New Bookmarks
Year 2019 Quarter 2:  April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

 

Choose a date below for additions to New Bookmarks

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June 2019

FBob Jensen's New Additions to Bookmarks

June 2019

Bob Jensen at Trinity University 


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

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

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

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
http://finance.townhall.com/columnists/politicalcalculations/2016/05/25/spring-2016-to-whom-does-the-us-government-owe-money-n2168161?utm_source=thdaily&utm_medium=email&utm_campaign=nl
The US Debt Clock in Real Time --- http://www.usdebtclock.org/ 
Remember the Jane Fonda Movie called "Rollover" --- https://en.wikipedia.org/wiki/Rollover_(film)
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas to sustain those investments.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
http://money.cnn.com/2013/01/15/news/economy/entitlement-benefits/
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---
http://faculty.trinity.edu/rjensen/Entitlements.htm

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

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

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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




Cognitors of the World Unite
NASBA and AICPA seek input on evolving licensure model ---

https://www.journalofaccountancy.com/news/2019/jun/cpa-licensure-model-input-201921411.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=11Jun2019

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

This is a 1998 lecture given by Bob Eliott before his world (the lofty public perception of CPA firm integrity) collapsed --- 
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.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


Atheists Drop $1 Billion Church Suit won't appeal ruling allowing tax exemption for clergy housing ---
https://freebeacon.com/issues/atheists-drop-1-billion-church-suit/


Open Textbook Library --- https://open.umn.edu/opentextbooks

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.

Wikibooks is a source of evolving free textbooks --- 
https://en.wikibooks.org/wiki/Subject:Books_by_subject

Bob Jensen's threads on free electronic literature --- 
http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm

 

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

 Important Issues in Statistical Testing and Recommended Improvements in Accounting Research

by Thomas R. Dyckman andStephen A. Zeff

Econometrics 20197(2), 18; https://doi.org/10.3390/econometrics7020018
https://www.mdpi.com/2225-1146/7/2/18/htm

Received: 17 December 2018 / Revised: 23 April 2019 / Accepted: 26 April 2019 / Published: 8 May 2019

Viewed by 608 PDF Full-text (254 KB) | HTML Full-text | XML Full-text

Abstract 

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 article belongs to the Special Issue Towards a New Paradigm for Statistical Evidence)


P-Value Nonsense
Statisticians clamor for retraction of paper by Harvard researchers they say uses a “nonsense statistic” ---

https://retractionwatch.com/2019/06/19/statisticians-clamor-for-retraction-of-paper-by-harvard-researchers-they-say-uses-a-nonsense-statistic/#more-100498

**How to Mislead With P-Values and Statistical Inference

From David Giles on March 26, 2019

A World Beyond p < 0.05

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

 

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

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

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

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

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

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

 

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

 

Highly recommended reading!

 

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

 

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

Continued in article

 

Illustrations of How to Mislead With Statistics --
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

 


P-Value Nonsense
Statisticians clamor for retraction of paper by Harvard researchers they say uses a “nonsense statistic” ---

https://retractionwatch.com/2019/06/19/statisticians-clamor-for-retraction-of-paper-by-harvard-researchers-they-say-uses-a-nonsense-statistic/#more-100498

**How to Mislead With P-Values and Statistical Inference

From David Giles on March 26, 2019

A World Beyond p < 0.05

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

 

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

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

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

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

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

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

 

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

 

Highly recommended reading!

 

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

 

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

Continued in article

 

Illustrations of How to Mislead With Statistics --
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm


Which KPMG Scandal Is Worse: PCAOB ‘Steal the Exam’ or CPE Training Exam Cheating?
https://goingconcern.com/which-kpmg-scandal-is-worse-pcaob-steal-the-exam-or-cpe-training-exam-cheating/

$50 Million Fine SEC Is Reportedly Giving KPMG Over PCAOB Scandal Isn’t Big Enough ---
https://goingconcern.com/kpmg-could-be-given-largest-fine-ever-auditor-sec/

Bob Jensen's threads on the two faces of KPMG ---
http://faculty.trinity.edu/rjensen/fraud001.htm


Walter E. Williams:  Colleges Committed to Ideological Diversity ---
https://townhall.com/columnists/walterewilliams/2019/06/04/colleges-committed-to-ideological-diversity-n2547327?utm_source=thdaily&utm_medium=email&utm_campaign=nl&newsletterad=06/04/2019&bcid=b16c6f948f297f77432f990d4411617f&recip=17935167

Huffington Post:  The 10 Worst Colleges For Free Speech: 2017 ---
https://townhall.com/columnists/walterewilliams/2019/06/04/colleges-committed-to-ideological-diversity-n2547327?utm_source=thdaily&utm_medium=email&utm_campaign=nl&newsletterad=06/04/2019&bcid=b16c6f948f297f77432f990d4411617f&recip=17935167

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.

Harvard and Princeton Leading Scholars Argue for "Truth Seeking"--- 
https://www.insidehighered.com/news/2017/03/16/ideological-odd-couple-robert-george-and-cornel-west-issue-joint-statement-against?utm_source=Inside+Higher+Ed&utm_campaign=bdb7326f2a-DNU20170316&utm_medium=email&utm_term=0_1fcbc04421-bdb7326f2a-197565045&mc_cid=bdb7326f2a&mc_eid=1e78f7c952

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.

U. of Virginia Students and Faculty Ask President to Stop Quoting Jefferson, the founder of the University of Virginia and principle author of Virginia's State Constitution --- 
http://www.chronicle.com/blogs/ticker/u-of-virginia-students-and-faculty-ask-president-to-stop-quoting-jefferson/115516?elqTrackId=e50a59346dec4186a11b83264cd1ea2a&elq=a373ec4040f04e3bb1f24fb30dd2426c&elqaid=11482&elqat=1&elqCampaignId=4497

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 
 

https://hbr.org/2016/11/what-so-many-people-dont-get-about-the-u-s-working-class?referral=00202&cm_mmc=email-_-newsletter-_-weekly_hotlist-_-hotlist_date&utm_source=newsletter_weekly_hotlist&utm_medium=email&utm_campaign=hotlist_date&spMailingID=15892371&spUserID=MTkyODM0MDg0MAS2&spJobID=903305802&spReportId=OTAzMzA1ODAyS0


Say What?  $12 trillion of negative-yielding bonds are sending a clear message of distress (mostly in Europe and Japan) ---
https://qz.com/1647791/12-trillion-of-negative-yielding-bonds-are-a-distress-signal/
Have your students explain this one!
Have students explain an inverted yield curve ---
https://en.wikipedia.org/wiki/Yield_curve


Sample CFA Exam Questions ---
https://www.businessinsider.com/cfa-exam-questions-2018-4


April 2019 Edition of the Accounting Historians' Notebook ---
http://aaahq.org/Portals/0/Users/241/77/14577/April%202019%20Notebook%20(Color).pdf?ver=2019-06-03-125305-930


FASB extends GAAP alternatives to not-for-profits ---
https://www.journalofaccountancy.com/news/2019/may/fasb-gaap-alternatives-not-for-profits-201921358.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=31May2019


Chief accountant Bricker to leave SEC ---
https://www.journalofaccountancy.com/news/2019/may/wesley-bricker-leaving-sec-201921363.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=31May2019


Our Students Can’t Write. We Have Ourselves to Blame ---
https://www.chronicle.com/article/Our-Students-Can-t-Write-We/246385?utm_source=wb&utm_medium=en&cid=wb

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?

