC enforcement actions. But it
certainly looks as though it will be harder to challenge very good faith
judgments made in difficult economic circumstances just because things go
wrong later - think the great recession of 2008 when this situation
occurred.
It certainly looks as
though all of the KPMG people involved in this situation performed
well - including a very quick withdrawal of the clean opinion right
after filing the 10-K when it became clear that things weren't going to work
out as the company represented.
Denny
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 21, 2019
SUMMARY: The
Financial Reporting Council, Britain's regulator for accounting and audit,
on Thursday [June 13, 2019] penalized PwC and partners Jaskamal Sarai and
Arif Ahmad in relation to audits of the 2015 and 2016 financial statements
of Redcentric PLC, a Harrogate, England-based company....In the Redcentric
case, the PwC failed to detect various fraud risks in the company's
statements, the FRC said. The 2016 financial statements of the company were
extensively restated, resulting in a breach of Redcentric's debt covenants,
the regulator added."
CLASSROOM APPLICATION: The
article may be used in an auditing class to discuss international issues,
regulation of the profession, and/or auditors' responsibility to detect
fraud.
QUESTIONS:
1. (Introductory) Why was PricewaterhouseCoopers LLP "handed
a £6.5 million...fine and a severe reprimand"?
2. (Introductory) What entity issued this fine and reprimand?
How did PwC resolve the matter?
3. (Advanced) According to the article, what audit failures
occurred in PwC's audit of the 2016 financial statements issued by
Redcentric? List all that you can find described in the article.
4. (Advanced) Suppose you are the intern described in the
article. Do you have a professional responsibility to react to the
facts described in the article? Explain your answer with details.
Action follows closer
regulatory monitoring of practices of ‘Big Four’ audit firms
A U.K.
regulator fined and reprimanded PricewaterhouseCoopers LLP and two of its
partners for shortfalls in its audits of a British service provider,
following increased scrutiny over the practices of the country’s biggest
audit firms.
The Financial Reporting Council, Britain’s
regulator for accounting and audit, on Thursday penalized PwC and partners
Jaskamal Sarai and Arif Ahmad in relation to audits of the 2015 and 2016
financial statements of Redcentric
PLC, a Harrogate, England-based company.
PwC
was handed a £6.5 million ($8.25 million) fine and a severe reprimand by the
FRC. The fine was reduced to £4.5 million because the professional services
firm agreed to settle. PwC will have to closely monitor the work conducted
by its Leeds audit practice under terms agreed with the regulator.
PwC—one of the “Big Four” alongside Deloitte
LLP, Ernst & Young LLP and KPMG LLP—earlier this month announced various
measures aimed at overhauling its U.K. audit
business.
In the
Redcentric case, the PwC failed to detect various fraud risks in the
company’s statements, the FRC said. The 2016 financial statements of the
company were extensively restated, resulting in a breach of Redcentric’s
debt covenants, the regulator added.
“We
are sorry that our work fell below the professional standards expected of
us,” a PwC spokesman said. “Since the work in question was completed we have
taken numerous steps to strengthen processes.”
Redcentric declined to comment.
PwC
and its partners applied superficial analytical procedures and failed to
conduct a proper analysis of Redcentric’s financial statements, the FRC
said. Redcentric in 2017 switched auditors and signed up PwC competitor
KPMG.
“The
sanctions reflect the seriousness and extent of the breaches,” said Claudia
Mortimore, deputive executive counsel at the FRC. In its findings, the FRC
noted that for the 2016 audit, significantly fewer hours were charged by
senior PwC staff than in previous years, and that a significant amount of
work was performed by an undergraduate trainee.
PwC’s
Mr. Sarai and Mr. Ahmad received a discounted fine of £140,000 and a severe
reprimand. Both partners took part in training that taught them how to
comply with certain accounting standards.
U.K.
lawmakers and regulators in recent months released proposals for an overhaul
of the sector. Another piece of analysis, dubbed The Brydon Review, is set
to be presented to a cabinet minister by the end of the year. The U.K.
government is expected to respond to the recommendations from regulators and
lawmakers in the coming months.
SUMMARY: Argentinian
banks whose shares are traded through American Depositary Receipts on U.S.
exchanges adopted International Financial Reporting Standards (IFRS) as of
January 1, 2018 with a comparison reporting period beginning January 1,
2017. The banks are required to apply IAS 29 because their economy is now
considered hyperinflationary-as of July 2018 they have experienced a
cumulative inflation rate of 100% over three years. NOTE TO INSTRUCTORS: The
remainder of this summary forms the basis for the answer to questions 3 and
4 and may be deleted before distribution to students. IAS 29, Financial
Reporting in Hyperinflationary Economies, was adopted by the IASB in 2001
having originally been issued by the IASC in July 1989. Its requirements
therefore are not an accounting change. However, IFRS was newly adopted by
these Argentinian banks and IAS 29 requires that financial statements from
entities in hyperinflationary economies be stated in "terms of the measuring
unit current at the end of the reporting period." Corresponding amounts from
earlier periods also must be stated in this measurement unit. To accomplish
this requirement, all nonmonetary assets on the statements of financial
position must be restated from their dates of original acquisition to the
current measurement unit if historical cost accounting is used by the
reporting entity; restatement from the previous revaluation must be done if
the entity reports under current cost accounting by periodically revaluing
nonmonetary assets.
1. (Introductory) Under what accounting standards do the
Argentinian banks discussed in this article report their financial
statements? When did they begin using these reporting standards?
2. (Introductory) What accounting measurement under IFRS were
these four Argentine financial firms required to implement? Why did
this reporting change occur?
3. (Advanced) What is the implication of the fact that these
banks were late with financial statement filings?
4. (Advanced) Access IAS 29, Financial Reporting in
Hyperinflationary Economies. Give the citations for two
determinations: a. the definition of a hyperinflationary economy and
b. summary of the accounting requirements under these circumstances.
Cite the paragraph numbers and briefly summarize the accounting
requirements.
Firms miss filing deadline as
they adjust to new rules in the midst of hyperinflation
New
accounting requirements aimed at establishing a common set of standards
around the world hit Argentine banks in the middle of a recession and runaway
inflation.
Four
Argentine financial firms missed filing deadlines for their annual reports
during the second quarter and were deemed delinquent by the U.S. Securities
and Exchange Commission. The companies, which are required to make U.S.
regulatory filings because they issue American depositary receipts, blamed
the adoption of the International Financial Reporting Standards for the
filing delay.
At issue was
a switch to IFRS accounting standards during skyrocketing inflation in
Argentina. IFRS rules require companies to monitor inflation and implement
special procedures for reporting in the currency of a hyperinflationary
economy when the three-year cumulative inflation rate exceeds 100% for
several months.
Argentina’s
economy has been considered hyperinflationary for accounting purposes since
July 1, 2018, a determination that required the companies to account for
that inflation.
Companies
had to change their accounting and reporting practices and train staff to
process adjustments for inflation in addition to restating comparative
figures in financial reports to reflect the loss of purchasing power of the
Argentine peso. All four firms have since filed the required reports.
The
application of hyperinflation accounting under IFRS drove Grupo Galicia to a
loss of 3.83 billion pesos in 2018 ($89.5 million at the current exchange
rate), from a year-earlier profit of 7.28 billion pesos, according to its
SEC filing.
Similarly,
the BBVA Argentine unit swung to a loss of 1.57 billion pesos in 2018,
compared with a profit of 1.86 billion pesos in 2017, it said in a filing.
Separately,
BBVA disclosed this month that Argentine authorities are investigating it
for alleged violations of anti-money-laundering and terrorist financing
regulations. A representative for BBVA had no immediate comment for this
article.
Grupo
Supervielle reported a loss of 3.06 billion pesos in 2018, compared with a
restated loss of 755.3 million pesos in 2017, according to its filing. Under
the old accounting standards, it had reported a 2017 profit of 2.44 billion
pesos. A representative for Grupo Supervielle said the firm opted to deploy
the new standards in full, in line with the Argentine Central Bank’s planned
adoption.
Meanwhile,
Banco Macro reported a net loss of 734.1 million pesos in 2018 under IFRS,
compared with a profit of 6.02 billion pesos in 2017.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 28 2019
SUMMARY: Companies
are tying management compensation to progress on environmental, social, and
governance (ESG) goals. Two examples in the article are Koninklijke DSM NV,
a Dutch life-sciences and specialty-materials maker, and candy maker Mars
Inc. At the Dutch company, operational managers' stock bonus vests over
three years based on performance goals, half of which are linked to
sustainability and governance factors. While the article focuses on
executive pay and ESG issues, reference also is made to capital budgeting.
At candy maker Mars Inc., the "profitability threshold for...projects [that
reduce energy and water consumption] is 25% lower than it is for other
productivity investments...while the time horizon in which they need to
become profitable is longer."
CLASSROOM APPLICATION: The
article may be used in a financial reporting class covering executive stock
compensation or a managerial accounting class covering managerial
compensation and/or ESG reporting.
QUESTIONS:
1. (Introductory) What is the purpose of executive stock
compensation or bonus plans?
2. (Introductory) According to the article, how does
including ESG issues in stock compensation targets change management
behavior?
3. (Advanced) Do you think that including goals related to
environmental, social, and governance as the basis for awarding
stock compensation or bonuses is appropriate? Explain your answer.
4. (Advanced) In his capital budget request, Mr. Floris Gooij
of Dutch company Koninklijke DSM NV included the expected impact on
greenhouse gas emissions of his plan to upgrade a plant in New
Jersey. To what corporate functional area did he submit this
information? Does this responsibility for emissions reporting
surprise you? Explain your answers.
5. (Advanced) Summarize the process for capital budgeting
decisions as you understand them. Specifically, what factors are
used in capital budgeting systems to assess potential projects?
6. (Introductory) For what types of ESG-related capital
projects does candy maker Mars Inc. adjusts its profitability
requirements?
How do you get management to
make progress on social, environmental and governance goals? Make their
compensation depend on it.
When Floris
Fooij proposed a $1.7 million upgrade for the vitamin plant he oversees in
New Jersey a few months ago, he did something he wouldn’t have done in the
past: He mapped out for the finance team how the upgrade would affect the
firm’s greenhouse-gas emissions.
His
employer, the Dutch life-sciences and specialty-materials maker Koninklijke
DSM NV, in recent years had tied the bonuses of operational managers such as
Mr. Fooij to corporate energy-efficiency and emissions-reduction targets.
That meant
that in addition to presenting the business case for the upgrade—it would
pay for itself in a few years, according to Mr. Fooij—he also had to
demonstrate that it wouldn’t increase the company’s emissions, or risk not
getting his full bonus.
“It pushes
us to think differently,” says 49-year-old Mr. Fooij, who has been with the
company for about 25 years. “The overall focus of the organization has
changed.”
Mr. Fooij is
eligible for a bonus paid in stock that vests over three years, as long as
the company meets certain performance goals that are measured on a
three-year rolling average. Half of those goals are linked to sustainability
and governance factors.
Everyday
decisions
DSM is part
of a small but growing group of companies, including candy maker Mars Inc.
and energy giant Royal Dutch Shell PLC, that have started linking a portion
of executive pay to corporate environmental, social and governance goals,
deploying a tactic they say helps align management’s mind-set with the
company’s ESG strategy.
The idea,
proponents say, is to give managers a personal incentive to incorporate such
considerations into everyday business decisions. If everyone from the chief
executive to the plant manager factors things like carbon emissions into
capital-expenditure decisions, rank-and-file employees also will be more
likely to make choices that help the company reach its goals more quickly—or
so the thinking goes.
“Making
people like me, and many other people in the organization, have a stake in
making progress in this area, as well as other areas, is a very natural
thing,” says Claus Aagaard, the chief financial officer of McLean,
Va.,-based Mars, which is aiming to cut carbon emissions from its direct
operations to zero by 2040.
When tying a
portion of executive compensation to sustainability goals, that portion must
be meaningful enough to incentivize change, says Jenny Davis-Peccoud, global
leader of Bain & Co.’s sustainability and corporate-responsibility practice.
And finance chiefs, in particular, need to support ESG-linked compensation
plans by creating processes that allow managers to incorporate
sustainability into what they do every day, she says.
“If people
don’t have the process to bring sustainability into their everyday
decisions, the link to sustainability and the [pay] incentive isn’t going to
be enough to get the change that you want to see,” says Ms. Davis-Peccoud.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 28, 2019
SUMMARY: "The
auditing standards board of the American Institute of Certified Public
Accountants on Thursday proposed an overhaul of the rules governing audit
evidence for private companies to better define the role of new technologies
in audits. The organization... proposed expanding the framework auditors use
when gathering and assessing evidence used to form their opinions of
financial statements... to assess the risk of bias associated with the
information they use...and consider the authenticity of the information
being gathered."
CLASSROOM APPLICATION: The
article may be used in an auditing class to discuss private company audits,
auditing standards, the AICPA Auditing Standards Board, and/or the impact of
technology on auditing procedures.
QUESTIONS:
1. (Advanced) For what types of audits does the American
Institute of CPAs establish standards of performance? What other
entity also establishes auditing standards in the U.S.?
2. (Introductory) According to the article, what change in
auditing standards is the AICPA proposing?
3. (Advanced) The article describes this auditing change as
driven by technological change. How are these two topics related?
4. (Advanced) Consider research you have conducted for any
college-level term paper or project. Have you considered the
authenticity and potential bias in the information you gather?
Explain your answer.
New standards would better
define the role of new technologies in gathering information, including from
social media and data analytics
The auditing
standards board of the American Institute of Certified Public Accountants on
Thursday proposed an overhaul of the rules governing audit evidence for
private companies to better define the role of new technologies in audits.
The
organization, which sets the standards for audits of private companies in
the U.S., proposed expanding the framework auditors use when gathering and
assessing evidence used to form their opinions of financial statements.
Current
standards focus on the accuracy and completeness of that information. But as
new technologies expand auditors’ ability to gather evidence, auditors can
and should view that information with a more critical lens.
Under the
new rules, auditors should assess the risk of bias associated with the
information they use to substantiate their audit opinion and consider the
authenticity of the information being gathered, the AICPA said.
“The use of
emerging technology—we can access information on social media, we can use
big data and all of that—was not reflected in the old standard,” said Robert
Dohrer, AICPA’s chief auditor. “The objective of the standard is to
recognize the attributes of those expanded sources of information.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on June 28, 2019
SUMMARY: According
to analysis by consulting firm Hackett Group, Inc., the 1,000 largest U.S.
public companies improved working capital management by decreasing their
cash collection period. A graph shows the total working capital held by
these firms and what the consulting firm states is the amount of working
capital that could be reduced, though its measurement basis for that
assessment is not explained.
CLASSROOM APPLICATION: The
article may be used in a financial accounting class when covering current
assets, current liabilities, and working capital.
QUESTIONS:
1. (Introductory) Define the terms "current assets" and
"current liabilities." State examples of items included in each of
these categories.
2. (Introductory) Define the term "working capital." What
financial statement shows current assets and liabilities from which
working capital can be determined?
3. (Advanced) How do you think the consulting firm Hackett
Group, Inc., accumulates the information shown in the graph entitled
"Lockdown"? Specifically relate your answer to your description of
the financial statement in question 3 above.
4. (Advanced) What do you think the author means by the
phrase "working-capital performance"?
5. (Advanced) What components of working capital are the
focus of management efforts to improve performance?
Inventories fall for the
1,000 largest public companies, a Hackett Group study finds
U.S.
companies’ working-capital efficiency reached a six-year high in 2018 as
finance chiefs increasingly prioritize managing inventories to more quickly
convert the capital into cash, a new study found.
The 1,000
largest U.S. public companies collected cash from their customers quicker
than they had since 2012, according to a study to be released Wednesday by
Hackett Group Inc., a consulting firm.
Hackett said
it sees more than $1.28 trillion that U.S. companies can trim from their
working capital. That figure translates to about 6% of U.S. gross domestic
product and marks an approximately 15% year-over-year increase from $1.1
trillion, the study showed.
That money
could be deployed to give companies a competitive edge. Companies that
wring money
from working capital can funnel those funds toward ramping up acquisitions
and initiatives that propel growth. A company’s working-capital performance
can be tied to the performance of its CFO. Finance chiefs are increasingly
standardizing processes to track working-capital performance across an
organization, to make the most of that funding source.
The
top-performing companies paid suppliers almost three weeks slower in 2018
than typical companies and collected cash from customers almost three weeks
quicker—while holding less than half the inventory, data showed. The amount
of funds trapped in inventory fell for the first time since 2012 last year.
Despite the improvements in the receivable and inventory categories,
payables performance deteriorated. Companies have begun to scale back on
extending payment terms, thus cutting suppliers some slack.
“Inventories
are an untapped area of working capital and they’re more difficult to go
after than payables,” Craig Bailey, associate principal at Hackett, said in
an interview. “Companies found there’s just not much to be gained going
after payment terms.”
Of the 1,000
companies surveyed, nine improved their cash-conversion cycle—a measure of
operational efficiency that tracks the speed of converting a transaction
into cash—every year from 2011 to 2018. The companies included PepsiCoInc.,HPInc., and
LennarCorp , the
report showed.
Hackett’s
survey found that the aerospace, oil-and-gas, and energy services industries
struggled the most when it came to working-capital performance last year.
National Oilwell VarcoInc., a
Houston-based manufacturer of oil-and-gas production equipment, was among
the companies with the largest working-capital opportunity, at $4.5 billion,
according to Hackett data provided to The Wall Street Journal.
“When an oil
rig gets built, capital sometimes gets stranded,” said Marshall Adkins, an
analyst at Raymond James & Associates Inc., who follows National Oilwell.
“Many of the offshore drilling rigs ordered five or six years ago were
stymied in a shipyard.”
SUMMARY: The
article discusses the regulation of cryptocurrencies with a focus on
Facebook's proposal for Libra. "Facebook's Libra would be run at a new
subsidiary, called Calibra, that would be governed along with external
partners, including companies such as Mastercard Inc. and PayPal Holdings
Inc. and tech giants Uber Technologies Inc. and Spotify Technology SA. It
would operate using a crypto wallet, or digital app that can be used to send
money and make payments, using the cryptocurrency." Federal agencies are
dealing with outdated rules in regulating this new currency. While the
proposal by Facebook generally falls under the Federal Reserve System
purview, other cryptocurrencies are described in the article. If they are
expected to make a profit, then the Securities and Exchange Commission (SEC)
would claim jurisdiction over them as investments. The related article
describes regulatory hurdles faced by startups wanting to be brokerages;
"SEC Chairman Clayton tells companies he is worried about manipulative
trading."
CLASSROOM APPLICATION: The
article may be used whenever discussing cryptocurrencies to describe their
development and regulation.
QUESTIONS:
1. (Introductory) What is a cryptocurrency?
2. (Introductory) What regulators are "grappling with
outdated rules" in coping with developing cryptocurrencies and their
exchange?
3. (Advanced) According to the article, when would the
Securities and Exchange Commission assert authority over a
cryptocurrency?
4. (Advanced) What is Facebook's Libra? How is Libra similar
to a currency backed by a sovereign government? How is Libra
expected to be regulated?
Social network began to learn
how Washington will check its push into digital currencies
WASHINGTON—
Facebook FB
1.85%Inc. began to learn how Washington will
check its push into digital currencies, with leaders of the Federal Reserve
and an influential Senate committee saying they will scrutinize its rollout.
Fed Chairman
Jerome Powell on Wednesday said the central bank has “significant input into
the payments system,” the e-commerce network that Facebook is seeking to
disrupt with its Libra currency. Banking regulators also can enforce
antimoney-laundering controls on such businesses, Mr. Powell said, noting
the Fed doesn’t have broad authority over cryptocurrencies.
“We will
wind up having quite high expectations from a sort of safety and soundness
and regulatory standpoint if they do decide to go forward with something,”
Mr. Powell said at a news conference after the Fed held its benchmark
interest rate steady.
Facebook
this week unveiled its plans
for the Libra “stablecoin”—a digital asset
backed by a basket of global currencies or other investments. The digital
money is supposed to make it easier to make online payments, particularly
for people around the world who lack bank accounts, Facebook said.
Mr. Powell
said Facebook has met with the Fed about the project, along with regulators
around the world. “It’s something we’re looking at,” he said. Mr. Powell
said Fed officials aren’t worried that Libra will displace national
currencies or make it harder to implement monetary policy. “I think we’re a
long way from that,” he added.
A Facebook
spokeswoman declined to comment.
Cryptocurrencies have become a puzzle for global regulators, with agencies
grappling with rules written decades ago to oversee market intermediaries
that don’t exist in cryptocurrency networks. In the U.S., the Securities and
Exchange Commission has asserted authority over cryptocurrencies it sees as
securities, or investments made with the expectation of profits. Other
agencies are charged with enforcing antimoney-laundering laws that apply to
money transactions.
Facebook’s Libra would be run at a new subsidiary,
called Calibra, that would be governed along with external partners,
including companies such as
Mastercard
Inc. and
PayPal Holdings Inc. and tech giants
Uber Technologies Inc. and
Spotify Technology
SA . It would operate using a crypto wallet, or digital app
that can be used to send money and make payments, using the cryptocurrency.
Facebook separately is expected to face critics on Capitol Hill, where the
Senate Banking Committee plans to hold a hearing next month to probe its
venture. Sen. Mike Crapo (R., Idaho) announced that his panel will examine
the project on July 16.
The committee’s quick move to stage a hearing indicates “there will be
significant political opposition” to Facebook’s involvement with Libra,
Cowen & Co. analyst Jaret Seiberg said. “We believe the initial hearing is
critical for Facebook and its digital currency expectations,” he added.
A hearing is
also likely in the House, where House Financial Services Committee
Chairwoman Maxine Waters (D., Calif.) has asked Facebook to put Libra on
hold until regulators and lawmakers decide how to oversee it.
“Regulators should see this as a wake-up call to get serious about the
privacy and national security concerns, cybersecurity risks, and trading
risks that are posed by cryptocurrencies,” Ms. Waters said.
Operators of stablecoin networks are generally regulated by state
money-transmission laws and federal requirements to guard against money
laundering, said Brian Brooks, chief legal officer of Coinbase Inc., which
boasts 30 million customer accounts and enables people to trade an array of
cryptocurrencies.
Speaking at an event in Washington, Mr. Brooks said banking regulators could
have some sway over how Facebook or its partners manage the basket of assets
that back Libra’s value.
Mr. Brooks said Washington could permit a wave of innovation
that makes finance cheaper and more accessible for consumers if it applies
the same hands-off approach to crypto assets that it did to the internet in
the 1990s.
“We have to bring regulation which largely was written between 1900 and 1950
in line with technology that was largely written in 2009,” said Mr. Brooks,
a former general counsel of Fannie Mae. “We are at a decision point on this
asset. There could be great things ahead, or there could be nothing ahead.”
Sometimes we must turn to other languages to find le mot juste. Here
are a whole bunch of foreign words with no direct English equivalent.
1.
Kummerspeck (German)
Excess
weight gained from emotional overeating. Literally, grief bacon.
2.
Shemomedjamo (Georgian)
You know when you’re really full, but your meal is just so delicious, you
can’t stop eating it? The Georgians feel your pain. This word means, “I
accidentally ate the whole thing."
3. Tartle
(Scots)
The nearly onomatopoeic word for that panicky hesitation just before you
have to introduce someone whose name you can't quite remember.
4.
Mamihlapinatapai (Yaghan language of Tierra del Fuego)
This word captures that special look shared between two people, when both
are wishing that the other would do something that they both want, but
neither want to do.
5.
Backpfeifengesicht (German)
A face badly in need of a fist.
6.
Iktsuarpok (Inuit)
You know that feeling of anticipation when you’re waiting for someone to
show up at your house and you keep going outside to see if they’re there
yet? This is the word for it.
7. Pelinti (Buli,
Ghana)
Your friend bites into a piece of piping hot pizza, then opens his mouth and
sort of tilts his head around while making an “aaaarrrahh” noise. The
Ghanaians have a word for that. More specifically, it means “to move hot
food around in your mouth.”
8. Greng-jai
(Thai)
That feeling you get when you don't want someone to do something for you
because it would be a pain for them.
9. Mencolek
(Indonesian)
You know that old trick where you tap someone lightly on the opposite
shoulder from behind to fool them? The Indonesians have a word for it.
10. Faamiti
(Samoan)
To make a squeaking sound by sucking air past the lips in order to gain the
attention of a dog or child.
11. Gigil
(Filipino)
The urge to pinch or squeeze something that is irresistibly cute.
12. Yuputka
(Ulwa)
A word made for walking in the woods at night, it’s the phantom sensation of
something crawling on your skin.
13.
Zhaghzhagh (Persian)
The chattering of teeth from the cold or from rage.
14.
Vybafnout (Czech)
A word tailor-made for annoying older brothers—it means to jump out and say
boo.
15.
Fremdschämen (German); Myötähäpeä (Finnish)
The kinder, gentler cousins of Schadenfreude, both these words mean
something akin to "vicarious embarrassment.”
16. Lagom
(Swedish)
Maybe Goldilocks was Swedish? This slippery little word is hard to define,
but means something like, “Not too much, and not too little, but juuuuust
right.”
17. Pålegg
(Norwegian)
Sandwich Artists unite! The Norwegians have a non-specific descriptor for
anything – ham, cheese, jam, Nutella, mustard, herring, pickles, Doritos,
you name it – you might consider putting into a sandwich.
18.
Layogenic (Tagalog)
Remember in Clueless when Cher describes someone as “a full-on Monet
… from far away, it’s OK, but up close it’s a big old mess”? That’s exactly
what this word means.
19.
Bakku-shan (Japanese)
Or there's this Japanese slang term, which describes the experience of
seeing a woman who appears pretty from behind but not from the front.
20.
Seigneur-terraces (French)
Coffee shop dwellers who sit at tables a long time but spend little money.
21.
Ya’arburnee (Arabic)
This word is the hopeful declaration that you will die before someone you
love deeply, because you cannot stand to live without them. Literally, may
you bury me.
22. Pana
Po’o (Hawaiian)
“Hmm, now where did I leave those keys?” he said, pana po’oing. It means to
scratch your head in order to help you remember something you’ve forgotten.
23.
Slampadato (Italian)
Addicted to the UV glow of tanning salons? This word describes you.
24. Zeg
(Georgian)
It means “the day after tomorrow.” OK, we do have "overmorrow" in English,
but when was the last time someone used that?
25. Cafune
(Brazilian Portuguese)
Leave it to the Brazilians to come up with a word for “tenderly running your
fingers through your lover’s hair.”
26. Koi No
Yokan (Japanese)
The sense upon first meeting a person that the two of you are going to fall
in love.
27. Kaelling
(Danish)
You know that woman who stands on her doorstep (or in line at the
supermarket, or at the park, or in a restaurant) cursing at her children?
The Danes know her, too.
28. Boketto
(Japanese)
It’s nice to know that the Japanese think enough of the act of gazing
vacantly into the distance without thinking to give it a name.
29. L’esprit
de l’escalier (French)
Literally, stairwell wit—a too-late retort thought of only after departure.
30.
Cotisuelto (Caribbean Spanish)
A word that would aptly describe the prevailing fashion trend among American
men under 40, it means one who wears the shirt tail outside of his trousers.
31. Packesel
(German)
The packesel is the person who’s stuck carrying everyone else’s bags on a
trip. Literally, a burro.
32. Hygge
(Danish)
Denmark’s mantra, hygge is the pleasant, genial, and intimate feeling
associated with sitting around a fire in the winter with close friends.
33. Cavoli
Riscaldati (Italian)
The result of attempting to revive an unworkable relationship. Translates to
"reheated cabbage."
34. Bilita
Mpash (Bantu)
An amazing dream. Not just a "good" dream; the opposite of a nightmare.
35. Litost
(Czech)
Milan Kundera described the emotion as “a state of torment created by the
sudden sight of one’s own misery.”
36.
Luftmensch (Yiddish)
There are several Yiddish words to describe social misfits. This one is for
an impractical dreamer with no business sense.
37 & 38.
Schlemiel and schlimazel (Yiddish)
Someone prone to bad luck. Yiddish distinguishes between the schlemiel and
schlimazel, whose fates would probably be grouped under those of the klutz
in other languages. The schlemiel is the traditional maladroit, who spills
his coffee; the schlimazel is the one on whom it's spilled.
Facts to Make you Smile forwarded by Jay
1... WHY
Why do men's clothes have
buttons on the right while women's clothes have buttons on the left?
BECAUSE
When buttons were invented,
they were very expensive and worn primarily by the rich. Since most people
are right-handed, it is easier to push buttons on the right through holes on
the left. Because wealthy women were dressed by maids, dressmakers put the
buttons on the maid's right! And that's where women's buttons have
remained since.
2 ... WHY?
Why do ships and aircraft
use 'mayday' as their call for help?
BECAUSE
This comes from the French
word m'aidez - meaning 'help me' - and is pronounced, approximately,
'mayday.'
3 ... WHY?
Why are zero scores in
tennis called 'love'?
BECAUSE
In France , where tennis
became popular, the round zero on the scoreboard looked like an egg and was
called 'l'oeuf,' which is French for 'the egg.' When tennis was introduced
in the US, Americans (naturally), mispronounced it 'love.'
4 ... WHY?
Why do X's at the end of a
letter signify kisses?
BECAUSE
In the Middle Ages, when
many people were unable to read or write, documents were often signed using
an X. Kissing the X represented an oath to fulfill obligations specified in
the document. The X and the kiss eventually became synonymous.
5 ... WHY?
Why is shifting
responsibility to someone else called passing the buck'?
BECAUSE
In card games, it was once
customary to pass an item, called a buck,
from player to player to
indicate whose turn it was to deal. If a player did not wish to assume the
responsibility of dealing, he would 'pass the buck' to the next player.
6 ... WHY?
Why do people clink their
glasses before drinking a toast?
BECAUSE
In earlier times it used to
be common for someone to try to kill an enemy by offering him a poisoned
drink. To prove to a guest that a drink was safe, it became customary for a
guest to pour a small amount of his drink into the glass of the host. Both
men would drink it simultaneously. When a guest trusted his host, he would
only touch or clink the host's glass with his own.
7. WHY?
Why are people in the
public eye said to be 'in the limelight'?
BECAUSE
Invented in 1825, limelight
was used in lighthouses and theaters by burning a cylinder of lime which
produced a brilliant light. In the theater, a performer 'in the limelight'
was the Center of attention.
8 ... WHY?
Why is someone who is
feeling great 'on cloud nine'?
BECAUSE
Types of clouds are
numbered according to the altitudes they attain, with nine being the highest
cloud. If someone is said to be on cloud nine, that person is floating well
above worldly cares.
9 ... WHY?
In golf, where did the term
'Caddie' come from?
BECAUSE
When Mary Queen of Scots
went to France as a young girl, Louis, King of France, learned that she
loved the Scots game 'golf.' He had the first course outside of Scotland
built for her enjoyment. To make sure she was properly chaperoned (and
guarded) while she played, Louis hired cadets from a military school to
accompany her.
Mary liked this a lot and
when she returned to Scotland (not a very good idea in the long run), she
took the practice with her. In French, the word cadet is pronounced
'ca-day' and the Scots changed it into caddie.
10 ... WHY?
Why are many coin
collection jar banks shaped like pigs?
BECAUSE
Long ago, dishes and
cookware in Europe were made of dense orange clay called 'pygg'. When people
saved coins in jars made of this clay, the jars became known as 'pygg
banks.' When an English potter misunderstood the word, he made a container
that resembled a pig. And it caught on
BIG CHEEKS Bet you don't know "Big cheeks"
Big cheeks. A grandson of
slaves, a boy was born in a poor neighborhood of New Orleans known as the
"Back of Town." His father abandoned the family when the child was an
infant. His mother became a prostitute and the boy and his sister had to
live with their grandmother.
Early in life he proved to
be gifted for music and with three other kids he sang in the streets of New
Orleans His first gains were coins that were thrown to them.
A Jewish family, Karnofsky,
who had emigrated from Lithuania to the USA, had pity for the 7-year-old boy
and brought him into their home. Initially giving 'work' in the house, to
feed this hungry child. There he remained and slept in this Jewish family's
home where, for the first time in his life, he was treated with kindness and
tenderness.
When he went to bed, Mrs.
Karnovsky sang him a Russian lullaby that he would sing with her. Later, he
learned to sing and play several Russian and Jewish songs.
Over time, this boy became
the adopted son of this family. The Karnofskys gave him money to buy his
first musical instrument; as was the custom in the Jewish families.
They sincerely admired his
musical talent. Later, when he became a professional musician and composer,
he used these Jewish melodies in compositions, such as St James Infirmary
and Go Down Moses.
The little black boy grew
up and wrote a book about this Jewish family who had adopted him in
1907. In memory of this family and until the end of his life, he wore a
Star of David and said that in this family, he had learned "how to live real
life and determination."
You might recognize his
name. This little boy was called: Louis "Satchmo" Armstrong.
Louis Armstrong proudly
spoke fluent Yiddish! And "Satchmo" is Yiddish for "Big Cheeks"!
Now,
don't you feel better educated? You're welcome!
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
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 ---
Jensen Question
Could this also be a reason why the practicing profession of accounhttps://spiderpride.richmond.edu/article/-/16357/new-fellowship-honors-legendary-b-school-professor.htmlting
virtually ignores academic accountancy's journal articles?
In accountancy practice life is perhaps more complicated since academic "accountics"
researchers, unlike engineering professor, seldom focus on issues of great
interest to the practicing profession (with some exceptions such as in tax and
occasionally AIS) ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
If accountics research was more of interest to practitioners there would also be
more interest on replications.
Like flipping a light switch, Vanguard Group Inc.
has figured out a way to shut off taxes in its mutual funds.
The first to benefit was the Vanguard Total Stock Market Index Fund.
Investors’ end-of-year tax forms abruptly stopped showing capital gains
in 2001, even as the fund went on to generate billions of dollars of
them. By 2011, Vanguard had flipped the switch in 14 stock funds. In
all, these funds have booked $191 billion in gains while reporting zero
to the Internal Revenue Service.
This astounding success gives Vanguard funds an edge over competitors.
Yet the world’s second-largest asset manager has avoided drawing
attention to it. Top executives at the Malvern, Pennsylvania-based firm
don’t want U.S. policymakers looking too closely at how they’re doing
it, according to a former insider.
But a review of financial statements and trading data shows that
Vanguard relies substantially on so-called heartbeat trades, which wash
away taxes by rapidly pumping stocks in and out of a fund.
These controversial transactions are common in
exchange-traded funds—a record $98 billion of them took place last year,
according to data compiled by Bloomberg News—but only Vanguard has used
them routinely to also benefit mutual funds.
Here’s how it works: Vanguard attaches a more tax-efficient ETF to an
existing mutual fund. Then the ETF siphons appreciated stocks out of the
mutual fund without incurring taxes, often using heartbeat trades.
Robert Gordon, who has
written about the concept and is president of
Twenty-First Securities Corp. in New York, calls it a tax “dialysis
machine.”
How to Spot a Heartbeat
Rapidly pumping money into
and out of the exchange-traded portion of the Vanguard Small-Cap Index
Fund removes taxable gains for the benefit of the mutual fund’s
shareholders.
Vanguard even got a
patent on the design, valid until 2023, so competitors can’t copy it.
Rich Powers, Vanguard’s head of ETF product
management, acknowledged the design’s tax advantages. But he said in an
interview that they’re not the driver of the company’s strategy and that
all of its trading complies with the law.
“We agree the Vanguard funds have been extremely tax
efficient, enabling us to provide higher after-tax returns to our
shareholders and better their chances of achieving long-term investment
success,” Freddy Martino, a spokesman for the company, said in an email.
Although the dialysis treatment shut off taxable
gains in the 14 stock funds, it didn’t completely neutralize them in a
separate real estate index fund, which invests in trusts that aren’t
taxed like stocks.
Taxable Gains Begone
Unlike
competitors that follow similar indexes,
Vanguard mutual funds stopped saddling investors with ◼ taxable
gains once ETF share classes were added.
Continued in article
Jensen Comment
There are of course less complicated ways to avoid taxes, the most common being
investing in tax exempt mutual funds --- my favorite of which is Vangaard's
long-term tax exempt fund that has hundreds of billions of dollars diversified
in almost countless bonds of cities, counties, school districts, etc. that
qualify as tax-exempt "muni" bonds ---
https://en.wikipedia.org/wiki/Municipal_bond
The interest earned on such "muni" bonds is tax exempt on Federal tax returns but not
necessarily state tax returns depending on the states and the bonds. For
example, a Massachusetts resident only gets interest exemptions on Mass. income
taxes for Mass. muni bonds but not muni bonds issued in the other 49 states. For Federal
tax returns only the interest is tax exempt and not the capital gains and losses
of muni bond trading.
Of course there are always trade-offs. Tax exempt bonds pay
lower interest rates than most taxable bonds, but the interest rate on any bond
is also subject to variation due to the market's perception of financial risk of
that bond.
It should be noted that there's nothing unethical investing in
tax exempt bonds. Lawmakers generally have
reasons for legislated tax shelters. For example, the purpose of the tax
exemption of a muni bond is to lower the cost of capital for cities, counties,
states, school districts, etc. The public sector would have a marked increase in
the cost of capital if it had to compete nose-to-nose with the private sector
when borrowing money. Elimination of muni bond tax exemptions would be a
disaster for cities, counties, states, and public schools. I don't
think any 2020 presidential candidate proposes doing away with this tax
exemption.
The Michael Milken Project: How did a 70-year-old ex-con barred for
life from Wall Street become one of its most respected men?
Milken and his brother Lowell founded Knowledge
Universe in 1996, as well as Knowledge Learning Corporation (KLC), the
parent company of KinderCare Learning Centers, the largest for-profit child
care provider in the country. He is currently chairman of the company.
He established K12 Inc., a publicly traded
education management organization (EMO) that provides online schooling,
including to charter school students for whom services are paid by tax
dollars, which is the largest EMO in terms of enrollment.
Continued in article
However, Milken badly overestimated how corporations would "eat the lunch" on
traditional (including prestigious) colleges ---
https://journals.uic.edu/ojs/index.php/fm/article/view/858/767#w2
In general the profit model has not panned out in higher education. Reasons are
very complicated, but to date for-profit experiments did not attract top faculty
or top students. Even when investing in a few top faculty, the for-profit
experiments could not overcome the attractions of top students for prestigious
colleges and universities.
Among the union flacks is one Ralph
Martire of the Center for Tax and Budget Accountability, a think tank well funded
by Illinois public employee unions.
Martire was brought in by three
liberal Illinois state lawmakers at a Evanston town hall to explain, clarify
or propagandize (take your choice) the Democratic solution to Illinois'
crushing pension problem. Which amounts to more taxes, spending, borrowing
and related ruinous non-solutions.
The only problem for Martire was that an
actuary was
in the audience and he punched deadly holes into the Democrat's scam. I
invite everyone to
read the argumentation of Mitchell
I. Serota, Ph.D., a Fellow of the Society of Actuaries, in which he, among
other things, reveals that the real unfunded pension obligation of Illinois'
five public employee pension funds is more like $250 billion, not
the often stated $140 billion. (I've previously written about this
here.)
Where the hell will Illinois find a quarter of a trillion
dollars?
Proposed: Once a journal has published a study, it
becomes responsible for publishing direct replications of that study.
Publication is subject to editorial review of technical merit but is not
dependent on outcome. Replications shall be published as brief reports in an
online supplement, linked from the electronic version of the original.
Jensen Comment
This is misleading in that "supply chain" is not adequately defined. The
majority of blockchain applications to date center on bit coin or other
cryptocurrencies, areas where fraud and hacking are enormous.
Even in other supply chain applications there are usually
problems that arise whether or not blockchain is involved. These problems
interact with blockchain applications such that it's difficult to totally blame
blockchain applications for the troubles. For example, if Tesla (hypothetically)
implemented a blockchain application in Tesla's supply chain this would not
correct the chronic problem Tesla has with logistics such as taking weeks or
months to supply parts to Tesla collision repair shops. This in turn is what
makes it so expensive to insure a Tesla for collision. Think of having to
provide rental cars for weeks or months while Tesla repair shops wait for back
ordered parts (like damaged doors).
Digital Money --
https://en.wikipedia.org/wiki/Money#Digital_or_electronic Bitcoin's Wild Ride --- The third Sixty Minutes segment on May 19, 2019 ---
https://www.cbs.com/shows/60_minutes/video/imBp7U6zDnGnhwlF6SnWI6Q4fWF2hgBo/one-loose-thread-rainbow-railroad-bitcoin-s-wild-ride/
Jensen Comment
My wife was totally confused by the segment. I got a little more out of it
because of my (limited) prior knowledge of bitcoin. There show did little to
clear up the difference between bitcoin investing versus mining. The show also
did not adequately explain the history of fraud in bitcoin market exchanges. The
essence of bitcoin is that it really is becoming money. But it's money that can
fluctuate wildly in value when buying goods and services that now accept bitcoin
as payments. The segment features a young man who got rich on bitcoin
promotions, went to jail for a year, and then got rich again on bitcoin
investing.
From MIT on May 15, 2015
You can now pay with cryptocurrency at Whole
Foods
The news:
The twins’ digital currency company, called Gemini, has formed a new
partnership with payments startup Flexa to incorporate crypto-payment
capabilities into the scanners that let you pay with services like Apple
Pay. You can now use an app called Spedn to pay with certain
cryptocurrencies for items at retailers including Whole Foods, and
Starbucks.
Will
crypto-payments stick this time? The
cryptocurrency industry has wanted to achieve mainstream adoption in retail
for ages, but it’s never taken off. In many cases that’s probably been down
to price volatility and slow processing times. The hope here is that Flexa
will be quicker, and cheaper than using credit card networks.
Jensen Comment
This becomes hugely complicated for services that are provided in multiple
states or multiple nations. Exhibit A is the audit of Apple Corporation that
entails audit services in most USA states and various foreign countries. Some
states or even nations will be competing for the a sales tax on accounting and
auditing services of large companies. It's much easier to tax product shipments
where there are invoices for each delivery in each location. Audit services are
not billed for "deliveries" in the same way such as when there is a single
billing for services around the world. What a mess this will become.
Keep in mind that accounting firms will not pay the taxes. The taxes will be
passed on to customers that are taxed by states in so many other ways. This
might even be an incentive to move a company to a state that has no sales taxes.
New Jersey is highest for property taxes and taxes everything
else imaginable. New Hampshire is second, but New Hampshire has no sales or
state income tax. All states have property taxes. Most other states have
either sales or income taxes or both.
This month, Carreyrou’s book about the
Theranos saga, Bad Blood, was released. It reads like a page-turner
in the finest tradition of Michael Crichton, complete with secondary and
tertiary characters and finely detailed scene settings, with the tragic
difference that everything in it is true. It has already been
purchased—after a bidding war—by a Hollywood studio, which has cast Jennifer
Lawrence as Holmes.
Question
What is the main temptation of white collar criminals?
Answer from http://faculty.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate
executives and bankers see billions of loose dollars swirling above there heads,
it's just too tempting to hold up both hands and pocket a few millions,
especially when colleagues around them have their hands in the air. I tell my
students that it's possible to buy an "A" grade in my courses but none of them
can possibly afford it. The point is that, being human, most of us are
vulnerable to some temptations in a weak moment. Fortunately, none of you
reading this have oak barrels of highly-aged whiskey in your cellars, the
world's most beautiful women/men lined up outside your bedroom door, and
billions of loose dollars swirling about like autumn leaves in a tornado.
Most corporate criminals that regret their actions later confess that the
temptations went beyond what they could resist. What amazes me in this era,
however, is how they want to steal more and more after they already have $100
million stashed. Why do they want more than they could possibly need?
The American Dream: Kurdish Immigrant Becomes a
Billionaire --- TED Talk: Hamdi Ulukaya: The anti-CEO playbook ---
https://www.ted.com/talks/hamdi_ulukaya_the_anti_ceo_playbook?utm_source=newsletter_weekly_2019-05-24&utm_campaign=newsletter_weekly&utm_medium=email&utm_content=talk_of_the_week_image
Jensen Comment
This video is not as anti-business as it sounds, and the fact that Ulukaya
became a billionaire as a CEO entrepreneur proves it. But he did in a socially
responsible way with hiring of refugees and local workers and the sharing of
corporate equity with employees.
Some things are overlooked in this otherwise inspiring video. Firstly, employees
that have their savings invested in their employer's company need, at some point
like retirement, to liquidate their holdings. In other words,
they need some kind of market for their shares that have
increased in value on paper but not necessarily in liquidity. One way
of achieving liquidity is the cursed IPO when private corporate shares are going
public to get into a cash market for those shares. Then
investors start asking questions like what are the profits and what is the
financial security of this investment?
The bottom line is that this is a pro-capitalism video, and seemingly
anti-socialist if you watch it closely. But it's socially responsible capitalism
to a point of where employees and Ulukay himself (a billionaire on paper) want
to cash in on their shares.
The other thing to note about Ulaukaya's yogurt business is that this is a
labor-intensive business relative to more capital-intensive businesses (think
electric cars and pharmaceuticals) that need to justify "profits" or
"anticipated profits" to get investors to put money into the business.
Hence it's a great video for a business case where there's a lot to debate like
keeping wages relatively low by paying in ownership shares.
The debate question is whether what Ulukaya did is consistent
with a profit maximization dream (even if this was not his dream per se)?
Jensen Comment
I cannot envision missing Styrofoam beverage cups, although I sneakily use two
paper cups at a time for hot beverages. But I do miss Styrofoam food containers
at our regional hospital. Unbelievably our regional hospital has four-star
restaurant food quality at very good prices. I bring home dinners from there at
least twice a week due to pricing and food quality. But when the hospital
stopped using Styrofoam takeout food containers I started having problems with
leaky containers currently used by the hospital. Now I take my own containers
from home and transfer the food before putting my takeout orders in the car.
Thus I'm helping the environment by not using Styrofoam. However, it's awkward
to take your own containers into all other restaurants just because you plan to
take half your dinners home.
A bigger problem in my estimation is all the Styrofoam used by Amazon and
other online companies to ship products to my home. I end up with a lot of
Styrofoam that has to be passed on to local landfills. Seems like shippers could
easily do away with Styrofoam packing material. I like the blow up "balloons"
used by Amazon some of the time.
By the way Maine was also the first state require a serious return refund for
bottles and cans. It worked in terms of cleaning up bottles and cans from
roadways since serious money can be made by collecting throwaways from Maine
roadways. Efforts did have to be made to stop bottles and cans from being
trucked into Maine from nearby states like New Hampshire.
·Canals, C. & A. Canals,
2019. When is n large enough? Looking for the right sample size to estimate
proportions. Journal of Statistical Computation and Simulation, 89,
1887-1898.
·Cavaliere, G. & A. Rahbek,
2019. A primer on bootstrap testing of hypotheses in time series models:
With an application to double autoregressive models. Discussion Paper 19-03,
Department of Economics, University of Copenhagen.
·Chudik, A. & G. Geogiardis, 2019.
Estimation of impulse response functions when shocks are observed at a
higher frequency than outcome variables. Globalization Institute Working
Paper 356, Federal Reserve Bank of Dallas.
·Reschenhofer, E.,
2019. Heteroscedasticity-robust estimation of autocorrelation.
Communications in Statistics - Simulation and Computation, 48, 1251-1263.
Harvard Law School; Harvard
University - Harvard Kennedy School (HKS)
Date Written: April 27, 2019
Abstract
Consumers,
employees, students, and others are often subjected to “sludge”: excessive or
unjustified frictions, such as paperwork burdens, that cost time or money; that
may make life difficult to navigate; that may be frustrating, stigmatizing, or
humiliating; and that might end up depriving people of access to important
goods, opportunities, and services. Because of behavioral biases and cognitive
scarcity, sludge can have much more harmful effects than private and public
institutions anticipate. To protect consumers, investors, employees, and others,
firms, universities, and government agencies should regularly conduct Sludge
Audits to catalogue the costs of sludge, and to decide when and how to reduce
it. Much of human life is unnecessarily sludgy. Sludge often has costs far in
excess of benefits, and it can have hurt the most vulnerable members of society.
From the CFO Journal's Morning Ledger on May 24, 2019
Specialty equipment maker AZZ Inc. said it
it
replaced its auditor
after the company disclosed material
weaknesses in controls over its financial reporting.
AZZ’s audit committee dismissed BDO USA LLP and replaced the
Chicago-based auditor with Grant Thornton LLP. AZZ said it informed
BDO of the dismissal last week.
AZZ’s move comes after two years of accounting difficulties. The company
delayed filing its fiscal 2019 and 2018 annual reports and had disclosed
separate material weaknesses in its internal controls over financial
reporting of revenue in both years.
From the CFO Journal's Morning Ledger on May 22, 2019
PCAOB Shares Guidance on
Communicating Critical Audit Matters
The Public Company
Accounting Oversight Board staff published new guidance
on the communication of so-called Critical Audit
Matters, or what the auditor found most difficult or
challenging when reviewing a company’s books.
The U.S. audit regulator
adopted rules requiring expanded auditor reports in
2017, with auditors required to start submitting the
revamped and expanded reports this year for larger
companies for fiscal years ending on or after June 30.
The staff’s guidance is
based on discussions with auditors regarding their
experiences conducting dry runs of composing the new,
more detailed reports for their clients. Staff also
reviewed the methodologies deployed by 10 U.S. audit
firms that collectively audit roughly 85% of large
public companies and conducted other outreach efforts.
PCAOB staff stressed that
the expanded reports should communicate information in a
way that investors will find helpful, including, for
example, explaining why a matter required especially
challenging, subjective or complex auditor judgment,
rather than just stating that it did.
From the CFO Journal's Morning Ledger on May 22, 2019
American farmers, hampered by cold, wet
weather across the Midwest and grappling with the fallout of the U.S.-China
trade standoff,are looking at
taking insurance payouts
instead of planting their crops—which may take a large bite out of next
year’s U.S. agricultural supplies.
Jensen Comment
I don't know about the Midwest, but this is the latest and coldest springtime I
can remember in northern New Hampshire. My furnace still runs every night.
Whereas I normally use about 1,100 gallons of fuel oil each winter it took
nearly 1,500 gallons to top off my 4,000 gallon tank this week. The good news is
that there was a lot of snow melt followed by lots of rain. My grass is very
green even if the springtime flowers and leaf unfurling in trees is very late
this year. There are lots of buds but no leaves as of yet.
This does not mean we should put our money into
call options of corn and soy beans. The pros are always ahead of us in
commodities and derivatives markets.
From the CFO Journal's Morning Ledger on May 22, 2019
President Xi
Jinping pinpointed a source of leverage his government has over
high-technology industries critical to the U.S. economy, touring a region of
China that calls itself
a rare-earths
kingdom
with his top trade negotiator.
From the CFO Journal's Morning Ledger on May 22, 2019
Lower-level finance staff members notched the largest base salary increase
in three years as tight labor market conditions and demand for finance
talent spurs increased competition among employers.
Staff in finance departments, a group that includes senior
accountants and analysts in corporate treasury divisions and financial
planning and analysis, saw base pay rise an average of 3.9%, according to an
annual compensation report by the Association for Financial Professionals,
which looked at how salaries rose during 2018.
It was the largest pay increase for the category since 2015,
when finance staff also reported a 3.9% average raise in base pay.
“It is a group that doesn’t earn a lot as base pay and their
bonuses are not as generous as the other categories, so it tends to get
higher increases in base pay,” said Mariam Lamech, director of survey
research at AFP.
Finance workers overall reported a 3.5% increase in base pay last year,
compared with a 4.3% increase in 2017, AFP said. The 2017 increase was due
in part to delayed raises following the 2008 economic downturn. In the
subsequent years, companies focused on rebuilding financial strength and
employees had less bargaining power, Ms. Lamech said.
While management-tier and executive-level employees saw
smaller gains in base pay, their bonuses rose at a faster clip. Executives
on average received a bonus of $81,731 in 2018, or about 42% of base salary,
the survey found. That compares with a bonus of $66,260 a year earlier.
Bonuses for management averaged at $24,032 in 2018, up 13.2% from 2017.
Jensen Comment
Meanwhile Ford announced the laying off of over 7,000 white collar workers, many
of them in accounting and finance. Go figure!
From the CFO Journal's Morning Ledger on May 21, 2019
Ford
Motor
Co. is cutting 7,000
salaried employees,
or about 10% of its white-collar workforce, as part of Chief
Executive Jim Hackett’s broader plan to revitalize the auto maker.
From the CFO Journal's Morning Ledger on May 21, 2019
As finance chiefs prepare for
the phaseout of the London interbank offered rate, or Libor, which underpins
trillions of dollars in financial contracts, many are dawdling in their
adoption of the U.S. Federal Reserve’s preferred replacement for the
interest-rate benchmark.
Borrowers led by Fannie
Mae, the federal mortgage
finance agency,
have sold $105 billion of floating-rate securities linked to SOFR,
the secured overnight
financing rate, since it made its debut almost a year ago, according to
CME Group
Inc. In that period, according to Wells Fargo & Co.,
companies have sold more than $900 billion of debt tied to the London
interbank offered rate, the old benchmark for variable-rate debt.
SOFR is seen as more reliable
than Libor because it is derived from the rate to borrow cash overnight
using U.S. government securities as collateral. But companies are in “a
state of paralysis” as they await the creation of longer-term SOFR rates,
said Mark Cabana, head of short-term interest-rate strategy research at
Bank of America Merrill Lynch.
Earlier this year, companies
began telling investors
how they plan to move away from the Libor,
CFO Journal reported in March. The
disclosures, which are expected to become more detailed in coming quarters,
came as finance teams rifled through loans, investments and derivatives to
assess the potential fallout from moving to a new benchmark.
From the CFO Journal's Morning Ledger on May 20, 2019
Setting the budget for a
company's capital spending is a key task for finance chiefs. By allocating
funds for new factories, equipment and other capital goods, CFOs signal
their level of optimism for the coming quarters. Capital expenditure plans
at large, listed U.S. firms recently pointed towards slower economic growth,
reports The Wall Street Journal.
Capital spending rose 3%
from a year earlier in the first quarter at 356 S&P 500 companies that had
disclosed figures in quarterly regulatory filings through midday May 8,
according to an analysis of data supplied by Calcbench.
That is down from a 20% rise in the year-ago period for the same companies,
the analysis shows.
Executives at several companies
said lingering trade tensions with China were making them and their
customers cautious, raising the prospect that slower business spending could
hamper economic growth later in 2019 and in 2020. U.S. nonresidential fixed
investment—which reflects business spending on software, research and
development, equipment and structures—rose at a 2.7% annual rate in the
first quarter, pulling back from a 5.4% pace in the fourth quarter, the
government said last month.
“Any time there’s
trade tensions of this kind, it does put a certain amount of conservatism, I
think, into all of our plans for capital spending,” Caterpillar
Inc. Chief Executive Jim Umpleby said on the company’s April 24 earnings
call. The maker of heavy machinery lowered capital spending to $547 million
in the first quarter from $757 million in the same period a year earlier.
Jensen Comment
In many instances capital spending is inhibited by worries that there will be a
trade agreement. Many companies in the USA would like to produce goods now made
in China using cheap labor, but it's a capital-spending gamble when there's a
threat that tariffs on cheap-labor Chinese products will be dropped in a trade
agreement.
I get a chuckle by watching ABC News that a couple of years
back had a "Buy American" module on nearly every show that featured factories in
the USA producing goods ---
https://abcnews.go.com/alerts/america-strong
The America Strong programming shifted almost entirely into human interest
stories rather than buy-American segments. What could be
the reason for this? I think it's because buy-American can now be
perceived as supporting President Trump's tariff war. The major media
avoids supporting Trump on everything.
Say What? Judy Woodruff on the PBS News Hour argues that to
keep prices low in the USA we should export more jobs to low wage countries like
China ---
From the CFO Journal's Morning Ledger on May 16, 2019
California investigators found that PG&E
Corp.’s equipment sparked the deadliest wildfire in state
history,
putting additional pressure on a company already facing billions of dollars
in fire-related liability costs.
Possible Student Project
Investigate alternatives for PG&E when reporting this contingent liability in a
10-K report before and after the report of the fire investigators.
My prediction is that the State of California will one day
own PG&E since these fire liability lawsuits combined with the California
long-term intention to put PG&E out of business will ruin all incentives for
investors and creditors to save PG&E in 2019. In the meantime California is in
no shape to immediately shut down all of PG&E's gas-fired power plants and
transmission lines while it transitioning to 100% renewable energy over the next
two decades. The lawyers will not be happy since there is no longer nearly
enough 2019 value for PG&E to weather the flood of forthcoming enormous
fire-damage lawsuits in 2019.
One interesting question is whether a
state-owned
PG&E will be immune from lawsuits over future forest fire damages.
Life has some damages that cannot be compensated.
Exhibit A was and still is any damage caused by perpetrators who have nothing
worth suing --- like suing the Boston Marathon bomber who's spending the rest of
his life in prison.
Life has some damages that can be shamefully compensated
States did
not
shut down tobacco companies since the only way to recover (partially) damages
was to allow those companies to carry on making and selling cancer-causing
cigarettes in an effort to pay prior legal settlements. Today I bought three
bottles of Roundup at Walmart ---
https://www.cnn.com/2019/05/13/health/monsanto-roundup-cancer-verdict-bn/index.html
California could let PG&E raise electricity prices to
cover all damage claims, but I doubt that consumers can afford the enormous rate
increases that would be required to settle the massive claims against PG&E.
Sometimes taxpayers take a hit like the way taxpayers pay for the flood
insurance losses. I doubt that California is in the mood to raise taxes to cover
PG&E current and future possible fire damage awards.
Sometimes society must just say no to lawyers and their victims.
From the CFO Journal's Morning Ledger on May 15, 2019
Workers Are Saying ‘Show Me the Money’ In
This Job Market
In a tight labor market, U.S. employers
looking to hold onto their talent should take a closer look at their
paystubs. According to a new survey by compensation software company
PayScale Inc., 25% of respondents said
they sought new jobs because they were looking for higher pay, with another
16% citing unhappiness in their role and 14% saying they wanted to work at
an organization more aligned with their values. Millennial workers, in
particular, are more likely to quit over money: the survey found they are 9%
more likely than baby boomers to leave jobs for such reasons.
The search for flexibility is another key
driver behind quit rates: women are 11% more likely than men to quit in
pursuit of more flexible work environments.
From the CFO Journal's Morning Ledger on May 15, 2019
Germany’s Merck Overhauls Currency Hedges
Germany-based
pharmaceuticals company Merck KGaA hasrevamped its hedging policy
to protect against unfavorable shifts in currency-exchange rates sparked by
global trade tensions.
The company shortened the
horizon of its currency hedges to one year from three years while expanding
the hedging program to cover revenue in all currencies in which it does
business, Chief Financial Officer Marcus Kuhnert told CFO Journal on
Tuesday.
“Currencies have become more volatile, and there is more risk potential
because of international trade disputes,” Mr. Kuhnert said.
Jensen Comment
A good project for students is to dig into how FX hedges differ between FASB
versus IFRS rules.
From the CFO Journal's Morning Ledger on May 14, 2019
Good morning. Shortly
after Steve Young took his first job out of college as an accountant at
Duke Energy
Corp. in 1980, desktop computers began appearing around the office. “This
thing on my desk was going to take our jobs,” Mr. Young recalls thinking.
“It didn’t happen at all. It made work better.”
Now, as finance chief, Mr.
Young
is guiding the company through adoptions of automated digital processes,
artificial intelligence and
data analytics across the Charlotte, N.C.-based public utility, a highly
regulated business that operates gas and electric utilities in seven states
and owns nuclear power plants and gas-transmission lines, he tells CFO
Journal.
New technology, new jobs.
One area
where new technology is helping Duke free up accountants for more
value-added tasks is accounting reconciliation. “This is a tedious task that
used to be done manually. And it was something that nobody liked to do,” Mr.
Young said. “Now we’ve automated 800 account reconciliations, and it has
eliminated about 2,000 hours of work. That allows accountants to do more
rewarding work in terms of financial-statement analytics.”
Data insights.
New data analysis tools can crunch the entire body of data and give the
company a higher level of assurance than sampling. “You don’t have to worry
whether your sample was correctly compiled or not, because it can look at
every transaction and identify those that are in error,” Mr. Young said.
“It’s an amazing leap in risk assessment and audit sampling, giving you a
more accurate picture quicker.”
From the CFO Journal's Morning Ledger on May 13, 2019
Finance chiefs at companies of
all sizes are grappling with the tightest U.S. labor market in half a
century. But the pain is most acute for small businesses, where job growth
fell to the lowest level in nearly eight years, as tiny companies struggle
to attract and retain workers, reports The Wall Street Journal.
Hardest hit.
Companies with fewer than 20 workers
boosted head count by just 0.9% in April
compared with a year earlier, according to Moody’s Analytics, which examined
data from payroll processor ADP. That trails the 3.5% increase at businesses
with 500 to 999 employees and the 1.8% gain at the largest companies.
Help wanted. Torque
Transmission,
a manufacturer with 18 employees in Fairport Harbor, Ohio, has struggled in
the past 2½ years to maintain a staff of three skilled machinists. “We have
posted ads online. We have a sign out on the front lawn. We have a couple of
temp agencies working on it,” said John W. Rampe, president of the
family-run business. Mr. Rampe has hired a machinist 10 times only to have
the new hire show up late or not at all—or turn out not to be a good fit.
“Being a small business we definitely have it a bit tougher,” he said.
Not so small.
Roughly 17% of private-sector workers—or nearly 21 million Americans—work at
companies with fewer than 20 employees, according to the most recent Bureau
of Labor Statistics data. Low unemployment and rising wages are creating
hiring challenges for companies of all sizes. There were 7.5 million
unfilled jobs on the last business day of March, according to the Labor
Department.
From the CFO Journal's Morning Ledger on May 10, 2019
Thebiggest
thing in physics is carbon.
More precisely, scientists have observed superconductivity when two
atom-thick sheets of carbon crystal known as graphene are rotated to
misalign by 1.1 degrees. The discovery could revolutionize electronics and
accelerate the age of quantum computers, reports Quanta magazine.
From the CFO Journal's Morning Ledger on May 10, 2019
U.S. securities regulators took
the first step toward easing the burden of the independent auditor review
requirement on smaller public companies.
The Securities and Exchange
Commission
voted 3-1 Thursday to advance a proposal
that would exempt public companies with less than $100 million in annual
revenue from regular outside audits, part of a broader effort to entice more
companies to go public. The proposal introduces a revenue test in addition
to current rules that require a company to have at least $75
million in publicly owned stock to be
categorized as an accelerated filer.
Taking aim at SOX. The
proposal advanced Thursday would be the latest in a series of revisions to
rules put in place under the 2002 Sarbanes-Oxley Act. Congress carved out
the smallest firms from the requirement in 2010, and a 2012 law exempted
companies with under $1 billion in annual revenue for their first five years
after going public.
More listings. SEC
Chairman Jay Clayton has made it a priority to make it more attractive for
companies to go public and framed Thursday’s proposal as a step toward that
goal. It follows a move by the SEC to expand the number of
companies that can
make scaled-back disclosures to regulators that also was aimed at boosting
interest in the public markets.
From the CFO Journal's Morning Ledger on May 9, 2019
General Motors
Co. said it isin talks to sell
its shuttered assembly plant
in Lordstown, Ohio, to an electric-truck maker, a development that drew
praise from President Trump for creating jobs in the politically pivotal
state.
Jensen Comment
Hopefully this electric truck maker will focus on something other than batter
power (think hydrogen fuel cells).
From the CFO Journal's Morning Ledger on May 8, 2019
U.K.
Regulator Fines KPMG Over Audit of Co-op Bank
A U.K.
regulator on Wednesday fined KPMG
LLP and a partner at the firm after they
admitted to misconductin relation to the audit of
financial statements of Co-operative Bank PLC, reports CFO
Journal's Nina Trentmann.
The
Financial Reporting Council, Britain’s watchdog for accounting and audit,
handed KPMG a fine of £5 million ($6.51 million) and “severely reprimanded”
the Big Four accounting firm for its failings in connection with the audit
of financial statements of Co-op Bank for 2009, the year the lender merged
with Britannia Building Society. The penalty was reduced to £4 million
because KPMG agreed to settle.
The FRC said
KPMG and its audit partner Andrew Walker admitted that their conduct fell
short in two areas: the audit of fair-value adjustments of loans in the
commercial loan book acquired from Britannia, and the audit of a series of
securities acquired from Britannia called leek notes.
From the CFO Journal's Morning Ledger on May 7, 2019
The Trump administration moved toallow an
additional 30,000 seasonal workers
to return to the U.S. this summer, a higher-than-expected number that
reflects internal tensions in the White House’s approach to legal
immigration
From the CFO Journal's Morning Ledger on May 7, 2019
Big
U.S. banks have complained for years about a key feature of theDodd-Frank
overhaul
requiring
them to keep billions of dollars of cash in reserve. Some are trying to find
a way around it.
From the CFO Journal's Morning Ledger on May 7, 2019
Kraft Heinz
Co. said errors in its accountinggo back several more years than previously
known,
widening the scope of the internal problems the beleaguered
food company has to resolve while facing a federal securities probe and
shareholder lawsuits.
From the CFO Journal's Morning Ledger on May 6, 2019
Berkshire Hathaway
Inc.has underperformed
the S&P 500 for a decade, forcing Warren Buffett into a position he rarely
resides: on the defensive.
From the CFO Journal's Morning Ledger on May 3, 2019
PG&E
Corp. said the U.S. Securities and Exchange Commissionhas opened
an investigationinto the company’s disclosures and accounting for losses related to
California wildfires.
From the CFO Journal's Morning Ledger on May 3, 2019
Good day.Facebook
Inc.
is recruiting dozens of financial firms and online merchants to help launch
a cryptocurrency-based payments system on the back of its gigantic social
network, The Wall Street Journal reports.
The effort, should it succeed, threatens
to upend the traditional, lucrative plumbing of e-commerce
and would likely be the most mainstream application yet of cryptocurrency.
At the heart of the initiative, under way for more than a year and
code-named Project Libra, is a digital coin that users could send to each
other and use to make purchases both on Facebook and across the internet,
according to people familiar with the matter.
Big-name backers.
Seeking total investments of about $1 billion, Facebook has talked to
financial institutions including Visa
Inc., Mastercard Inc. and payment processor First
Data Corp., the people said. The money would underpin the value of
the coin to protect it from the wild price swings seen in bitcoin and other
cryptocurrencies, they said.
Getting paid
with ads?
One-third of the world’s people log on monthly to Facebook, and they all
need to buy things. One idea being considered is that users could click ads
to buy a product and pay with Facebook tokens, which the retailer could then
recycle to pay for more ads, one person said. Facebook rolled out a similar
feature—using dollars and traditional card payments—on Instagram, which it
owns, in March.
From the CFO Journal's Morning Ledger on May 2, 2019
New international lease
accounting rules are prompting some finance chiefs to overhaul how they
benchmark corporate performance—a challenging move that could disenfranchise
investors married to metrics once used to compare performance to past
results, CFO Journal’s Nina Trentmann reports.
New
accounting, new math.
The changes will cause many companiesto report higher earnings before interest,
taxes, depreciation and amortization,
as well as higher free cash flow, a measure of cash earned from operations
after capital spending. Meanwhile, some credit metrics, such as leverage
ratios and earnings per share measures, will appear weaker in certain
instances.
Big risks.
Changes to the inputs of familiar benchmarks also could make it harder for
shareholders to compare past results to current performance or judge the
success of a company’s strategy. “There are a lot of adjustments to
financial metrics already,” said Mark Bentley, a director at the U.K.
Individual Shareholders Society, which represents retail shareholders in
Britain, “and the more we have, the more difficult it will be to assess the
underlying performance of the business.”
More money,
more problems?
Under the new standard, lease payments are split into two components, one of
which is considered when calculating free cash flow, resulting in a higher
figure. “Every company that adopts the new standard will get a boost in
reported free cash flows arising from the recategorization of operating
lease payments,” said Trevor Pijper, a vice president at Moody’s
Investor Service
Inc. “Investors could then ask, ‘What are you doing with all this free cash?
From the CFO Journal's Morning Ledger on April 30, 2019
Suppliers to Boeing Co. are struggling to navigate uncertainty
arising from the continued grounding of the company’s 737 MAX aircraft, CFO
Journal’s Nina Trentmann reports.
By the numbers.
Executives of the 600-plus companies that supply more than three million
parts to make the beleaguered jet
are bracing for potential changes to production levelsshould Boeing’s aircraft remain grounded beyond
the summer. Boeing cut its production rate to 42 jets a month in April, from
52 previously, but had earlier signaled it could boost the output to 57
planes later this year.
The risk for
CFOs. A
production rate increase with short notice could be just as disruptive as a
cut. “It is not an easy supply chain to switch on and off,” said Douglas
Groves, chief financial officer and treasurer at Ducommun
Inc., a Boeing supplier that makes wing flaps, floor panels and pylons for
the 737 MAX. The company’s management discusses the situation every day, Mr.
Groves said. “We are doing a lot of scenario planning,” he said.
On the defensive. Boeing
Chief Executive Dennis Muilenburg on Monday rejected
criticism
of how the plane maker designed a 737 MAX flight-control system that
accident investigators have implicated in two fatal crashes of the jetline
Kimberly A. Zahller, Assistant Professor, University of Colorado
Margaret Beranek, Assistant Professor, University of Colorado
IN
THIS CASE, STUDENTS ARE GIVEN THE CHANCE TO move beyond traditional
cost-benefit analysis in analyzing and integrating ethical and qualitative
factors in a small business’ decision whether or not to accept a new
partner¬ship opportunity with a large retailer. The opportunity requires
significant changes in the company’s mission and values in addition to the
adoption of new technology with implications for consumer privacy. Students
in manage¬rial accounting, cost accounting, and information systems classes
reported that the case was thought-provoking and enhanced their
understanding of ethical issues involved in collecting and managing
corporate data. Students also found the intersection of accounting and
information systems courses and the application to a realistic situa¬tion
interesting.
Denim Products
Incorporated: Creating and Using a Master Budget
Teresa Stephenson, University of Alaska Anchorage
Jason Porter, Washington State University
THIS CASE HELPS STUDENTS in upper division or graduate accounting and
business courses gain an in-depth knowl¬edge of budgeting by developing and
analyzing a multiproduct, multiperiod master budget. The case consists of
three segments that can be used in conjunction or separately. In the first
segment, students create a master budget using a standardized template. In
the second segment, students analyze their budgets to determine optimal
sales-mix and ways to improve profitability. In the third segment, students
consider an ambiguous ethical dilemma and develop business-related arguments
to support their position. Working on this type of case provides students
with a greater understanding of a master budget and the information such a
budget can provide to decision makers.
Pikesville Lightning
(B): Evaluating New Initiatives via Strategy Mapping and the Balanced
Scorecard
Roopa Venkatesh, Associate Professor, University of Nebraska at Omaha Amy Fredin,
Associate Professor, St. Cloud State University
Jennifer Riley. Associate Professor, University of Nebraska
at Omaha
THIS CASE STUDY IS AN EXTENSION OF “PIKESVILLE LIGHTENING: EVALUATING
STRATEGIC BUSINESS EXPANSION OPPORTUNITIES.”1 Greg Storm, owner of the
Pikesville Lightning minor league baseball team, plans to roll out a new
product offering to appeal to the team fans, but he is not sure whether the
idea fits within the organization’s strategy. If he does go ahead with it,
he needs to move quickly, but he also needs a way to measure the success of
the initiative. With limited time, Storm starts sketching out a possible
strategy map for this initiative, but he has not received any feedback from
his leadership group regarding this effort. This case takes a less commonly
used perspective in balanced scorecard cases by providing students with a
partially completed strategy map, the key objectives of the organization,
and requires students to complete a strategy map and subsequently translate
the components into a balanced scorecard.
SUMMARY: The
article discusses concerns with slowing growth at Alphabet, Inc., evident in
the first quarter earnings report and conference call. More users now begin
searches on sites such as Amazon rather than on search engines, reducing ad
revenues and increasing costs. Cost increases occur because "the shift to a
long-term drag for Google, which annually pays billions to rivals like Apple
Inc. to place advertisements onto rival phones." Controlling those costs,
called "traffic acquisition costs," was the one bright spot in the company's
performance.
CLASSROOM APPLICATION: The
article may be used in any financial reporting class to discuss quarterly
earnings reporting and income statement components.
QUESTIONS:
1. (Introductory) "For all its myriad arms and efforts to
diversify, Google remains essentially an old-fashioned billboard
operation with a high-tech gloss-and it now faces more rivals."
Explain your understanding of this description of Google's business.
2. (Introductory) What happened to the stock price as
executives conducted the conference call to discuss its first
quarter 2019 operating results?
3. (Advanced) Summarize the trends in revenues, expenditures,
and profitability that concerned analysts in Alphabet, Inc.'s first
quarter 2019 results.
4. (Advanced) One bright spot in the results related to
"traffic acquisition costs." Explain what these costs are as well as
the results that Google achieved in this area.
Parent company Alphabet posts
slowest revenue growth since 2015
Google’s once-untouchable online-advertising operation took a body blow,
hurt by mounting competition and struggles within its increasingly
high-profile YouTube unit.
Google parent AlphabetInc. in the
first quarter posted its slowest revenue growth since 2015. The poor results
highlight the risks for one of Silicon Valley’s biggest names in effectively
leaning on one massive, if lucrative, business.
For
all its myriad arms and efforts to diversify, Google remains essentially an
old-fashioned billboard operation with a high-tech gloss—and it now faces
more rivals.
The company’s results are an outlier amid
what has otherwise been a steady earnings season in the technology sector.
Peers like FacebookInc. and
TwitterInc.
previously posted strong earnings, while Amazon.comInc. last
week reported record profit that will allow it to pour fresh cash into
improving its Prime membership program.
Alphabet shares fell 7% Monday after hours, with the drop picking up during
the earnings call as executives declined to answer direct questions about
the flagging growth. Nearly an hour in, one analyst, Ross Sandler of
Barclays, audibly sighed. “I guess I’ll beat a dead horse on the
deceleration,” he said.
“We
are very excited about the opportunities across the board,” responded Chief
Financial Officer Ruth Porat.
If Alphabet shares drop in
regular trading on Tuesday
to match the after-hours decline, that would wipe more than $60 billion from
the company’s market capitalization and mark the worst single-day session in
nearly seven years. Before the earnings report, shares were up 24% this
year.