Continued in article

Bob Jensen's writing helpers (with a lot of help from the pros) ---
http://faculty.trinity.edu/rjensen/Bookbob3.htm#Dictionaries


Excel:  A Dozen Excel Time Savers ---
https://www.journalofaccountancy.com/issues/2019/may/microsoft-excel-time-savers-tricks.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=19Jun2019

Excel:  A dynamic new way to SORT data arrays ---
https://www.journalofaccountancy.com/issues/2019/jun/excel-sort-array-based-function.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Jun2019

Excel:  How to Combine or Group Pie Charts in Microsoft Excel ---
https://www.howtogeek.com/416048/how-to-combine-or-group-pie-charts-in-microsoft-excel/


Marriage Tax Penalty Update ---
https://www.thetaxadviser.com/issues/2019/jun/marriage-tax-penalty-post-tcja.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Jun2019


The Subpart F high-tax exception before and after tax reform ---
https://www.thetaxadviser.com/issues/2019/jun/subpart-f-high-tax-exception.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=19Jun2019


Pogo:  "The Enemy is Us"
CFOs Complain about by Complex Accounting Systems ---
https://www.computerweekly.com/news/252464670/Half-of-CFOs-frustrated-by-complex-accounting-systems

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.


Could the Tax Cuts and Jobs Act Mean More State Income Tax Audits?
https://www.cpajournal.com/2019/05/28/could-the-tax-cuts-and-jobs-act-mean-more-state-income-tax-audits/


The Fiscal Roots of Inflation ---
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3379370

 


What's your fraud IQ? Take a quiz for fun ---
https://www.journalofaccountancy.com/issues/2019/jun/fraud-iq-quiz-small-business.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=03Jun2019


Tesla has made hundreds of millions of dollars selling tax credits to other automakers. Now we know who bought them ---
https://www.businessinsider.com/tesla-sold-carbon-emissions-credits-to-general-motors-fiat-chryser-2019-6


Walmart to pay more than $282 million to settle bribery investigations --- 
https://www.businessinsider.com/walmart-to-pay-282-million-settle-sec-justice-department-charges-2019-6 

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


The Couple Who Feds Say Scammed Berkshire Hathaway (think Warren Buffett) for Millions (in a solar energy Ponzi scheme) ---
https://www.bloomberg.com/news/articles/2019-06-04/the-couple-who-feds-say-scammed-buffett-s-berkshire-hathaway?cmpid=BBD060419_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190604&utm_campaign=bloombergdaily

Bob Jensen's threads on fraud over the years ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Tax:  There are two types of stock options: NSOs and ISOs ---
https://www.accountingweb.com/tax/individuals/should-clients-choose-an-nso-or-an-iso?source=060519

Bob Jensen's threads on the history of FAS 123R ---
http://faculty.trinity.edu/rjensen/theory/sfas123/jensen01.htm
 


Atheists Drop $1 Billion Church Suit won't appeal ruling allowing tax exemption for clergy housing ---
https://www.businessinsider.com/libra-facebook-announces-digital-currency-blockchain-2019-6


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

Libra and Remittances ---
https://marginalrevolution.com/marginalrevolution/2019/06/libra-and-remittances.html

Libra: Financial Inclusion for the World's Poor, or Scam? ---
http://newmonetarism.blogspot.com/2019/06/libra-financial-inclusion-for-worlds.html

JP Koning on Ill-Considered Government Policies Standing in the Way of the Emergence of the Digital Cash that Can Eliminate Any Lower Bound on Interest Rates ---
https://blog.supplysideliberal.com/post/2019/6/26/jp-koning-on-government-policies-standing-in-the-way-of-the-emergence-of-the-digital-cash-that-can-eliminate-any-lower-bound-on-interest-rates

Facebook just announced its own cryptocurrency ---
https://www.businessinsider.com/libra-facebook-announces-digital-currency-blockchain-2019-6

Facebook’s New Cryptocurrency, Libra, Gets Big Backers ---
https://www.wsj.com/articles/facebooks-new-cryptocurrency-gets-big-backers-11560463312?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=73685941&_hsenc=p2ANqtz-9naoUR4uWhQq1o9YNNWsBDupuk2-QzWHk-3huA2RCri8YWIy34JXRMp4QgnXCrQSOI1sa5eUUXfGgiR-h3-5ga9uExDg&_hsmi=73685941

MIT:  A group of big banks plans to launch its own digital currency within a year ---
https://www.technologyreview.com/f/613616/14-of-the-worlds-big-banks-may-have-a-digital-currency-within-a-year/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=73326445&_hsenc=p2ANqtz-8g6HuZncYr1Oifw19Lc7OsEErQsxLuZQniKN09dz2tgVwpVGPuQ_SUphouimB7WxffMDG090JVY3xY9WFxMZBkd4jjPw&_hsmi=73326445

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

Beyond Bitcoin: Here are some of the new use cases for distributed ledger technology ---
https://www.businessinsider.com/beyond-bitcoin-report-2018-3


WSJ: IRS Tax Crime Enforcement Unit Relying More On Analytics ---
https://taxprof.typepad.com/taxprof_blog/2019/06/wsj-irs-tax-crime-enforcement-unit-relying-more-on-analytics.html


Ford invested $500M into an electric vehicle startup. Here's how Rivian is doing exactly what Tesla isn't.---
https://www.businessinsider.com/electric-vehicle-startup-rivian-versus-tesla-ford-amazon-2019-6


PG&E Corp. has agreed to pay $1 billion to compensate more than a dozen California cities, counties and agencies for losses resulting from deadly wildfires sparked by its equipment ---
https://www.wsj.com/articles/pg-e-settles-with-some-california-communities-on-wildfire-claims-11560894354?mod=djemCFO
Jensen Comment
Who really pays the $1 billion? Not the bankrupt PG&E, The custormers of PG&E pay the $1 billion.


Unanimous Supreme Court: State Cannot Tax Out-Of-State Beneficiary On Undistributed Trust Income ---
https://taxprof.typepad.com/taxprof_blog/2019/06/unanimous-supreme-court-state-cannot-tax-out-of-state-beneficiary-on-undistributed-trust-income.html


Taxes and the Canadian Underground Economy

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 (20012003), 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 

Accounting Horizons 2019
Lobbying and Opposition to SFAS No. 123(R): An Examination of Campaign Contributions from CEOs and PACs ---

https://aaajournals.org/doi/full/10.2308/acch-52301

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.

 

Bob Jensen's threads on SFAS 123(R) are at
http://faculty.trinity.edu/rjensen/theory/sfas123/jensen01.htm


Information Bias and Disclosure

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3385134
39 Pages
 Posted: 31 May 2019

Joyce Tian

University of Waterloo - School of Accounting and Finance

Florin Sabac

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.

Keywords: managerial bias, accounting bias, disclosure, neutrality

Systematic Risk --- https://en.wikipedia.org/wiki/Systematic_risk

Using Accounting Earnings and Aggregate Economic Indicators to Estimate Firm-level Systematic Risk

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3387609
48 Pages
 Posted: 29 May 2019

Ray Ball

University of Chicago - Booth School of Business

Gil Sadka

University of Texas at Dallas

Ayung Tseng

Indiana University

Date Written: May 11, 2019

Abstract

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.

Keywords: asset pricing, earnings beta, demand, supply, systematic risk

JEL Classification: G12, M41


Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3380239
34 Pages
 Posted: 28 May 2019

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Charles‐Albert Lehalle

Capital Fund Management

Tamara Nefedova

Université Paris-Dauphine

Amine Raboun

Université Paris Dauphine

Date Written: April 24, 2019

Abstract

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.

Keywords: Trading Costs, Market Impact, Liquidity, Anomalies-based Investments

JEL Classification: G11, G14


The Fiscal Roots of Inflation

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3379370
51 Pages
 Posted: 25 May 2019

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Multiple version iconThere 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


Bankruptcy Prediction Models and the Cost of Debt

Journal of Fixed Income, Forthcoming

https://doi.org/10.3905/jfi.2012.21.4.025

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1622407
Posted: 21 May 2019

Sattar Mansi

Virginia Polytechnic Institute & State University

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Andrew (Jianzhong) Zhang

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

Journal of Fixed Income, Vol. 24, No. 2, 2014

https://doi.org/10.3905/jfi.2014.24.2.005

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671685
Posted: 21 May 2019

George E. Batta

Claremont McKenna College - Robert Day School of Economics and Finance

Wan Wongsunwai

The Chinese University of Hong Kong (CUHK)

Date Written: May 2014

Abstract

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

Contemporary Accounting Research, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3379846
Posted: 21 May 2019

Jenny Chu

University of Cambridge - Judge Business School

Patricia M. Dechow

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Annika Yu Wang

University of Houston - Bauer College of Business

Date Written: November 21, 2018

Abstract

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

JEL Classification: G12, M41


Unmasking Fraud at Toshiba

Issues in Accounting Education, Forthcoming
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3382076
SSRN
 

32 Pages Posted: 21 May 2019

Dennis Caplan

University at Albany (SUNY)

Saurav K. Dutta

State University of New York (SUNY) at Albany

David Marcinko

Skidmore College

Date Written: May 3, 2019

Abstract

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.

Keywords: price masking, audit risk and materiality, internal control, corporate governance, earnings management, fraud triangle


Going Negative: What to do with Negative Book Equity Stocks

https://doi.org/10.3905/JPM.2008.35.1.95

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1142649
Posted: 21 May 2019

Stephen J. Brown

New York University - Stern School of Business

Paul Lajbcygier

Monash University - Department of Banking & Finance

Bob Li

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: June 9, 2008

Abstract

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 and Stock Valuation Models

https://doi.org/10.3905/JPM.2009.35.4.170

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1051281
Posted: 21 May 2019

John D. Stowe

Ohio University

Dennis W. McLeavey

CFA Institute; University of Rhode Island College of Business Administration

Jerald E. Pinto

CFA Institute

Date Written: December 3, 2007

Abstract

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

JEL Classification: G12, G35


Interest Rate Swap Credit Valuation Adjustment

IES Working Paper: 16/2014

https://doi.org/10.3905/jod.2015.23.2.024
SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2302519

Posted: 20 May 2019

Jakub Cerny

Charles University in Prague - Faculty of Mathematics and Physics

Jiri Witzany

University of Economics in Prague

Date Written: May 2014

Abstract

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.

Keywords: Counterparty Credit Risk, Credit Valuation Adjustment, Wrong-way Risk, Risky Swaption Price, Semi-analytical Formula, Interest Rate Swap Price

JEL Classification: C63, G12, G13, G32


Transparency vs. Comparability: The Impact of Accounting Standards on Foreign Direct Investment

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3373339
33 Pages
 Posted: 16 May 2019

Gregory Sabin

Boston University - Questrom School of Business

Date Written: February 2019

Abstract

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.


Do Fundamentals Drive Cryptocurrency Prices?

CEPR Discussion Paper No. DP13724

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3387313
69 Pages
 Posted: 13 May 2019

Siddharth Bhambhwani

University of Miami - School of Business Administration

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

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

Date Written: 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.

Keywords: Asset Pricing Factors, Bitcoin, cointegration, Computing Power, Dash, ethereum, Hashrate, Litecoin, Monero, network

JEL Classification: E4, G12, G14


PwC In the U.K. Got a Big Fine For Doing a Crappy Job Auditing Redcentric ---
https://goingconcern.com/pwc-in-the-u-k-got-a-big-fine-for-doing-a-crappy-job-auditing-redcentric/

The Public Company Accounting Oversight Board has barred William Trainor, former partner at EY, over its allegations that Trainor bungled the 2013 audit of internal control over financial reporting for Forest Oil Corp. ---
https://goingconcern.com/ex-ey-audit-partners-lousy-audit-judgment-landed-him-a-25000-fine-from-the-pcaob/


Ninth Circuit upholds IRS cost-sharing regulation ---
https://www.journalofaccountancy.com/news/2019/jun/irs-cost-sharing-regulation-201921433.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=11Jun2019


The Behavioral Economics Guide 2019 ---
https://www.behavioraleconomics.com/the-be-guide/the-behavioral-economics-guide-2019/

Richard Thaler and the Rise of Behavioral Economics

The Scandinavian Journal of Economics, Vol. 120, Issue 3, pp. 661-684, 2018

SSRN

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3210990

 

24 Pages Posted: 13 Jul 2018  

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere 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


Robert J. Nash explains why he believes one can still be effective at age 80 as both a teacher and a scholar ---
https://www.insidehighered.com/advice/2019/06/12/professor-who-has-taught-more-half-century-explains-why-he-hasnt-been-willing?utm_source=Inside+Higher+Ed&utm_campaign=776ee2eb95-DNU_2019_COPY_02&utm_medium=email&utm_term=0_1fcbc04421-776ee2eb95-197603613&mc_cid=776ee2eb95&mc_eid=495c6bd417
Jensen Comment
I know an accounting professor who is becoming more known for publishing journal articles after retirement. I know one who is purportedly fantastic in the classroom as he approaches 90 years of age. But I've also had some colleagues who carried on far longer then they should have in the classroom while they deprived students of fresh faculty blood because of clinging to tenure positions well past their prime. Being an "effective teacher and scholar" at age 80 doesn't necessarily mean you're better than younger competition, especially in terms of technical updates that you stop trying to comprehend.