Alphabet reported first-quarter revenue of $36.3 billion, roughly $1 billion
short of forecasts. Per-share earnings of $9.50 also disappointed, and were
a substantial fall from a year earlier, when results were supercharged by
the conglomerate marking up its stakes in private technology companies.
Growth
slowed across the board. Revenues were up 17% year-over-year, compared with
26% in last year’s first quarter. The company’s margin, a constant concern
for analysts and investors, fell to 18%, compared with 25% last year.
The crimped margin can in part be blamed on
last month’s $1.7 billion fine from European
regulators
for abusing the dominance of its search engine and limiting competition.
Excluding the fine, the company’s margin came in at 23% and its per-share
earnings were $11.90.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 3, 2019
SUMMARY: "Six
miles west of Lake Michigan, in Mount Pleasant, Wis., is a cleared building
site-formerly occupied by 75 homes and hundreds of acres of
farmland-awaiting Foxconn Technology's $10 billion liquid-crystal-display
factory. Crews are widening the interstate highway and village and county
taxpayers have borrowed around $350 million to buy land and improve
infrastructure. But one thing that's largely missing from the picture is
Foxconn....The Foxconn project is among the biggest U.S. public-incentive
deals ever offered to a foreign company, a more than $4 billion package of
state and local tax breaks and investments. A Foxconn video last year showed
renderings of a futuristic campus resembling Apple's spaceship like Silicon
Valley headquarters..."
CLASSROOM APPLICATION: The
article may be used to in a managerial accounting class to discuss capital
projects and government incentives for manufacturers' locations.
QUESTIONS:
1. (Introductory) Describe what you know about Foxconn
Technology Group: where is the company headquartered and what is its
business?
2. (Advanced) What commitments has Foxconn made to the
governments of Mount Pleasant and Racine County, Wisconsin?
3. (Advanced) What incentives did the government offer to
Foxconn to locate its plan in Mount Pleasant, Wisconsin?
4. (Introductory) What initial costs have the local
governments incurred?
5. (Introductory) What initial project costs has Foxconn
incurred to date?
6. (Advanced) Consider Foxconn's capital budgeting process.
How do the incentives you describe above impact the viability of
this project to build a manufacturing plant? What other factors
impact the viability of the project?
The iPhone maker got fat
incentives to build a $10 billion LCD plant that largely hasn’t materialized
on land where Mount Pleasant, Wis., razed homes and crops
MOUNT PLEASANT, Wis.—Six miles west of Lake
Michigan lies a cleared building site half again as big as Central Park,
ready for Foxconn Technology
Group’s $10 billion liquid-crystal-display factory.
Contractors have bulldozed about 75 homes in Mount Pleasant and cleared
hundreds of farmland acres. Crews are widening Interstate 94 from Milwaukee
to the Illinois state line to accommodate driverless trucks and thousands of
employees. Village and county taxpayers have borrowed around $350 million so
far to buy land and make infrastructure improvements, from burying sewer
pipes to laying storm drains.
As of Dec. 31, the Taiwanese manufacturing
giant, famous as an AppleInc.
supplier, had spent only $99 million, 1% of its pledged investment,
according to its latest state filings. The company projected as many as
2,080 in-state employees by the end of 2019 but had fewer than 200 at last
year’s end, state filings show. The village is still awaiting factory
building plans for review. Locals said Foxconn contractors have recently
been scarce on the site.
The
impact on Mount Pleasant, by contrast, is palpable. Its debt rating has
slipped. Local politics has become fraught. Neighbors have fallen out over
land seizures.
“At
some point we’re talking about things that are just imaginary,” said Nick
Demske, a commissioner in Racine County, where the plant is. “We’re
pretending.”
Mount
Pleasant and the county referred inquiries to county executive Jonathan
Delagrave and an outside spokesman. A project this massive is bound to have
hiccups, Mr. Delagrave said. “I think it’s fair for people to question it,
absolutely. But I also think that it’s fair to say a lot of good things are
happening.”
Foxconn said it “stands by the job creation commitments that we have made,
and we look forward to completing” the manufacturing facilities. “After the
winter break, which has an impact on construction projects of this scale, we
are now looking forward to beginning the next phases of construction...by
Summer 2019 with production expected to commence during the fourth quarter
of 2020.”
It
said it awarded contracts in the past months valued at nearly $34 million
for construction of utilities and roadways. “We believe in Wisconsin, its
people, and its potential to become a high technology hub.”
By Jacob Bunge and micah Maidenberg | Apr 24, 2019
TOPICS: Supply
Chains
SUMMARY: Walmart
Inc. "will develop a network of cattle ranches and meat-processing plants to
provide Angus beef products exclusively for its stores...." Benefits and
risks of this business strategy are discussed in the article. One benefit
may be difficult to quantify--but should increase sales over what otherwise
would be achieved--is the ability to "provide the company and its customers
better visibility into their food supply."
CLASSROOM APPLICATION: The
article may be used in a managerial accounting class to discuss supply
chains and vertical integration. The article also mentions reporting by
Tyson Foods that "Walmart contributed 17% of its fiscal 2018 sales" and so
may be used to discuss segment reporting requirements in financial
accounting.
QUESTIONS:
1. (Advanced) What is a supply chain?
2. (Advanced) What is vertical integration? Explain how this
concept is being used by several large discount store chains
discussed in this article.
3. (Introductory) Explain what benefits Walmart expects to
achieve by "developing a network of cattle ranches and meat
processing plants."
4. (Advanced) What risks is Walmart assuming by undertaking
this vertical integration strategy?
Retail giant to source cattle
from family farms and ranches, has agreements with firms to butcher cows and
process and package meat
WalmartInc.WMT
0.92%is pushing
into the meat business, the latest retailer to seek greater control and
profits in the steaks and rotisserie chickens that fill grocery-aisle meat
cases.
The
Arkansas-based chain will develop a network of cattle ranches and
meat-processing plants to provide Angus beef products exclusively for its
stores, a move Walmart said will provide the company and its customers
better visibility into their food supply.
Walmart’s move follows rival Costco WholesaleCorp.’sCOST
0.80%effort to
develop a poultry processing plant and dozens of supplier farms to provide
the chain’s signature $4.99 rotisserie chickens. Walmart and other chains
already operate their own milk-processing plants and bakeries.
Retailers’ moves to take greater control of some commodity processing come
partly in response to consumers’ growing focus on how food is produced, with
shoppers scrutinizing everything from the fertilizer used on grain fields to
drugs fed to chickens. The efforts follow years of low crop prices, making
it cheaper to raise livestock and poultry.
“To
answer our customer’s demands, we need visibility into every step in the
supply chain,” Scott Neal, a Walmart senior vice president, said in prepared
remarks.
Beyond reducing costs by handling
processing and packaging themselves, the retailers could also gain greater
leverage in negotiating supply deals with major U.S. meat companies like
Tyson FoodsInc.,
Cargill Inc. and Pilgrim’s PrideCorp. ,
analysts said. The investments could also expose retailers to new risks,
ranging from animal diseases to meat plant worker safety.
Walmart’s move “is definitely going to create some waves and may change up
the game a bit on the beef side, because traceability is the next big
thing,” said Jeremy Scott, an analyst with Mizuho Securities.
Tyson
shares were down slightly in afternoon trading. Tyson estimated that Walmart
contributed 17% of its fiscal 2018 sales and was the meat company’s biggest
single customer, according to a November regulatory filing.
“Walmart is a great business partner of Tyson Foods, and we are fully
supportive of the project,” a Tyson spokeswoman said.
A
Cargill spokesman said the company supports Walmart’s plan. “Together with
our customers, we are committed to developing sustainable and transparent
supply chains,” he said.
Walmart’s effort will focus on Angus beef cuts like steaks, roasts and
rib-eyes and will supply 500 stores in the Southeast.
The
company is partnering with Bob McClaren of 44 Farms and Prime Pursuits, who
will help Walmart find cattle; Creekstone Farms, which will butcher the
cattle at a Kansas facility, and FPL Foods, which will pack the meat at a
Georgia facility for delivery to stores.
Costco
is building a $450 million chicken slaughtering and processing facility In
Fremont, Neb., capable of processing two million birds a week, churning out
rotisserie chickens and other poultry products to be sold under Costco’s
Kirkland brand. The plant is slated to open in September, and will be
supplied by 100 to 125 farms, according to a spokeswoman for Lincoln Premium
Poultry, which will manage the plant.
Building the plant will ensure a steady supply of chickens in the specific
sizes Costco sells, she said.
Executives for Pilgrim’s, a chicken supplier to Costco, have said Costco’s
move doesn’t represent a threat and that the chain had increased its
business with Pilgrim’s.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 3, 2019
SUMMARY: "Suppliers
to Boeing Co. are struggling to navigate uncertainty arising from the
continued grounding of the company's 737 MAX aircraft." More than 600 Boeing
suppliers may be impacted by the grounding of this aircraft and Boeing
having "cut its production rate to 42 jets a month in April...." This
production cut is a reduction of approximately 20% from previous levels and
occurs when the company "...had earlier signaled it could boost the output
to 57 planes later this year."
CLASSROOM APPLICATION: The
article may be used in a managerial accounting class to discuss supply
chains, the purchase order process, and concepts related to variance
analysis.
QUESTIONS:
1. (Introductory) "It is not an easy supply chain to switch
on and off," said Douglas Groves, chief financial officer and
treasurer at Ducommun Inc. What is this company? Why is it so
difficult to adjust this supply chain?
2. (Advanced) What is a purchase order? Why is Ducommun Inc.
waiting to hear about purchase order changes from Boeing?
3. (Introductory) Why does the impact to Honeywell
International Inc. of Boeing's aircraft production rate change
differ from the impact on Ducommun Inc.?
4. (Advanced) What costs is Boeing incurring in order to
"discourage component makers from reducing production"? How do you
think these costs will be accounted for?
5. (Advanced) Consider Boeing's materials purchase price and
overhead variances for components of the 737 MAX aircraft. Describe
how these component costs and variances will be impacted by the
issues discussed in this article.
‘It is not an easy supply
chain to switch on and off,’ a parts maker says
Suppliers to BoeingCo. are
struggling to navigate uncertainty arising from the continued grounding of
the company’s 737 MAX aircraft.
Reliant on Boeing orders, executives of the 600-plus companies that supply
more than three million parts to make the beleaguered jet are bracing for
potential changes to production levels should the aircraft remain grounded
beyond the summer.
Boeing in April reduced its monthly production rate
to 42, down from 52 before the second fatal crash of a 737 MAX in five
months on March 10 in Ethiopia.
Boeing
last week said it would go through its list of suppliers and components one
by one and make adjustments if necessary. That might make suppliers—who
provide parts from fan blades to fuselages—reconsider their risk-management
strategies and growth plans, given that Boeing before the crashes had
indicated it could boost monthly production to 57 planes later this year.
A
production rate increase with short notice could be just as disruptive as a
cut. “It is not an easy supply chain to switch on and off,” said Douglas
Groves, chief financial officer and treasurer at Ducommun Inc., a Boeing
supplier that makes wing flaps, also called spoilers; floor panels; and
pylons for the 737 MAX. “Once you turn it off, it takes a while to turn it
back on.”
The
companies have had discussions, but Ducommun hasn’t received formal purchase
order changes, Mr. Groves said. Ducommun still makes its components at a
rate of 52 planes a month. The company generates around $100 million a year
from part sales for the 737 MAX.
The
company’s management discusses the 737 MAX situation every day, Mr. Groves
said. “We are doing a lot of scenario planning,” he said. “But it all
depends on how long this is going on for.”
Investigations into the causes of the two fatal crashes are ongoing. For
many suppliers, the core question is whether the grounding of the aircraft
will continue beyond the summer, said Kenneth Herbert, an analyst at
Canaccord Genuity LLC.
The Federal Aviation Administration grounded all
737 MAX jets on March 13, three days after the Ethiopian Air accident.
“The
million-dollar question is at what point will suppliers decide to slow
investments,” Mr. Herbert said. CFOs at some Boeing suppliers haven’t
adjusted their spending, but that could change, depending on the outcome of
the accident investigations, said Mr. Herbert.
Honeywell InternationalInc., which
makes mechanical systems and avionics for the 737 MAX, said it is optimistic
the plane will resume service in the second half of the year. “Given that
most—just about everybody—expects a resolution, we do too,” Chief Executive
Darius Adamczyk said on a recent earnings call.
Honeywell has absorbed the production rate cut to 42 planes a month, he
said, adding that the impact on the company’s finances is negligible.
SafranSA, a
French company that makes passenger seats, wheels and fans for the 737 MAX,
on Friday said it would adjust its production if necessary. It expects a
€200 million ($222.9 million) cash-flow impact if Boeing doesn’t deliver any
new 737 MAX planes to its customers in the second quarter, Chief Financial
Officer Bernard-Pierre Jacques Delpit said during an earnings call. The
company declined to comment further.
CFM
International, a joint venture between Safran and General ElectricCo. that
makes the engine for the 737 MAX, said it doesn’t plan to cut production at
this point. It has been coordinating with Boeing, a spokesman said.
For
Ducommun, a short-term cut in output would be challenging, Mr. Groves said.
The company places its orders for titanium, one of the metals used in its
components, more than 12 months in advance. Instead, Ducommun could hold
excess inventory, but that would come at a cost to Boeing, Mr. Groves said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 3, 2019
SUMMARY: Ford
Motor Company announced in February that it would "investigate its
certification process [for vehicle emissions] after employees raised
concerns about its testing method." The company said "in a securities filing
Friday [April 26, 2019] that it couldn't predict what would happen with the
matter" or whether a material adverse financial result could be expected.
CLASSROOM APPLICATION: The
article may be used to discuss contingent liability disclosure.
QUESTIONS:
1. (Introductory) Summarize the events to date related to
Ford investigating its own auto emissions testing process.
2. (Advanced) What is significant about the fact that the
Justice Department is part of the investigation of Ford Motor Co.
emissions testing?
3. (Advanced) What outside factors are influencing the U.S.
government's attention to auto emission measurements?
4. (Advanced) Refer to the article's description of
disclosure in a filing with the U.S. Securities and Exchange
Commission on Friday, April 26, 2019. What accounting standards
require the disclosure that is discussed in the article? Why is the
disclosure required if the company cannot predict whether this issue
will have a material impact on future results of operations?
Investigation adds to list of
challenges facing Chief Executive Jim Hackett as he engineers a turnaround
plan
The Justice Department opened a criminal
investigation into how Ford Motor Co. certifies its vehicles to meet U.S.
emissions standards, adding to the list of challenges facing Chief Executive
Jim Hackett as he engineers a turnaround plan
for the No. 2 U.S. auto maker.
Ford said in February it was planning to investigate its certification
process after some employees raised concerns about
its testing methods. That month, Ford informed the Environmental Protection
Agency and the California Air Resources Board of the internal probe.
The
company said in a securities filing Friday that it couldn’t predict what
would happen with the matter and couldn’t “provide assurance that it will
not have a material adverse effect on us.”
Ford
started an internal investigation late last year after it had an outside
company look into its staffers’ concerns.
In a
separate statement Friday, Ford said it continues to work with regulators
and outside experts on a technical review of the certification issue. The
Justice Department contacted the auto maker earlier this month to say it had
opened the criminal probe, Ford said.
“We’ll
keep them posted on what we’re finding through our investigation and
technical review,” said Kim Pittel, Ford’s vice president of sustainability,
environment and safety engineering. “It’s worth noting that the Department
of Justice in the past has taken an interest in fuel-economy and emissions
issues in the auto sector.”
Ford
could face federal and state penalties as well as lawsuits from customers if
the fuel-economy ratings on its vehicles or emissions compliance are found
to be faulty.
Ford
hasn’t disclosed how many models are included in the investigation. The
company said in February that its investigation would take months.
The matter threatens to become a
distraction for Ford as Mr. Hackett works to overhaul operations across
Ford’s global regions. The company recently started a multiyear, $11 billion restructuring
to stem losses and spark growth in overseas operations, including Europe and
South America.
Ford’s
certification issue centers on a simulation model it uses in EPA testing as
part of the process that determines a vehicle’s fuel economy and emissions
compliance.
Vehicles normally are tested for emissions and fuel economy using a machine
called a dynamometer, which is stationary. To gauge how a car will perform
in real-world driving, testers also are required to simulate so-called road
load, which is the effect from tire friction or aerodynamic drag while the
vehicle is in motion.
Ford
employees who stepped forward last fall raised concerns about the method the
auto maker was using to estimate road load, the company has said. That led
Ford to conduct an internal investigation and eventually alert regulators.
During
the past decade, a number of large auto companies have taken significant
financial hits from fuel-economy and emissions controversies, after either
inflating their mileage ratings or intentionally skirting laws governing
tailpipe pollution.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 10, 2019
SUMMARY: "Qualcomm
Inc. will receive at least $4.5 billion as part of a legal settlement with
Apple Inc. that ended more than two years of wrangling over the chip maker's
patent-licensing fees, the company said Wednesday," April 30, 2019. The
company therefore forecasts revenues for the third (current) quarter to
nearly double from a year ago.
CLASSROOM APPLICATION: The
article may be used in a financial reporting class to discuss gain
contingencies.
QUESTIONS:
1. (Advanced) What is a gain contingency? How does this
accounting topic relate to the issues in this article?
2. (Advanced) How does accounting for gain contingencies
differ from accounting for loss contingencies?
3. (Introductory) "Qualcomm expects revenue in the current
third quarter to jump to between $9.2 billion to $10.2 billion. In
the same quarter a year ago, total revenue was $5.6 billion."
Explain how that result relates to the accounting for gain
contingencies.
4. (Introductory) What activity or activities comprise
Qualcomm's business model that were under threat depending on the
outcome of its dispute with Apple, Inc.?
5. (Advanced) Do you think the Qualcomm 50% stock price
increase relates only to the newly expected third quarter revenues
from the Apple settlement? Explain.
Payment is one part of
three-pronged deal between the companies last month
Qualcomm
Inc. will receive at least $4.5 billion as part of a legal
settlement with Apple
Inc. that ended more than two years of wrangling over the chip
maker’s patent-licensing fees, the company said Wednesday.
The
payment—part of a three-pronged settlement between the companies last
month—would range from $4.5 billion to $4.7 billion, based on how the
accounting ultimately works out, Qualcomm Chief Executive Steve Mollenkopf
said in an interview with The Wall Street Journal.
The payment
was a crucial element of a deal with Apple that settled a dispute
threatening to upend Qualcomm’s business model, which combines a chip-making
arm and a patent-licensing division that collects royalties from companies
that use its technology. The payment also was to settle prior disputes with
Apple’s contract manufacturers, a group of largely Taiwan-based companies
that build iPhones, Qualcomm said.
In forging
the agreement, the companies settled on a six-year licensing deal and a
multiyear agreement for Qualcomm to supply Apple with modem chips—tiny
wafers of silicon that handle communications with cell towers.
Qualcomm got another piece of good news right after the agreement, when
Apple’s current modem supplier, Intel
Corp. , suddenly said it would bow out of the race to make 5G
modems—something Mr. Mollenkopf said he hadn’t expected.
“We really
were surprised by that as much as anybody else,” he said. “We really focus
on what we can control, and as you know, this is probably the most
competitive chip industry in the world and everyone’s trying to get a
piece.”
Resolving
the dispute with Apple bought Qualcomm goodwill with investors, who sent its
shares soaring by more than 50% in the agreement’s aftermath. But the chip
maker’s fiscal second-quarter results, despite coming in ahead of what Wall
Street analysts had expected, included a revenue decline and a gloomy
outlook for its cellular phone system-on-chip business.
Qualcomm
estimated it would ship between 150 million and 170 million of those chips
in its third quarter, a decrease of as much as 25% compared with the same
period last year. Analysts had expected almost 180 million chip shipments
for the period, according to a FactSet survey.
During their call with analysts, Qualcomm
executives blamed the dimmer outlook on economic
weakness in China
and a slower-than-expected
rollout of next-generation wireless technology.
They said, however, that the introduction of 5G networks was now proceeding
quickly after a pause, and that would boost Qualcomm’s overall business in
the future.
Qualcomm’s
stock, which inched higher to $86.37 during 4 p.m. ET trading, pitched lower
by more than 4% after the results were announced. But the shares came back a
bit, recently down about 3.4%.
For the second
quarter, Qualcomm reported $4.88 billion in adjusted revenue, compared with
the $4.8 billion analysts surveyed by FactSet had expected. Total revenue
came to $4.98 billion, down 4.6% from the same period a year ago.
Net income more than
doubled to $663 million. Qualcomm said adjusted profit came to 77 cents a
share, compared with the 71 cents analysts had projected.
With the addition of
revenue from the Apple settlement, Qualcomm expects revenue in the current
third quarter to jump to between $9.2 billion to $10.2 billion. In the same
quarter a year ago, total revenue was $5.6 billion.
The deal opens the
door for Apple to add next-generation cellular technology to future phones
via Qualcomm, which already produces 5G modems for Android phones. Most
analysts don’t expect Apple to introduce a 5G phone until 2020.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 10, 2019
SUMMARY: On
Wednesday, May 8, 2019, U.K. regulator the Financial Reporting Council
"...fined KPMG LLP and a partner at the firm after they admitted to
misconduct in relation to the audit of financial statements of Co-operative
Bank PLC....for 2009, the year the lender merged with Britannia Building
Society...KPMG and its audit partner Andrew Walker admitted that their
conduct fell short in two areas: the audit of fair-value adjustments of
loans in the commercial loan book acquired from Britannia, and the audit of
a series of securities acquired from Britannia...."
CLASSROOM APPLICATION: The
article may be used in an auditing or financial reporting class to discuss
the challenges of fair value accounting and related auditing issues
including application of professional skepticism.
QUESTIONS:
1. (Introductory) In what two areas did KPMG as a firm and
one of its individual audit partners admit to performing inadequate
audit work?
2. (Advanced) What is difficult about accounting for, and
auditing, these areas of financial reporting?
3. (Introductory) Define the term "professional skepticism."
4. (Advanced) Name on action that might constitute an auditor
exhibiting insufficient professional skepticism in the problem areas
you gave in answer to question 1 above. Explain your selection.
Audits relating to Co-op’s
merger with Britannia Building Society fell short of expectations, Financial
Reporting Council said
A U.K.
regulator on Wednesday fined KPMG LLP and a partner at the firm after they
admitted to misconduct in relation to the audit of financial statements of
Co-operative Bank PLC.
The
Financial Reporting Council, Britain’s watchdog for accounting and audit,
handed KPMG a fine of £5 million ($6.51 million) and “severely reprimanded”
the Big Four accounting firm for its failings in connection with the audit
of financial statements of Co-op Bank for 2009, the year the lender merged
with Britannia Building Society. The penalty was reduced to £4 million
because KPMG agreed to settle.
The FRC said
KPMG and its audit partner Andrew Walker admitted that their conduct fell
short in two areas: the audit of fair-value adjustments of loans in the
commercial loan book acquired from Britannia, and the audit of a series of
securities acquired from Britannia called leek notes.
KPMG and Mr.
Walker failed to obtain “sufficient appropriate audit evidence” and to
exercise “sufficient professional skepticism,” the FRC said. They also
failed to inform Co-op Bank about inadequacies in disclosures relating to
the leek notes.
KPMG will
pay £500,000 toward the FRC’s costs. A separate KPMG audit-quality team will
be conducting additional reviews of the company’s audit engagements with
credit institutions for financial years 2019, 2020 and 2021 and report to
the FRC, the regulator said.
“We regret that some of our
audit work around specific elements of the Bank’s [Co-op Bank’s] Fair Value
Adjustments did not meet the appropriate standards,” a spokesman for KPMG
said, adding that the firm has improved its practices since then.
Mr. Walker received a discounted
fine of £100,000 and was also severely reprimanded, according to the FRC.
Wednesday’s fine comes after an
earlier action
by the regulator against KPMG and three executives at the end of April.
KPMG, alongside its peers Deloitte LLP, Ernst & Young LLP and
PricewaterhouseCoopers LLP, has
come under increased
scrutiny amid a number of high-profile
corporate collapses in the U.K., including that of construction company
Carillion PLC.
Regulators and lawmakers in recent weeks released proposals for an overhaul
of the sector. The U.K. government is
expected to respond
to the recommendations in the coming months.
As part of the overhaul, the FRC
will be folded into a new regulator called the audit, reporting and
governance authority.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May10, 2019
SUMMARY: The
article describes the impact of new lease accounting requirements under
International Financial Reporting Standards (IFRS). IFRS and U.S. GAAP
diverge in the income statement presentation of leases under the new
standard: under IFRS, all long-term leases are treated as capital
leases-that is, in a fashion equivalent to outright purchases of long-lived
assets with debt financing. Profit and loss statements therefore will no
longer show lease rental expense for leases previously treated as operating;
instead, interest expense on the outstanding lease obligation balance and
amortization of the leased asset will be shown in the operating statement.
The impact of these changes under IFRS on reporting entities' financial
statement ratios is discussed in the article.
CLASSROOM APPLICATION: The
article may be used when discussing the new lease accounting requirements
being implemented in 2019 with a focus on IFRS.
QUESTIONS:
1. (Introductory) What changes in accounting for leases are
highlighted in the article?
2. (Advanced) Name one change under new IFRS lease accounting
requirements not highlighted in the article.
3. (Introductory) As described in the article, what will be
the impact of changing accounting requirements for leases on
financial statement ratios for companies reporting under IFRS?
4. (Advanced) What has been the result of discussions with
analysts about these impending changes in lease accounting?
As companies recategorize
lease expenses, common earnings metrics are getting skewed, prompting
companies to shift to new benchmarks
New
international lease accounting rules are prompting some finance chiefs to
overhaul how they benchmark corporate performance—a challenging move that
could disenfranchise investors married to metrics once used to compare
performance to past results.
Companies in
more than 140 countries that require the application of International
Financial Reporting Standards have to transition this year to new lease
accounting rules. Finance chiefs must now report leases on the balance sheet
as assets and liabilities—a break from prior rules that allowed some leases
to be recorded in footnotes to financial statements. As part of the change,
companies have to record certain lease payments as depreciation and interest
charges, rather than operating expenses.
The
accounting change means that the mathematics underlying common performance
metrics are changing.
The changes
will cause many companies to report higher earnings before interest, taxes,
depreciation and amortization, as well as higher free cash flow, a measure
of cash earned from operations after capital spending. Meanwhile, some
credit metrics, such as leverage ratios and earnings per share measures,
will appear weaker in certain instances.
Before the
rule change, investors and analysts didn’t have a complete picture of the
financial position of a company because of the absence of certain leases on
the balance sheet, according to the International Accounting Standards
Board, which set the new lease standard.
In response to the new rule, companies
including French telecommunications company Orange
SA, Germany’s Deutsche Telekom
AG and airline group Air France-KLM
SA are providing new or amended performance metrics they say
will give investors a consistent way to gauge performance.
This is set
to interrupt the consistency Wall Street analysts and investors prefer in
company reports. Finance chiefs say they’re making the new figures easily
comparable with metrics used under the old accounting rules.
Change to how a
business measures success can confound investors and affect how the market
responds to the company’s financial results, accountants and investors say.
Changes to the inputs of familiar benchmarks also could make it harder for
shareholders to compare past results to current performance or judge the
success of a company’s strategy.
“There are a lot of
adjustments to financial metrics already,” said Mark Bentley, a director at
the U.K. Individual Shareholders Society, which represents retail
shareholders in Britain, “and the more we have, the more difficult it will
be to assess the underlying performance of the business.”
Paris-based Orange
will replace adjusted Ebitda with Ebitda after leases, or EbitdaL, to
reflect the company’s large number of leases and how payments associated
with them affect earnings, said Ramon Fernandez, the company’s finance
chief.
Without the changes,
Orange’s lease payments wouldn’t be included in this profitability
indicator, distorting the picture. “In practice, it will be similar, but not
identical,” Mr. Fernandez said.
The new accounting
standard also is leading many companies to report higher free cash flow,
even though the underlying business economics haven’t changed.
Under the new
standard, lease payments are split into two components, only one of which is
considered when calculating free cash flow, resulting in a higher figure.
“Every company that
adopts the new standard will get a boost in reported free cash flows arising
from the recategorization of operating lease payments,” said Trevor Pijper,
a vice president at Moody’s Investors Service Inc. “Investors could then
ask, ‘What are you doing with all this free cash?’”
Deutsche Telekom
will report free cash flow after leases to help shareholders understand the
impact of the new accounting rules and compare the company’s performance to
prior reporting periods and its medium-term prognosis. Without the changes,
the German telecommunications company would have recorded a substantial rise
in free cash flow, according to a spokesman.
Air France-KLM will
switch to a metric called adjusted operating free cash flow. The new
benchmark includes the company’s lease payments and therefore doesn’t
inflate its free cash flows, said Marie-Agnès de Peslouan, head of investor
relations at the Franco-Dutch airline.
“We had a few
discussions with analysts,” Ms. de Peslouan said. “They didn’t understand
why our free cash flow would have been higher without the adjustments,” Ms.
de Peslouan said, highlighting the challenge for executives seeking to
explain the impact of the new accounting rules and subsequent changes to
performance metrics.
Air France-KLM did a better job than some of its competitors
to explain the changes, said Daniel Roeska, an analyst at research and
brokerage firm Sanford C. Bernstein & Co. “But everyone is in agreement that
we are just moving numbers from one box to the next,” Mr. Roeska said,
adding that the new performance metric doesn’t impact his analysis of the
airline’s performance.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 10, 2019
SUMMARY: "A
former supplier to Apple Inc. agreed Friday [May 3, 2019] to settle civil
fraud claims that it misled investors about its problems making
scratch-resistant sapphire glass for iPhones....The SEC said [former chief
executive of GT Advanced Technologies, Inc. Thomas] Gutierrez falsely stated
on earnings calls in 2014 that GT had met performance goals and expected to
receive an installment payment from Apple. He also provided unsupported
sales projections, the SEC said, causing the company to misstate
closely-watched metrics such as its customized earnings estimates. Mr.
Gutierrez resigned as CEO in 2015." Both the company and Mr. Gutierrez
settled the matter without admitting wrongdoing. One of Mr. Gutierrez's
attorneys stated that "his client agreed to the settle 'solely to end this
matter.'"
CLASSROOM APPLICATION: The
article may be used to discuss the importance of management and production
information in disclosures by a publicly traded company as well as CEO
responsibility for financial disclosures.
QUESTIONS:
1. (Introductory) According the the U.S. Securities and
Exchange Commission (SEC), what problems arose in GT Advanced
Technologies Inc.'s (GTATQ) fulfillment of scratch-resistant
sapphire glass for Apple, Inc. iPhones?
2. (Advanced) Refer to the related article. What problems
does GTATQ say developed in their working relationship with Apple to
fulfill scratch-resistant sapphire glass?
3. (Introductory) What financial reporting and disclosure
implications arose from those problems? Be specific in the items you
identify from the article related to these topics.
4. (Advanced) Why is the former GTATQ chief executive officer
individually responsible for a fine paid to the SEC while GTATQ
settled without paying a fine?
GT Advanced Technologies,
which emerged from bankruptcy in 2016, settled the SEC probe and its former
CEO agreed to pay $140,000
WASHINGTON—A former supplier to Apple
Inc.
AAPL
-1.07%agreed
Friday to settle civil fraud claims that it misled investors about its
problems making scratch-resistant sapphire glass for iPhones.
GT Advanced Technologies Inc., which
emerged from bankruptcy in 2016
and is now a private company, settled the
Securities and Exchange Commission’s probe without paying a fine. Thomas
Gutierrez, GT’s former chief executive, agreed to pay $140,000 to resolve an
investigation of him.
New
Hampshire-based GT and Mr. Gutierrez settled the probes without admitting or
denying wrongdoing. An attorney for the company and a company spokesman
didn’t respond to requests for comment.
Jordan
Hershman, an attorney for Mr. Gutierrez, said his client agreed to settle
“solely to end this matter.” The SEC claimed that Mr. Gutierrez “negligently
made one alleged misstatement regarding the company’s expectation of
receiving a future milestone payment,” while the CEO also warned the payment
might never materialize, Mr. Hershman said.
The
settlement comes five years after the company’s venture with Apple blew up.
GT’s $578
million contract with Apple required it to produce “an unprecedented amount
of sapphire in boules that were over twice the size of boules GT had
previously produced,” the Securities and Exchange Commission said in a
settlement order dated Friday.
GT had
trouble meeting quality and delivery standards set by its contract, the SEC
said. After GT missed a milestone in late 2014, Apple withheld a $139
million payment and gained the right to accelerate repayment of $306 million
it had already paid to GT, the SEC alleged.
Instead of
recognizing those liabilities as near-term debt, GT accused Apple of
breaching the terms of the contract.
The SEC said Friday that GT’s accusations
were hollow and intended to cover up its need to recognize debt that would
have put its status as an operating company in doubt. GT entered bankruptcy
in late 2014, and at the time maintained Apple had engaged in
a “bait and switch.”
The SEC said
Mr. Gutierrez falsely stated on earnings calls in 2014 that GT had met
performance goals and expected to receive an installment payment from Apple.
He also provided unsupported sales projections, the SEC said, causing the
company to misstate closely-watched metrics such as its customized earnings
estimates. Mr. Gutierrez resigned as CEO in 2015.
“GT and its
CEO painted a rosy picture of the company’s performance and ability to
obtain funding that was paramount to GT’s survival while they were aware of
information that would have catastrophic consequences for the company,” said
Anita Bandy, an associate director of enforcement at the SEC.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 3, 2019
SUMMARY: "Home
Depot Inc. said long-serving finance chief Carol Tomé will retire later this
year and named an internal successor to the CFO post. Ms. Tomé plans to
retire on Aug. 31, having served as CFO of one of the world's biggest
home-improvement chains since May 2001." The article also discuss recent
financial performance and market reactions.
CLASSROOM APPLICATION: Questions
ask students to consider the skills demanded of a chief financial officer.
QUESTIONS:
1. (Introductory) What are Carol Tomé's notable achievements
as described in the article?
2. (Advanced) What skills beyond financial accounting and
reporting expertise do you think are necessary to achieve such
success?
3. (Introductory) What have been Home Depot's reported
results for the fourth quarter ended on February 3, 2019?
4. (Advanced) Why did analysts and investors express some
disappointment in results achieved during this fiscal fourth-quarter
ended February 3, 2019?
Carol Tomé served as CFO of
one of the world’s biggest home-improvement chains since May 2001
Home Depot
Inc. said long-serving finance chief Carol Tomé will retire
later this year and named an internal successor to the CFO post.
Ms. Tomé
plans to retire on Aug. 31, having served as CFO of one of the world’s
biggest home-improvement chains since May 2001. She joined the company in
1995 and has directly reported to all five of Home Depot’s chief executives
during her tenure.
Richard
McPhail, currently senior vice president of finance control and
administration, will be promoted to executive vice president and CFO
following Ms. Tome’s retirement. Mr. McPhail joined the Atlanta-based
retailer in 2005 and has been responsible for the company’s financial plans,
as well as managing its profit and loss on a daily basis, a spokesman said.
"Developing
top talent and ensuring seamless succession planning is a hallmark of our
company,” said Home Depot Chief Executive and President Craig Menear.
Ms. Tomé is leaving
Home Depot having helped the company increase shareholder value by more than
450% during her tenure, Mr. Menear said.
Ms. Tomé was
instrumental in guiding the company’s turnaround strategy during the
recession. Home Depot has reported higher annual sales and profit in each of
the past eight years, according to data from S&P Global Market Intelligence.
Home Depot shares
slipped 0.8% in after-hours trading on Tuesday. The stock closed the day up
0.8% at $203.70 a share.
Home Depot reported fourth-quarter net income of $2.34 billion, up 32% from
a year earlier. Net sales were $26.49 billion, up 11% from a year ago. But
the company disappointed analysts and investors
with weaker-than-expected gains in comparable sales, which rose 3.2% for the
quarter ended in February, missing forecasts of a 4.5% increase.
Ms. Tomé’s planned
departure from Home Depot will also end one of the longest-running CFO
tenures. The average term of a finance chief at a Fortune 500 or S&P 500
company was 5.1 years, according to the 2018 Crist|Kolder Volatility Report.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 17, 2019
TOPICS: Auditing,
Securities and Exchange Commission
SUMMARY: On
Thursday, May 9, 2019, the U.S. Securities and Exchange Commission passed a
rule change "that would exempt public companies with less than $100 million
in annual revenue from regular outside audits...." The rule change passed
3-1 with Commissioner Robert Jackson Jr., voting against its passing. He is
"...the agency's lone Democratic member, [and] criticized the proposal,
saying it had no basis in current market conditions."
CLASSROOM APPLICATION: The
article may be used in an auditing class.
QUESTIONS:
1. (Introductory) Why has the SEC voted to remove the
requirement for certain publicly traded companies to have annual
financial statement audits by outside accountants?
2. (Advanced) What other requirements are being implemented
in place of the annual audit requirement?
3. (Advanced) How do these requirements offer compensating
controls comparable to a financial statement audit?
Proposed rule would exempt
public companies with less than $100 million in annual revenue from a
component of outside audits
WASHINGTON—The Securities and Exchange Commission voted 3-1 on Thursday to
advance a proposal that would exempt public companies with less than $100
million in annual revenue from a component of outside audits, part of a
broader effort to entice more companies to go public.