 




 

EY:  Updated FRD on new credit impairment standard (ASC 326) ---
https://www.ey.com/ul/en/accountinglink/frd-04488-181us-credit-impairment

EY:  AICPA issues final standard that changes the form and content of the auditor’s report ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_06397-191US_AuditorReport_13June2019/$FILE/TothePoint_06397-191US_AuditorReport_13June2019.pdf

EY:  June 2019 Financial Reporting Briefs ---
https://www.ey.com/Publication/vwLUAssetsAL/FinancialReportingBriefs_06383-191US_13June2019/$FILE/FinancialReportingBriefs_06383-191US_13June2019.pdf

EY: Comment letter on the FASB’s proposal to change the disclosure requirements for income taxes ---
https://www.ey.com/Publication/vwLUAssetsAL/CommentLetter_06338-191US_Incometaxes_31May2019/$FILE/CommentLetter_06338-191US_Incometaxes_31May2019.pdf

Yogi Berra:  Predictions are hard, especially about the future
EY:  How long-term value is being redefined and communicated ---

https://www.ey.com/en_us/board-matters/how-long-term-value-is-being-redefined-and-communicated

EY:  Accounting for digitally distributed content (after adoption of ASU 2019-02) – Media and entertainment ---
https://www.ey.com/Publication/vwLUAssetsAL/DigitalContent_07331-191US_23May2019/$FILE/DigitalContent_07331-191US_23May2019.pdf

 




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 terms the 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 pair were 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 Stiehl in 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 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.


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 slumped Monday 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

KPMG LLP is preparing to pay as much as $50 million to settle civil claims r

Which KPMG Scandal Is Worse: PCAOB ‘Steal the Exam’ or CPE Training Exam Cheating?
https://goingconcern.com/which-kpmg-scandal-is-worse-pcaob-steal-the-exam-or-cpe-training-exam-cheating/ elated 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.


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 is experiencing 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 LLP resigned 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

U.S. mortgage rates dropped below 4% for the first time since early last year, adding to hopes for a revival in the housing market ---
https://www.wsj.com/articles/mortgage-rates-fall-below-4-lifting-hopes-for-housing-rebound-11559235561?mod=djemCFO


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.

Read the accounting standard update here ---
https://www.fasb.org/cs/Satellite?c=Document_C&cid=1176172752478&pagename=FASB%2FDocument_C%2FDocumentPage&mod=djemCFO

 




Teaching Case
The Coffee Theory:  Regulating Bitcoin ---
https://taxprof.typepad.com/taxprof_blog/2019/06/ryznar-regulating-bitcoin-a-tax-case-study.html


Teaching Case

Unmasking Fraud at Toshiba

Issues in Accounting Education, Forthcoming
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3382076
SSRN
 

32 Pages Posted: 21 May 2019

Dennis Caplan

University at Albany (SUNY)

Saurav K. Dutta

State University of New York (SUNY) at Albany

David Marcinko

Skidmore College

Date Written: May 3, 2019

Abstract

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.

Keywords: price masking, audit risk and materiality, internal control, corporate governance, earnings management, fraud triangle


Teaching Case From The Wall Street Journal Weekly Accounting Review on May 31, 2019

SEC Accuses Major U.S. Landlord of Running 'Ponzi Scheme-Like' Scam

By Cezary Podkul | May 23, 2019

TOPICS: Fraud, Internal Controls, Ponzi Schemes

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...."

READ THE ARTICLE



 

RELATED ARTICLES: 
U.S. Pursues One of the Biggest Mortgage-Fraud Probes Since the Financial Crisis
by Cezary Podkul
Aug 15, 2018
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

 

"SEC Accuses Major U.S. Landlord of Running 'Ponzi Scheme-Like' Scam By Cezary Podkul , The Wall Street Journal, May 23, 2019
https://https//www.wsj.com/articles/sec-accuses-major-u-s-landlord-with-running-ponzi-scheme-like-scam-11558555886

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

Logistics Bottlenecks Hamper Efforts to Produce Less in China

By Costas Paris and Joanne Chiu | May 23, 2019

TOPICS: Supply Chain

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

 

"Logistics Bottlenecks Hamper Efforts to Produce Less in China," by Costas Paris and Joanne Chiu, The Wall Street Journal, May 23, 2019
https://www.wsj.com/articles/logistics-bottlenecks-hamper-efforts-to-produce-less-in-china-11558605608

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

Intelsat's New Finance Chief To Tackle Debt, Weak Demand

By Nina Trentmann | May 29, 2019

TOPICS: Ebitda, Financial Ratios, Impairment

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.

QUESTIONS: 

 

1. (Advanced) What does Intelsat SA do? Where is the company located? Hint: you may access the filing of financial information discussed in this article at https://www.sec.gov/Archives/edgar/data/1525773/000119312519127020/0001193125-19-127020-index.htm

 

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Intelsat's New Finance Chief To Tackle Debt, Weak Demand," by Nina Trentmann, The Wall Street Journal, May 29, 2019
https://www.wsj.com/articles/intelsat-names-new-finance-chief-as-it-awaits-key-regulatory-decision-11559070084

Satellite operator has been struggling with high debt and challenging market conditions

Intelsat SA 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 Communications SA, 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

U.K. Regulator Plans to Increase Oversight of Audit, Accounting Sector

By Nina Trentmann | May 23, 2019

TOPICS: Audit Quality, Auditing, Regulation

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.

READ THE ARTICLE



 

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

Reviewed By: Judy Beckman, University of Rhode Island

 

"U.K. Regulator Plans to Increase Oversight of Audit, Accounting Sector," By Nina Trentmann, The Wall Street Journal, May 23, 2019
https://www.wsj.com/articles/u-k-regulator-plans-to-increase-oversight-of-audit-accounting-sector-11558632877

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

Best Buy Rides Web Sales to Higher Profit

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

 

"Best Buy Rides Web Sales to Higher Profit," by Khadeeja Safdar and Aisha Al-Muslim, The Wall Street Journal, May 24, 2019
https://www.wsj.com/articles/best-buy-performs-better-than-expected-11558611698

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.com Inc. and Target Corp. posted strong sales in the recent quarter, while Kohl’s Corp. and J.C. Penney Co. 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 Apple Inc.’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.com Inc. and Target Corp. posted strong sales in the recent quarter, while Kohl’s Corp. and J.C. Penney Co. 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 Apple Inc.’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

SEC Chief Accountant to Leave in June

By Tatyana Shumsky | May 30, 2019

TOPICS: SEC, Securities and Exchange Commission

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"SEC Chief Accountant to Leave in June," by Tatyana Shumsky, The Wall Street Journal, May 30, 2019
https://www.wsj.com/articles/sec-chief-accountant-to-leave-in-june-11559251535

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

PricewaterhouseCoopers Moves to Overhaul U.K. Audit Business

By Nina Trentmann | Jun 05, 2019

TOPICS: Audit Quality, Auditing Services

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.

READ THE ARTICLE



 

RELATED ARTICLES: 
U.K. Regulator Plans to Increase Oversight of Audit, Accounting Sector
by Nina Trentmann
May 23, 2019
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

 

"PricewaterhouseCoopers Moves to Overhaul U.K. Audit Business," by Nina Trentmann, The Wall Street Journal, June 7, 2019
https://www.wsj.com/articles/pricewaterhousecoopers-moves-to-overhaul-u-k-audit-business-11559739528

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

Ernst & Young Quits Role at China Bank

By Zhou Wei and Grace Zhu | Jun 04, 2019

TOPICS: Audit Reports, Auditor Changes, Banking

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Ernst & Young Quits Role at China Bank," by Zhou, The Wall Street Journal, June 4, 2019
https://www.wsj.com/articles/ernst-young-quits-as-auditor-for-chinese-bank-11559561656

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

Congress, Enforcement Agencies Target Tech

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Congress, Enforcement Agencies Target Tech," by Brent Kendall and John D. McKinnon, The Wall Street Journal, June 3, 2019
https://www.wsj.com/articles/ftc-to-examine-how-facebook-s-practices-affect-digital-competition-11559576731

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 Alphabet Inc.’s GOOG 2.08% Google and Apple Inc., while the FTC has oversight of Facebook Inc. and Amazon.com Inc. 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

SVMK Turns to New CFO to Help Drive Growth

By Maria Armental | Jun 03, 2019

TOPICS: CFO, Chief Financial Officer

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"SVMK Turns to New CFO to Help Drive Growth," by Maria Armental, The Wall Street Journal, June 3, 2019
https://www.wsj.com/articles/svmk-turns-to-new-cfo-to-help-drive-growth-11559603019

The newly public company named a new finance chief as it aims for ambitious expansion

SVMK Inc., 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 Autodesk Inc., 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

United Technologies Strikes Deal to Merge With Raytheon

By Cara Lombardo and Doug Cameron | Jun 09, 2019

TOPICS: Business Combination

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"United Technologies Strikes Deal to Merge With Raytheon," by Cara Lombardo and Doug Cameron , The Wall Street Journal, June 9, 2019
https://www.wsj.com/articles/united-technologies-strikes-deal-to-acquire-raytheon-11560112912

Combination creates No. 2 aerospace-defense company making everything from F-35 engines to Patriot missile systems

United Technologies Corp. doubled down on the aerospace market with an all-stock deal to merge with defense contractor Raytheon Co. 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 Boeing Co. 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

Tariffs Trigger Working Capital Woes for Some Companies

By Tatyana Shumsky | Jun 10, 2019

TOPICS: Inventory

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Tariffs Trigger Working Capital Woes for Some Companies," by Tatyana Shumsky , The Wall Street Journal, June 10, 2019
https://www.wsj.com/articles/tariffs-trigger-working-capital-woes-for-some-companies-11560178003

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 Group Inc., 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 Electronics Inc. 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

U.S. Corporate Cash Piles Drop to Three-Year Low

By Maria Armental | Jun 10, 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.)

READ THE ARTICLE



 

RELATED ARTICLES: 
Tariffs Trigger Working Capital Woes for Some Companies
by Tatyana Shumsky
Jun 10, 2019
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

 

"U.S. Corporate Cash Piles Drop to Three-Year Low," by Maria Armental, The Wall Street Journal, June 10, 2019
https://www.wsj.com/articles/u-s-corporate-cash-piles-drop-to-three-year-low-11560164400

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.

Apple Inc., again the top cash holder, saw its cash pile drop 14% to $245 billion. Rounding up the top five were: Microsoft Corp. , Alphabet Inc. and newcomers Amazon.com Inc. and Facebook Inc., which replaced Cisco Systems Inc. and Oracle Corp. 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

Treasury Finishes Rules Ending Blue-State Tax-Cap Workarounds: Regulations effectively nullify laws passed in some states to skirt $10,000 cap

By Richard Rubin | Jun 12, 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.

READ THE ARTICLE



 

RELATED ARTICLES: 
New York Towns Target Proposed IRS Ruling
by Jimmy Vielkind
Oct 01, 2018
Page: A3

Reviewed By: Judy Beckman, University of Rhode Island

 

"Treasury Finishes Rules Ending Blue-State Tax-Cap Workarounds," by Richard Rubin, The Wall Street Journal, June 12, 2019
https://www.wsj.com/articles/treasury-finishes-rules-ending-blue-state-tax-cap-workarounds-11560284101

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

Wisconsin Group Negotiated Tax Credits for Jobs That Didn't Arrive
 

By Shayndi Raice | Jun 12, 2019


 

TOPICS: Audit, Governmental Accounting

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.

 

READ THE ARTICLE


 

RELATED ARTICLES: 
Foxconn Tore Up a Small Town to Build a Big Factory-Then Retreated
by Valerie Bauerlein
Apr 30, 2019
Page: A1
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Wisconsin Group Negotiated Tax Credits for Jobs That Didn't Arrive," by Shayndi Raice, The Wall Street Journal, June 12, 2019
https://www.wsj.com/articles/wisconsin-economic-development-group-paid-for-jobs-added-in-other-states-11560250801

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

CFOs Grapple With How Much Cybersecurity Spending is Enough

By Kristin Broughton | Jun 12, 2019

TOPICS: Cybersecurity, Managerial Accounting, Risk Assessment, Risk Management, CFO

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"CFOs Grapple With How Much Cybersecurity Spending is Enough," by Kristin Broughton, The Wall Street Journal, June 12. 2019
https://www.wsj.com/articles/cfos-grapple-with-how-much-cybersecurity-spending-is-enough-11560378386

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

What You Need to Know About Capital-Gains Taxes (but Probably Don't)

By Tom Herman | Jun 17, 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?

READ THE ARTICLE



 

RELATED ARTICLES: 
The Smart Ways to Be a Tax-Savvy Investor
by Tom Herman
Feb 11, 2019
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

 

"What You Need to Know About Capital-Gains Taxes (but Probably Don't),"  by Tom Herman , The Wall Street Journal, June
https://www.wsj.com/articles/what-you-need-to-know-about-capital-gains-taxes-but-probably-dont-11560736980

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

WeWork's Mounting Lease Debt Looms Over IPO Plans

By Konrad Putzier | Jun 19, 2019

TOPICS: FASB, IASB, Lease Accounting

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"WeWork's Mounting Lease Debt Looms Over IPO Plans By Konrad Putzier, The Wall Street Journal, June 19, 2019
https://www.wsj.com/articles/weworks-mounting-lease-debt-looms-over-ipo-plans-11560855601

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.

Continued in article


Which KPMG Scandal Is Worse: PCAOB ‘Steal the Exam’ or CPE Training Exam Cheating?
https://goingconcern.com/which-kpmg-scandal-is-worse-pcaob-steal-the-exam-or-cpe-training-exam-cheating/

$50 Million Fine SEC Is Reportedly Giving KPMG Over PCAOB Scandal Isn’t Big Enough ---
https://goingconcern.com/kpmg-could-be-given-largest-fine-ever-auditor-sec/

Bob Jensen's threads on the two faces of KPMG ---
http://faculty.trinity.edu/rjensen/fraud001.htm

 

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 21, 2019

KPMG to Pay as Much as $50 Million to Settle SEC Probe

By Dave Michaels | Jun 14, 2019

TOPICS: Audit Inspections, PCAOB

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"KPMG to Pay as Much as $50 Million to Settle SEC Probe, by Dave Michaels, The Wall Street Journal, June 14, 2019
https://www.wsj.com/articles/kpmg-to-pay-as-much-as-50-million-to-settle-sec-probe-11560474967

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 Xerox Corp. 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.