Under the
plan, smaller public companies such as those in the health care, information
technology and biotech industries would get a pass from outside audits of
their systems for preventing accounting errors and fraud, easing rules put
in place nearly two decades ago in response to the Enron Corp. and WorldCom
accounting frauds.
SEC Chairman
Jay Clayton has made it a priority to make it more attractive for companies
to go public and framed Thursday’s proposal as a step toward that goal. It
follows a move by the SEC last June to expand the number of companies that
can make scaled-back disclosures to regulators that also was aimed at
boosting interest in the public markets.
“Many of
these smaller companies—including biotech and health-care companies—will be
able to redirect the savings into growing their companies by investing in
research and human capital,” Mr. Clayton said.
The SEC
under Mr. Clayton has pursued a steady stream of rule changes intended to
make capital markets more attractive and boost the number of initial public
offerings. The changes or proposed changes include giving companies greater
leeway to discuss their IPO plans privately with potential investors before
announcing their intentions and allowing companies to file IPO paperwork
confidentially with the SEC.
The number of companies listed on stock
exchanges has declined by roughly half in the past two decades, though in
2019 a number of companies have gone public, including Lyft Inc., Pinterest
Inc. and an alternative-meat startup Beyond Meat
Inc.Uber Technologies
Inc. is set to launch
its IPO on Friday.
Republicans
in Congress and industry groups such as the U.S. Chamber of Commerce have
long advocated repealing or easing the auditing requirements, arguing that
expensive audits would deter businesses from becoming public companies. The
rule proposal takes a slightly different form than previous plans. A bill
that passed the Republican-controlled House in 2017 would have given the
break to any public company with a market capitalization of $500 million or
less, rather than relying on a revenue threshold.
“The
question is going to be the cutoff,” said Mike Hermsen, a partner at Mayer
Brown who specializes in securities. He said he expected other small
companies with slightly higher revenue to question why they don’t deserve to
be exempted from outside audit requirements.
The proposal
would keep in place requirements that the newly exempted companies maintain
independent audit committees, among other internal safeguards.
Thursday’s
proposal would be the latest in a series of revisions to rules put in place
under the 2002 Sarbanes-Oxley Act. Congress carved out the smallest firms
from the requirement in 2010, and a 2012 law exempted companies with under
$1 billion in annual revenue for their first five years after going public.
SEC
Commissioner Robert Jackson Jr., the agency’s lone Democratic member,
criticized the proposal, saying it had no basis in current market
conditions. His office conducted its own analysis and found that investors
rely heavily on outside audits to evaluate the types of companies that would
be exempted by the proposal.
Mr. Jackson
pointed to a 2011 report by the SEC’s chief accountant that said there was
“no specific evidence” that savings from rolling back audit requirements
would justify “the loss of investor protections.”
“One problem
at Enron and WorldCom was that corporate insiders were free to make
decisions of enormous consequence without adequate controls,” Mr. Jackson
said. “While paying auditors isn’t free, neither is fraud.”
The official
who led development of the proposal said it wouldn’t open the door for big
accounting scandals, noting that Enron was a far larger company than those
addressed by the proposal.
“Enron and
WorldCom are not companies that would be eligible for this relief,” said
William Hinman, director of the SEC’s corporation finance division.
A 2017 study
by accounting professors at the University of Washington and Georgetown
University estimated that 20% of exempted firms had ineffective internal
controls from 2007 to 2014. During that same period, just 11% of them
actually disclosed such a weakness.
They also
found that 41% of exempted firms provided insufficient information to
identify the causes of the weaknesses in their internal controls, compared
with just 7% for firms that were complying with the Sarbanes-Oxley rules.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 17, 2019
SUMMARY: This
article is part of the WSJ report entitled "Class of 2019" which contains
seven articles. The focus of this article is the changing nature of the job
environment occurring due to technological change. Perhaps no surprise to
faculty: one implication is that reading comprehension and communication
skills are even more important than ever in today's environment. Another
issue also is discussed in the related article: graduates may be asked to
manage projects and thus manage other, older workers from early on in a
career.
CLASSROOM APPLICATION: The
article may be used to discuss today's careers in any accounting class.
QUESTIONS:
1. (Introductory) What is the benefit to college graduates of
today's low employment rates?
2. (Advanced) How has technological development impacted the
workplace challenges facing newly hired college graduates?
3. (Advanced) As stated in the article, what skills do
employers look for because technical skills turn over very fast?
4. (Advanced) Refer to the related article. Do you feel ready
to manage a project and other workers upon entering the workforce?
What steps should you take to get ready for these responsibilities?
Welcome to the working world! The good
news: You’re entering the hottest job market in half a
century.
The bad news: Your first step onto the corporate ladder could still be a
tough one.
Automation
and outsourcing have stripped many of the rote tasks from entry-level
positions, so companies are reimagining the jobs they’re offering to the
Class of 2019. You and your classmates will likely be expected to operate on
a more sophisticated level than graduates of past decades.
Technical
skills turn over fast, so employers are looking for fast learners who can
quickly evolve and have exceptional soft skills—the ability to write, listen
and communicate effectively.
Your future employer may expect you to make
sales calls on day one. You might be asked to prepare a client presentation
your first week. In short order, you could be handed the job of managing a project.
“The
hard skills are changing. Just because we do a role one way today doesn’t
mean we were doing it that way three years ago,” says Kelli Jordan, who runs
career and skills initiatives for International Business Machines
Corp. , which has about 350,000 employees. “We need people who
can adapt.”
White-collar
jobs that many young people a generation ago slid comfortably into after
turning their tassels were often administrative in nature and involved
back-office tasks like data entry, says Adam Miller, chief executive of
Cornerstone OnDemand, a human-resources software firm.
Common roles
10 to 20 years ago—like billing clerk or operations analyst—involved taking
information that arrived on paper, such as a customer order, and typing data
into, say, an accounting system. “You only spoke to other employees,” Mr.
Miller says.
Today,
software has taken over many tedious processes, making starter jobs more
demanding. “Everything has an external-facing component,” from entry-level
marketing roles to product management, he says.
Continued in article
&&&&&&&&&&&&&&&&&&&&&&&&&&&&
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 17, 2019
SUMMARY: The
article discusses financial performance and reporting by recent technology
firms that have taken their shares public. Companies recently conducting
initial public offerings have accumulated the largest losses in history even
as they "tout their new business models that disrupt old industries...."
They report non-GAAP metrics which they argue are better gauges of their
performance than GAAP reported numbers. Typically, the metrics ignore
significant expenses, including marketing. Later sections of the article
acknowledge that early investors such as venture capitalists typically must
consider large losses in startup firms.
CLASSROOM APPLICATION: The
article may be used to discuss non-GAAP reporting.
QUESTIONS:
1. (Introductory) What is the basis for the article opening
statement that Uber and other big startups now going public are
losing "historic amounts of money"?
2. (Advanced) What is "non-GAAP reporting"? Cite your source
for this definition.
3. (Introductory) What non-GAAP measure does Uber report that
the company says is a better gauge of its performance than measures
based on U.S. GAAP?
4. (Advanced) Consider the explanation of WeWork's
"community-adjusted EBITDA." What is EBITDA? How is that a non-GAAP
measure in and of itself?
5. (Advanced) Again consider the explanation of WeWork's
"community-adjusted EBITDA" and particularly its treatment of
discounts received for signing long-term leases. How does WeWork
adjust GAAP reporting in calculating this measure? Explain your
understanding of the GAAP reporting as well as the company's non-GAAP
approach.
To try to
win over investors, they have also come up with unusual alternatives for
measuring their performance. So far, investors aren’t buying it.
The ride-hailing rivals have struggled
after debuting on the public markets with the two largest-ever 12-month
losses for American startups preceding an IPO. Uber, with a $3.7 billion
loss in the 12 months through March, priced its shares at the low end of
expectations and its stock has fallen
about 11% from Friday’s offering price. Lyft, with a loss of $911 million
last year, has fallen about 30% since its debut in March.
Both
companies provide financial measures they say better gauge their
performance. These measures ignore significant expenses. Uber calls this
“core platform contribution profit,” and on this basis, it made $940 million
last year versus a $3 billion operating loss. Lyft’s “contribution” profit,
measured differently, was $921 million.
Some
companies turn around after poor public debuts. And Uber and Lyft aren’t
alone in creating unconventional metrics that they say better reflect the
health and potential of their businesses.
WeWork
Cos., the shared office-space company, filed for an IPO in December—its
executives say it should be treated like a tech firm—after inventing a new
profit metric called “community-adjusted Ebitda.”
The
measurement flipped WeWork’s bottom line last year from a net loss of about
$1.9 billion, using standard accounting, to a profit of $467 million, using
the company’s preferred measure. The loss, based on generally accepted
accounting principles, would be the second largest in history among U.S.
startups going public—between Uber and Lyft—according to S&P Global Market
Intelligence.
“The early
investors are trying to find some sucker who will buy the stock in the
public market,” said Howard Schilit, a forensic accountant known for
detecting accounting tricks. “In order to sell the deals, they make up a
fact pattern that is nonsensical.”
Spokesmen
for WeWork and Uber declined to comment. A Lyft spokesman said the
contribution figure is meant to help investors understand how its margins
are expanding.
The creative accounting
is reminiscent of the late 1990s dot-com bubble, when money-losing companies
went public touting “pro forma” profit as a better measure of financial
performance. More recently, Silicon Valley startups have used unconventional
financial terms like “annual recurring revenue,” “billings” and “bookings”
that can give a more favorable impression than traditional accounting would.
Many
companies argue these nontraditional metrics are better measures for
understanding the growth trajectory of their businesses. Venture capitalists
often place a premium on startups that can grow quickly, ignoring some
upfront expenses. Marketing costs, for example, might push companies into
the red at first, but if customers who sign up are highly profitable in the
long run, the losses would be worth the investment today, venture
capitalists and entrepreneurs say.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 17, 2019
SUMMARY: "Executives
at Japan's largest car maker are paid almost entirely in cash, but Chief
Executive Akio Toyoda hopes to use awards of restricted stock to encourage
longer-term thinking." The impact of the Japanese cultural context,
particulary its aversion to high cash compensation, on Toyota's ability to
compete for worldwide talent is the focus of the article. Also mentioned is
the connection between stock-based compensation and long-term, strategic
thinking by managers.
CLASSROOM APPLICATION: The
article may be used when introducing accounting for stock-based
compensation.
QUESTIONS:
1. (Advanced) What is restricted stock? Cite your source for
this information.
2. (Introductory) What change is Toyota making to its
executive compensation plan?
3. (Advanced) What benefits does Toyota expect to obtain from
implementing these change to its compensation plan?
The Japanese car maker
proposes to use stock for a portion of pay to improve longer-term strategy
and attract talent
TOKYO— Toyota Motor
Corp.TM
-0.01%plans to
make its top executives pay closer attention to the company’s stock price.
Currently,
executives at Japan’s largest car maker are paid almost entirely in cash.
Now, Chief Executive Akio Toyoda hopes to encourage longer-term thinking by
using restricted stock for a portion of executive pay.
Toyota plans
to ask shareholders to approve a proposal that would increase the total cap
on board members’ aggregate compensation to ¥7 billion ($63 million), up
from the current ¥4 billion. Of that ¥7 billion, up to ¥3 billion can be
paid in cash and ¥4 billion in share allotments.
Chief
Financial Officer Koji Kobayashi said the aim was to keep everyone’s total
compensation amounts essentially the same. The shift to more stock
compensation will encourage “longer-term strategic thinking,” he said. A
Toyota spokesman said the total cap was rising to give the company the
flexibility to attract talent.
Currently
the only non-Japanese executive in the topmost ranks is Frenchman Didier
Leroy, the chief competitive officer. Mr. Leroy made ¥1.03 billion ($9.3
million) in the year ended March 31, 2018, the most recent figure available,
compared with ¥380 million for his boss, Mr. Toyoda.
In general,
pay for executives and senior managers is low in Japan compared with the
U.S. That tends to slow efforts by Toyota and others to attract top talent
in robotics and artificial intelligence. Mr. Toyoda is focusing on
next-generation battery-powered vehicles and driverless cars.
However, the
country is sensitive about high paychecks.
One of the charges
against former Nissan Motor Co. Chairman Carlos Ghosn is that he planned to
receive more than $80 million after retirement and failed to disclose the
plan to escape public scrutiny. Mr. Ghosn has said he is innocent.
He says no promises were made about any possible postretirement pay and he
had no obligation to report it.
Toyota’s
restricted stock plan will apply only to top executives who are also members
of the company’s board. Currently, six executives hold board seats, while
the board also has three nonexecutive members.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 17, 2019
SUMMARY: The
article describes cost cutting needed at jeweler Pandora A/S as the company
faces falling revenues. "The restructuring efforts come after years of rapid
expansion during which the company extended its store and franchise network
across the world." The amounts are reported in Danish kroner. Discussion
questions focus on students seeing how the WSJ reports on foreign companies
to provide context for U.S. readers to quickly comprehend amounts in U.S.
dollar terms.
CLASSROOM APPLICATION: The
article may be used in introducing direct and indirect currency exchange
rates to convert financial statement items.
QUESTIONS:
1. (Introductory) Where is Pandora A/S headquartered? Where
is the stock of Pandora A/S traded?
2. (Introductory) In what currency does the company report
its financial results?
3. (Introductory) In writing this article, how does the Wall
Street Journal adjust for this difference in the currency to address
its mainly-U.S. readers?
4. (Advanced) "This year, Pandora aims to cut 600 million
Danish kroner in costs." Based on the context of this paragraph in
the article, estimate how much in U.S. dollar savings the company
wants to make.
5. (Advanced) Access today's exchange range for the Danish
kroner and U.S. dollar. Select the appropriate exchange rate, either
direct or indirect, and show a current calculation of the answer you
gave in response to the question above. In your answer, also define
the terms direct and indirect exchange rates.
Copenhagen-based jewelry
company aims to turn business around amid a decline in sales
Struggling jewelry chain Pandora
A/S plans to make further cuts to head count and other costs as the Danish
company advances its turnaround effort, Chief Financial Officer Anders Boyer
said.
The
Copenhagen-based company last week said it would eliminate 1,200 jobs at its
manufacturing site in Thailand, part of a drive to take out 1.2 billion
Danish kroner ($180 million) in costs by 2020 that was announced in
February. This year, Pandora aims to cut 600 million Danish kroner in costs,
Mr. Boyer said.
The
restructuring efforts come after years of rapid expansion during which the
company extended its store and franchise network across the world.
Pandora
plans to make more selected job reductions in other parts of the world, Mr.
Boyer said. The company employs around 28,000 people world-wide.
“I see very
significant cost-saving opportunities,” Mr. Boyer told CFO Journal in a
recent interview. “If revenues continue to decline, then you have to revisit
the situation,” he said.
Pandora will
also be more targeted and less aggressive in expanding its retail footprint.
The company slowed the number of new store openings from around 250 last
year to 75 this year, Mr. Boyer said.
“We will concentrate
on opening up new stores in China and Latin America,” he said.
The company last
week reported revenue of 4.8 billion Danish kroner ($720 million) for the
first quarter, down 8% compared with the prior year period. Net profit was
797 million Danish kroner, down from 1.15 billion Danish kroner in the first
quarter of 2018.
The slowdown in sales forced
Pandora to issue several profit warnings. The company ousted Chief Executive
Anders Colding Friis last year following a cut to corporate guidance. Mr.
Boyer
joined Pandora
as CFO in August.
Pandora shares are
down around 63% over the past two years to 252.8 Danish kroner a share on
Wednesday, while the wider Nasdaq Copenhagen index fell 2.1% during the same
period.
Pandora’s new CEO
Alexander Lacik took over in April, following several months during which
the company was without a chief executive. During that time, Mr. Boyer and
Chief Operating Officer Jeremy Schwartz ran the company. Mr. Schwartz
resigned in April.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 24, 2019
SUMMARY: Home
Depot has reported its fiscal first quarter results while, as of the
publication date, rival Lowe's had yet to do so. The article describes
several retailing performance metrics including comparable-store sales
growth. Management guidance for improvement in the second quarter and
analyst expectations for the current period also are discussed.
CLASSROOM APPLICATION: The
article may be used in any level of financial reporting class to discuss
income statement components, analyst forecasts, and management guidance.
QUESTIONS:
1. (Introductory) What factor(s) led to Home Depot reporting
improved sales and net income in comparison to the preceding fiscal
year?
2. (Introductory) How did Home Depot's sales performance
compare to expectations by analysts who follow the company?
3. (Advanced) What is management's outlook for the next
quarter? Include in your answer a definition of the term "management
guidance."
4. (Advanced) Did these reported results change what
management expects in the remainder of the fiscal year?
Same-store sales growth was
weaker than analysts had expected
Home DepotInc.’s
HD
0.83%sales rose
in the fiscal first quarter, lifted by a rise in the number of customer
transactions and stronger spending per visit.
The
home-improvement retailer’s overall sales rose 5.7% to $26.38 billion for
the quarter ended May 5 from the comparable quarter a year earlier. Analysts
surveyed by Refinitiv expected sales of $26.22 billion.
The
number of customer transactions rose 3.8% and average ticket prices, or the
amount of money customers spent per visit, rose 2%. Meanwhile, same-store
sales, or comparable-store sales—a common metric in retail based on revenue
at stores open at least one year—rose 2.5%. Analysts polled by Consensus
Metrix expected a 4.3% rise. Still, customer transactions and average ticket
prices rose.
The
company said unfavorable weather in February as well as a drop in lumber
prices put pressure on its underlying performance in the quarter.
However, the company reaffirmed its full-year guidance, signalling it
expects an improvement in the second quarter and comparable sales growth to
pick up pace for the rest of the year, said Zachary Fadem, a Wells Fargo &
Co. analyst in a note.
Home
Depot reported net income of $2.51 billion, or $2.27 a share, up from $2.4
billion, or $2.08 a share, a year earlier. Profit was lifted by higher sales
and lower expenses from interest and investment income compared with the
year before, Home Depot said. Analysts projected earnings of $2.20 a share.
Shares
of Home Depot were flat in premarket trading on low trading volumes.
Home-improvement rival Lowe’s Cos. is due to release its first-quarter
report Wednesday.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 24, 2019
TOPICS: Capital
Budgeting, Cost Management, Managerial Accounting
SUMMARY: Stanley
Black & Decker now owns the Craftsman brand of tools after purchasing it
from Sears Holdings Corp. Sears had "moved Craftsman production to China
several years ago to reduce costs after decades of contracting with
manufacturers in the U.S., including Stanley." Stanley will move production
of tools and tool-chests to the locations where those units are sold, though
the company still relies "...on foreign-made components for some of those
tools, such as motors for its power tools." The impact of impending tariff
increases on these decisions is discussed.
CLASSROOM APPLICATION: The
article may be used in a managerial accounting class to discuss cost
management and capital budgeting.
QUESTIONS:
1. (Introductory) Where is Stanley Black & Decker located?
What the location of the planned production facility discussed in
the article?
2. (Advanced) Consider the decision to open the new
manufacturing plant. How does the imposition of tariffs on
foreign-made products impact that capital budgeting decision? Be
specific in the items of analysis you think will be impacted
3. (Introductory) How did Stanley Black & Decker acquire the
Craftsman product line of tools?
4. (Introductory) Refer to the graph entitled Homemade.
Describe the overall trends in manufacturing locations of tool and
tool-chests sold in the North American continent.
5. (Advanced) Compare those results to the manufacture of the
same goods sold in Europe, Australia, and New Zealand.
6. (Advanced) What is the percentage increase in tariffs on
certain goods imported from China under the Trump Administration?
7. (Introductory) What will be the overall increase in tariff
costs for Stanley Black & Decker from this increase in tariffs on
components imported from China?
Automated Texas factory to
produce wrenches and sockets at costs similar to work now done in China
Stanley Black & DeckerInc.
SWK
0.71%plans to
move production of Craftsman wrenches from China back to the U.S., the
latest manufacturer looking to use automation to increase domestic output as
tariffs raise the cost of imports from overseas.
Stanley is investing $90 million to open a plant in Fort Worth, Texas, by
late next year that will employ about 500 people to make 10 million
Craftsman wrenches and ratchets and 50 million sockets annually. Robots and
fast-forging presses will help boost output about 25% above the older
forging machinery now used to make Craftsman wrenches in China, helping keep
production costs at the new plant in line with those in China, Stanley said.
The company’s strategy mirrors moves by
other manufacturers in recent years to bring some foreign production back to
more automated factories in the
U.S.WhirlpoolCorp.WHR
-0.92%is making
some small KitchenAid appliances in the U.S. again after they were made by a
contractor in China for years. CaterpillarInc. has
moved the assembly of excavators and small bulldozers from Japan to new
plants in the U.S. to free up production capacity for the Asian market.
“We’re
pushing very hard to manufacture where we sell it,” Stanley Chief Executive
James Loree said in an interview.
Stanley is facing higher tariff costs and weakening demand for tools from a
slowing U.S. housing-construction industry and a slowing economy in Europe.
The company beat sales and net-income expectations in the first quarter,
though, and shares are up 14% this year, slightly better than the gain in
the S&P 500.
The Connecticut-based maker of
hand-and-power tools bought the Craftsman brand in 2017 from Sears HoldingsCorp. ,
which moved production of Craftsman products to China several years ago to
reduce costs after decades of contracting with manufacturers in the U.S.,
including Stanley.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 24, 2019
SUMMARY: "PG&E
Corp. will stay in control of its bankruptcy proceeding...long enough to
find out what California lawmakers will do this year about wildfire
liabilities facing the state's largest utility." As discussed in the related
articles, California investigators have found that the company's equipment
started the Camp Fire. The related video discusses methods to prevent such
equipment from starting fires. Questions link students to the company's
quarterly report as of March 31, 2019 which shows a comparison to the year
end December 31, 2018 reports. Disclosures address the impact of accounting
assumptions during the bankruptcy proceedings.
CLASSROOM APPLICATION: The
article may be used to discuss bankruptcy, solvency, and assumptions behind
financial reporting.
QUESTIONS:
1. (Introductory) What does PG&E Corp. do? Is the company
still in operation? Explain your understanding.
2. (Introductory) Why has PG&E Corp. filed for bankruptcy?
4. (Advanced) Based on the section entitled "Financial
Reporting in Reorganization," what are the accounting implications
of the bankruptcy filing?
5. (Advanced) Read the section "Liabilities Subject to
Compromise." What are these liabilities?
6. (Advanced) Access the PG&E Corp. balance sheet through the
links on the left-hand side of the screen. Would you characterize
the company as insolvent prior to the bankruptcy filing? Explain
your answer.
7. (Advanced) What changes do you note in comparing the
balance sheets from the year ended December 31, 2018 to the quarter
ended March 31, 2019? Make a list of each item you observe and
explain how you think each change relates to the bankruptcy filing.
Creditors and California’s
governor faulted the utility for a lack of progress toward exiting
bankruptcy
PG&ECorp. will
stay in control of its bankruptcy proceeding until Sept. 29, less time than
it wanted, but long enough to find out what California lawmakers will do
this year about wildfire liabilities facing the state’s largest utility.
The company had requested until the end of
November to find a path out of chapter 11 protection, but creditors and
California Gov. Gavin Newsom said the company needed a push.
Wednesday’s decision at a hearing in the U.S. Bankruptcy Court in San
Francisco was a reprieve for PG&E, which faced a threat of being stripped of
its exclusive right to propose a plan addressing more than $30 billion in
wildfire damage claims.
The
utility is facing pressure for action from Mr. Newsom and many of its
creditors and bondholders as well as fire victims. Bankruptcy law gives
companies that file for chapter 11 protection a certain amount of time,
called the “exclusivity period,” to propose a restructuring strategy without
worrying about competing proposals from those outside the company.
Had
PG&E lost its exclusive control rights Wednesday, as some creditors wanted,
rivals would have been free to propose a chapter 11 plan without the
company’s agreement.
“That
would be a fundamental crisis in confidence,” PG&E lawyer Stephen Karotkin
said at the hearing. Business partners would be rattled and the markets
would be upset, he said, if PG&E’s ability to steer its fate was called into
question in bankruptcy court.
“It’s
the worst thing that could happen,” Mr. Karotkin said.
Judge
Dennis Montali said he would be reluctant to strip PG&E of control unless
there was a viable alternative plan on offer. One large group of
creditors—financial institutions that want to recover insurance paid for
fire damages—signaled it might be prepared to propose a chapter 11 plan if
PG&E doesn’t move quickly to tackle its problems.
“If
there comes a time when we are able to put forward a viable plan, we will be
back before the court,” said Matthew Feldman, a lawyer for the insurance
group.
PG&E
wanted exclusive control of its bankruptcy case until Nov. 29, arguing it
needs an additional six months to get relief from California’s stiff
liability laws for utilities from the state legislature. An official
committee that represents financial creditors said that was too much time,
because PG&E should know by the end of the legislative session in September
whether its lobbying efforts will succeed.
“Our
thinking is that by the end of September the debtors should be well aware of
what action was taken and wasn’t taken,” said Gregory Bray, lawyer for the
financial creditors group.
If
PG&E fails to negotiate a chapter 11 plan by Sep. 29, it would have to
return to court and demonstrate that it has made enough progress to justify
continued protection against competing restructuring proposals.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on May 24, 2019
By Suzanne Kapner and Sarah Nassauer | May 22, 2019
TOPICS: Profitability
SUMMARY: As
shown in recently disclosed financial reports, sales at several major chains
slowed during the latest quarter. Retailers note that these poorer sales
results were not due to consumer confidence issues. The negative results
create a challenging environment in which the increased 25% tariffs on some
goods imported from China will be implemented.
CLASSROOM APPLICATION: The
article may be used in a management accounting course to discuss the
accountants' roles in providing information for management under these
changing circumstances. Topics covered include inventory costs, foreign
currency implications, and pricing strategies.
QUESTIONS:
1. (Introductory) What is the tone of sales reports have been
made by retailers disclosing their first quarter financial reports?
2. (Introductory) What impact on prices are retailers
expecting will occur due to impending tariffs on goods imported from
China?
3. (Advanced) Are these price impacts specifically related to
the goods on which the tariffs will be imposed? Explain your answer.
4. (Advanced) How are internal company accountants supporting
management strategies addressing the expected impact of tariffs
being imposed on goods from China imported to the U.S.? State all
that you can glean from comments made in the article.
Kohl’s, J.C. Penney, Home
Depot fall short of analysts’ estimates, plan for impact of higher duties on
Chinese merchandise
Sales
at several major chains slowed during the latest quarter, clouding the
outlook for the retail sector as it braces for the impact of higher tariffs
on merchandise imported from China.
Earlier this month, the Trump administration imposed a 25% tariff on $200
billion in Chinese goods, up from a 10% duty put in place in October. The
U.S.-China trade fight has left American shoppers largely unscathed, as
major consumer categories, including apparel and toys, have eluded tariffs
so far.
Currency fluctuations also have made imports cheaper, and U.S. retailers
have worked to reduce costs elsewhere to avoid raising prices. But prices
have risen on some items, including bicycles, auto parts and furniture; and
retailers say they are formulating plans to manage the 25% tariff.
Kohl’s, which imports about a fifth of its goods from China, said Tuesday
that additional costs related to rising import tariffs prompted it to lower
its guidance for the year.
Home
Depot finance chief Carol Tomé said the home-improvement chain estimates it
will spend about $1 billion more to buy goods with the 25% tariffs in place,
coming on top of the roughly $1 billion in costs added by the 10% tariff.
The
company said it plans to manage the cost increases by buying more volume at
lower prices from some vendors and by spreading price increases across a
wider swath of items to limit the impact on sales. “There is a lot of work
that has to go into this before we can actually determine the impact,” Ms.
Tomé said.
Last week Walmart executives said they
will likely raise some prices
in the face of tariffs, but are managing cost increases product by product.
Generally, large retailers are better positioned to extract price cuts from
suppliers or spread increases strategically across all the items they sell
to mitigate the impact on sales, say analysts. And purchases of products
like auto parts that are needs, not wants, are less likely to decline
because of tariff-induced price increases.
AutoZoneInc.AZO
1.68%Chief
Executive Bill Rhodes said it is too early to know how the 25% tariff will
affect costs and prices. “If we do in fact experience higher costs it will
be our intention to pass those higher costs on to our customers,” he said
Tuesday on a conference call to discuss earnings.
Around 30% to 45% of auto-parts sales
originate from China, Wells Fargo
said in a report.
Retailers won’t have to absorb cost increases until early June when many
products subject to the 25% tariff come off container ships in U.S. ports,
said Brad Loftus, senior partner in the retail practice at Boston Consulting
Group.
Retailers are using short-term tactics like asking shipping companies to
speed vessels to arrive ahead of any more tariff increases, Mr. Loftus said.
Longer term, retailers are working to diversify sourcing options and
creating more responsive pricing practices, he said.
Late
last year Home Depot opened a new sourcing office in Vietnam and is
considering moving production of some goods outside of China, Ms. Tomé said.
Continued in article
Humor for May 2019
My birthday was on April 30. One of our sons said that I'm 50 plus shipping
and handling ---
Bob Jensen
These are from a book
called Disorder in the Courts and are things people actually said in court,
word for word, taken down and published by court reporters that had the
torment of staying calm while the exchanges were taking place.
ATTORNEY: What was the
first thing your husband said to you that morning? WITNESS: He said,
'Where am I, Cathy?' ATTORNEY: And why
did that upset you? WITNESS: My name is
Susan!
_______________________________ ATTORNEY: What gear
were you in at the moment of the impact? WITNESS: Gucci
sweats and Reeboks.
____________________________________________ ATTORNEY: Are you
sexually active? WITNESS: No, I just
lie there.
____________________________________________ ATTORNEY: What is
your date of birth? WITNESS: July 18th. ATTORNEY: What year? WITNESS: Every year.
_____________________________________ ATTORNEY: How old is
your son, the one living with you? WITNESS:
Thirty-eight or thirty-five, I can't remember which. ATTORNEY: How long
has he lived with you? WITNESS: Forty-five
years.
_________________________________ ATTORNEY: This
myasthenia gravis, does it affect your memory at all? WITNESS: Yes. ATTORNEY: And in
what ways does it affect your memory? WITNESS: I forget. ATTORNEY: You
forget? Can you give us an example of something you forgot?
___________________________________________ ATTORNEY: Now
doctor, isn't it true that when a person dies in his sleep, he doesn't know
about it until the next morning? WITNESS: Did you
actually pass the bar exam?
____________________________________ ATTORNEY: The
youngest son, the 20-year-old, how old is he? WITNESS: He's 20,
much like your IQ.
___________________________________________ ATTORNEY: Were you
present when your picture was taken? WITNESS: Are you
shitting me?
_________________________________________ ATTORNEY: So the
date of conception (of the baby) was August 8th? WITNESS: Yes. ATTORNEY: And what
were you doing at that time? WITNESS: Getting
laid
____________________________________________ ATTORNEY: She had
three children, right? WITNESS: Yes. ATTORNEY: How many
were boys? WITNESS: None. ATTORNEY: Were there
any girls? WITNESS: Your Honor,
I think I need a different attorney. Can I get a new attorney?
____________________________________________ ATTORNEY: How was
your first marriage terminated? WITNESS: By death. ATTORNEY: And by
whose death was it terminated? WITNESS: Take a
guess.
___________________________________________ ATTORNEY: Can you
describe the individual? WITNESS: He was
about medium height and had a beard ATTORNEY: Was this a
male or a female? WITNESS: Unless the
Circus was in town I'm going with male.
_____________________________________ ATTORNEY: Is your
appearance here this morning pursuant to a deposition notice which I sent to
your attorney? WITNESS: No, this is
how I dress when I go to work.
______________________________________ ATTORNEY: Doctor,
how many of your autopsies have you performed on dead people? WITNESS: All of
them. The live ones put up too much of a fight.
_________________________________________ ATTORNEY: ALL your
responses MUST be oral, OK? What school did you go to? WITNESS: Oral...
_________________________________________ ATTORNEY: Do you
recall the time that you examined the body? WITNESS: The autopsy
started around 8:30 PM ATTORNEY: And Mr.
Denton was dead at the time? WITNESS: If not, he
was by the time I finished.
____________________________________________ ATTORNEY: Are you
qualified to give a urine sample? WITNESS: Are you
qualified to ask that question?
______________________________________ ATTORNEY: Doctor,
before you performed the autopsy, did you check for a pulse? WITNESS: No. ATTORNEY: Did you
check for blood pressure? WITNESS: No. ATTORNEY: Did you
check for breathing? WITNESS: No. ATTORNEY: So, then
it is possible that the patient was alive when you began the autopsy? WITNESS: No. ATTORNEY: How can
you be so sure, Doctor? WITNESS: Because his
brain was sitting on my desk in a jar. ATTORNEY: I see, but
could the patient have still been alive, nevertheless? WITNESS: Yes, it is
possible that he could have been alive and practicing law.
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
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 ---
For years I followed the publications of J. Edward Ketz, an
accounting professor at Penn State University. In particular, Ed was the main
contributor to one of my favorite blogs entitled "Grumpy Old Accountants." What
I really, really liked about this blog is that it was in the style of the much
earlier Barron's Magazine articles of Abe Briloff ---
https://en.wikipedia.org/wiki/Abraham_J._Briloff
My threads on Abe Briloff are at
http://faculty.trinity.edu/rjensen/theory01.htm#Briloff
The "style" of Abe and later Ed is to critically evaluate
financial statements of real-world companies for errors and controversies in
financial audits.. These two accounting professors were "muckrakers" as
accounting investigators. Needless to say neither muckraker, especially Abe
Briloff, was popular with the big auditing firms or the AICPA.
I'm sad that the archives Grumpy Old Accountants are no longer
online. However, you can find some of those modules cited and quoted at the
following two sites (search for "Grumpy" or "Ketz")
Securities class action filings involving accounting allegations
remained at uncharacteristically high levels
as the trend of core filings against larger defendant firms
continued.
The total value of
accounting class action settlements rebounded to the second-highest
level in the last 10 years, with all five mega
settlements involving an
accounting allegation.
•There
were 143
securities class actions involving accounting allegations (accounting case
filings) during 2018, nearly 86 percent more than the historical average.1
(page
2)
•Total
accounting case filings far exceeded
post-PSLRA(Private
Securities Litigation Reform Act) levels for the second year in a row. The total was driven
by the filing of 79
merger and acquisition
(M&A)
accounting casefilings
alleging failure to reconcile a non-GAAP
measure
to a GAAP measure.2
(pages
2, 4)
•Market
capitalization losses for core accounting case filings3
rose to its highest level in the
last 10 years as the trend of filings
against larger
defendant firms
continued. (pages
5, 10)
•The
number of accounting case settlements declined relative to 2017 and the prior
five years but remained
above the lows in 2011–2012.
(page
8)
•The
value of accounting case settlements more than quintupled
compared to the prior year, comprising almost 90 percent of total
settlement value in 2018.(page
9)
•The
average settlement for accounting cases increased dramatically
due to a handful of
large settlements. In
addition,
the median settlement amount for accounting
cases overall increased by almost 60 percent,
indicating a broader shift in the
typical case size.4
(pages
1, 1
Continued in article
Important Issues in Statistical Testing and Recommended
Improvements in Research
April 27,
2019 Message from Tom Dyckman, Emeritus Accounting Professor from Cornell
University
Caught by
accident a video of the history of Persia on your blog. I think it was
prepared by the National Historical Association. I watched it for the hour
and then another on the a time-history of the world over the last 200,000
years. Both fascinating and well done. I now put away an hour each day for
education via your blog. Thanks.
Enclosing my
latest manuscript just accepted for publication in Econometrics. It deals
with issues you have been interested in as well as I that address issues
in statistical testing and accounting.
Jensen Comment
Although the article has not yet been published, here's the introduction:
Important Issues in Statistical Testing and Recommended Improvements in
Accounting Research
Thomas R. Dyckman, Cornell University
Stephen A. Zeff, Rice University
Synopsis:
A great deal of the accounting research published in recent
years has involved statistical tests. Our paper proposes improvements to
both the quality and execution of such research. We address the following
limitations in current research that appear to us to be ignored or used
inappropriately: (1) unaddressed situational effects resulting from model
limitations and what has been referred to as “data carpentry,” (2)
limitations and alternatives to winsorizing, (3) necessary improvements to
relying on a study’s calculated “p-values” instead of on the economic or
behavioral importance of the results, and (4) the information loss incurred
by under-valuing what can and cannot be learned from replications.
Keywords:
Model Specification, Model Testing, Reporting Results (p-values),
Replications.
Introduction
As professors of accounting for nearly 60 years and past
presidents of the American Accounting Association, we are concerned about
the quality of statistical research in accounting. This article is a call to
our accounting colleagues, and perhaps also to those in other fields, to
invest substantial time and effort toward improving their requisite
knowledge and skill when conducting the appropriate statistical analysis.
Involving expert statisticians may be helpful, as we all need to recognize
the limitations in our own knowledge in order to tap into this expertise.
Our heightened interest in improvements to the quality of statistical
analysis in accounting research was in response to attending research
presentations and reading the current literature.
Several years ago, we suggested several improvements to
statistical testing and reporting (Dyckman and Zeff 2014). In that paper, we
reviewed the 66 articles involving statistical testing that accounted for 90
percent of the research papers published between September 2012 and May 2013
in The AccountingReview and the Journal of Accounting
Research, two leading journals in the field of accounting. Of these 66
papers, 90 percent relied on regression analysis. Our paper examined ways of
improving the statistical analysis and the need to report the economic
importance of the results.
An extension of these concerns was included in a commissioned
paper included in the 50th anniversary of Abacus (Dyckman and Zeff 2015). We
acknowledge several accounting academics who are also concerned with these
issues, including Ohlson (2018), Kim, Ji and Ahmed (2018), and Stone (2018),
whose works we cite.
Concerns about statistical testing led to exploring the
advantages of a Bayesian approach and abandoning null hypothesis tests (NHST)
in favor of reporting confidence intervals. We also suggested the advantages
– and limitations – of meta-analysis that would allow for the inclusion of
replication studies in the assessment of evidence. This approach would
replace the typical NHST process and its reliance on p-values (Dyckman
2016).
A fourth article which reviewed the first 30 years’ history
of the research journal, Accounting Horizons, continued our concern with the
current applications of statistical testing to accounting research. An
additional aspect of this article was the attention we gave to accounting
researchers’ seeming lack of interest in communicating with an audience of
professionals beyond other like researchers, as if their only role as
researchers was to enrich the research literature and not to contribute to
the stock of accounting knowledge. We submit that accounting academics,
because of the academic reward structure in their universities, tend to
write for their peers. Accounting standard setters and accounting
professionals, as well as those who make business and policy decisions, are
all too often relegated to the sidelines. We argued that accounting research
should, in the end, be relevant to important issues faced by accounting
professionals, regulators and management, and that the research findings
should be readable by individuals in this broader user community (Zeff and
Dyckman 2018).
In the current paper, we expand on the statistical testing
issues raised in our earlier papers, and we identify limitations often
overlooked or ignored. Our experience suggests that many accounting
professors, and perhaps those in other fields, are not familiar with, or
equipped to, address them. We take up the following major topics: Model
Specification and Data Carpentry, Testing the Model, Reporting Results, and
Replication Studies, followed by A Critical Evaluation and A Way Forward.
Model Specification and Data Carpentry
The choice of a topic and related theory established the
basis for the hypotheses to be examined and the concepts that will
constitute the independent variables. Accounting investigations often rest
only on a story rather than on a theory. A major problem here is that a
story, but not theory, can be changed or modified, which encourages data
mining (Black 1993, 73). Establishing the appropriate relationships require
an understanding of the actual decision-making environment. These
ingredients, along with the research team’s insights and abilities, are
critical to designing the research testing program and the data collection
and analysis process. Failure to take them into account in the
data-selection decision process and analysis was discussed in detail in a
recent paper by Gow, Larcker, and Reiss (2016). There, the authors provided
a detailed example (pp. 502-514) of how the decision environment can reflect
its own idiosyncratic differences that, in turn, influence the data. For
example, even if the business context is essentially the same across
companies, data limitations remain. First, the data will inevitably reflect
different sets of decision makers and different organizations, different
time periods, different information, and, at least, some differences in the
definitions of the variables deemed to be relevant. The interactions between
these variables, and with any relevant but excluded variables, will, as the
authors showed, lead to questionable results. How the selected variables
interact with each other – and with any excluded but relevant variables –
depends on the nature of the contextual environment in which the relation
arises. We note here that careful research designs up front can reduce
interactions among the independent variables. Authors can and should
describe the decision environment and differences, if any, that have a
potential impact upon the analysis and conclusions. A thorough analysis and
description of the decision environments is essential and endows additional
credibility on the research.
Continued
in article
April 28, 2019 reply from Ed
Scribner
Bob,
Maybe this paper
by D&Z will advance the cause of publishing replications.
Ed
April 28, 2019 reply from Bob
Jensen
Hi Ed,
More
importantly the two major Dyckman and Zeff papers will (hopefully) advance
academic research into the various ways to mislead with statistics, albeit
the "misleading" is often done innocently (naively) rather than
intentionally. Accountics scientists over the years grew lazy by buying data
(think Compustat, CRSP, and AuditAnalytics) and feeding that data, sometimes
unviewed, into off-the-shelf statistical inference programs (like stirring
the stew and looking for lumps).
It's really
naïve to assume that replication is not needed when the data like Compustat
data are purchased and, therefore, cannot be "fabricated" by the
researchers. Even if we ignore errors in the purchased data, there are many
other ways to lazily mislead using purchased data --- ways summarized
broadly in this Dyckman and Zeff forthcoming 2019 econometrics paper.
Whenever I
was asked to referee papers using statistical inference my first suspicions
were sample size and non-stationarity. Oddly enough, samples are often too
large for statistical inference in accountics science. With very large
samples, differences are often statistically significant but not
substantively different. I recall pointing this out as an assigned
discussant at a conference before Deirdre McCloskey started writing about
this problem --- https://en.wikipedia.org/wiki/Deirdre_McCloskey
Also see
ttp://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
At the conference the author of the paper did not appear to understand this
point that McCloskey latter became known for in economics.
An even
bigger problem is nonstationary populations from which data is sampled ---
https://en.wikipedia.org/wiki/Stationary_process
The classic example here is the major problem with election polling. The
famous statistician (at the time employed by the NYT) named Nate Silver
predicted the day before the 2010 election (for Ted Kennedy's Senate seat)
that Mass. Attorney General Martha Coakley would womp Republican Candidate
Scott Brown. After Scott Brown became Senator Brown Nate Silver discovered
belatedly that due to various reasons
a huge number of voters changed their minds on election day.
Economic/financial data, like political poll data, are often sampled from
non-stationary processes where non-stationarity is overlooked by accountics
scientists. Dyckman and Zeff focused on this problem in their earlier (2014)
paper.
I think it's important to study their 2014 paper before digging into this
subsequent 2019 paper.
Dyckman, T.
R., and S. A. Zeff. 2014. Some methodological deficiencies in empirical
research articles in accounting. Accounting Horizons 28 (3): 695-712.
Elizabeth Warren Proposes Regressive Tax on America's
Largest Companies (hoping to raise $1 trillion in ten years)
https://www.wsj.com/articles/elizabeth-warren-proposes-new-corporate-tax-11554987601
To the extent those 1,200 largest companies do business with the government
(think military fuel purchased from Exxon to fill tankers manufactured by
Boeing) this is a wash item where the government taxes
itself hundreds of billions of dollars
Presidential hopeful Sen. Elizabeth
Warren has proposed a new 7 percent tax on “the largest, most profitable
U.S. companies.” The Real Corporate Profits Tax would affect some 1,200
companies and is projected to raise $1 trillion over a decade. Warren
specifically mentioned Amazon in her proposal — the company would have paid
$698 million more in U.S. taxes for 2018 under Warren’s plan.
Jensen Comment
What Warren fails to mention is that this is probably the most regressive tax
imaginable next to a sales tax and VAT tax.
What she fails to mention is that big corporations
don't pay taxes. Business firms collect taxes from customers by charging higher prices.
The estimated $698 million to be paid by Amazon will be collected from you and
me and Amazon's other customers. The added tax on large airlines will be tacked
onto air fares. The added tax on Home Depot, Kroger, GM, Exxon, and Ford will be paid
by its customers by way of higher prices. For example, one of the waitresses in
our nearby Polly's Pancakes is a single mom with three children living in a
mobile home heated with kerosene (commonly used for homes without basements in
this very cold mountain climate). Elizabeth Warren's tax will increase the price
of her kerosene (local suppliers buy from big outfits like Exxon) along with the
fuel she purchases for her rusty old sedan and her electric bill from our grid
powered mostly by natural gas.
Why do poor people and the lower middle class end up
paying the lion's share of Elizabeth Warren's proposed tax? Mainly because there
are so many more people that are poor or lower middle class relative to higher
income people. In the USA the poor and lower middle class pay virtually no
income tax, but they pay regressive taxes like sales taxes, fuel taxes, property
taxes (even when renting), and the corporate taxes factored into prices of
purchased goods and services.
This is not a tax on the super rich who invest more
than they spend. It's a tax on the poor and middle classes who spend most of
every penny they receive.
Don't get me wrong. Some big corporations will be
hurt badly to the extent that imported goods are relatively cheaper when
marketed by smaller companies exempted from the tax. LL Bean's prices on shoes
and clothing will be more price competitive relative to Amazon, although
customers who buy more from LL Bean will still be paying a premium above
Amazon's prices. LL Bean customers just won't have as much selection as they did when they
bought more from Amazon. Volvos will be cheaper relative to Fords made in
Michigan, and if Warren's tax was greater (say 20%) Ford would really hurt
because Volvo's US operations are tax exempt under her proposal.
The good news is that even her fellow democrats are
usually opposed to regressive taxes. They prefer a 70% tax on earnings of
physicians and other high income taxpayers.
Senator Warren has a history of proposing taxes that
are unconstitutional. This is just one of those political gimmicks in her
political campaign that will never come to reality. In truth she has no idea how
to fund her $100+ trillion dollar spending programs for free medical care, free
college, free guaranteed annual income for everybody, and African/Native
American repartitions on top of all the existing safety nets like subsidized
housing, food stamps, and welfare.
Jensen Comment
California's Proposition 13 putting a cap on tax valuation for longer-term
residents enables folks to remain in their homes.. Otherwise most would've been
forced to move through no fault of their own. Without such relief folks in the
other 49 states are often forced to move, and many choose to leave states like
NY, NJ, Connecticut, Illinois, and elsewhere, thereby depriving those states of
income taxes, estate taxes, sales taxes, etc.
Property taxes discourage building new homes or making
improvements to existing homes.
The article above discusses other aspects of property taxes
that are now used in many states like New Hampshire and Vermont for funding of
schools. Property taxes work better in New Hampshire because home owners find
tax relief by not having to pay income taxes and sales taxes. Property taxes
don't work well in Vermont due to Vermont's taxes on everything imaginable,
taxes that discourage moving into the state and encourage moving out of the
state. This is creating a crisis for economic development and retaining a work
force in Vermont. Exhibit A is the exit of physicians who set up practices just
across the border in New Hampshire. On any given day I see as many or more
Vermont license plates as NH license plates in NH parking lots. Those Vermont
folks come to NH for shopping, medical services, etc.
There is also a lot of cheating. I had a conversation in a
barbershop with a man who claims residency in a modest dilapidated house in
Woodsville, NH just across the Connecticut River that separates Vermont from New
Hampshire. He says his neighbor collects his mail while he and his wife live in
more of the year in an expensive retirement home on the Vermont side of the
river. For both homes he pays property taxes, but by declaring NH residency he
avoids paying Vermont income tax in his retirement. His Amazon purchases are
sent to NH to save on sales taxes.
Jensen Comment
The other side of the coin question is whether corporate audits prevent fraud
(including insider trading). In this latter case there's no way of knowing since
failure of fraud to take place is a statistic that can never be determined. It's
like asking how many rapes or murders never transpire because of fear of
punishment? If crimes never transpire we don't hear about those non-events in
history. We do know that audits were often financed by companies before they
were required by law in the 1930s for companies listed on stock exchanges. This
is a sign that audits were perceived by companies to have benefits exceeding
costs.
The Number 1 mission of the SEC is to avoid having investors
flee capital markets because of fear of being cheated, especially fear of being
cheated by insiders. Fraud can never be completely eradicated. But the fact that
investors still seem to have faith in the capital markets is a sign that efforts
of the SEC are not entirely failing. There were critical times in history for
the future of capital markets. Exhibit A is the Crash of 1929. Exhibit B
is the Enron scandal ---
http://faculty.trinity.edu/rjensen/FraudEnron.htm
Interestingly, these critical times increased the the legally-required
investments in auditing such as the 1930s securities laws and the Sarbanes-Oxley
Act of 2002.
NYT: NY Times: Although Trump Cut Taxes For Most Americans,
Democrats Convinced The Public That They Paid More Taxes ---
Jensen Comment
I had lconversation with a surgeon last week who complained that he normally
gets a tax refund of about $2,000 but this year was hit with a $15,000
shortfall. I did not get into details about his finances. But it would seem that
the main culprit is the $10,000 limit for property tax deductions that were
previously fully deductible on his expensive home and vacation home. High
earners in other states (think Vermont) were also hit by caps on state income
tax deductions. Everybody makes a big deal on how high income folks benefited
most from the tax changes. That is not necessarily the case for all high income
folks.
Next year many older taxpayers will be hit harder after the 7.5
percent limit before medical expenses (think supplemental Medicare insurance and
out-of-pocket costs of medications) kick in making it harder to convince the
older generation that Trump lowered their taxes. Next year that limit is 10%.
My beef is still that government
regulators should not be so willing to allow a corporation to settle with
just a fine – without punishing responsible individuals, and without
admitting guilt. In the end, this boils down to just a slap on the wrist.
Best, Tom
March 30, 2019 reply from Bob Jensen
Hi Tom,
It gets worse. Many of us think we can store
some privacy information on the hard drive like credit card numbers.
passwords, pin numbers, and even tax returns. The thought is that we will
remove those files before taking the computer in for repair, when sometimes
the computer is dead to a point where we cannot remove those files.
Unscrupulous technicians will then download
those files and sell them to the worse crooks. And it's very difficult to
later trace how those files were stolen in the first place unless law
enforcement sets up a sting.
Why some healthcare companies are betting big on blockchain
---
https://blog.aicpa.org/2019/04/why-some-healthcare-companies-are-betting-big-on-blockchain.html#sthash.u8OPi5Cd.dpbs
Jensen Comment
Bernie Sanders intends to eliminate the entire private sector in healthcare
insurance. Should that private sector invest hundreds of millions in blockchain
with such a threat looming on the horizon. The stock prices of the health
insurers are now crashing. Raising capital for large capital investments will be
increasingly difficult in the healthcare insurance and related industries.
Concordia University, Quebec - Concordia University
Date Written: March 21, 2019
Abstract
Firms transacting using blockchain-based assets and liabilities have begun to
enter capital markets in search for funding. Historically, firms have been able
to raise substantial funding without an audited financial statement, however we
project that in the future, audits will become a common requirement given
increased competition among firms, increased scrutiny from regulators, past
instances of fraud, and firms seeking an IPO. At the time of writing, accounting
firms are hesitant to accept mandates from companies that hold a significant
amount of cryptoassets primarily because the blockchain market introduces novel,
technically sophisticated, and risky propositions that auditors are unequipped
to handle. Through interviews with senior accounting professionals and
structured brainstorming meetings with a multidisciplinary team of accountants
and blockchain experts, we critically analyze the purported roadblocks to
auditing blockchain firms and map them to traditional auditing practices,
demonstrating that providing an audit opinion is challenging but not
insurmountable.
Hyndman, R. J., 2019. A brief history of forecasting competitions.
Working Paper 03/19, Department of Econometrics and Business Statistics,
Monash University.
Sargan, J. D.,, 1958. The estimation of economic relationships using
instrumental variables. Econometrica, 26, 393-415. (Read for free
online.)
Sokal, A. D., 1996. Transgressing the boundaries: Towards a
trasnformative hermeneutics of quantum gravity. Social Text,
46/47, 217-252.
Zeng, G. & Zeng, E., 2019. On the relationship between
multicollinearity and separation in logistic regression.
Communications in Statistics - Simulation and Computation, published
online.
Zhang, X., S. Paul, & Y-G. Yang, 2019. Small sample bias correction
or bias reduction? Communications in Statistics - Simulation and
Computation, published online.
Jensen Comment
I complain a lot about the dearth of accounting education blogs and Websites
hosted by academic accountants. You will, however, never hear me complain about
the wonderful MAAW (mostly history) site hosted by (retired) accounting
professor Jim Martin.
The phrase "take on more pension risk" does not mean they are necessarily in
worse shape that many cities in the rest of the nation such as (icky) Chicago.
An Analysis of
Contributors, Institutions, and Content of Accounting and the Public Interest
2001–2015
Diane H. Roberts
Accounting and the Public Interest
December 2018, Vol. 18, No. 1, pp. 129-151
https://aaajournals.org/doi/full/10.2308/apin-52245
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.
Capacity Planning Under Uncertainty and the Cost of Capital David Johnstone and
Alfred Wagenhofer
Journal of Management Accounting Research
Fall 2018, Vol. 30, No. 3, pp. 169-185
https://doi.org/10.2308/jmar-51859
We explore how risk
aversion affects optimal capacity and pricing decisions within the economic
setting of Banker and Hughes (1994). A risk-averse firm invests in fixed
capacity and sets a product price, but can also purchase spot capacity at
higher unit cost. Initial capacity and price are set by maximizing the
firm's mean-variance certainty equivalent. We find that, contrary to common
intuition, optimal capacity or list prices can increase under greater risk
aversion depending on exogenous fundamentals. We show how the firm's
capacity and price choices affect the economic trade-off between the mean
and the risk of the firm's uncertain payoffs. We also show that the cost of
capital is affected not only by the firm's covariance with other assets, but
also by its payoff mean. The objective of minimizing the cost of capital is,
therefore, fundamentally inconsistent with maximizing project value.
Jensen Comment
About all I have to say about this one is that among the wealthy tax avoidance
or deferral is bipartisan. The wealthy from both parties join hands to write
complexity into the tax code, complexity that allows them to save a lot taxes
(although sometimes they don't save as much money as the article implies since
avoiding taxes costs money). When avoiding/deferring taxes legally these wealthy
people sometimes pay out in ways other than taxes. For example, they get tax
free returns (other than capital gains taxes) on investments in tax free bonds
that provide capital to cities, counties, and school districts
at lower interest rates (relative to risk). In
other words, they accept lower returns and more financial risk to avoid taxes.
Also they invest in very long term investments such that they do not sell in
their lifetimes (think of all those Australian ranches and other land tracts
owned by Ted Turner). Upon death their heirs get hit with capital gains taxes,
but the parents avoided such taxes in their own lifetimes.
And sometimes the tax shelters that they buy into provide lower returns for
investments in worthy projects. I used to help my San Antonio neighbor with his
tax returns. He invested in a tax shelter sold to him by his brokerage firm. The
money he invested earned a relatively low rate of return but went to building
low-income housing. In other words he could've earned higher returns on taxable
investments and then let the government build the low-income housing. He liked
to think that he was just avoiding the government middleman by giving more
directly to those housing projects.
But I cannot deny the political subterfuge by the untrawealthy that is
mentioned in the above article. The ultrawealthy are not usually honorable
billionaires that come to mind among the billionaires I tend to admire for their
good deeds and benevolence. And some of the worst robber barons of all time
ended up doing good deeds near the end of their lives (think of all those
Carnegie libraries across the USA) maybe because they were trying to redeem
themselves before meeting their maker.
Management accounting continues
to be useful for business, and one of its tools is Activity-Based Costing (ABC).
This paper is a thematic research review on the ABC System, its development,
applications, challenges, and benefits. Several researchers claim that ABC is
efficient in product pricing, cost-cutting strategy, and customer and
profitability analysis. Meanwhile, Time-Driven ABC was introduced with the
advantages of firm-wide application and lower costs. Several academicians argue
that TDABC can be useful in the simulation of the optimal resource allocation,
benchmarking, Balanced Scorecard and Total Quality Management. For both American
and British companies, researchers attributed a highly significant correlation
between overall ABC success and the purpose ‘Activity Performance Measurement
and Improvement.’ According to practitioners, ABC adoption has an important
consequence, i.e. it reinstated the relevance of management
accounting. However, based on
adoption rates in the U.K. and the U.S.A., few companies adopt ABC. Challenges
faced by companies in the implementation are the possible reasons. Researchers
cited the huge costs and technical complexity as the system’s predominant
challenges. This paper synthesized the researchers’ conclusions into two
unifying hypotheses on factors correlated to ABC adoption and success.
This paper describes the construction of the Distributional Financial
Accounts (DFAs), a new dataset containing quarterly estimates of the
distribution of U.S. household wealth since 1989, and provides the first look at
the resulting data. The DFAs build on two existing Federal Reserve Board
statistical products --- quarterly aggregate measures of household wealth from
the Financial Accounts of the United States and triennial wealth distribution
measures from the Survey of Consumer Finances --- to incorporate distributional
information into a national accounting
framework. The DFAs complement other existing sources of data on the wealth
distribution by using a more comprehensive measure of household wealth and by
providing quarterly data on a timely basis. We encourage policymakers,
researchers, and other interested parties to use the DFAs to help understand
issues related to the distribution of U.S. household wealth.
We show how shareholder-debtholder agency conflicts interact with strategic
reporting under asymmetric information to influence bank regulation. Relative to
a benchmark unregulated economy, higher capital requirements mitigate
inefficient asset substitution, but potentially exacerbate under investment due
to debt overhang. The optimal regulatory policy balances distortions created by
agency conflicts and asymmetric information, while incorporating the social
benefit of bank debt. Asymmetric information and strategic reporting only impact
regulation for intermediate social debt benefit levels. For lower social debt
benefits in this interval, regulatory capital requirements are insensitive to
accounting reports so bank balance
sheets need not be marked to market to implement the optimal regulatory policy.
For higher social debt benefits, however, capital requirements are sensitive to
accounting reports, thereby
necessitating mark-to-market accounting
to implement bank regulation. Mark-to-market
accounting is essential when bank
leverage levels are high, and is more likely to be necessary as banks' asset
risk or specificity increases.
Keywords: mark-to-market accounting; bank regulation; agency conflicts
Relative Performance Evaluation and the Timing of Earnings Release
Shanghai University of Finance and Economics - School of Accountancy
Date Written: March 1, 2019
Abstract
Relative performance evaluation (RPE) compensates managers on their relative
performance against a peer group. Since observing more peers’ performance allows
managers to better estimate the performance level required to achieve RPE
targets, we conjecture that releasing earnings later than peers facilitates
managers to achieve targets by exploiting last-minute reporting discretion.
Empirical evidence is consistent with our conjecture. Further, managers tend to
select peers that release earnings more timely and delay own firms’ earnings
releases to be later than peers’ after RPE adoption. Our evidence suggests
strategic timing of earnings release and discretionary reporting in response to
relative performance evaluation.
Temple University - Fox School of Business and Management
Date Written: November 28, 2018
Abstract
We exploit state-level staggered shocks to third-party auditor legal
liability in the U.S. to test whether auditor litigation risk affects client’s
access to private debt markets. We argue that higher auditor litigation risk
reduces the agency costs of debt by improving financial statement quality.
Further, greater auditor litigation risk enhances the insurance value to
creditors of the auditing process. Consistent with these arguments, we find that
an exogenous increase in auditor litigation risk leads to both an increase in a
client’s likelihood of receiving bank loans and the average amount of bank loans
that the client receives. Our cross-sectional tests show that the effect of
auditor litigation risk on clients’ access to debt finance is stronger when
borrowers face ex-ante greater agency costs of debt and when creditors benefit
more from the enhanced insurance value of auditors. Last, we also find that
increased auditor litigation risk leads to an increase in the contractibility of
accounting numbers, as proxied by
the use of debt covenants, and a decrease in the cost of borrowing. To the best
of our knowledge, we are the first to document these relations between auditor
litigation risk and clients’ borrowing in a “clean” setting that ensures
confidence in causal inferences.
Keywords: debt financing; auditor litigation risk; state
liability laws
Disclosure Overload? An Empirical Analysis of International Financial
Reporting Standards Disclosure Requirements
Despite the positive effects of the adoption of International Financial
Reporting Standards (IFRS) noted in the literature, standard setters have
issued reports suggesting that the required disclosures in IFRS have become
too burdensome and should be reduced. We examine this disclosure overload
problem by testing whether the disclosure reduction recommendations of the
Excess Baggage Report issued by professional
accounting bodies from Scotland
and New Zealand in 2011 are associated with companies’ disclosure incentives
and are value relevant for a sample of 196 Australian listed companies. The
Excess Baggage Report classifies current IFRS disclosure requirement items
into three categories: Retain; Delete; and Disclose if Material. We find
that Retain items are disclosed the most, followed by those classified as
Disclose if Material, and then by Delete items. Only Retain items are
significantly associated with companies’ disclosure incentives. We also find
that these disclosure categories are value relevant, especially for
below‐median profitability firms. Our findings may provide input to the
IASB’s ongoing Disclosure Initiatives project.
Keywords: Disclosure incentives, Disclosure overload, IFRS
disclosure requirements, Value relevance
Equity Financial Assets: A Tool for Earnings Management—A Case Study of a
Chinese Corporation
Shanghai University of Finance and Economics - School of Accountancy
Date Written: March 2019
Abstract
With China’s adoption of principles‐based international
accounting standards and its
convergence with International Accounting
Standard 39 (IAS 39), Chinese companies have discretion under the original
Accounting Standards for Enterprises
22 (CAS 22) as to how they account for the initial measurement, sale, and
subsequent reclassification of financial assets. We use a Chinese company
(‘Company A’) as a case study to illustrate how earnings are managed to exploit
this discretion. We document that the company re‐classifies its available for
sale equity investments as long‐term equity investments to decrease the
volatility of the company’s apparent profits. We also make some predictions
regarding how the company will handle its financial assets under the new
standard, which is the same as IFRS 9. Our research contributes to the
continuous improvement of China’s
accounting standards and has implications for regulators of the capital
market.
Keywords: CAS 22, Case study, Earnings management, Financial
assets
Extractive Industries Reporting: A Review of
Accounting Challenges and the
Research Literature
While the extractive industries (EI) are of major significance
economically, the reporting of their activities has been the subject of
contentious debate posing dilemmas for regulators and standard setters over
many decades. In order to ensure alignment with the International
Accounting Standards Board (IASB)
research project on EI, we first identify some important economic
characteristics of EI and associated
accounting challenges together with an overview of how current
accounting standards deal with
these challenges using International Financial Reporting Standards as the
focus. Second, we conduct a review of extant research on EI reporting
analyzed around the key areas of: (a) international diversity of
accounting practices and the
challenges facing information users; (b) standard‐setting processes and
lobbying behaviour that deals with why the IASB (and other standard setters)
have not succeeded in developing rigorous standards for extractive
activities; (c) the reporting of oil, gas, and mineral reserves, given that
large proportions of the assets of EI firms (the reserves) are off‐balance
sheet; (d) environmental, social, and governance (ESG) reporting dealing
with how EI firms have increased their reporting of ESG information in
response to regulatory demands and pressure for voluntary disclosures; and
(e) other EI related topics such as earnings management, risk disclosures,
and voluntary disclosure behaviour. Finally, we present some conclusions
together with suggestions relating to key areas for future research on EI
reporting.
Keywords: Environmental, social, and governance reporting,
Extractive industries and activities, Full cost versus successful efforts
methods, IFRS, Lobbying and standard setting, Reserve recognition
accounting
Non‐GAAP Earnings and the Earnings Quality Trade‐Off
Using a large sample of earnings press releases by Australian firms, we
compare multiple attributes of non‐GAAP earnings measures with their closest
GAAP equivalent. We find that, on average, non‐GAAP earnings are more
persistent, smoother, more value relevant, and have higher predictive power
than their closest GAAP equivalent. However, the same set of non‐GAAP
earnings disclosures are also less conservative and less timely than their
closest GAAP equivalent. The results are consistent with non‐GAAP earnings
measures reflecting a reversal of the trade‐off between the valuation and
stewardship roles of accounting
inherent in accounting standards
and the way they are applied. We also find that differences in several of
these attributes between GAAP and non‐GAAP earnings are more evident in
larger firms, firms with lower market‐to‐book ratios, firms with a higher
proportion of independent directors, and firms that report profits rather
than losses. Our evidence is consistent with the argument that
accounting standards impose
significant amounts of conditional conservatism at some cost to the
valuation role of accounting
information. Non‐GAAP earnings measures can therefore be seen as a response
to the challenges faced by a single GAAP performance measure in satisfying
the competing demands of value relevance and stewardship.
Keywords: Non‐GAAP disclosures, Earnings quality
When Enough is Enough: The Use of Stopping Rules in Auditor Determinations
of Evidence Sufficiency
University of Central Florida - Kenneth G. Dixon School of Accounting
Date Written: February 25, 2019
Abstract
Advances in auditing technology and PCAOB reports documenting deficiencies by
public accounting firms have
increased recent dialog about what constitutes sufficient audit evidence,
particularly given that the determination of sufficiency depends largely on
professional judgment. We analyze interview responses of 15 financial statement
auditors through a framework depicting four information gathering stopping rules
that may be descriptive of how auditors make evidence sufficiency judgments
(Browne and Pitts 2004). The analysis shows all four information stopping rules
to be present in auditor’s determination of evidence sufficiency, with a
preference for the mental list and magnitude threshold rules in easier
sufficiency judgments and a preference for the difference threshold and
representational stability rules in more difficult judgments. Our findings
suggest that we have more to learn about audit evidence sufficiency
determinations, particularly in the performance of difficult audit tasks and how
audit procedures directing evidence collection become institutionalized in audit
programs.
Athens University of Economics and Business - Department of Accounting and
Finance
Date Written: February 28, 2019
Abstract
We investigate the implications of voluntary forecasting activity on the
persistence of actual reported figures. We further explore the impact of
managements’ error direction (i.e. pessimistic versus optimistic manager) on the
persistence of actual reported figures. We finally explore whether forecasting
activity can be used as a vehicle useful in obtaining profitable investment
strategies. The empirical evidence supports the intuition that management
forecasts indicate actual accounting
figures of higher reporting quality. Moreover, pessimistic managers provide more
persistent accounting figures than
optimistic managers. Finally, the evidence suggests that forecasting activity
occurrence indicates different quality implications for Forecasters relative to
non-Forecasters, creating thus ground for creating profitable investment
portfolio combinations.
This lecture reveals the summary of my major contributions to the field of
Accounting based on my experience in
the industry, and more importantly as an academic. It is the story of my career
in Accounting that led to my
elevation and appointment as the first Professor in
Accounting in Pan Atlantic
University, the first Professor in the Department of
Accounting of PAU, and of course the
first Chartered Accountant to be appointed a Professor by the University.
Keywords:Accounting,
Inaugural, Lecture, Professor
*************************************************
IFRS-Local GAAP Reconciliation Statements and
Accounting Information Quality
The main objective of this paper is to investigate the quantitative impact of
International Financial Reporting Standards (IFRS) on
accounting components. IFRS 1
requires IFRS adopter firms to prepare comparative information under IFRS and
under local GAAP, which is termed as IFRS-Local GAAP (e.g., IFRS-UK GAAP for the
UK) reconciliation statement. This statement shows every
accounting line item (in all
financial statements) under two accounting
systems for the same accounting
period, which helps us to know the differences between local GAAP and IFRS.
Analysing 1153 Australian listed firms’ reconciliation statements, this study
documents that investment value is 35.38 percent higher in IFRS relating to
investment value under local GAAP. Financial assets are shown 28.48 percent
higher in IFRS relating to financial assets under local GAAP; goodwill is valued
22.60 percent higher in IFRS relating to goodwill value under local GAAP. On the
other hand, retained earnings decrease by 23.3 percent under IFRS compared to
retained earnings under local GAAP. More importantly, net income increases by
5.64 percent under IFRS compared to those under local GAAP. The findings of this
study suggest that IFRS affects significantly
accounting components which
indicates the value relevance of IFRS. In addition, this study shows the
importance of understanding the differences between local
accounting standards and
international accounting standards.
This study will also be beneficial for investors, decision makers, preparers of
financial statements, and other users of
accounting information. More importantly, this study will be useful to
those countries planning to adopt or in the process of adopting international
accounting standards (e.g.,
Indonesia, Japan).
Using the New Zealand central government as a case study, we review the
process of adopting accrual accounting
in government through the eyes of those who were directly involved in the
change. The study draws on the literature on problemitization in the context of
accounting change and the
application of the notion of epistemic communities providing the basis for the
changes that were made. Our findings show that the triggers behind the
introduction of accrual accounting
were closely connected with the roles played by a network of individuals within
the public sector and the New Zealand central government without which the
changes might not have been deemed successful. We also find that the pace at
which the adoption was achieved was underpinned by the effort of these
individuals. Our findings suggest that while there is no general reform format
that can be applied to all countries, epistemic communities play a significant
role in the successful adoption of governmental
accounting reforms.
Keywords: accrual
accounting; epistemic community; New Zealand
Hong Kong Polytechnic University - School of Accounting and Finance
Date Written: February 19, 2019
Abstract
Sloan (1996), Richardson et al. (2005, 2006) examine how firms’ accruals
relate to subsequent financial performance. They identify a negative correlation
and attribute it to accruals lack of reliability. This paper considers the issue
from a different starting point: we forecast sales and expenses separately and
argue on prior grounds that accruals are generally informative about the
changes/growth in the income statement items. Two accruals variables serve as
the primary predictors, year-to-year changes in operating assets and operating
liabilities. This framework thus implies 2 forecasting equations and where the
RHS of each includes the 2 accrual variables, plus controlling variables.
Traditional accounting concepts can
be applied to gauge the expected magnitudes of the 2x2 load-factors. Moreover,
this framework leads to the hypothesis that the 2 accrual variables have a
negative effect on the ROA and earnings forecasts, consistent with the
literature. However, a closer look at the estimated load-factors shows some
subtleties. First, liability accruals are markedly more informative than asset
accruals. Second, while both accrual variables forecast ROA robustly, a shift to
earnings weakens the results. Third, the 2 accrual variables are more
informative about future performance in case of smaller firms. The empirics also
highlight the ways in which financial assets and liabilities influence the
forecasting and how their effects differ from those of the (operating) accruals.
Government of Cameroon - Ministry of Finance - Cameroon
Date Written: September 2, 2016
Abstract
Forensic Investigation is trending. It is emerging and fast becoming a
veritable tool in financial crimes curtailment and/or eradication. This mini
project work proposes to examine the concept of Forensic Investigation as an
emerging phenomenon particularly as it affects developing nation.
Forensic science is the scientific method of gathering and examining information
about the past which is then used in a court of law. The word forensic comes
from the Latin forēnsis, meaning "of or before the forum." In Roman times, a
criminal charge meant presenting the case before a group of public individuals
in the forum. Both the person accused of the crime and the accuser would give
speeches based on their sides of the story. The case would be decided in favor
of the individual with the best argument and delivery. This origin is the source
of the two modern usages of the word forensic – as a form of legal evidence and
as a category of public presentation. In modern use, the term forensics in the
place of forensic science can be considered correct, as the term forensic is
effectively a synonym for legal or related to courts. However, the term is now
so closely associated with the scientific field that many dictionaries include
the meaning that equates the word forensics with forensic science.
Early methods: The ancient world lacked standardized forensic practices, which
aided criminals in escaping punishment. Criminal investigations and trials
heavily relied on forced confessions and witness testimony. However, ancient
sources do contain several accounts of techniques that foreshadow concepts in
forensic science that were developed centuries later
For instance, Archimedes (287-212 BC) invented a method for determining the
volume of an object with an irregular shape. According to Vitruvius, a votive
crown for a temple had been made for King Hiero II, who had supplied the pure
gold to be used, and Archimedes was asked to determine whether some silver had
been substituted by the dishonest goldsmith. Archimedes had to solve the problem
without damaging the crown, so he could not melt it down into a regularly shaped
body in order to calculate its density. Instead he used the law of displacement
to prove that the goldsmith had taken some of the gold and substituted silver
instead.
The first written account of using medicine and entomology to solve criminal
cases is attributed to the book of Xi Yuan Lu (translated as Washing Away of
Wrongs), written in China by Song Ci (宋慈,
1186–1249) in 1248, during the Song Dynasty. In one of the accounts, the case of
a person murdered with a sickle was solved by an investigator who instructed
everyone to bring his sickle to one location. (He realized it was a sickle by
testing various blades on an animal carcass and comparing the wound.) Flies,
attracted by the smell of blood, eventually gathered on a single sickle. In
light of this, the murderer confessed. The book also offered advice on how to
distinguish between a drowning (water in the lungs) and strangulation (broken
neck cartilage), along with other evidence from examining corpses on determining
if a death was caused by murder, suicide or an accident.
Methods from around the world involved saliva and examination of the mouth and
tongue to determine innocence or guilt. In ancient Chinese and Indian cultures,
sometimes suspects were made to fill their mouths with dried rice and spit it
back out. In ancient middle-eastern cultures the accused were made to lick hot
metal rods briefly. Both of these tests had some validity since a guilty person
would produce less saliva and thus have a drier mouth. The accused were
considered guilty if rice was sticking to their mouths in abundance or if their
tongues were severely burned due to lack of shielding from saliva.
Fingerprints: Sir William Herschel was one of the first to advocate the use of
fingerprinting in the identification of criminal suspects. While working for the
Indian Civil Service, he began to use thumbprints on documents as a security
measure to prevent the then-rampant repudiation of signatures in 1858.
In 1877 at Hooghly (near Calcutta), he instituted the use of fingerprints on
contracts and deeds, and he registered government pensioners' fingerprints to
prevent the collection of money by relatives after a pensioner's death. Herschel
also fingerprinted prisoners upon sentencing to prevent various frauds that were
attempted in order to avoid serving a prison sentence.
In 1880, Dr. Henry Faulds, a Scottish surgeon in a Tokyo hospital, published his
first paper on the subject in the scientific journal Nature, discussing the
usefulness of fingerprints for identification and proposing a method to record
them with printing ink. He established their first classification and was also
the first to identify fingerprints left on a vial. Returning to the UK in 1886,
he offered the concept to the Metropolitan Police in London, but it was
dismissed at that time.
Faulds wrote to Charles Darwin with a description of his method, but, too old
and ill to work on it, Darwin gave the information to his cousin, Francis Galton,
who was interested in anthropology. Having been thus inspired to study
fingerprints for ten years, Galton published a detailed statistical model of
fingerprint analysis and identification and encouraged its use in forensic
science in his book Finger Prints. He had calculated that the chance of a "false
positive" (two different individuals having the same fingerprints) was about 1
in 64 billion.