Continued in article

June 25, 2019 reply from Dennis Beresford

Bob,

A former KPMG partner was also cited in a recent SEC legal release: https://www.sec.gov/litigation/opinions/2019/34-85964.pdf

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

Regulator Fines PwC for Audit Shortfalls Related to British Service Provider

By Nina Trentmann | Jun 13, 2019

TOPICS: Audit Quality, Auditing

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

 

"Regulator Fines PwC for Audit Shortfalls Related to British Service Provider," by Nina Trentmann, The Wall Street Journal, June 13, 2019
https://www.wsj.com/articles/regulator-fines-pwc-for-audit-shortfalls-related-to-british-service-provider-11560435259

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.

The FRC has taken various actions against U.K. audit firms and companies’ internal audit teams, including against KPMG.

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.

Continued in article

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

 


Teaching Case From The Wall Street Journal Weekly Accounting Review on June 28, 2019

Argentine Banks Stumble in Adoption of New Accounting Standard

By Maria Armental | Jun 24, 2019

TOPICS: IFRS, Inflation, International Accounting

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.

CLASSROOM APPLICATION: The article may be used in an international accounting or other financial reporting class to discuss the impact of inflation and/or IFRS reporting by entities traded in the U.S. Grupo Financiero Galicia SA's filing of it December 31, 2018 financial statements was made on May 28, 2018 on Form 20-F/A and is available at https://www.sec.gov/cgi-bin/viewer?action=view&cik=1114700&accession_number=0001193125-19-157837&xbrl_type=v This bank's notice that the financial statements would not be filed on a timely basis was submitted to the SEC on April 30, 2019 and is available at https://www.sec.gov/Archives/edgar/data/1114700/000119312519129533/d734729dnt20f.htm

QUESTIONS: 

 

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Argentine Banks Stumble in Adoption of New Accounting Standard," by Maria Armental, The Wall Street Journal, June 24, 2019
https://www.wsj.com/articles/argentine-banks-stumble-in-adoption-of-new-accounting-standard-11561368600

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.

The firms are Grupo Financiero Galicia SA, whose largest holding is Banco de Galicia; Banco Macro SA ; BBVA Banco Francés SA, the Argentine unit of Spain’s Banco Bilbao Vizcaya Argentaria SA ; and Grupo Supervielle SA, which owns Banco Supervielle.

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

The Morning Ledger: More Companies Link Executive Pay to Sustainability Targets

By Tatyana Shumsky | Jun 24, 2019

TOPICS: Capital Budgeting, Executive Compensation

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?

READ THE ARTICLE



 

RELATED ARTICLES: 
The Difficulty of Measuring a Company's Social Impact
by Alina Dizik
Jun 24, 2019
Page: ##

Reviewed By: Judy Beckman, University of Rhode Island

 

"The Morning Ledger: More Companies Link Executive Pay to Sustainability Targets," by Tatyana Shumsky | Jun 24, 2019, The Wall Street Journal, June 24, 2019
https://www.wsj.com/articles/more-companies-link-executive-pay-to-sustainability-targets-11561379745

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

AICPA Proposes Overhaul of Evidence Standards in Private-Company Audits

By Tatyana Shumsky | Jun 20, 2019

TOPICS: Audit Testing, Auditing, Auditing Standards

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"AICPA Proposes Overhaul of Evidence Standards in Private-Company Audits," by Tatyana Shumsky, The Wall Street Journal, June 20, 2019
https://www.wsj.com/articles/aicpa-proposes-overhaul-of-evidence-standards-in-private-company-audits-11561072750

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

Biggest U.S. Companies' Working-Capital Performance Hits Six-Year High

By Mark Maurer | Jun 26, 2019

TOPICS: Inventory

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Biggest U.S. Companies' Working-Capital Performance Hits Six-Year High," by Mark Maurer, The Wall Street Journal, June 26, 2019
https://www.wsj.com/articles/biggest-u-s-companies-working-capital-performance-hits-six-year-high-11561464005

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 PepsiCo Inc., HP Inc., and Lennar Corp , 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 Varco Inc., 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.”

Continued in article


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

Libra and Remittances ---
https://marginalrevolution.com/marginalrevolution/2019/06/libra-and-remittances.html

Libra: Financial Inclusion for the World's Poor, or Scam? ---
http://newmonetarism.blogspot.com/2019/06/libra-financial-inclusion-for-worlds.html

JP Koning on Ill-Considered Government Policies Standing in the Way of the Emergence of the Digital Cash that Can Eliminate Any Lower Bound on Interest Rates ---
https://blog.supplysideliberal.com/post/2019/6/26/jp-koning-on-government-policies-standing-in-the-way-of-the-emergence-of-the-digital-cash-that-can-eliminate-any-lower-bound-on-interest-rates

Facebook just announced its own cryptocurrency ---
https://www.businessinsider.com/libra-facebook-announces-digital-currency-blockchain-2019-6

Facebook’s New Cryptocurrency, Libra, Gets Big Backers ---
https://www.wsj.com/articles/facebooks-new-cryptocurrency-gets-big-backers-11560463312?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=73685941&_hsenc=p2ANqtz-9naoUR4uWhQq1o9YNNWsBDupuk2-QzWHk-3huA2RCri8YWIy34JXRMp4QgnXCrQSOI1sa5eUUXfGgiR-h3-5ga9uExDg&_hsmi=73685941

MIT:  A group of big banks plans to launch its own digital currency within a year ---
https://www.technologyreview.com/f/613616/14-of-the-worlds-big-banks-may-have-a-digital-currency-within-a-year/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=73326445&_hsenc=p2ANqtz-8g6HuZncYr1Oifw19Lc7OsEErQsxLuZQniKN09dz2tgVwpVGPuQ_SUphouimB7WxffMDG090JVY3xY9WFxMZBkd4jjPw&_hsmi=73326445

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

Beyond Bitcoin: Here are some of the new use cases for distributed ledger technology ---
https://www.businessinsider.com/beyond-bitcoin-report-2018-3

Teaching Case From The Wall Street Journal Weekly Accounting Review on June 28 2019

Fed, Congress Promise Scrutiny of Facebook Cryptocurrency

By Dave Michaels | Jun 20, 2019

TOPICS: blockchain technology

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?

READ THE ARTICLE



 

RELATED ARTICLES: 
Cryptocurrency Startups Are in Limbo as Regulators Grapple With Risks
by Dave Michaels and Alexander Osipovich
Jun 20, 2019
Page: B10

Reviewed By: Judy Beckman, University of Rhode Island

 

"Fed, Congress Promise Scrutiny of Facebook Cryptocurrency," by Dave Michaels | Jun 20, 2019, The Wall Street Journal, June 20, 2019
https://www.wsj.com/articles/fed-congress-promise-scrutiny-of-facebook-cryptocurrency-11560983531

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.”

 

Related

Cryptocurrency Startups Are in Limbo as Regulators Grapple With Risks

Analysis: Facebook’s Crypto Plan Borrows From China

Facebook’s New Cryptocurrency, Libra, Gets Big Backers

Continued in article

 




Humor for June 2019

20 lessons from TV.--- https://twitter.com/JohnDonoghue64/status/1136233779750756352

Dad's Casual 'Conversation' With Infant Son ---
https://time.com/5602253/dj-pryor-and-son/?utm_source=time.com&utm_medium=email&utm_campaign=the-brief-pm&utm_content=2019060618pm&xid=newsletter-brief

A Four-Year Old Killer ---
https://www.nationalreview.com/corner/worst-advice-column-ever-written/ 

Bob Hope One Liner ---
https://www.youtube.com/watch?v=IJTfJz0gVBQ


Forwarded by Paula

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!