Keywords: Forensic Accounts, Finance Investigation, Fraud,
corruption, growth, development
IAN D. GOW and STUART KELLS, The Big Four: The Curious
Past and Perilous Future of the Global Accounting Monopoly (Oakland, CA:
Berrett-Koehler Publishers, Inc., 2018, 1–256, hardcover).
I. OVERVIEW
I find it rather
difficult to characterize the purpose of this book and its intended
audience. Certainly, the book was not written with academic readers in mind.
This is clear from the title with the dubious and pejorative reference to
the Big 4 firms as “the global accounting monopoly.” Moreover, early in the
book (pp. 9 and 10) the authors distance themselves from the academic
literature in auditing, which is described as “narrow and a-historical” and
typically “reverential” and “non-confrontational” toward the Big 4 firms.
Moreover, (many) accounting academics are themselves tarred with the term
“idiot savants” (p.10). I suspect then, that the book is intended for a
general audience that has an interest in business topics and who might also
be attracted to (virtual) bookstore offerings with titles like The Coming
Global Catastrophe or How to Make a Hundred Million without Really
Trying. Such readers would know next to nothing about auditing—or
accounting for that matter—but might recognize “the Big 4” from news
articles about fraud and corporate malfeasance with which the names of these
firms are periodically associated.
Since readers of The
Accounting Review are by-and-large academics, what can we learn from
this book? My short answer is—not too much. When reading it, I felt that I
was listening to the voice of someone who had worked a short time for a Big
4 firm, had very bad experiences there, and was bent on obtaining a bit of
revenge. For example, the daily routine of a junior auditor is described as
“dull and repetitive” (p. 113) and the function of auditing is supposedly
“low status” and “deprecated” inside the firms. Further, it is claimed that,
“[m]ost graduates view a stint in auditing as a stepping stone to something
else. Anything else.” Personal experiences vary, but—by contrast—I view the
four years I spent on the audit staff in the Chicago office of Ernst & Ernst
(albeit, in an earlier era) as interesting, fun, and crucial to my personal
development. I am sure many others have had similar positive, more recent
experiences in one of the Big 4 firms.
Probably the strongest
features of the book are the broad histories of the individual firms and
some of the key players in those histories, as well as the history of the
profession as a whole. The authors recognize the crucial importance of the
changes that occurred during the 1970s following the U.S. Department of
Justice's decision that anti-trust legislation applied to the sale of
professional services—not just to trade in goods. The resulting transition
of public accounting from a somewhat amorphous “professional” orientation to
an economics-based “business” orientation is well known. The authors do a
reasonable job of describing the ensuing cultural changes within firms; the
rise, fall, and rebirth of management advisory services; as well as a
particularly interesting discussion of the less well-known controversies
surrounding taxation consulting. The pervasive weakness of the book is the
authors' analysis of these controversies, which comes across as
sensationalistic and amateurish. Given their disdain for the academic
literature, this is not surprising.
Before considering some
of these issues in more detail, I should comment on the history of the
Italian Medici Bank that is discussed at length in the book as analogous to
the history of the Big 4. While I found this to be of some initial
interest—particularly the idea that the Medici family pioneered the
franchise model of partnerships to limit their legal liability—by page 190
the analogy is stretched beyond breaking and the discussion is more annoying
than helpful.
II. THE SUPPOSED CULTURE OF THE BIG 4
In Chapters 7 and 8, the
authors provide their “take” on how the Big 4 firms operate. The reader can
guess that this will not be approbation when the organizational structure is
initially compared to that of the Mafia, where the “earnings flow from the
most junior thug upward” (p. 83). This is meant as a description of a firm's
staff leverage—the ratio of more junior staff to partners. The fact that
large public accounting firms have traditionally had pyramidal organizations
with a broad base of junior staff is certainly true, although technology and
outsourcing may well be shrinking the base. Rather than provide a reasoned
analysis of the costs and benefits—either to the firm partners or the staff
members themselves—of maintaining a mix of staff with various levels of
experience, the authors recount instances where staff with inadequate skills
contributed to audit failure, client complaints about seeing too many junior
staff rather than the partner who sold the job, and several personal
anecdotes in which former Big 4 staff complain about constant evaluation and
review of their work. The tone of these chapters—and, in fact, the book as a
whole—is well conveyed by quotations from some staff member's resignation
letter that “went viral” and complained that “her job … involved filling out
useless workpapers that didn't benefit anybody” and that “auditing was for
people who truly don't have any other options” (p. 107).
Much of the discussion
of Big 4 culture concerns firm partners. While some of the caricatures of
partner types—Lifers, Technicians, Super Partners, etc.—are amusing to read
(p. 86), I am not sure they convey anything useful. In fact, acknowledging
the existence of these various types is seemingly inconsistent with other
claims that the selection of Big 4 firm partners involves a “curious mixture
of personal attributes” (p. 85) that results in partners who share strong
similarities. Obviously, the selection of a fellow partner in a partnership
organization will be a highly personal process during which the incumbents
consider the incremental net benefits of this person to the firm. I suspect
that this process is essentially the same in a Big 4 firm as it would be in
a non-Big 4 firm or a firm of architects, lawyers, or consultants, and that
similar amusing tales could be told about the partner selection process in
these firms—maybe even about the promotion of accounting academics!
III. AUDITING AND PROBLEMS OF INDEPENDENCE
Chapters 9 through 12 are (to me) the core of the book, in the sense that
they touch on serious issues that have been of interest to academic
researchers for many years. These chapters cover the nature of auditing,
conflicts arising from the auditing—consulting nexus, tax advisory work, and
the problems of the Big 4 firms in penetrating the China market.
Unfortunately, as with most of this book, the discussion is largely shallow
and sensationalistic. Consider this characterization of the “seven deadly
sins of traditional auditing” (p. 149) as “Lapdog. Slacker. Innovation
killer. Nitpicker. Red-tape tangler. Under-deliverer. Hollow ritualist.”
These sound more like quotes from a Donald Trump Twitter rant than even a
semi-serious analysis for a general audience! The discussion in these
chapters is largely built around the many cases of “audit failures”
(McKesson & Robbins, Colonial Bank, Westec Corp., Enron, Lehman Bros., etc.)
that are well known and more carefully examined in places such as the
casebook by
Knapp (2013).
Continued in article
Auditor Industry Specialization and Audit Pricing and Effort By Gil Soo Bae, Seung
Uk Choi, and Jae Eun Lee
AUDITING: A Journal of Practice & Theory
February 2019, Vol. 38, No. 1, pp. 51-75
https://aaajournals.org/doi/full/10.2308/ajpt-52039
We
test for discrimination against minority borrowers in the prices charged by
mortgage lenders. We construct a unique dataset of federally-guaranteed loans
where we observe all three dimensions of a mortgage’s price: the interest rate,
discount points, and fees. While we find statistically significant gaps by race
and ethnicity in interest rates, these gaps are exactly offset by differences in
discount points. We trace out point-rate price schedules and show that
minorities and whites face identical schedules, but sort to different locations
on the schedule. Such sorting likely reflects differences in liquidity or
preferences, rather than lender steering. Indeed, we also provide evidence that
lenders generate the same expected revenue from minorities and whites. Finally,
we find no differences in total fees by race or ethnicity.
Olayan School of Business, The American
University of Beirut
Date Written: August 15, 2018
Abstract
Purpose: Several studies, especially in Asian
economies, have investigated the antecedents, implications, and consequences of
related-party transactions (RPTs). This paper reviews this literature to
collate, gauge, and critically discuss understandings of the relationship
between RPTs and risk, with a particular focus on audit risk.
Design/methodology/approach: The paper discusses RPTs and how they have been
associated with corporate scandals and the expropriation of shareholders’
wealth. RPTs are defined as per accounting
standards and the main types of RPTs are described based on the extant
literature. Two key research design issues are discussed: measures used to
operationalize RPTs and observable variations in sample size across RPT studies.
Evidence is presented on the negative effects of RPTs and the role of
regulation, corporate governance, and auditing in reducing risks. Findings:
Prior studies have associated RPTs with the expropriation of shareholders’
wealth, declining firm valuations, lower-quality financial reporting, increased
risk of material misstatements, and decreases in long-term firm performance.
Further, the evidence suggests that regulation, corporate governance, and
auditing can mitigate the negative effects of RPTs. Practical implications: This
paper provides insights for regulators on the effects of enforcement, corporate
governance, and external audits on reducing the negative effects of RPTs, and
highlights the increased risk of material misstatements in financial statements
when RPTs are conducted. Moreover, it reveals how RPTs affect risk assessments
for auditors. Originality/value: This paper represents the first comprehensive
review of the empirical RPT literature. It provides a starting point for future
investigations of RPTs, not least because it reveals important limitations with
the extant body of research in this domain. It also offers salient insights and
implications for practitioners and policy makers.
We examine employment effects, such as wages
and employee turnover, before, during, and after periods of fraudulent
financial reporting. To analyze these effects, we combine U.S. Census data
with SEC enforcement actions against firms with serious misreporting
(“fraud”). We find compared to a matched sample that fraud firms’ employee
wages decline by 9% and the separation rate is higher by 12% during and
after fraud periods while employment growth at fraud firms is positive
during fraud periods and negative afterward. We discuss several reasons that
plausibly drive these findings. (i) Frauds cause informational opacity,
misleading employees to still join or continue to work at the firm. (ii)
During fraud, managers overinvest in labor changing employee mix, and after
fraud the overemployment is unwound causing effects from displacement. (iii)
Fraud is misconduct; association with misconduct can affect workers in the
labor market. We explore the heterogeneous effects of fraudulent financial
reporting, including thin and thick labor markets, bankruptcy and
non-bankruptcy firms, worker movements, pre-fraud wage levels, and period of
hire. Negative wage effects are prevalent across these sample cuts,
indicating that fraudulent financial reporting appears to create meaningful
and negative consequences for employees possibly through channels such as
labor market disruptions, punishment, and stigma.
Keywords: Wages, Employment
Growth, Accounting Fraud,
Information Asymmetry, Stigma
Auditor Alignment and the Internal Information Environment
We investigate how auditor alignment, i.e. parent and subsidiary are
audited by auditors from the same audit firm network, affects the quality of
the internal information environment of groups and their subsidiaries
decision making and performance management processes. We predict that
auditor alignment improves internal information quality via better
information coordination across the group, and via lower internal
information asymmetry between parent and subsidiaries. We use a sample of
European groups and find that auditor alignment benefits the subsidiaries’
as well as the groups’ responsiveness to investment opportunities. At
subsidiary level, it decreases the loss-making likelihood, and at group
level, it facilitates tax planning. We use the staggered introduction of the
revised ISA 600, which was incorporated in the applicable audit standards in
most countries of our international sample, as exogenous variation in the
subsidiary’s auditor alignment likelihood to alleviate endogeneity concerns.
We present cross-sectional evidence that groups with high coordination needs
and parent-subsidiary pairs with high internal information asymmetry benefit
more from auditor alignment. Our contribution is of interest to regulators
who consider group audits a priority topic, and to practitioners and
academics alike by demonstrating the benefits of an important audit
characteristic, auditor alignment, for the internal decision-making and
performance management processes of the firm.
Keywords: group audit, auditor alignment, interface between
auditing and managerial accounting,
internal information quality, common auditor
The Effects of Financial Reporting and Disclosure on Corporate Investment: A
Review
A fundamental question in accounting
is whether and to what extent financial reporting facilitates the allocation
of capital to the right investment projects. Over the last two decades, a
large and growing body of literature has contributed to our understanding of
whether and why financial reporting affects investment decision-making. We
review the empirical literature on this topic, provide a framework to
organize this literature, and highlight opportunities for future research.
Keywords: financial reporting, disclosure,
accounting, investment, real
effects, R&D, acquisitions
Market Valuations of Bargain Purchase Gains: Are These True Gains under IFRS?
This study investigates stock market valuations for bargain purchase gains (BPGs)
in the context of International Financial Reporting Standards (IFRS) between
2005–2014. Motivated by the increased frequency and high concentration of BPGs
in Europe, we study a sample of acquirers listed on the London Stock Exchange to
assess the value relevance of BPGs (a) under discrepant disclosure practices
(i.e., disclosure versus non- disclosure of the reasons for the gains), (b)
before and after the revision of IFRS 3, and (c) considering different income
classifications for BPGs (operating or non-operating earnings). BPGs, on
average, are not significantly valued by the stock market. However, the post-IFRS
3 revision period, marked by stricter measurement criteria and additional
disclosure requirements, witnessed a significant shift in firm valuations. BPGs
for which the reason for the gain is disclosed are positively valued only in the
post-IFRS 3 revision period. BPGs are consistently perceived as value irrelevant
for those firms which fail to comply with mandated IFRS 3 disclosure
requirements regarding the reason for the gain. Finally, BPGs classified as a
component of non-operating income with sufficient note disclosure on the reason
for the gain are significantly associated with prices and returns.
University of Oxford - Faculty of Law; Loyens & Loeff N.V.
Date Written: February 1, 2015
Abstract
The present book explores tax arbitrage opportunities ensuing from
financial engineering techniques with cross-border financial instruments,
making use of complex types of arrangements such as hybrids, synthetics or
non-traditional financial instruments, which are able to meet the criteria
for a favourable tax treatment in multiple jurisdictions.
Covering pivotal matters arising under tax treaties and EU law, among other
arbitrage potentiating aspects, drawing conclusions to hub an international
tax planning frame.
In-depth analysis on the factors determining the characterization of
income under OECD, UN and U.S. Income Tax Model Conventions; namely in
situations of overlap and thin capitalization;
Characterization of income under the Parent-Subsidiary Directive and the
Interest & Royalties Directive;
Recharacterization of an instrument’s underlying capital under EU law and
tax treaties;
EU law on the denial of tax benefits and determent of cross-border tax
arbitrage;
Non-discrimination under tax treaties and EU law;
Notes on OECD BEPS and arm’s length intra-group finance of multinational
enterprises;
Exploitation of accounting and regulatory inconsistencies;
Comparative analysis of at least 7 jurisdictions, including Australia,
Belgium, Brazil, Luxembourg, Portugal, the United Kingdom and the United
States.
The author also proposes an objective benchmark for the taxation of
financial instruments to achieve greater international tax neutrality,
ultimately promoting global wealth.
Questions the debt-equity divide and the vital fictions of the income tax
system;
Hybrids, synthetics and non-traditional financial instruments are
examined, considering finance concepts such as basic building blocks and
risk-based rules;
Plunges in the beguiling debate on economic substance versus legal form,
considering the role of the expected-return taxation theory;
Admissibility of international tax arbitrage;
Shortcomings of coordination rules leading to circularly-linked rules;
Keywords: interpretation of tax treaties, tax treaty
characterization of income, OECD MC, UN MC, US MC, taxation of financial
instruments, thin capitalization, arbitrage opportunities, international tax
planning, international transactions, strategic interactions.
Recent Regulation in Credit Risk Management: A Statistical Framework
University of Alberta - Department of Mathematical and Statistical
Sciences
Date Written: April 14, 2019
Abstract
A recently introduced accounting standard, namely the International
Financial Reporting Standard 9, requires banks to build provisions based on
forward-looking expected loss models. When there is a significant increase
in credit risk of a loan, additional provisions must be charged to the
income statement. Banks need to set for each loan a threshold defining what
such a significant increase in credit risk constitutes. A low threshold
allows banks to recognize credit risk early, but leads to income volatility.
We introduce a statistical framework to model this trade-off between early
recognition of credit risk and avoidance of excessive income volatility. We
analyze the resulting optimization problem for different models, relate it
to the banking stress test of the European Union, and illustrate it using
default data by Standard and Poor’s.
Keywords: credit risk, risk modelling, IFRS 9, expected
credit loss, early recognition, income volatility
JEL Classification: G32, C51
The Sound of Silence: What Does a Standard Unqualified Audit Opinion Mean
Under the New Going Concern Financial Accounting Standard?
University of Nebraska at Lincoln - School of Accountancy
Date Written: April 17, 2019
Abstract
Updated FASB standards require management to formally assess an entity’s
ability to continue as a going concern and disclose any substantial doubt about
such. We
experimentally investigate the effect of this new standard on jurors’
assessments of auditor
blame and negligence for failing to issue a going concern opinion to an auditee
that subsequently
ceases operating. Results reveal (1) when management has not disclosed going
concern issues,
negligence verdicts and blame ascribed to auditors for investors’ losses
increase under the new
FASB standard, and (2) when management has disclosed going concern issues,
auditor blame
increases further. In a second experiment, we find that including a going
concern-related CAM in
the audit report substantially decreases auditor blame and negligence verdicts
by influencing
perceptions of auditors’ diligence regarding the going concern evaluation. These
findings
provide useful insights regarding the impact of both new financial accounting
and auditing
standards on auditor liability.
A fundamental question in accounting
is whether and to what extent financial reporting facilitates the allocation of
capital to the right investment projects. Over the last two decades, a large and
growing body of literature has contributed to our understanding of whether and
why financial reporting affects investment decision-making. We review the
empirical literature on this topic, provide a framework to organize this
literature, and highlight opportunities for future research.
Keywords: financial reporting, disclosure,
accounting, investment, real
effects, R&D, acquisitions
Common Structures of Asset-Backed Securities and Their Risks
In recent years, one area of growing concern in corporate governance is the
accounting and transfer of risk using special purpose entities (or trusts). Such
entities are used widely in issuing asset-backed securities. This paper provides
an overview of the asset-backed securities market, and discusses the common
structures used in this market to transform the risks associated with the
underlying collateral into risks associated with the issued securities.
Understanding these structures is essential to understanding the allocation and
transfer of risk among the different parties in an asset-backed transaction –
the originator, the special-purpose entity, investors, and related parties such
as insurance guarantors. Understanding these structures is also essential in
proposing potential solutions to regulatory and accounting concerns about the
transfer of risks in asset-backed securities.
University of Michigan, Stephen M. Ross School of Business
Date Written: April 20, 2019
Abstract
This paper uses detailed UPC-level data from Nielsen to examine the
relationship between excise taxes, retail prices, and consumer welfare in the
market for distilled spirits. Empirically, we doc- ument the presence of a
nominal rigidity in retail prices that arises because firms largely choose
prices that end in ninety-nine cents and change prices in whole-dollar
increments. Theoretically, we show that this rigidity can rationalize both
highly incomplete and excessive pass-through esti- mates without restrictions on
the underlying demand curve. A correctly specified model, such as an (ordered)
logit, takes this discreteness into account when predicting the effects of
alternative tax changes. We show that explicitly accounting for discrete pricing
has a substantial impact both on estimates of tax incidence and the excess
burden cost of tax revenue. Quantitatively, we document substantial non-monotonicities
in both of these quantities, expanding the potential scope of what policymakers
should consider when raising excise taxes.
Concordia University, Quebec - Concordia University
Date Written: March 21, 2019
Abstract
Firms transacting using blockchain-based assets and liabilities have begun to
enter capital markets in search for funding. Historically, firms have been able
to raise substantial funding without an audited financial statement, however we
project that in the future, audits will become a common requirement given
increased competition among firms, increased scrutiny from regulators, past
instances of fraud, and firms seeking an IPO. At the time of writing, accounting
firms are hesitant to accept mandates from companies that hold a significant
amount of cryptoassets primarily because the blockchain market introduces novel,
technically sophisticated, and risky propositions that auditors are unequipped
to handle. Through interviews with senior accounting professionals and
structured brainstorming meetings with a multidisciplinary team of accountants
and blockchain experts, we critically analyze the purported roadblocks to
auditing blockchain firms and map them to traditional auditing practices,
demonstrating that providing an audit opinion is challenging but not
insurmountable.
In this study, we leverage social identity theory to study the financial
reporting behavior of chief financial officers (CFOs) with prior auditing
experience. Social identity theory suggests that the values learned within a
profession are likely to influence behavior after an individual leaves the
profession. Our tests indicate that, on average, CFOs who were former auditors
report less aggressively than CFOs without previous auditing experience. Thus,
the public accounting social identity – which should include a mindset that
values ethical, conservative, and transparent financial reporting – appears to
persist when auditors take high-level positions in industry. However, we also
find that the reporting behavior of prior-auditor CFOs becomes more aggressive
over time as the salience of their public accounting experience decays. Auditors
appear to adjust effort similarly, as both audit fees and audit delay are lower
for clients with prior-auditor CFOs but increase as the CFOs’ time away from
public accounting increases. Overall, our study provides support for social
identity theory in a new setting and offers important insights regarding how
auditing experience impacts the financial reporting decisions of top executives.
Keywords: Financial Reporting, Social Identity, Auditing,
Discretionary Accruals
Big Four Auditors, Litigation Risk, and Disclosure Tone
We examine the effect of Big 4 auditors on management’s use of optimistic
language in audited financial statement disclosures. While regulators and
practitioners consider the audit of disclosures to be increasingly important,
empirical evidence of an auditor’s effect on management’s qualitative disclosure
choices is limited. Focusing on the notes to the financial statements, which are
the primary disclosure item subject to audit, we find that the tone of the
qualitative footnote disclosures is significantly more reflective of bad
economic news in the presence of a Big 4 auditor compared with a non-Big 4
auditor. This inference continues to hold for a matched sample constructed using
entropy balancing to control for inherent differences between clients of Big 4
and non-Big 4 auditors. The Big 4 effect on footnote disclosure tone is more
pronounced for the subsample of companies with high litigation risk. A
transaction-based analysis of specific footnotes reveals a generally signficant
Big 4 effect on footnote disclosure tone when the footnotes are related to
signficant business transactions under the Broad Transactions category of the
Financial Accounting Standards
Board’s Accounting Standards
Codification. Finally, when we examine Management’s Discussion and Analysis,
which is not subject to audit, we do not find a Big 4 effect on the sensitivity
of its tone to bad news. Our results are consistent with higher litigation
exposure motivating Big 4 auditors to constrain management’s use of optimistic
language while auditing financial reports. This research provides new evidence
to the ongoing regulatory discussions regarding the value of auditing
disclosures.
Keywords: Big 4 Auditors, Tone, Disclosure, Footnote,
Litigation risk
Several new accounting
pronouncements are effective for the first quarter of 2019 for calendaryear
entities.1 We list them below, along with related EY publications, which are
produced by our US Professional Practice Group and are available free of
charge on EY AccountingLink.
All entities should
carefully evaluate which accounting requirements apply to them for the first
time.
To help entities with
planning, we have added a more comprehensive list of new guidance and
effective dates in the appendix to this publication.
Pronouncements and
resources
Continued in article
EY:
SEC staff issues
framework for analyzing whether a digital asset is a security
The SEC
staff issued a framework
for analyzing whether a digital asset, such as a token or coin, meets the
definition of a security under US securities laws. The framework is built on
the analysis of an investment contract that the US Supreme Court laid out in
SEC v. Howey in 1946 in what became
known as the Howey test. Under this test, a digital asset would meet the
definition of a security if it involves an investment of money in a common
enterprise with a reasonable expectation of profit derived from the efforts
of others. The framework issued by the staff of the SEC’s Strategic Hub for
Innovation and Financial Technology (FinHub) identifies characteristics that
market participants should consider to determine whether and when a digital
asset is offered or sold as an investment contract and therefore is a
security.
The SEC’s
Division of Corporation Finance also issued a response to a
no-action request
indicating it will not recommend
enforcement action if the digital tokens described in the request were
offered or sold without registration because, among other things, those
tokens will only be used to prepay for services within an existing business
and the token proceeds will not be used for development. The response
illustrates how the SEC staff applied the framework to a specific fact
pattern.
From the time Bitcoin was first proposed by Nakamoto in 2008,
its underlying technology has been under intense scrutiny. Its influence has
gone beyond this initial technical interest to stimulate research in
economics, finance,
accounting, regulation and taxation, where it is analysed not
for its technical merits but for its impact on global financial and monetary
systems, and its investment and business potential – some legal, some
illegal. From a comprehensive search of the literature that resulted in an
original sample of 13,507 results, a final sample of 1,206 papers on Bitcoin
were categorised and mapped across six disciplines, revealing Bitcoin’s
multidisciplinary influence. There is every indication that this interest
will continue into the future.
Keywords:
bitcoin, blockchain, cryptocurrency, digital currency, research, literature
JEL Classification:
O33
From the CFO Journal's Morning Ledger on
April 26, 2019
The share of
recent U.S. high-school graduates whoenrolled in
college
rebounded last year, showing the strongest labor market in decades has yet
to entice young Americans away from pursuing more education.
From the CFO Journal's Morning Ledger on
April 26, 2019
African swine fever has swept across
China’s pig farms,
spreading more quickly than authorities had expected and devastating the
country’s pork industry
From the CFO Journal's Morning Ledger on
April 25, 2019
Is Zero-Based Budgeting to Blame for Kraft Heinz’s Woes?
From the CFO Journal's Morning Ledger on
April 24, 2019
Good morning. As Kraft Heinz Co.’s new Chief Executive Miguel
Patricio prepares to take over, he should ponder whether being better known
for cost-cutting than for your ketchup or mac ‘n’ cheese is a recipe for
failure, The Wall Street Journal’s John D. Stoll writes.
Many point to
zero-based budgeting as
a primary source of Kraft’s headaches, including a $15
billion writedown earlier this year. Zero-based budgeting calls on managers
to begin each fiscal year with a clean-sheet approach to expenses and
financial targets. Under this system, a quirky marketing campaign or a
whizzbang invention that made so much sense last year can be killed because
it doesn’t square with this year’s financial goals.
But it has its limitations. “If you are so rigidly focused on what is
directly in front of you you’ll miss a lot,” said Brian Wieser, head of
business intelligence at GroupM, WPP PLC’s ad-buying
agency. “It’s critical to optimize against forests rather than trees.”
From the CFO Journal's Morning Ledger on
April 18, 2019
Federal prosecutorshave
charged scores of doctors,
nurses, pharmacists and other medical professionals with scheming to
distribute more than 32 million powerful and addictive pain pills.
Will the Big Four spin off either auditing or
consulting in the UK? What about the Big Six?
From the CFO Journal's Morning Ledger on
April 18, 2019
A U.K.
regulator is proposing sweeping changes to rules governing the nation’s
audit industry, with the aim of boosting competition, avoiding conflicts of
interest and restoring the reputation of a sector that has been tarnished by
corporate scandals, reports CFO Journal.
Big
Four:
The Competition and Markets Authority said audit firms Deloitte LLP,
Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers
LLP shouldsplit their audit and consulting businesses.
The U.K.’s competition
regulator also proposed that these larger firms participate in joint audits
with smaller audit firms, and for corporate audit committees to be held
accountable for their choice of auditor.
Below
expectations:
“People’s livelihoods, savings and pensions all depend on the auditors’ job
being done to a high standard,” said Andrew Tyrie, chairman of the CMA, in a
statement. “But too many fall short—more than a quarter of big company
audits are considered substandard by the regulator. This cannot be allowed
to continue.” The British government has 90 days to respond to the CMA's
recommendations.
Reputation redo:
The government has sought to improve the reputation of the U.K.’s audit and
accounting sector as the country prepares to leave the European Union. The
industry in 2017 accounted for £8.9 billion ($12 billion) of tax receipts in
the U.K.—1.5% of the total—and contributed £59 billion to Britain’s gross
domestic product, according to a study by Oxford Economics Ltd.
released in November.
From the CFO Journal's Morning Ledger on
April 15, 2019
Russian aluminum giant
United Co. Rusal
plans to invest $200 million in a Kentucky rolling mill that would be the
largest new aluminum plant built in the U.S.
in nearly four
decades.
Negative Goodwill Illustration
From the CFO Journal's Morning Ledger on
April 15, 2019
Deutsche Bank
AG will likely depend on an obscure but valuable accounting quirk—known as
negative goodwill,
or badwill—to make a deal for smaller rival
Commerzbank
AG workable.
From the CFO Journal's Morning Ledger on
April 12, 2019
The
U.K.’s audit regulator is investigating the audits of financial statements
of Interserve PLC, an outsourcing firm that last month sold itself to
its lenders to avoid collapse.
The Financial Reporting Council on Thursday said it would
probe the audits for 2015, 2016 and 2017under its Audit
Enforcement Practice. The audits were conducted by Grant Thornton UK
LLP, one of the country’s major audit firms.
Grant
Thornton is already under investigation by the FRC for its work for
Patisserie Holdings PLC, a U.K. cafe chain that discovered alleged
financial fraud in the fall and went into administration in January. Grant
Thornton confirmed the FRC’s investigation and vowed it would “of course
fully cooperate” with the regulator.
The new
probe comes at a time of increased scrutiny over the U.K. audit sector amid
various corporate failures, including that of construction giant
Carillion PLC in 2018.
U.K.
lawmakers last week called for a breakup of the audit and consulting
business units of the Big Four accounting firms into separate legal
entities. Under the changes, audit work would no longer be subsidized by the
firms’ other business, a step aimed at avoiding conflicts of interest.
From the CFO Journal's Morning Ledger on
April 9, 2019
Fiat
Chrysler Automobiles
NVwill pay $110 million
to settle a longstanding lawsuit alleging that the auto maker misled U.S.
investors regarding safety concerns and excess diesel emissions, according
to court documents.
From the CFO Journal's Morning Ledger on
April 9, 2019
Finance
chiefs are often closely involved in guiding Wall Street on the financial
prospects and strategies of their companies, but that doesn’t mean analysts
always agree with management’s view. General Electric Co.’s shares
tumbled 5.2% Monday after the company was downgraded to a sell rating by
JPMorgan Chase & Co., just four months after the bank upgraded its
longtime bearish view, The Wall Street Journal reports.
About
face.
JPMorgan analyst Stephen Tusa
reduced his price target to $5 a shareon Monday. “We believe
many investors are underestimating the severity of the challenges and
underlying risks at GE, while overestimating the value of small positives,”
Mr. Tusa wrote in a note to clients.
Known
skeptic. Mr.
Tusa has been one of GE’s biggest skeptics and his investment calls have had
an outsize influence on the company’s shares. In December, Mr. Tusa upgraded
GE but kept his $6 price target even as the stock rallied above $10 under
new Chief Executive Larry Culp.
Risks
abound.
GE shares had risen roughly 38% this year as of Friday’s close, despite the
company warning last month that cash flow will be negative for 2019. Mr.
Tusa said Wall Street is over-projecting GE’s cash flow in the coming years,
with GE Capital needing more cash to cover continuing problems in that
financial-services division. GE’s more than $100 billion in debt leaves it
exposed should the economy sour, he said.
Did the FASB accept or reject a proposal by
regional banks to soften loan-loss accounting? From the CFO Journal's Morning Ledger on
April 3, 2019
Accounting
standard settersrejected
a proposalby regional
banks to soften the impact of a change that will force banks to book losses
on soured loans much faster. The rejection means the accounting change—known
as CECL, for current expected credit losses—will go forward as planned at
the start of 2020 for publicly traded U.S. banks.
From the CFO Journal's Morning Ledger on
April 3, 2019
U.K.
parliamentarians are calling for an overhaul of the country’s audit sector
as the industry faces scrutiny following several high-profile corporate
collapses, CFO Journal’s Nina Trentmann reports.
Conflict of interest.
The Business, Energy and Industrial Strategy Committee is proposing to break
up the audit and consulting business units of the Big Four accounting firms
into separate legal entities
so that audit work is no longer subsidized by the firms’ other business,
a move aimed at tackling conflicts of interest.
Not the
last word.
The BEIS Committee’s suggestion goes beyond previous proposals by the U.K.’s
competition regulator, the Competition and Markets Authority, to force the
Big Four to separate the operations of their audit and nonaudit businesses.
However, the CMA is expected to issue a final report to the government in a
few weeks’ time. That report could include proposed legislation and may
prompt action by the U.K. government.
Unintended consequences.
The new proposals—which also include capping the number of listed companies
a firm can audit, trying out joint audits and making companies change
auditors more frequently—may not necessarily improve the standard of audits.
Joint audits could create gaps in oversight that a company’s management
might exploit, said Fiona Czerniawska, managing director of Source Global
Research, a research firm.
From the CFO Journal's Morning Ledger on
April 2, 2019
U.K. Watchdog to Review Conduct,
Governance at KPMG Audit Unit
The U.K. watchdog for
accounting and audit on
Tuesday
launched an independent review
into the governance, controls and culture
at KPMG LLP’s U.K. audit unit, writes Ms. Trentmann.
The
Financial Reporting Council will examine KPMG’s risk management, its
controls and the behavior of partners and other employees in the audit
practice. This first-of-its-kind review will be conducted by A&O Consulting,
the consulting arm of Allen & Overy LLP, on behalf of the FRC, a
spokesman for the regulator said.
The FRC will also assess whether KPMG is capable of delivering high-quality
audits in the U.K. A 2018 quality assessment the FRC conducted found that
around 50% of audits done by KPMG were below standard, the FRC said.
From the CFO Journal's Morning Ledger on
April 1, 2019
Saudi Arabian Oil
Co. made $111 billion in net income last year, according to rating agency
Moody’s Investors
Service,
making the oil and gas firm the most
profitable company in the world.
A Great Illustration for Cost Accounting
Courses
Why is Chicken So Cheap? ---
https://blog.supplysideliberal.com/post/2019/4/5/the-economist-why-is-chicken-so-cheap
Jensen Comment
I might add that KFC franchises are immensely popular in China with over 5,000
restaurants to date and growing by leaps and bounds. Chicken must also be
relatively cheap in China.
Another Great 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
haveagreed to pay
$775 million
to resolve claims that the blood thinner Xarelto causes excessive bleeding,
according to the companies.
Jensen Comment
This is a nice summary of how battery production works in Tesla's Nevada
gigafactory. The article is stresses the production waste and accident risks at
this huge plant.
What struck me is how vulnerable the plant is to sabotage from disgruntled
workers to Al-Qaeda..
Jensen Comment
This suggests a new line of research for both managerial and financial
accounting --- the risks of accidents and sabotage.
One risk is putting crucial production in one plant. Oil companies and
automobile companies typically protect themselves with multiple plants rather
than concentrating the plant in one place. Electric companies are part of a grid
of multiple production sources. Tesla seems to have put all its battery eggs in
one basket.
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
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 Issues in Accounting Education
Diamond Foods, Inc.: A Comprehensive Case in
Financial Analysis and Valuation
by Mahendra R. Gujarathiin Issues in Accounting Education: February 2019, Vol. 34, No. 1, pp. 13-33.
https://aaajournals.org/doi/full/10.2308/iace-52344
ABSTRACT
This real-world
comprehensive case provides an experiential assignment to bring alive most
major topics addressed in the financial statement analysis and valuation
course. By demonstrating the interconnections between different topics, the
case also serves as an integrative assignment to develop a holistic
understanding of the course. The case presents a platform to develop
students' critical-thinking and problem-solving skills. By requiring them to
apply the frameworks of strategy and industry analysis, techniques of
accounting and financial analysis, and by placing them in the role of a
financial analyst, the case develops an understanding of the challenges
involved in financial analysis and valuation in a real-world context. The
case helps students to experience the power of using financial statements
and other publicly available information to derive insights into firm
valuation and to appreciate the role of accruals-based and real earnings
management in stock valuation.
I. CASE
I think Diamond is still
very interesting. This is a company that is growing rapidly. It doesn't look
like any food company I've seen in 25 years of following the food sector.
—Tim Rammy on cnbc.com
video, September 22, 2011
Diamond appears to be
losing its dominant position in the walnut industry. As a result, its
business model is deteriorating. Company profitability also appears to be
overstated due to accounting treatment of a prospective “momentum payment,”
which may be in lieu of a retrospective payment.
—Research report by Off
Wall Street, September 25, 2011
It
was the morning of Monday, September 26, 2011 and Mark Jenkins was getting
nervous. He had just finished reading a report1
by Off Wall Street Consulting Group® on Diamond Foods Inc.
(hereafter, Diamond, or the Company). The report stated that the “Company
profitability appears to be overstated due to the accounting treatment of
‘momentum payments.'” The report changed the firm's recommendation on
Diamond (Ticker: DMND) to “Sell,” and lowered the target price for Diamond
from $90 on the previous Friday (September 23, 2011) to $43.
It had been almost two
months since Mark had joined Progressive Capital, a boutique Wall Street
firm specializing in short-sale research. The first few weeks passed quickly
during his training and orientation activities, but the last few weeks had
been unsettling for Mark. He was brought into Progressive at a senior level
in recognition of his prior experience in investment banking and a recent
M.B.A. degree from a prestigious management school. Despite working hard,
Mark had
yet to come up with a recommendation for a short sale. Diamond Foods, he
thought, might be a good candidate for his maiden recommendation.
It
was an unnerving experience, however. Recommending a short sale could be
risky because the stock seemed to be on a tear. Diamond's stock price had
more than doubled in the previous year (see
Exhibit 1,
Panel A for monthly stock price movements of Diamond's stock vis-à-vis
the S&P 500 index during the previous year). On September 15, 2011, the
Company announced the growth of 63 percent in Earnings per Share (EPS) for
fiscal 2011.2
Within a week of that announcement, Diamond's stock price had increased from
$78 to $90 on September 23, 2011 (see
Exhibit 1,
Panel B for daily price movements of Diamond's stock vis-à-vis the
S&P 500 index in the days following the results announcement).
Continued in article
Teaching Case from Issues in Accounting Education
Pane in the Glass: A Review of the Accounting Cycle
by Jefferson P. Jones, James H. Long, and Jonathan D. Stanley Issues in Accounting Education: February 2019, Vol. 34, No. 1, pp. 35-50.
ABSTRACT
This case employs a
realistic scenario in which students apply for internships with Pane in the
Glass, Inc.'s financial reporting group. As part of the interview process,
students are required to demonstrate their financial accounting knowledge by
completing a simulated accounting and financial reporting cycle using Excel.
Specifically, they: (1) analyze transactions and prepare the appropriate
journal entries, (2) book adjusting and closing journal entries, and (3)
prepare a set of financial statements. This case is intended to provide
students with a comprehensive review and integration of intermediate
financial accounting concepts. The modular nature of the case allows the
instructor to assign any number of the case requirements, depending on the
desired level of involvement and the amount of time available. In addition,
the instructor can easily add, remove, or modify individual transactions,
maximizing flexibility and allowing the instructor to tailor the case to
specific topics of interest and/or emphasis.
I. THE CASE
Pane in the Glass, Inc.
(Pane) is a glass manufacturing company based in Pensacola, FL. Pane's
products are primarily used as components in the manufacture of automotive
and marine vehicles (windows and windshields), and for home and commercial
construction applications (windows and insulation). Pane also produces
myriad specialty glass items.
You have applied for an internship with Pane's financial reporting group. As
part of the interview, you are required to demonstrate your financial
accounting knowledge.1
The interviewer has provided you with information about Pane's accounting
policies, procedures, and other relevant facts (Exhibit 1), information
about transactions that occurred during Pane's fiscal year ending December
31, 20X1 (Exhibit 2), additional information that is available at year-end
(Exhibit 3), and an Excel workbook that contains Pane's beginning trial
balance and simulates Pane's accounting software system (the components of
which are described in
Table 1). You
are required to account for Pane's transactions and complete a simulated
annual financial reporting cycle. Specifically, you have been asked to
perform the requirements as presented in Modules 1, 2, and 3.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on March 22, 2019
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?
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.”
“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
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?
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
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?
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
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?
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.
“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
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.
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
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?
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
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?
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
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)?
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
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?
Company laid off number of
staff amid broader realignment and executive turnover
Samsung ElectronicsCo. 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 GroupeSA’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
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.
Announcement is reversal from
earlier plans to produce new Chevrolet vehicle outside of U.S.
General MotorsCo.
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
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 5, 2019
SUMMARY: "General
Electric Co. has signaled it may want to switch to a new auditor, after more
than a century with KPMG LLP." But the other three of the Big Four audit
firms all provide services that could interfere with the SEC independence
requirements to audit a publicly-traded company. '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." But "GE's audit would be a lucrative
prize." And a spokesman for Ernst & Young said 'we fully expect to be able
to be compliant" with conflict-of-interest rules by the time GE makes a
decision. Spokesmen for KPMG, PwC and Deloitte declined to comment."
CLASSROOM APPLICATION: The
article may be used to discuss independence requirements and/or audit
quality issues in an auditing class.
QUESTIONS:
1. (Introductory) What factors discussed in the main and
related articles are influencing GE to consider changing from its
long-time auditor, KPMG, to another firm?
2. (Advanced) The article states that "any new auditor would
have to follow Securities and Exchange Commission rules that a
company's auditor be 'independent'..." Define the term independence
as it relates to auditing.
3. (Advanced) The Securities and Exchange Commission rules
for auditor independence apply because GE is a publicly-traded
company. Do independence requirements apply to auditors of other
types of entities or in the case of providing other non-audit
attestation services? Explain your answers.
4. (Introductory) What other services does GE receive from
firms which could provide its financial statement audit?
5. (Advanced) What other firms besides those discussed in the
article could provide GE's audit? What barriers exist that might
impede other firms from doing so?
One
problem: The only other audit firms big enough to take on 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.
GE has had a series of accounting problems
in recent years that KPMG, which has audited GE since 1909, failed to catch.
After 35% of GE shareholders voted last April against KPMG continuing as
GE’s auditor, the company said it would explore other options.
GE’s
audit would be a lucrative prize. The company 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.
GE is
trying to eliminate at least some of the conflicts to ensure it can switch
auditors and has implemented new procedures “to mitigate the cost and
complexity” of doing so, the company said in its proxy statement last week.
But it is a complex, time-consuming process, and GE hasn’t specified what
changes it might have to make to its existing arrangements or what they
might cost.
A GE
spokeswoman said the company plans to start a formal auditor-search process
after its 2019 audit, which KPMG will handle. “The ultimate timing of this
rotation will depend upon circumstances at the time,” she said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 5, 2019
TOPICS: Auditing
Services, Big Four Accounting Firms
SUMMARY: "U.K.
parliamentarians called for an overhaul of the country's audit sector on
Tuesday as the industry faces scrutiny following several high-profile
corporate collapses. The Business, Energy and Industrial Strategy Committee
proposed to break up the audit and consulting business units of the Big Four
accounting firms into separate legal entities....The suggestion goes beyond
previous proposals by the U.K.'s competition regulator, the Competition and
Markets Authority to force [the Big 4 firms] to separate the operations of
their audit and nonaudit businesses."
CLASSROOM APPLICATION: The
article may be used to discuss regulation and factors supporting audit
quality.
QUESTIONS:
1. (Advanced) What are the major business activities of large
public accounting firms? Cite your source for this information if
you utilize an outside resource such as your textbook.
2. (Introductory) How many of the U.K.'s listed companies are
audited by the four largest public accounting firms?
3. (Introductory) According to the article, what event
triggered the current U.K. discussion about changing the audit
profession to improve audit quality?
4. (Introductory) What other changes are being proposed by
the U.K.'s Competition and Markets Authority besides breaking up the
large public accounting firms into their audit and nonaudit service
components?
5. (Advanced) How could these changes improve audit quality?
6. (Advanced) How could these changes harm audit quality?
Recommendations come amid
increased scrutiny of the country’s audit sector
U.K.
parliamentarians called for an overhaul of the country’s audit sector on
Tuesday as the industry faces scrutiny following several high-profile
corporate collapses.
The
Business, Energy and Industrial Strategy Committee proposed to break up the
audit and consulting business units of the Big Four accounting firms into
separate legal entities so that audit work is no longer subsidized by the
firms’ other business, a move aimed at tackling conflicts of interest.
The
suggestion goes beyond previous proposals by the U.K.’s competition
regulator, the Competition and Markets Authority, to force KPMG LLP, Ernst &
Young LLP, PricewaterhouseCoopers LLP and Deloitte LLP to separate the
operations of their audit and nonaudit businesses.
Tuesday’s report also recommended imposing a cap on the number of listed
companies that a firm can audit, trying out the use of joint audits and
making companies change auditors more frequently. Under the proposals,
companies would have to switch auditors every seven years and wouldn’t be
allowed to assign their former auditor for nonaudit work during the first
three years after the change.
The
report also suggests expanding the scope of audits to make auditors focus
more on potential future risks.
“The
Big Four’s dominance has fostered a precarious market which shuts out
challengers and delivers audits which investors and the public cannot rely
on,” said Rachel Reeves, the chair of the BEIS Committee, in a statement.
The
four firms accounted for 99% of audits of companies listed in the FTSE 100
index in 2016 and 2017, and for 97% of audits of companies in the FTSE 350,
the committee said.
The CMA is expected to issue a final report
to the government in a few weeks’ time. The report could include
proposed legislation and may prompt action by the U.K. government.
The
four accounting firms welcomed the idea of widening the scope of audits but
rejected the proposal to break up their businesses.
“This
will be detrimental to audit quality and could materially damage the U.K.’s
competitive position as a leading capital market,” said Stephen Griggs,
managing partner for Deloitte’s U.K. audit business in a statement. Deloitte
audits 27 firms in the FTSE 100 and 88 in the FTSE 350, a spokeswoman said.
PwC,
another Big Four company, said breaking up accounting firms would reduce
audit quality, increase costs and cause disruption for businesses.
“We
agree that audit firms and the regulator must focus on increasing trust in
audit and the consistency of audit quality,” said Hemione Hudson, head of
assurance at PwC U.K., in a statement.
A KPMG
spokesman said “trust in audit is in urgent need of repair.” The company
stopped taking on nonaudit related work for FTSE 350 companies that it
already audits in October, and expects the majority of existing projects to
finish by the end of this year.
KPMG,
which audits 29 companies in the FTSE 100, signed off on the accounts of
U.K. construction and outsourcing company Carillion PLC less than a year
before the company entered administration in 2018.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 5, 2019
TOPICS: Deduction,
Individual Income Taxation, State and Local Taxes
SUMMARY: "Freshman
Democrats from Illinois are pushing to relax the cap on the state and local
tax deduction, offering a contrast to New York and New Jersey Democrats
backing a full repeal....The plan...would increase the cap to $15,000 for
individuals and $30,000 for married couples and raise that limit along with
inflation. Currently, the $10,000 cap applies to individuals and married
couples and it isn't indexed...." The bill, and the bill for repeal, are
unlikely to pass in this Congress. However, "House Democrats from high-tax
states will want to vote on something related to the cap before they run for
re-election next year...."
CLASSROOM APPLICATION: The
article may be used in an individual income tax class.
QUESTIONS:
1. (Introductory) From what tax law change did the $10,000
cap on the federal tax deduction for state and local taxes
(so-called SALT) originate?
2. (Introductory) What are the current proposals to change
this provision? Who is making these proposals?
3. (Advanced) Why is it particularly challenging for
Democratic candidates to make these tax change proposals?
4. (Advanced) Why is it also important for Democrats to
propose these changes, particularly those from states with higher
overall taxation?
Lawmakers who won GOP-held
seats want to increase $10,000 cap on state and local tax deduction
WASHINGTON—Freshman Democrats from Illinois are pushing to relax the cap on
the state and local tax deduction, offering a contrast to New York and New
Jersey Democrats backing a full repeal that would disproportionately benefit
the top 1% of households.
The
new proposal by the two House Democrats who captured Republican-held seats
in Illinois and attempts to repeal the cap aren’t likely to become law in
this Congress. Republicans control the Senate, and Finance Committee
Chairman Chuck Grassley (R., Iowa) has said he isn’t open to changing the
cap.
Still,
House Democrats from high-tax states will want to vote on something related
to the cap before they run for re-election next year, and lawmakers will
have to decide what they can and should pass. Many Democrats represent
low-income or low-tax states where their constituents won’t get much of a
benefit from repealing or raising the cap.
The
plan from Reps. Lauren Underwood and Sean Casten would increase the cap to
$15,000 for individuals and $30,000 for married couples and raise that limit
along with inflation. Currently, the $10,000 cap applies to individuals and
married couples and it isn’t indexed, meaning that it will affect more
households over time.
Their
bill attempts to counter the criticism that full repeal would deliver the
biggest benefits to the richest Americans, a fact that has proven tricky for
Democrats who often object to tax cuts for the rich.
“Our
goal and our objective is to help middle-class families,” Ms. Underwood told
reporters on Thursday. “My priority is our communities in northern
Illinois.”
Republicans imposed the $10,000 cap as part of the 2017 tax law, which also
cut tax rates, doubled the child tax credit and sharply narrowed the
alternative minimum tax. Most taxpayers, even in high-tax states, received
tax cuts, but the cap still proved unpopular with suburban voters. That
provision contributed to GOP election losses in high-tax states such as New
York, New Jersey, California and Illinois, where Mr. Casten defeated Rep.
Peter Roskam, a chief author of the tax law.
The
most popular Democratic proposal so far comes from Rep. Bill Pascrell of New
Jersey. His bill, which has 41 co-sponsors, would repeal the cap and raise
the top individual tax rate from 37% to 39.6%.
Mr.
Pascrell’s combination would reduce tax revenue by $532 billion over a
decade, and the largest benefits as a share of income would go to the top 1%
of households, according to the Tax Foundation, a conservative group.
A
separate bill from Reps. Peter King (R., N.Y.) and Tom Suozzi (D., N.Y.)
would repeal the cap on state and local deduction, or SALT, as well.
“New
Yorkers pay $36 billion more to the federal government than we get back and
the SALT cap was another punch in the gut,” Mr. Suozzi said. “I am open to
any and all ideas which reinstates critical tax relief for middle-class,
hardworking Americans in high cost of living areas, but I will continue to
fight for a level playing field and a full repeal of the cap.”
Ms.
Underwood and Mr. Casten said the narrower approach would make it easier to
find an offsetting provision to comply with House pay-as-you-go rules. They
haven’t specified what that would be.
“This
is a very small fix to a massively flawed tax bill,” said Mr. Casten, who
added that he would favor full repeal of the cap.
Still,
many of the people who would benefit from the Underwood-Casten bill already
got tax cuts from the 2017 tax law, said Seth Hanlon, a senior fellow at the
Center for American Progress, a Washington group aligned with Democrats.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 5, 2019
SUMMARY: "Tesla
Inc. said new-vehicle deliveries in the first quarter fell 31% from the
previous three months as the electric-car maker struggled to ship its Model
3 compact car to customers in Europe and China for the first time." The
article discusses other challenges facing the company in making deliveries;
measurement of deliveries given the company's terms of sale; concerns among
analysts about the impact of Model 3 pricing on demand for other Tesla
models; and the impact on revenue estimates from the wide range of annual
production estimates so far offered by the company.
CLASSROOM APPLICATION: The
article may be used in a financial accounting course covering the sales term
of F.O.B. shipping point and FOB destination. It also may be used in
managerial accounting course discussing production levels and forecasting or
budgeting.
QUESTIONS:
1. (Introductory) What happened to the number of vehicles
delivered by Tesla in the quarter ended March 31, 2019?
2. (Introductory) What problems caused this impact on the
number of deliveries?
3. (Advanced) "Tesla books its sales when a car is
delivered." Does that mean the sales terms are FOB Shipping Point or
FOB destination? In your answer, explain the meaning of setting the
FOB point.
4. (Advanced) Why have analysts focused so heavily on the
production and delivery of various Tesla models?
5. (Advanced) How wide an impact on reported revenues could
result from the range of production forecasts given by Tesla for
2019?
Reviewed By: Judy Beckman, University of Rhode Island
"Tesla's First-Quarter Deliveries Plummet," by
Tim Higgins, The Wall Street Journal, April 3, 2019
Electric car maker faces
challenges shipping Model 3 overseas for the first time
TeslaInc.TSLA
-8.23%said
new-vehicle deliveries in the first quarter fell 31% from the previous three
months as the electric-car maker struggled to ship its Model 3 compact car
to customers in Europe and China for the first time.
The
Silicon Valley auto maker Wednesday said it delivered about 63,000 vehicles
in the latest period, worse than analysts’ already-lowered expectations.
Analysts on average had predicted deliveries would drop to 73,500, according
to FactSet, a figure reflecting total deliveries of Model 3, Model S and
Model X vehicles.
Tesla shares
fell about 8% in Thursday morning trading.
Concerns of a slow start to deliveries in 2019—Tesla books its sales when a
car is delivered—have raised questions about the company’s ability to meet
ambitious sales targets after it struggled for nearly two years to increase
production of the Model 3, its lowest-price vehicle. Tesla had slashed the
Model 3’s starting price three times during the quarter, finally reaching
its long-promised base of $35,000, suggesting to some analysts that demand
for more-expensive versions had plateaued.
Last
quarter was Tesla’s first sales period following the phaseout of U.S. tax
credits went into effect, dropping to $3,750 from $7,500 for buyers. The
credits end at the beginning of next year.
Tesla
attributed the slowdown to challenges associated with taking the Model 3
overseas for the first time, noting it had only delivered half of the entire
quarter’s vehicles 10 days before the period ended. The company cautioned
that lower-than-expected sales volumes along with several price cuts would
negatively affect first-quarter income. It said it planned to end the
quarter with “sufficient cash on hand.”
David
Whiston, an analyst at Morningstar Research Services, said the Model 3
“should bounce back in Q2 if the transition challenges to delivering in
Europe and China are behind them.”
Tesla
said it delivered 50,900 Model 3 cars in the first quarter, down 20% from
63,359 the preceding three months. Analysts had expected 54,600 in the
latest quarter. Sales of the more-expensive Model S car and Model X
sport-utility vehicle collectively fell to 12,100 from 27,602 during the
fourth quarter.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 5, 2019
SUMMARY: "Senators
Chuck Grassley (R., Iowa) and Ron Wyden (D., Ore.) launched an investigation
into syndicated conservation easements, the tax-advantaged land deals that
have already drawn scrutiny from the IRS and the Justice Department. Messrs.
Grassley and Wyden, the chairman and top Democrat on the tax-writing Finance
Committee, sent letters Wednesday to 14 people involved in easement deals.
The letters, which were reviewed by The Wall Street Journal, ask for copies
of appraisals, promotional materials and internal documents."
CLASSROOM APPLICATION: The
article may be used in an individual or entity taxation class. The related
article was previously covered in this review.
QUESTIONS:
1. (Introductory) What are conservation easements? What are
syndicated conservation easements?
2. (Advanced) What tax deduction is allowed for conservation
easements?
3. (Introductory) How can conservation easement tax law
provisions be abused?
4. (Advanced) What societal benefit arises from this tax
deduction for conservation easements?
Grassley and Wyden seek
details of syndicated conservation easements they suspect exploit laws
designed to protect environmentally sensitive land
WASHINGTON—Sens. Chuck Grassley (R., Iowa) and Ron Wyden (D., Ore.) launched
an investigation into syndicated conservation easements, the tax-advantaged
land deals that have already drawn scrutiny from the IRS and the Justice
Department.
Messrs. Grassley and Wyden, the chairman and top Democrat on the tax-writing
Finance Committee, sent letters Wednesday to 14 people involved in easement
deals. The letters, which were reviewed by The Wall Street Journal, ask for
copies of appraisals, promotional materials and internal documents. The
senators are also requesting investors’ names and addresses, along with
information about promoters’ fees.
“The
goal of our bipartisan investigation is to ensure a few bad actors don’t
threaten the program by selling off deductions based on exorbitant
appraisals,” Mr. Wyden said. “The program must not be abused and used as a
lucrative tax shelter for the wealthy.”
The
inquiry will provide lawmakers with new, detailed information about a
tax-avoidance strategy that is popular among some high-income taxpayers, and
the investigation could provide momentum for legislative changes.
“There
are very legitimate purposes for the conservation easement provisions of the
tax code,” Mr. Grassley said. “But when a handful of individuals cook up a
scheme to cash in at the expense of federal revenue and in violation of
Congress’s intent, something needs to change.”
The tax code allows landowners
to claim deductions
for donating conservation easements. That is, taxpayers can place a
permanent land-use restriction on an environmentally sensitive property and
claim a charitable contribution for the value diminished by the
restrictions.
For
example, if a piece of property is worth $10 million with no restrictions
and $2 million without the ability to build houses, the owner can claim an
$8 million deduction for donating that restriction to a land trust.
The break is popular with environmental
groups and lawmakers, and Congress has expanded conservation easement
incentives several times. President Trump has used
conservation easements
on his properties in at least four states.
Conservation easements can be abused. That
is partly because the break’s value rises with the value of the land, and
taxpayers aren’t required to quantify the environmental benefits the public
is getting in exchange for forgone tax revenue. Risk also arises because the
tax deduction relies heavily on appraisals that can be challenged only with
labor-intensive audits by a shrinking Internal Revenue
Service.
Committee aides say they support the incentive and are trying to protect its
integrity.
In the past few years, particularly in the
southeastern U.S., financial advisers have started promoting syndicated
easements—deals
where tax benefits are parceled out
to high-income people who have no previous connection to the property but
are looking for deductions.
In
some cases, people are offered the opportunity to buy into a partnership and
quickly get tax deductions worth more than their initial investments.
Promoters describe these transactions as an efficient way to conserve land
and shift tax benefits from landowners who don’t have the income to take
deductions to people who do. But critics inside and outside the government
say they often rely on exaggerated, unrealistic appraisals.
In
late 2016, the IRS labeled some syndicated easement deals—those in which the
deductions are at least 2.5 times the investment—as “listed transactions.”
That ruling required taxpayers and advisers to flag them on tax returns,
making it easier for the IRS to track and audit them.
Those disclosures showed that taxpayers deducted $20 billion
from these transactions from 2010 through
2016, including $6 billion for 2016 alone, according to the IRS.
SUMMARY: The
stock market's strongest run in more than two decades will be tested
beginning this week, as a looming pullback in corporate profit growth sets
up major indexes for a fresh bout of volatility. "Dozens of companies have
slashed their profit forecasts for the first quarter. Walgreens Boots
Alliance Inc. last week became the latest big company to cut its full-year
profit forecast as a result of challenging market conditions...."
CLASSROOM APPLICATION: The
article may be used to discuss earnings forecasts by both management and
analysts.
QUESTIONS:
1. (Introductory) Who is predicting changes in U.S.
companies' earnings forecasts?
2. (Advanced) Are earnings predicted to fall in the near
term? Explain your answer.
3. (Advanced) As described in the article, what factors
besides corporate earnings influence stock market prices?
Companies that miss earnings
estimates could respond by cutting spending, which could trigger stock
selloff
The
stock market’s strongest run in more than two decades will be tested
beginning this week, as a looming pullback in corporate profit growth sets
up major indexes for a fresh bout of volatility.
Dozens of companies have slashed their
profit forecasts for the first quarter. Walgreens Boots AllianceInc. last
week became the latest big company to cut its full-year profit forecast as a
result of challenging market conditions, joining corporate powers such as
Apple Inc., FedExCorp. and
3MCo.
With
earnings season kicking off in earnest this week and valuations creeping up
to their highest levels in more than half a year, investors say they plan to
scrutinize corporate executives’ comments to gauge whether the contraction
in corporate profit growth is a momentary blip or further evidence of a
late-cycle economic slowdown.
So
far, investors appear to have been looking past the expected profit crunch
thanks to a more accommodative Federal Reserve. The central bank earlier
this year decided to put interest-rate increases on hold for the rest of
2019, helping to stoke investors’ demand for riskier assets to push the S&P
500 up more than 15% since January—its best start to a year since 1998.
That
runup has put it within striking distance of the high it reached last
September, just before markets were routed as the year ended. With money
managers increasingly predicting a rate cut by the central bank, stocks
could power higher through the slowdown in corporate profit growth, some
analysts added.
“Investors are rightly encouraged by the
Fed’s reactions, but the Fed easing on policy isn’t going to alleviate
margin pressures,” said Mike Wilson, chief equity strategist at Morgan Stanley. “There’s
a big risk to profit margins and quality of earnings we see this month and
it’s definitely not priced into the market.”
Analysts estimate S&P 500 profits in the first quarter contracted 4.2% from
a year earlier, according to FactSet. They expect that will be followed by
no growth in the second quarter. That puts the broad index at risk of
entering its first earnings recession—marked by at least two or more
consecutive quarters of declining earnings—since 2016.
Companies that miss earnings estimates could respond by cutting spending on
capital improvements and labor, further strangling economic growth and
reigniting a stock-market selloff, Mr. Wilson warned, adding that earnings
misses tend to force companies to rethink their priorities.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 12, 2019
SUMMARY: "...For
all of Uber's complexities, the company still appears on pace to go from
filing to public debut in less than six months." Uber is much more complex
than its rival Lyft which just went public at the end of March 2019; both
companies had "submitted their confidential IPO filings at the same time in
December...Uber operates in 63 countries...and it has a wider range of
operations...including a freight division and a unit developing autonomous
vehicles." The article discusses the implications of these diverse
operations: segment reporting, required risk disclosures, and the potential
that subsidiaries or equity method investees of Uber may have to be audited
for the first time.
CLASSROOM APPLICATION: The
article may be used in financial reporting or auditing class.
QUESTIONS:
1. (Introductory) What financial reporting challenge faces
Uber as it plans to undertake its initial public offering of stock?
2. (Advanced) Refer to the related article. Do you think that
Careem Networks FZ will be kept as a separate legal entity from Uber?
Explain your answer.
3. (Advanced) Assume that Uber will maintain Careem Networks
FZ as a separate legal entity. How will its operations be shown in
the financial statements for the Uber IPO?
4. (Advanced) What is segment reporting? Based on the
description in the article, what segments are likely to be reported
by Uber in its financial statements?
5. (Advanced) What risk disclosures are required in financial
statements filed by publicly traded companies? Why are Uber's risk
disclosures likely subjected to more scrutiny from the U.S.
Securities and Exchange Commission than was Lyft?
Uber operates in 63 countries
compared with Lyft’s two, and has a wider range of operations
Uber Technologies Inc. is moving closer to an
IPO, but due to its global reach and diverse operations, it faced a greater
regulatory burden that put it on a more circuitous route to public markets
than smaller rival LyftInc.
Uber’s journey—it is expected to
make its IPO filing public
as soon as Thursday—highlights the challenges of placing a value on a
wide-ranging grouping of businesses.
It
also illuminates the task Uber executives have yet to tackle: communicating
the story of its varied businesses to experienced fund managers and
mom-and-pop investors who are considering buying stock in the company.
Investors and regulators are likely to see similar issues play out as the
most valuable private companies eventually migrate to Wall Street.
Take WeWork Cos., which was valued at $47
billion by private investors. The venture-backed shared-office giant also
has a global footprint,
has widely varied investments and has acquired several digital platforms as
it broadens its offerings to business customers.
Uber
operates in 63 countries compared with Lyft’s two, and it has a wider range
of operations beyond ride-hailing, including a freight division and a unit
developing autonomous vehicles.
Uber and Lyft both submitted their
confidential IPO filings at the same time in December, according to a person
familiar with the matter. But Lyft’s simpler business enabled it to fast
track its process, and it went public
at the end of March.
Uber’s
plans to unveil its IPO filing as soon as this Thursday would put it on
track to begin its roadshow later this month and for a stock market debut in
mid-May, a typical IPO timeline.
Representatives for Uber, Lyft and WeWork declined to comment for this
article.
Uber’s global reach, extended last month by a
$3.1 billion acquisition
of Middle Eastern rival Careem Networks FZ, has contributed to a more
cumbersome regulatory approval process for its IPO, according to advisers
who help companies prepare to go public. Uber also owns part of Didi Chuxing,
the Chinese ride-sharing business, and Southeast Asia’s Grab and has a joint
venture with Russia’s Yandex.
In
going public, it all comes down to whether a company’s “investments are
material enough to require financial disclosures. If they have to be audited
and they haven’t previously been audited, that’s where things get really
hairy,” said Barrett Daniels, a partner at Deloitte & Touche LLP who helps
companies prepare for IPOs.
“You
never know what the SEC is going to ask for,” Mr. Daniels said. “The more
questions, simply, the more time it takes to respond to get through the IPO
process.”
The
SEC typically questions management about how a company presents financial
results in its prospectus. The results of joint ventures, for example, could
be highlighted separately or consolidated in a company’s overall financials,
consultants said.
Regulators also likely scrutinized how Uber approaches segment
reporting—often a sticky issue for companies with a mix of business lines
and global reach. Uber’s ride-hailing business spans cars, bikes, scooters,
boats and aircraft. The company’s food-delivery unit, Uber Eats, accounts
for a growing portion of its revenue, according to a person familiar with
the matter.
The
SEC will be looking to ensure that Uber gives investors the same level of
nuance and specificity on business segments that managers use to allocate
resources, said Chris Clapp, managing director at MorganFranklin Consulting
LLC.
“Companies have a bias often times to have it be more consolidated because
they don’t want to have to answer questions at a very detailed level about
their financial performance,” he said. “It’s a fine line that companies have
to walk to determine what’s the right level of detail.”
Lyft’s
more streamlined and simpler business likely aided the company in
expediently passing regulators’ reviews and entering public markets,
advisers not involved in the company’s IPO said.
Uber’s
larger business footprint also could mean it faces a wider range of risks,
inviting more back and forth with regulators, advisers said. The SEC
requires companies to disclose all their market risk factors so investors
can make an informed decision when deciding whether to buy the stock.
“Every
section of the registration statement just gets more and more complicated
because the business as a whole is more complicated and the SEC just has
more areas to home in on and ask more questions about,” Mr. Clapp said.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 12, 2019
SUMMARY: The
Treasury Department didn't plan to meet Wednesday's deadline for handing
President Trump's tax returns to House Democrats, as it continued to review
the request, Secretary Steven Mnuchin wrote. Treasury Secretary Mnuchin's
reasoning on not providing Mr. Trump's tax returns differs from the
president's stated reasoning. "Mr. Mnuchin... said the request raises
"serious issues" about whether the committee has a legitimate legislative
purpose and how broad congressional investigatory powers are under the
Constitution...Mr. Neal had written the letter to IRS Commissioner Charles
Rettig, because Treasury delegates its authority over the tax code to the
agency. Mr. Rettig said earlier Wednesday that the IRS was working on the
request but noted that the agency is part of the Treasury Department and Mr.
Mnuchin was the one who responded."
CLASSROOM APPLICATION: The
article may be used in an individual income tax class.
QUESTIONS:
1. (Introductory) Who has requested that President Trumps's
tax returns be furnished?
2. (Advanced) Is the president required by law to make his
tax returns available to the voting public? To Congress?
3. (Introductory) What has been the response to the request
for the president's tax returns?
4. (Introductory) Refer to the related video. What is
President Trump's stated reason for not supplying his personal tax
returns?
5. (Advanced) What are the possible outcomes of this request
for President Trump's tax returns?
House committee Chairman
Richard Neal had requested IRS to release documents by Wednesday
WASHINGTON—The Treasury Department didn’t plan to meet Wednesday’s deadline
for handing President Trump’s tax returns to House Democrats, as it
continued to review the request, Secretary Steven Mnuchin wrote.
Mr. Mnuchin, in a letter on Wednesday
to House Ways and Means Committee Chairman Rep. Richard Neal (D., Mass.),
said the request raises “serious issues” about whether the committee has a
legitimate legislative purpose and how broad congressional investigatory
powers are under the Constitution. Those are the issues that a court would
consider if Treasury ultimately refuses Mr. Neal’s request. Mr. Mnuchin
wrote that he intends to supervise Treasury’s response so that taxpayer
protections are “scrupulously observed.”
Mr.
Neal sought six years’ worth of the president’s personal and business
returns under a 1924 law that lets the leaders of the tax-writing committees
obtain anyone’s returns. That statute requires that the Treasury Secretary
“shall furnish” them upon request. Mr. Neal set a deadline of Wednesday for
the documents.
In the
letter, Mr. Mnuchin cited Mr. Neal’s own comments from last year about the
unprecedented nature of the request and Mr. Mnuchin urged caution.
“The
legal implications of this request could affect protections for all
Americans against politically-motivated disclosures of personal tax
information, regardless of which party is in power,” the Treasury secretary
wrote.
If the
Treasury directs the Internal Revenue Service to ultimately comply with the
request, documents that the president has long sought to keep private would
be turned over to Mr. Neal, though they couldn’t be revealed publicly
without a committee vote. If the IRS rejects the request, Mr. Neal is likely
to initiate legal maneuvers that would land the legislative and executive
branches in court, fighting over whether the House has a legitimate
legislative purpose for requesting the returns.
Mr.
Neal had written the letter to IRS Commissioner Charles Rettig, because
Treasury delegates its authority over the tax code to the agency. Mr. Rettig
said earlier Wednesday that the IRS was working on the request but noted
that the agency is part of the Treasury Department and Mr. Mnuchin was the
one who responded.
“How
many lawyers and how much time does it take for Secretary Mnuchin to
understand that ‘shall’ means ‘shall’?” said Rep. Lloyd Doggett (D., Texas),
a Ways and Means member who has pressed for Mr. Trump’s tax returns. “This
partisan letter is just fancy repackaging of the same double talk Secretary
Mnuchin offered to my questioning last month.”
In a
statement, Mr. Neal said he would consult with counsel and determine an
appropriate response to Mr. Mnuchin.
Over
the weekend, Mick Mulvaney, the acting White House chief of staff, said
Democrats would never see Mr. Trump’s returns. Mr. Rettig said he hasn’t
been instructed by anyone from the White House not to comply with Mr. Neal’s
request.
“House
Democrats’ unprecedented request has serious implications for all Americans
and requires serious, careful analysis,” Senate Finance Chairman Chuck
Grassley (R., Iowa) said in praising Mr. Mnuchin’s response. “It’s not meant
to be used as a partisan tool by politicians to reveal a political
opponent’s private information. That’s not a legitimate use of congressional
authority and would set a dangerous precedent that can’t be undone.”
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 12, 2019
SUMMARY: "The
U.S. government ran a $691 billion deficit from October through March, the
Treasury Department said on Wednesday, compared with $600 billion during the
same period a year earlier." Factors leading to the budget deficit increase
include a 5% increase in overall spending compared to only a 1% increase in
tax receipts.
CLASSROOM APPLICATION: The
article may be used in a governmental accounting class.
QUESTIONS:
1. (Advanced) Define the term budget deficit.
2. (Introductory) By how much did the U.S. federal
government's budget deficit increase relative to the same period
last year?
3. (Advanced) What factors are driving the 2019 federal
budget deficit increase?
4. (Advanced) What factors are expected to influence the
budget deficit in the long-term future?
Government spending increased 5% from October
through March as revenues rose 1% over same period
The
U.S. budget gap widened in the first half of the fiscal year as spending
rose faster than revenue.
The
government ran a $691 billion deficit from October through March, the
Treasury Department said on Wednesday, compared with $600 billion during the
same period a year earlier.
The
Treasury Department said spending has driven the 2019 fiscal deficit
increase. Federal outlays rose 5%, to $2.198 trillion in the
October-through-March period, while revenues increased 1%, to $1.507
trillion.
More
broadly, deficits are projected to climb in the coming decades as an aging
U.S. population fuels higher costs for programs such as Social Security and
Medicare. The Congressional Budget Office projects deficits as a share of
gross domestic product will average 4.4% over the next 10 years, compared
with a 2.9% average over the previous 50 years.
The
fiscal outlook will be the focus of policy negotiations in Congress this
year as lawmakers work toward a new two-year agreement to set top-line
government spending levels, and to avoid automatic spending cuts set to kick
in after October.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 12, 2019
SUMMARY: "The
dollar fell after a report showed consumer prices rose less than expected
last month, further solidifying expectations that the Federal Reserve will
remain on hold."
CLASSROOM APPLICATION: The
article may be used when discussing foreign currency exchange rates.
QUESTIONS:
1. (Introductory) What factors led to the falling of the U.S.
dollar against world currencies?
2. (Introductory) Refer to the graphic. Since when has the
U.S. dollar been falling?
3. (Introductory) What has been the overall change in the
dollar relative to other currencies over the last month?
4. (Advanced) Why do investors in foreign-exchange markets
pay close attention to the policies of the U.S. Federal Reserve?
5. (Advanced) Suppose you are a controller for a company
making purchases and sales in foreign currencies worldwide. How
important is it for you to understand actions by the U.S. Federal
Reserve?
Labor Department report on
consumer prices solidifies expectations Fed will remain on hold on interest
rates
The
dollar fell after a report showed consumer prices rose less than expected
last month, further solidifying expectations that the Federal Reserve will
remain on hold.
The
WSJ Dollar Index, which measures the U.S. currency against a basket of 16
others, declined for a third consecutive session, falling 0.2% to 89.88.
The dollar slipped after the Labor
Department said Wednesday
that the consumer-price index for core prices, which excludes volatile food
and energy prices, rose just 0.15% from February. A broader measure of what
Americans pay for household items such as spatulas and services such as pet
grooming, increased 0.41% in
March
from the prior month.
Economists surveyed by The Wall Street Journal expected overall prices to
increase 0.3% in March and prices excluding food and energy to edge up 0.2%.
The index has fallen 0.7% since reaching its 2019 high on March 7.
The data are too close to the Fed’s annual
inflation rate target of 2% to have much impact on the central bank’s
interest-rate policy, said Daniel Katzive, head of currency strategy in
North America at BNP
Paribas
.
Fed
officials have said that they expect to hold interest rates steady at their
current range of 2.25% to 2.5% for the remainder of the year unless the
economy sees a sharp rise in inflation.
The
dollar remained lower after the Fed released minutes of its March meeting.
Officials saw little reason to continue raising rates due to greater risks
to the U.S. economy from the global growth slowdown and muted inflation
readings that surprised officials.
Investors in the foreign-exchange market pay close attention to central bank
policies surrounding interest rates because higher rates typically attract
people to a currency.
The U.S. currency rose briefly after
European Central Bank President Mario Draghi on Wednesday said policy makers
will consider whether they need to mitigate the effect on eurozone
banks
of its negative interest rate.
Unlike
the Fed, the ECB didn’t raise short-term interest rates during the region’s
economic upswing. European banks have chafed at the long period of negative
rates, which were first introduced almost five years ago and which lenders
complain hurt profits because they can’t be fully passed on to customers.
Continued in article
&&&&&&&&&&&&&&&&&&&&&&&&&&
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 19, 2019
TOPICS: Individual
Income Taxation, Standard Deduction
SUMMARY: Tax
filings made this week are the first under the new tax law enacted in
Congress in 2017 and applicable to 2018 tax returns. The article describes
some of the new provisions of the tax law impacting retirees.
CLASSROOM APPLICATION: The
article may be used in an individual income tax class.
QUESTIONS:
1. (Advanced) What is the standard deduction for U.S.
individual taxpayers? In your answer, define this tax return item
and state its amounts.