 




Humor June 2019--- http://faculty.trinity.edu/rjensen/book19q2.htm#Humor0619.htm

Humor May 2019--- http://faculty.trinity.edu/rjensen/book19q2.htm#Humor0519.htm

Humor April 2019--- http://faculty.trinity.edu/rjensen/book19q2.htm#Humor0419.htm    

Humor March 2019--- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0319.htm  

Humor February 2019--- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0219.htm 

Humor January 2019-- http://faculty.trinity.edu/rjensen/book19q1.htm#Humor0118.htm   

Humor December 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1218.htm  

Humor November 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1118.htm 

Humor October 2018--- http://faculty.trinity.edu/rjensen/book18q4.htm#Humor1018.htm  

Humor September 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0918.htm 

Humor August 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0818.htm   

Humor July 2018--- http://faculty.trinity.edu/rjensen/book18q3.htm#Humor0718.htm 

Humor June 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0618.htm

Humor May 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0518.htm

Humor April 2018--- http://faculty.trinity.edu/rjensen/book18q2.htm#Humor0418.htm

Humor March 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0318.htm 

Humor February 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0218.htm

Humor January 2018--- http://faculty.trinity.edu/rjensen/book18q1.htm#Humor0118.htm 

Tidbits Archives --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm




And that's the way it was on June 30, 2019 with a little help from my friends.

 

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

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

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

Free Online Textbooks, Videos, and Tutorials --- http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://faculty.trinity.edu/rjensen/Resume.htm

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library  and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html

 

 

 

 

May 2019

Bob Jensen's New Additions to Bookmarks

May 2019

Bob Jensen at Trinity University 


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

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

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

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
http://finance.townhall.com/columnists/politicalcalculations/2016/05/25/spring-2016-to-whom-does-the-us-government-owe-money-n2168161?utm_source=thdaily&utm_medium=email&utm_campaign=nl
The US Debt Clock in Real Time --- http://www.usdebtclock.org/ 
Remember the Jane Fonda Movie called "Rollover" --- https://en.wikipedia.org/wiki/Rollover_(film)
One worry is that nations holding trillions of dollars invested in USA debt are dependent upon sales of oil and gas to sustain those investments.

To Whom Does the USA Federal Government Owe Money (the unbooked obligation of $100 trillion and unknown more in contracted entitlements) ---
http://money.cnn.com/2013/01/15/news/economy/entitlement-benefits/
The biggest worry of the entitlements obligations is enormous obligation for the future under the Medicare and Medicaid programs that are now deemed totally unsustainable ---
http://faculty.trinity.edu/rjensen/Entitlements.htm

For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
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Click here to search Bob Jensen's web site if you have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
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Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

 

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

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

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

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

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

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

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

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

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

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

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

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




 David Giles:  Update on the "Series of Unsurprising Results in Economics" ---
https://davegiles.blogspot.com/2019/05/update-on-series-of-unsurprising.html

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.
 


Derivative Financial Instrument (e.g., options, futures, forwards, and swaps and all sorts of complicated combinations for hedging)  --- https://en.wikipedia.org/wiki/Derivative_(finance)

The opening of a canal in 1848 led to the birth of modern financial derivatives, and the early demise of some of the men who traded them ---
https://www.damninteresting.com/death-by-derivatives/

Bob Jensen's tutorials on derivatives --- http://faculty.trinity.edu/rjensen/caseans/000index.htm


Exchange-Traded Funds (ETFs) ---  https://en.wikipedia.org/wiki/Exchange-traded_fund

Vanguard Patented a Way to Avoid Taxes on Mutual Funds ---
https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/?cmpid=BBD050419_WKND&utm_medium=email&utm_source=newsletter&utm_term=190504&utm_campaign=weekendreading

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?
https://www.institutionalinvestor.com/article/b1f6wj9ghqxv8h/The-Michael-Milken-Project

Jensen Comment
After being released from prison, one of Milken's pet projects was for-profit education ---
https://en.wikipedia.org/wiki/Michael_Milken

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.


WSJ: IRS Payments To Tax Snitches Are Up 900% ---
https://taxprof.typepad.com/taxprof_blog/2019/04/wsj-irs-payments-to-tax-snitches-are-up-900.html


The TurboTax Scam:  Listen to TurboTax Lie to Get Out of Refunding Overcharged Customers ---
https://www.propublica.org/article/listen-to-turbotax-lie-to-get-out-of-refunding-overcharged-customers


Accounting Professionals:  What’s Next in the World of Sales Tax?
https://www.accountingweb.com/tax/sales-tax/whats-next-in-the-world-of-sales-tax?source=051519


Pension Scams:  Where will illinois find a quarter of a trillion dollars?

A candidate in Kentucky vows to expose the nation’s worst public pension system in a way that could reveal corruption everywhere ---
https://www.statedatalab.org/news/detail/the-2019-election-that-should-have-hedge-funds-and-wall-street-worried

 ILLINOIS’ PENSION CRISIS IS MORE FEARSOME THAN UNION FLACKS WANT US BELIEVE ---
https://www.statedatalab.org/news/detail/illinois-pension-crisis-is-more-fearsome-than-union-flacks-want-us-believe

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?

 

Continued in article


Pottery Barn Rule --- https://en.wikipedia.org/wiki/Pottery_Barn_rule

A Pottery Barn Rule for Scientific Journals ---
https://thehardestscience.com/2012/09/27/a-pottery-barn-rule-for-scientific-journals/

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.

Another Journal Adopts the “Pottery Barn Rule” ---
https://replicationnetwork.com/2019/05/04/another-journal-adopts-the-pottery-barn-rule/

I suspect the AAA has not even considered a pottery barn rule for journals like The Accounting Review.


How to Mislead With Statistics
Gartner says 90% of blockchain-based supply chain projects are in trouble ---
https://modernconsensus.com/uncategorized/gartner-survey-blockchain-supply-chain-trouble/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=72468246&_hsenc=p2ANqtz-_TdgxzYGXpHXTd_resmlKeteK16nV8BTxj1BkkropYXNpAw2nVGt0W_Zne02cBoZYmiYilYeZRPQRiqu7ZpvkXCG2EfA&_hsmi=72468248

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).

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

In With Crypto --- The World Is Growing Tired of Government-Controlled Fiat Currencies ---
https://mises.org/wire/world-growing-tired-government-controlled-fiat-currencies?utm_source=Mises Institute Subscriptions&utm_campaign=732f2cf8aa-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-732f2cf8aa-228708937

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

Cameron and Tyler Winklevoss want you to pay for groceries using cryptocurrency.

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.