2. (Introductory) Why do many retirees benefit from the
increased standard deduction under the new tax law?
3. (Advanced) What are 529 savings accounts? How do they
provide tax benefits to taxpayers in general? To retirees
specifically?
Retirees who take the standard deduction can still claim a tax benefit for
donating to charity.
Taxpayers age 70½ or older can transfer up
to $100,000 a year from their individual retirement accounts to charities.
These donations can count
toward the minimum required distributions the Internal Revenue Service
requires those taxpayers to take from these accounts. But the donor doesn’t
have to report the IRA withdrawal as taxable income. This can help the
taxpayer keep his or her reported adjusted gross income below thresholds at
which higher Medicare premiums and higher taxes on investment income and
Social Security benefits kick in.
People
over 70½ who itemize their deductions can also benefit from such charitable
transfers, said Ed Slott, an IRA specialist in Rockville Centre, N.Y.
3. More options for 529 donors:
The new law allows taxpayers to withdraw up
to $10,000 a year from a
tax-advantaged 529 college savings account
to pay a child’s private-school tuition bills from kindergarten to
12th grade.
For
parents and grandparents who write tuition checks, saving in a 529 has
advantages. The accounts, which are offered by states, allow savers to make
after-tax contributions that qualify for state income tax breaks in many
states and grow free of federal and state taxes. Withdrawals are also
tax-free if used to pay eligible education expenses.
As in prior years, donors who want to give a child more than
the $15,000 permitted under the gift-tax exemption can contribute up to five
times that amount, or $75,000, to a 529. (They would then have to refrain
from contributing for that child for the next four years.)
About a dozen states don’t allow tax-free
withdrawals from 529s for private K-12 school tuition, so check with your
plan first, said Mark Kantrowitz, publisher of Savingforcollege.com.
For
the next seven years, the gift-tax exemption for individuals is an
inflation-adjusted $11.4 million, up from $11.18 million in 2018 and $5.49
million in 2017. For couples, it is $22.8 million, up from $22.36 million in
2018 and $10.98 million in 2017.
Congress also raised the estate-tax exemption to $11.4 million per
person today from $5.49 million in 2017. As a result, taxpayers can give
away a total of $11.4 million tax-free, either while alive or at death,
without paying a 40% gift or estate tax.
Because in 2026 gift- and estate-tax exemptions are set to revert to
pre-2018 levels of $5.49 million per person adjusted for
inflation, individuals with assets above about $6 million—and couples with
more than $12 million—should consider making gifts, said Paul McCawley, an
estate planning attorney at Greenberg Traurig LLP.
The
sooner you give assets away, the more appreciation your heirs can pocket
free of gift or estate tax, Mr. McCawley said.
The
Treasury Department and the IRS recently issued proposed regulations that
would grandfather gifts made at the higher exemption amount between 2018 and
2025 after the exemption reverts to pre-2018 levels.
5. Less generous medical-expense deduction:
For
2018, taxpayers can deduct eligible medical expenses that exceed 7.5% of
adjusted gross income. That means for someone with a $100,000 income and
$50,000 of medical or nursing-home bills, $7,500 is not deductible.
One
way to reduce the pain is to take advantage of the tax break available to
people 70½ or older who make charitable transfers from IRAs, said Mr. Slott.
Because the donor doesn’t have to report charitable IRA transfers as taxable
income, a $5,000 gift would reduce a $100,000 income to $95,000. That, in
turn, would mean $9,500 of medical expenses are ineligible for the deduction
in 2019, rather than $10,000.
With a
traditional IRA,
savers typically get a tax deduction for contributions and owe ordinary
income tax on withdrawals. With a Roth IRA, there is no upfront tax
deduction, but withdrawals in retirement are usually tax-free. Tax-free
withdrawals are attractive since they don’t push the saver into a higher tax
bracket or trigger higher Medicare premiums.
Continued in article
Jensen Comment
One of the best things to happen in tax reform to date is that Congress
preserved the tax exemption of most (not all) muni bond interest income.
Muni bonds lower the cost of capital of school districts, counties, towns,
and states across the USA. Making their interest taxable would add hundreds
of billions to the capital costs of those jurisdictions ---
https://en.wikipedia.org/wiki/Municipal_bond
Capital gains of muni bonds are taxable at the federal level. Interest may
be taxable at the state level, although states often exempt the interest of
muni bonds issued in their own states. For example, a Massachusetts resident
does not have to pay tax on a Mass. school district bond but has to pay tax
on an Iowa school district bond. The interest of neither one of these bonds
is taxable on a federal return. Investors now have over a trillion dollars
invested in muni bond mutual funds that diversify risk.
Many progressives would like to tax muni bond
interest, but the capital costs to state and local jurisdictions would be
outrageous in terms of having to compete with with safer private sector
debt.
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 19, 2019
SUMMARY: The
article discusses 3M which is "increasingly standing alone as a large
company that is still in a variety of industries." Listed as comparable
entities are United Technologies Corp. and DowDuPont Inc. Those companies
are splitting up while "3M continues adding to its stable of 60,000 products
and increasing its research budget...."
CLASSROOM APPLICATION: The
article is useful to discuss the conglomerate form of business operation and
segment reporting.
QUESTIONS:
1. (Introductory) What is a conglomerate form of business?
2. (Introductory) According to the article, what companies
are peers of 3M? Does this mean they operate in the same industry?
Explain.
3. (Advanced) What is segment reporting?
4. (Advanced) Access the 3M filing on Form10-K to the U.S.
Securities and Exchange Commission available at
https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000066740&owner=exclude&count=40&hidefilings=0
Click on Interactive Data for the 10-K files on February 7, 2019,
then click on Notes Tables on the left hand side of the page, and
final scroll down to click on Business Segments (Tables). What
segments does 3 M report? What information about each segment does
the company report?
5. (Introductory) Based on the information in the article,
how has 3M changed its reporting about operating segments? When did
the company make this change?
6. (Advanced) What factors make it difficult to manage large
conglomerate businesses?
7. (Advanced) What benefits does 3M claim it derives from its
conglomerate form?
The maker of Post-its and
adhesives says its sprawling operations are more efficient because of
similarities in its products
As other sprawling corporations break up or
shed assets, 3MCo.MMM
0.57%is doubling
down on its future as a conglomerate.
Peers such as United TechnologiesCorp. and
DowDuPontInc. are
splitting up. General ElectricCo. is
shrinking. ArconicInc.,
cleaved off three years ago from the aluminum giant that was Alcoa, plans to
dump more units this year.
But St. Paul, Minn.,-based 3M continues
adding to its stable of 60,000 products and increasing its research budget,
even as the slowing global economy creates headwinds in some of its biggest
markets. 3M, which has 93,000 employees and 182 factories world-wide, lowered its profit outlook for this year
in January as a result of slowing demand in China and elsewhere for cars,
electronics and other goods made with its products. 3M is scheduled to
report first-quarter earnings on April 25.
The
company plans to spend about 6% of revenue on research and
development—nearly $2 billion a year—and 5.5% on capital investments over
the next five years. The target research amount is higher than the 5.7% of
annual revenue spent over the past five years.
Electric cars and teeth-straightening are two of the businesses where 3M
thinks its investments could generate the biggest returns, and the company
expects research spending in those areas to grow fourfold over the next five
years.
“We
innovate, create new markets, new segments and we’re always moving to new
places to prioritize,” Chief Executive Michael Roman said at a conference in
February. Earlier this year, the company rearranged its businesses into four
segments, down from five.
Tale of the
Tape
3M is
growing its sprawling business while other conglomerates have broken up
recently to boost performance.
Shares
of 3M have fallen 0.4% over the past 12 months, compared with an increase of
4.6% in the S&P 500 Industrials.
At
many companies, such expansions add layers of management that slow
innovation and make it harder to launch new products, said Amit Seru, a
finance professor at Stanford Graduate School of Business. 3M has managed to
keep innovating for the long-term by creating the right internal incentives
and culture, he said.
“3Ms
are the exception, not the rule,” said Mr. Seru. “Very few firms have been
able to remain innovative for a long time.”
Still,
3M is increasingly standing alone as a large company that is still in a
variety of industries, said Jiwook Jung, a professor at the University of
Illinois at Urbana-Champaign. Other companies have been focusing on their
core products because of activist-investor pressure and buyouts.
“Although it’s diversified, it has an engineering culture producing things
rather than playing with financial investments,” said Mr. Jung.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 19, 2019
By Patricia Kowsmann and Paul J. Davies | Apr 15, 2019
TOPICS: business
combinations, Goodwill
SUMMARY: Deutsche
Bank AG and Commerzbank AG "...have been in formal talks since March over a
potential merger, spurred on by the German government. There is no guarantee
a deal will happen. Both banks are viewed skeptically by investors and trade
at deep discounts to their book value, reflecting poor profits and lingering
doubts about the quality of some assets." Consequently, the merger likely
will result in negative goodwill that would produce a reported gain under
current IFRS and U.S.GAAP requirements.
CLASSROOM APPLICATION: The
article may be used to discuss negative goodwill arising from a business
combination.
QUESTIONS:
1. (Advanced) When does negative goodwill occur in a business
combination transaction?
2. (Advanced) What accounting treatment is given to negative
goodwill? Cite authoritative accounting literature in your answer.
3. (Introductory) Why is the promise of this accounting
treatment enticing these two banks to merge?
4. (Advanced) According to the article, the "badwill" number
in the Deutsche Bank AG and Commerzbank AG business combination
could vary greatly. Why is that possible?
5. (Advanced) According to the article, the "badwill" number
in the Deutsche Bank AG and Commerzbank AG business combination
could shrink after the business combination is executed. How could
that happen?
Deutsche Bank has told investors and others close to the bank that it hopes
European Central Bank supervisors will allow wide latitude to use the
accounting treatment—known as negative goodwill, or so-called badwill—as
part of a takeover, people familiar with the talks said.
The two banks have been in formal talks
since March over a potential merger, spurred on by the German government.
There is no guarantee a deal will happen. Both banks are viewed skeptically
by investors and trade at deep discounts to their book value, reflecting
poor profits and lingering doubts about the quality of some assets.
A combined bank
could recognize a one-time profit of more than €16 billion, or more than $18
billion, using badwill, according to analyst estimates. That profit would be
crucial for maintaining the combined entity’s capital ratios, which
regulators are likely to increase as a condition of approving a deal.
The
badwill number could vary greatly depending on the valuation paid for
Commerzbank. It could also shrink if Deutsche Bank, after it executes a
deal, decides Commerzbank’s assets are worth less than their current book
value. The less badwill that is generated, the more fresh capital from
shareholders could be needed.
Deutsche Bank shareholders, who since 2008 have injected more than €30
billion of capital into the bank, are resistant to put in much more. Even
with a hefty badwill gain, the combined bank will need fresh cash to lay off
employees and close unwanted operations. Asset disposals—such as selling
Deutsche Bank’s asset-management arm DWS, or Commerzbank’s Polish operations
known as mBank—could also be used to raise cash.
“This is not free money that can be used to
fund restructuring costs or clean up the balance sheet or return to
shareholders,” Jeremy Sigee, analyst at Exane BNP Paribas, wrote in
a recent note. “Every penny of it is needed to keep the regulatory capital
ratios where they started.”
Badwill lets buyers book a profit if they buy a target for less than
net-asset value, or book value, which is the difference between a firm’s
assets and liabilities. If a target company is sold for less than its stated
book value, then the buyer can treat the difference as a gain.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 19, 2019
SUMMARY: Vanguard
Group is taking a more vocal position in its voting during proxy season. The
index-fund manager "plans to vote, in most cases, against corporate
executives running for two or more public-company board seats beyond where
they are employed...." The article explains that Vanguard and rival
Black-Rock Inc. "control roughly 26% of the S&P 500...[which] means their
voting policies and opinions influence how American corporations conduct
themselves." The article further discusses corporate governance issues such
as gender diversity and executive compensation.
CLASSROOM APPLICATION: The
article may be used when discussing corporate governance and/or boards of
directors in a financial reporting class.
QUESTIONS:
1. (Introductory) What is the Vanguard Group?
2. (Introductory) Why does Vanguard, and its peer Black-Rock,
Inc., have significant influence over how U.S. public companies
conduct themselves?
3. (Advanced) What is corporate governance? Cite your source
for this definition.
4. (Advanced) What is the purpose of a board of directors?
5. (Introductory) What corporate governance concerns have
Vanguard and it rival Black-Rock Inc. raised?
6. (Advanced) Specifically consider the issue of limiting the
number of boards of directorships that may be held by individual
executives. Name one factor in favor of such a limit; name one
factor which might lead to opposing such a limit.
The index-fund giant is
preparing to issue updated proxy-voting guidelines
Vanguard Group is taking a tougher stance against companies whose board
members it believes are stretched too thin.
The
world’s second-largest asset manager plans to vote, in most cases, against
corporate executives running for two or more public-company board seats
beyond where they are employed, a Vanguard spokeswoman said. Vanguard said
it would generally vote against other board candidates seeking more than
four board seats at one time.
Vanguard, which has roughly $5.3 trillion under management, is a large
shareholder in many major public companies. It has recently begun informing
U.S. companies it invests in about the new policy, which is part of a
broader update on corporate-governance guidance planned for release this
week. Vanguard said it is following the new policy as it votes on proxies at
this year’s annual meetings.
Index-fund managers such as Vanguard and
rival BlackRockInc.BLK
-0.39%control roughly 26% of
the S&P 500, according to an analysis by J.P. Morgan Chase & Co. This means
their voting policies and opinions influence how American corporations
conduct themselves. BlackRock has tended to be more outspoken than its
peers. Last year, the firm made changes to its voting guidelines
and indicated it would be more likely to vote against chief executives on
more than one other public company board.
Some in the money-management business have
criticized the firms for not going far enough
given their size. This is forcing index-fund managers to be more transparent
on how they are thinking about everything from boards’ gender diversity to
compensation practices to share buybacks. So-called overboarding is another focus,
driven by concerns that directors can have too many demands placed on their
time.
“Overboarding has become a bigger and bigger issue because the role of the
director has increased over time,” said Jack “Rusty” O’Kelley, who leads
Russell Reynolds Associates’ board advisory and effectiveness practice. “To
serve on a board is requiring more time and effort.”
The
executive-search firm estimated in a recent report that each public-company
directorship requires an average of 200 hours a year, not including the time
it takes to travel to board meetings and other events.
More than 60% of public-company directors
sit on at least two public boards, and 45% of CEOs sit on at least one
outside board, according to a 2018 analysis
of S&P 500 corporations by executive-search firm Spencer Stuart.
“As we go into the U.S. proxy season, we are engaging with
and voting at a substantial number of companies. It’s an appropriate time to
put these matters front and center,” said Glenn Booraem, who heads
stewardship at Vanguard.
Voting
isn’t the only way Vanguard can nudge companies as to how they are governed.
It can use other methods, such as engaging with firms behind the scenes. The
timing of Vanguard’s change could disrupt some companies’ plans, as many are
nearing annual meetings, where shareholders will vote on the directors, and
may need to rethink their nominees.
There
can be potential downsides on placing more restrictions on company boards,
according to some advisers.
“Losing valuable directors, depriving shareholders of these directors’
contributions and limiting the pool of effective director candidates are
downsides of board-service limits that are too tight,” said Sabastian Niles,
a partner at Wachtell, Lipton, Rosen & Katz who advises clients on activism
defense and corporate governance.
Vanguard will weigh many factors in assessing boards and push for a variety
of viewpoints in corporate boardrooms. It is also expected to indicate in
the updated guidelines it will support more disclosures on board diversity
across gender, age, ethnicity and other aspects. It will likely support
proposals to separate the roles of chairman and CEO if it thinks boards
aren’t providing enough independent oversight.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 19, 2019
SUMMARY: On
Thursday, April 11, 2019, Uber "disclosed its ...S-1 filing it had made
privately with the Securities and Exchange Commission in December. The
filing shows the...revenue from ride-hailing...was little changed over the
previous 6 months." The article also discusses the future outlook for
ride-hailing service revenues, the competitiveness of the industry, and
corporate governance issues at Uber.
CLASSROOM APPLICATION: The
article may be used when discussing IPOs, revenue forecasts, or corporate
governance. The related article was covered in last week's review.
QUESTIONS:
1. (Introductory) "Lyft, which made its debut late [in March]
provides something of a cautionary tale for Uber." What is that
story?
2. (Advanced) At what stage in the process of undertaking its
initial public offering of securities (IPO) does Uber now stand?
Include in your answer your understanding of the documents Uber has
filed with the U.S. Securities and Exchange Commission.
3. (Advanced) Uber touted in its S-1 filing the fact that it
doesn't have "super-voting shares." What are such shares? Why does
it speak well of a company's corporate governance not to have such
shares?
4. (Introductory) What revenue trends are discussed in this
article, short-term and/or long-term? Describe the issues Uber faces
in this important area for company performance.
Company’s ride-hailing
revenue little changed over past six months
Uber
Technologies Inc. made its IPO papers public Thursday, revealing some of the
secrets of a company with big, global ambitions that faces slowing growth in
its core ride-hailing business.
San
Francisco-based Uber on Thursday disclosed the so-called S-1 filing it had
made privately with the Securities and Exchange Commission in December.
The
filing shows that the spectacular growth Uber has enjoyed in its core
ride-hailing business has leveled off lately. The company’s revenue from
ride-hailing—excluding items such as driver referrals and some
incentives—was $2.31 billion in the fourth quarter, little changed over the
prior six months.
The
filing represents a major step for Uber toward its highly anticipated public
listing, which would be the biggest in a year expected to be full of them.
It sets up the company to begin trading in early May following a so-called
roadshow beginning in late April, in which Uber would pitch the shares to
investors.
The company is aiming for a valuation of as
much as $100 billion,
which, although below some prior expectations, would make it the biggest new
issue since Alibaba Group Holding Ltd went public in 2014 with an initial
market value of $169 billion, according to Dealogic.
Uber
plans to list its shares on the New York Stock Exchange under the symbol
UBER.
The
filing document exposes to wider public view a 10-year-old company that has
changed how millions of people get from place to place and represents one of
Silicon Valley’s biggest recent success stories: Uber’s growth has been
explosive, with overall revenue jumping from just $495 million in 2014 to
$11.27 billion last year.
But
that growth hasn’t come cheaply. The company’s total losses on
operations—excluding items like sales of business units—totaled more than
$10 billion between 2016 and 2018, and were $3.03 billion last year alone.
That is an astounding sum for any large corporation, even a cash-hungry
startup. Uber has raised nearly $20 billion since its founding, including
from debt—by far the most ever for any U.S. startup, according to PitchBook.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 26, 2019
SUMMARY: The
article analyzes Uber's initial public offering document (its S-1
registration statement). Discussion of accounting treatment for driver
incentive costs shows the usefulness of the information for financial
statement analysis. This treatment differs between Uber and Lyft.
CLASSROOM APPLICATION: The
article may be used in any financial reporting class or to discuss financial
statement analysis.
QUESTIONS:
1. (Advanced) What statement indicates that in some markets
Uber faces negative gross profits?
2. (Advanced) What financial measure does Uber call 'core
platform revenue'? Is this a measurement defined by U.S. generally
accepted accounting principles?
3. (Introductory) What accounting difference makes it
difficult to compare Uber's performance to those of Lyft, Inc.?
4. (Introductory) According to the article, how does Uber's
financial reporting provide greater clarity for investors than does
Lyft's reporting?
Uber’s public documents differ from rival
Lyft by being more explicit about the incentives it gives drivers—if only
that were comforting
Forget net profits—in some markets, Uber is starting in a hole, paying more
to drivers to complete a trip than the customer pays for the ride.
The ride-hailing company’s initial public offering document is the latest
window into goodies it offers drivers to keep their wheels turning. Its
accounting methods vary from rival Lyft
,LYFT
+1.08%but both companies could make
things clearer for investors.
In
some ways, Uber’s financial statements, which are seeking to justify a $100 billion valuation,
are more revealing.
More so than its neighbor Lyft, the San Francisco-based company details each
step of the ride-hailing process, from the customer’s payment for the
ride—so-called “gross bookings”—to the amount of revenue the company takes
after paying nearly all of the driver’s wage and average bonus, plus some
other incentives. This is what Uber calls “core platform revenue.”
But not all the fees paid to the driver are recorded the same way. In
markets where it is trying to establish a dominant position, such as in
emerging markets or with its Uber Eats program, Uber offers drivers more
bells and whistles to encourage them to plug into its platform. This
so-called “excess” driver incentive is listed apart from what Uber collects
in core platform revenue.
In
theory, when competition fades, Uber won’t have to pay these incentives any
longer. So by breaking them out separately, investors can see how its
profits might swing if its aggressive strategy is successful.
But this effort to clarify its business isn’t something that brings a whole
lot of comfort. These fees are growing not shrinking, which investors can
see by digging in deeper. In 2018, excess driver incentives increased almost
60% to $837 million, and rose as a percentage of revenue, in large part
because of the rapid expansion of Uber Eats.
Lyft reports its driver incentives differently, as the revenue line takes
into account more of the incentives to drivers. It is a cleaner treatment,
perhaps, but also a less revealing one. Without more detail, investors can’t
make as good an assessment about how much it is paying to grow.
For both companies, the future course of driver incentive
costs will be key. The more they pay out—a function of their dogged
competition—the harder it will be to turn consistent profits.
Both companies could have a more straightforward way of showing these costs
by breaking them out clearly and uniformly. Investors might reward them with
a higher valuation as a result, assuming they like what they see.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 26, 2019
By WSJ Opinion Page Letters to the Editor | Apr 23, 2019
TOPICS: Tax
Policy
SUMMARY: This
opinion page piece refers to a letter to the editor from April 9 that is is
authored by a co-director of the Urban-Brookings Tax Policy Center and
author of "Fiscal Therapy: Curing America's Debt Addiction and Investing in
the Future," (see the related article). Mr. Gale notes that "less than half
as many American taxpayers are claiming the mortgage-interest deduction for
2018 as did the year earlier. With any luck, the 2017 tax overhaul will
prove to be only the first step toward eventually replacing the century-old
housing subsidy with a more effective program." The author claims that this
reduction "... is a welcome change. The mortgage-interest deduction has
existed since the income tax was created in 1913, but it has never been easy
to justify." His arguments are based on economic theory.
CLASSROOM APPLICATION: The
article may be used to discuss tax policy and fairness in an individual
income tax class.
QUESTIONS:
1. (Advanced) Refer to the related article. List the economic
reasons in the letter to the WSJ editors from Mr. William G. Gale
for his opposition to the mortgage interest deduction.
2. (Advanced) Who is Mr. Gale? Why do you think he wrote the
letter published in the April 9, 2019 WSJ?
3. (Introductory) Do the authors of the two letters to the
editor published in the April 23, 2019, WSJ agree that the economic
reasons are driving current change in tax policy? Explain.
Two people with the same
income should pay the same income tax. How difficult is it to understand
that idea?
William G. Gale’s “Chipping
Away at the Mortgage Deduction”
(op-ed, April 10) misses the whole point of income taxes. A federal income
tax should be fair and actually tax only income. Two people with the same
income should pay the same income tax. How difficult is it to understand
that idea?
To make the
federal income tax be fair, there should be no mortgage deduction, zero
state and local tax (SALT) deduction, no charitable deduction, no child tax
credits and no standard deduction.
If one has
exactly the same income as another person, the first person pays more tax if
the other person has 1) a bigger mortgage deduction, 2) a bigger SALT
deduction, 3) a bigger charitable deduction, 4) more children creating more
child tax credits, etc.
The new huge
standard deduction creates an artificial bottom tax bracket of zero.
Eliminate the standard deduction and actually have the bottom tax bracket
with a zero rate and adjust the cutoff points in the other brackets
appropriately.
Mr. Gale
advocates phasing out deductions which makes sense. Congress has already put
limits on mortgage and SALT deductions. The next step is to get rid of all
deductions and tax credits.
When the
income tax started there was a “gentleman’s agreement” that the federal
income tax should never apply to interest on state and municipal bonds.
Where is the logic in that? If the federal income tax applies to any
interest, it should apply to all interest.
Tom Miller
Cicero, Ind.
Mr. Gale
gets it right: “current mortgage subsidies aren’t meant to help the
middle-class or new homeowners.” No kidding. Consider a married couple in
Nevada, with a mortgage note of $500,000 at 4% interest, fixed over 30
years. This couple will incur $19,840 of interest in the first year of
ownership, which is less than the standard deduction of $24,000. As a
result, this couple’s mortgage interest does nothing to change their tax
bill; with or without a mortgage debt, this couple would claim the standard
deduction, unless they donated generously or spent lavishly (charitable
contributions and sales taxes can be itemized as well).
Let’s be
honest, the evisceration of the mortgage interest deduction has nothing to
do with fanciful, obscure notions of “income,” the tax laws of Denmark or
Australia, or carbon footprints. Mortgage interest deductions were
sacrificed to pay for a 14 percentage-point decrease in corporate tax rates
(from 35% to 21%). One can debate whether that trade-off is good or bad, but
nobody benefits if that discussion is fogged over by tortured logic or
revisionist tax history.
John Taylor
Phoenix
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 26, 2019
By Corrie Driebusch and Maureen Farrell | Apr 18, 2019
TOPICS: Initial
Public Offerings
SUMMARY: In
the weeks since the Lyft, Inc. initial public offering in March 2019,
"...its shares hares have fallen, ending Thursday down 19% from their IPO
price. As a result, Pinterest and Zoom took a more conservative approach to
pricing shares, people familiar with the offerings said." Their stocks
surged on the first day of trading.
CLASSROOM APPLICATION: The
article may be used in a financial reporting class to emphasize that
subsequent trading of shares does not impact the amount recorded upon stock
issuance.
QUESTIONS:
1. (Advanced) What is a "technology unicorn"? Cite your
source for this definition.
2. (Advanced) Who are the two "technology unicorns" discussed
in the article? Explain their business models as far as you
understand them.
3. (Introductory) What do these two companies have in common?
What impact could the initial public offering of Lyft, Inc. stock
have had on the IPO s of Pinterest and Zoom?
4. (Advanced) What happened to the value of Zoom and
Pinterest stocks at the end of the first day of public trading? Is
this impact shown in the accounting records of these two companies?
Explain.
Performance of two companies
in the public markets will set the stage for the IPO market going forward
Pinterest Inc. PINS +3.85%
and Zoom Video Communications Inc. soared in their trading debuts Thursday,
a sign of investors’ undiminished appetite for fast-growing technology
companies.
Shares of
Pinterest and Zoom closed up 28% and 72% above their respective initial
public offering prices. Pinterest’s so-called first-day pop exceeded the
U.S.-listed tech company’s average pop since 2010, according to Dealogic.
But Zoom’s climb was even more pronounced. It is the best first-day pop
since Twitter
Inc.’s 2013 debut, and only eight other companies that raised
at least $500 million in their public offerings have closed with higher
gains on their first day of trading, according to Dealogic.
“What can I
say? Now we just have to work harder to live up to their expectations,” said
Eric Yuan, chief executive officer of Zoom, referring to the investor
enthusiasm for his company’s stock.
As of
Thursday’s close of trading, Zoom’s fully diluted valuation stood at roughly
$18 billion — a steep jump from the $1 billion valuation it received from
private investors in early 2017. Zoom’s valuation exceeded that of
Pinterest’s by the close of trading.
Both debuts
were awaited by investors as a gauge of the IPO market’s strength and will
set the stage for investor appetite for forthcoming offerings. Those include
the IPO of Uber Technologies Inc., which is expected to come to market in
early May as one of the largest U.S.-listed offerings ever. This year has
been widely expected to be the biggest on record in terms of dollars raised
by IPOs.
Bankers,
traders and investors are hoping both companies’ stocks follow a different
trajectory than the last buzz-worthy name to go public, Lyft. The
ride-sharing company priced shares in its IPO above their original price
range, and the stock initially climbed.
In the weeks since the company’s late-March IPO, however, its shares have fallen,
ending Thursday down 19% from their IPO price.
As a result,
Pinterest and Zoom took a more conservative approach to pricing shares,
people familiar with the offerings said. Pinterest set its target price
range at a level that would translate to a lower valuation than its last
private financing round. It priced its IPO
at $19 a share late Wednesday, $2 above its expected range, giving the
company a valuation of $12.6 billion on a fully diluted basis.
By the close
of trading, Pinterest’s fully diluted valuation had jumped to roughly $16
billion, with its share price exceeding its last private price of $21.54 in
2017.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 26, 2019
SUMMARY: The
article discusses the range of business exposure needed to rise to the top
post of CEO through the example of Marianne Lake, who has served as chief
financial officer of JPMorgan since 2012, and Jennifer Piepszak who will
assume the CFO role on May 1. Ms. Lake will move to a position leading a
major segment of JPMorgan's operations.
CLASSROOM APPLICATION: The
article may be used to discuss accounting career paths and gender-related
issues.
QUESTIONS:
1. (Advanced) What is the role of a chief financial officer?
2. (Advanced) Does this role extend beyond responsibility for
the accounting function at a large company such as JPMorgan?
Explain.
3. (Introductory) Why did JPMorgan move Marianne Lake out of
the role of CFO in order to help her prepare to possibly succeed
Jamie Dimon as chief executive officer?
4. (Introductory) Why did JPMorgan move Jennifer Piepszak
into the role of CFO in order to help her prepare to possibly
succeed Jamie Dimon as chief executive officer?
JPMorgan
Chase
JPM
+0.50%& Co. put
two women with decades of experience at the bank at the top of the list to
one day succeed James Dimon as chief executive.
Marianne
Lake, who has served as chief financial officer since 2012, will leave the
role to run all of the bank’s consumer-lending businesses, including its
growing credit-card operations as well as auto lending and mortgages.
Jennifer Piepszak, who was
running JPMorgan’s credit-card business,
will take over as finance chief. The changes will take effect May 1.
Ms. Piepszak
will join the company’s operating committee of top executives, a group that
already includes Ms. Lake.
Ms. Lake has
long been
viewed as a contender
to succeed Mr. Dimon, but analysts and others monitoring the succession race
believed she first needed experience running one of the bank’s major
businesses. A rising star within the bank, Ms. Piepszak’s move to the CFO
role makes her one of JPMorgan’s most prominent representatives and gives
her broad influence over its far-flung businesses.
Mr. Dimon,
63 years old, is in no hurry to retire. Asked at the bank’s February
investor day when he planned to step down, he said: “Five years. Maybe four
now.”
The
ascension of either Ms. Lake or Ms. Piepszak to the top job at the largest
U.S. bank would be a major development for women, who occupy few senior
roles in the banking business and on Wall Street.
The
suggested time frame for succession has led some to assume the bank’s
co-chief operating officers—Gordon Smith, who runs the bank’s consumer and
community operations, and investment-banking head Daniel Pinto—would be too
close to retirement themselves when Mr. Dimon departs. The two men, who
assumed their current roles plus president titles in a shake-up a year ago,
are considered candidates were Mr. Dimon to depart sooner than expected.
Mr. Dimon
was diagnosed with throat cancer in 2014 but made a full recovery.
Both 49, Ms.
Lake and Ms. Piepszak are seen as having the right combination of youth and
experience to potentially succeed Mr. Dimon if he sticks around for another
five years.
During his tenure, Mr. Dimon has several times shuffled his lieutenants to
make sure candidates have a wide range of experience and exposure to the
bank. But a number of executives couldn’t wait him out, choosing instead to
trade the possibility of the top job at JPMorgan for CEO roles at other
financial institutions.
Mr. Dimon joined JPMorgan in 2004 when the New York bank bought Bank One
Corp. and he became CEO in 2005.
Ms. Lake, who joined JPMorgan in 1999, will report to Mr. Smith but have a
broad remit in consumer lending in a new role the bank created for her. She
will run the bank’s credit-card businesses, and the heads of mortgage and
auto lending will report to her, according to a memo the bank sent to
employees.
In her 25 years at the bank, Ms. Piepszak has run its business-banking unit
and was finance chief of its mortgage business.
Mr. Dimon enjoys an unparalleled level of job security among big-bank CEOs,
having steered JPMorgan through the financial crisis to record profits.
Still, Wall Street has long obsessed over the timing of his departure. Mr.
Dimon recently said he wouldn’t run for president, a question he gets often
at public appearances, and his name was floated as a possible candidate for
Treasury secretary following Donald Trump’s 2016 election.
Continued in article
Teaching Case From The Wall Street Journal Weekly Accounting
Review on April 26, 2019
SUMMARY: "Facebook
posted $15.08 billion in revenue, up 26% from $11.97 billion in the same
period last year, but profits of only $2.43 billion in the first quarter, as
the one-time [charge for an expected fine from the Federal Trade Commission]
wiped out most of its income. The company reported per-share earnings of 85
cents in the first quarter, down from $1.69 a year ago. Including the money
being reserved for the estimated legal settlement, Facebook would have had
earnings of $1.89 a share."
CLASSROOM APPLICATION: The
article may be used when discussing contingent liabilities.
QUESTIONS:
1. (Introductory) For what does Facebook expect to incur a
fine?
2. (Advanced) Define the term contingent liability and
summarize the accounting for this liability. Has Facebook recorded
such a liability? Explain.
3. (Advanced) Why does the accounting for a contingent
liability "wipe out most" of Facebook's income in one quarter?
4. (Introductory) According to the article, what is the range
of possible settlement amounts for this fine?
5. (Advanced) What is the requirement regarding the amount
that a company must record for a contingent liability? Has Facebook
reported in compliance with this requirement? Explain.
Agency has been investigating
whether company violated consent decree when user data was shared with
Cambridge Analytica
Facebook
FB
-0.91%Inc. set aside $3 billion for an expected
fine from the Federal Trade Commission over privacy violations, cutting into
the social-media giant’s profit even as its underlying business remained
strong.
Facebook
posted $15.08 billion in revenue, up 26% from $11.97 billion in the
year-earlier period. Its profit dropped by more than half, to $2.43 billion
in the first quarter, as the one-time reserve wiped out most of its income.
A
multibillion-dollar penalty would likely be the largest ever against a major
U.S. tech company by a U.S. regulator, and lands amid sharp debate on
Capitol Hill about how best to hold Silicon Valley accountable for its
abuses. It would also be the largest privacy-related fine in FTC history.
Facebook
agreed in 2012 not to collect personal data and share it without user
consent, as part of a settlement with the FTC. The agency began
probing
last year whether Facebook had violated the terms of that earlier settlement
when data of tens of millions of its users were transferred to Cambridge
Analytica, a data firm that did work for the 2016 campaign of President
Trump. The Wall Street Journal
reported in February
that FTC staff had discussed a fine of up to $5 billion.
The FTC
investigation has run for more than a year, prompting complaints from some
lawmakers. Facebook’s statements on Wednesday suggest the case could be
winding up, though the FTC has not given any deadline. While Facebook
estimated a settlement would range between $3 billion and $5 billion, it
cautioned “there can be no assurance as to the timing or the terms of any
final outcome.”
Jessica
Rich, a former head of the FTC’s consumer protection bureau, said that the
legal reserve wasn’t necessarily proof that a settlement was forthcoming.
But she credited “enormous consumer outrage” for the size of the fine
Facebook anticipates paying, noting the largest privacy settlement the
agency has ever reached was $100 million. “The pressure is on the FTC to
show that they can take serious action when warranted,” she said.
An aphorism is a statement of truth or opinion expressed in a
concise and witty manner.
The term is often applied to philosophical, moral and literary
principles.
♦I
read that 4,153,237 people got married last year. Not to cause any trouble,
but shouldn't that be an even number?
♦I find it ironic that the colours red, white, and blue stand for freedom
until they are flashing behind you.
♦When
wearing a bikini, women reveal 90% of their body. Men are so polite they
only look at the covered parts.
♦Relationships are a lot like algebra. Have you ever looked at your X and
wondered Y?
♦America
is a country which produces citizens who will cross the ocean to fight for
democracy but won't cross the street to vote.
♦You know that tingly little feeling you get when you love someone? That's
your common sense leaving your body.
♦My
therapist says I have a preoccupation with vengeance. We'll see about that!
♦I
think my neighbour is stalking me as she's been Googling my name on her
computer. I saw it through my telescope last night.
♦Money
talks ... but all mine ever says is good-bye.
♦You're not fat, you're just easier to see.
♦If
you think nobody cares whether you're alive, try missing a couple of
payments.
♦I always wondered what the job application is like at Hooters. Do they just
give you a bra and say, "Here, fill this out?"
♦I
can’t understand why women are OK that JC Penny has an older women’s
clothing line named, "Sag Harbour."
♦Denny’s has a slogan, "If it’s your birthday, the meal is on us." If you’re
in Denny’s and it’s your birthday, your life sucks!
♦The
location of your mailbox shows you how far away from your house you can go
in a robe before you start looking like a mental patient.
♦I think it's pretty cool how Chinese people made a language entirely out of
tattoos.
♦Money
can’t buy happiness, but it keeps the kids in touch!
♦The reason Mayberry was so peaceful and quiet was because nobody was
married. Andy, Aunt Bea, Barney, Floyd, Howard, Goober, Gomer, Sam, Earnest
T Bass, Helen, Thelma Lou, Clara and, of course, Opie were all single. The
only married person was Otis, and he stayed drunk.
============================================
Now, don’t you feel better knowing what an aphorism is?
There
are 2 versions of this paper
There
are 2 versions of this paper
There
are 2 versions of this paper