 

Fidelity Will Offer Cryptocurrency Trading Within a Few Weeks ---
https://www.bloomberg.com/news/articles/2019-05-06/fidelity-said-to-offer-cryptocurrency-trading-within-a-few-weeks?cmpid=BBD050619_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190506&utm_campaign=bloombergdaily

Trading manipulation is rampant on certain cryptocurrency exchanges, according to researchers at several universities ---
https://www.bloomberg.com/news/articles/2019-04-15/-flash-boys-trading-bots-are-running-wild-on-crypto-exchanges?cmpid=BBD041519_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190415&utm_campaign=bloombergdaily

Bitcoin rockets above $5,000 ---
https://markets.businessinsider.com/currencies/news/bitcoin-price-rockets-above-5000-2019-4-1028077970

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

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

10 Years After Bitcoin Began, are We Underestimating Crypto? ---
https://readwrite.com/2019/03/29/10-years-after-bitcoin-began-are-we-underestimating-crypto/

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

Why do we keep thinking blockchains can't be hacked?
MIT:  The world’s flashiest cryptocurrency exchange just got hacked ---
https://www.technologyreview.com/f/613506/the-worlds-flashiest-cryptocurrency-exchange-just-got-hacked/

Beyond Bitcoin: Here are some of the new use cases for distributed ledger technology ---
https://www.businessinsider.com/beyond-bitcoin-report-2018-3

Gartner says 90% of blockchain-based supply chain projects are in trouble ---
https://modernconsensus.com/uncategorized/gartner-survey-blockchain-supply-chain-trouble/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=72468246&_hsenc=p2ANqtz-_TdgxzYGXpHXTd_resmlKeteK16nV8BTxj1BkkropYXNpAw2nVGt0W_Zne02cBoZYmiYilYeZRPQRiqu7ZpvkXCG2EfA&_hsmi=72468248

Future of fraud in a blockchain world ---
https://www.fraud-magazine.com/article.aspx?id=4295002445

Blockchain and Cryptocurrency/Initial Coin Offering (ICO) Fraud and SEC Whistleblower Program ---
https://www.zuckermanlaw.com/blockchain-fraud-sec-whistleblower-attorneys/

Bots exploiting blockchains for profit ---
https://techxplore.com/news/2019-04-bots-exploiting-blockchains-profit.html

Is Blockchain the Answer to Fraud Prevention? ---
https://www.comparethecloud.net/articles/blockchain-fraud-prevention/

Will Blockchain Make Auditors Obsolete?
by Eric E. Cohen
ThinkTWENTY20, Issue 1, 2019
---
 https://thinktwenty20.store/collections/all


Sales tax proposals threaten to ensnare CPA firms ---
https://www.journalofaccountancy.com/news/2019/may/state-sales-tax-proposals-201921056.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=20May2019

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.


Secretariat’s Kentucky Derby Record Is Safe, Thanks To The Taxman
There are several reasons: Tracks are sandier to lessen the risk of injury. Hormones were banned in 2008. And then there’s the Tax Reform Act of 1986
https://taxprof.typepad.com/taxprof_blog/2019/05/secretariats-kentucky-derby-record-is-safe-thanks-to-the-taxman.html


Which states have the highest and lowest property taxes?
https://www.usatoday.com/story/money/2019/05/20/property-taxes-state-which-has-highest-and-lowest/3697929002/

Jensen Comment

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.


A $1 Billion Fraud:  Does Theranos Mark the Peak of the Silicon Valley Bubble?
http://nautil.us/issue/60/searches/does-theranos-mark-the-peak-of-the-silicon-valley-bubble?utm_source=frontpage&utm_medium=mview&utm_campaign=does-theranos-mark-the-peak-of-the-silicon-valley-bubble

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?

See Bob Jensen's "Rotten to the Core" document at http://faculty.trinity.edu/rjensen/FraudRotten.htm 
The exact quotation from Jane Bryant Quinn at http://faculty.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Why white collar crime pays big time even if you know you will eventually be caught --- 
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

Bob Jensen's threads on professionalism and ethics --- 
http://faculty.trinity.edu/rjensen/Fraud001c.htm

Bob Jensen's Rotten to the Core threads --- 
http://faculty.trinity.edu/rjensen/FraudRotten.htm


Harvard:  Companies Don’t Always Need a Purpose Beyond Profit ---
https://hbr.org/2019/05/companies-dont-always-need-a-purpose-beyond-profit?utm_medium=email&utm_source=newsletter_monthly&utm_campaign=finance_not_activesubs&referral=00209&deliveryName=DM38262

 

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)?


Internet crime resulted in $2.7 billion in losses last year, almost double the figure for 2017, according to the FBI. Complaints in 2018 were up almost 17%, the agency said ---
https://www.thinkadvisor.com/2019/04/26/fbi-sees-big-rise-in-internet-crime-complaints-losses/

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


Excel:  Smoothing capital expenditure in Excel ---
https://www.fm-magazine.com/news/2019/may/excel-cash-flow-calculation-201920562.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=24May2019

Excel:  How to Convert Text to Date Values in Microsoft Excel ---
https://www.howtogeek.com/415246/how-to-convert-text-to-date-values-in-microsoft-excel/

Excel:  How to create, edit, and format images in Excel ---
https://www.pcworld.com/article/3389141/how-to-create-edit-and-format-images-in-excel.html

Excel:  A Dozen Excel Timesavers ---
https://www.journalofaccountancy.com/issues/2019/may/microsoft-excel-time-savers-tricks.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=13May2019 

Excel:  Tips for Excel-Based Financial Statements ---
https://www.journalofaccountancy.com/issues/2019/feb/excel-based-financial-reports.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01May2019engage

Excel:  How to use the NETWORKDAYS function in Excel ---
https://www.enterprisetimes.co.uk/2019/04/26/count-only-week-days-in-excel/

Excel:  How to create a simple invoice using Excel ---
https://www.howtogeek.com/399929/how-to-create-a-simple-invoice-using-excel/


Stock-based compensation: Back to basics ---
https://www.thetaxadviser.com/issues/2019/may/stock-based-compensation-basics.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=03May2019


Maine has become the the first state to ban Styrofoam containers for food and beverages ---
https://psmag.com/news/maine-is-the-first-state-to-ban-styrofoam?utm_source=Pacific+Standard&utm_campaign=e6e3817ed3-EMAIL_CAMPAIGN_2019_05_03_03_35&utm_medium=email&utm_term=0_a4fd1bcb7e-e6e3817ed3-80656397

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.


From David Giles on May 1, 2019 ---
https://davegiles.blogspot.com/2019/05/may-reading-list.html

May Econometrics Reading List

Here's a selection of suggested reading for this month:

·                     Athey, S. & G. W. Imbens, 2019. Machine learning methods economists should know about. Mimeo.

·                     Bhagwat, P. & E. Marchand, 2019. On a proper Bayes but inadmissible estimator. American Statistician, online.

·                     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.

 


Sludge Audits

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3379367
15 Pages
Posted: 30 Apr 2019 Last revised: 2 May 2019

Cass R. Sunstein

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.


Zorba:  The Zorba Research Blog is being replaced by the ThinkTWENTY Forum to be found at
http://www.thinktwenty20.com/index.php/blog-issues-forum

EY:  FASB proposes simplifying accounting for income taxes ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_06247-191US_SimplificationProject_14May2019/$FILE/TothePoint_06247-191US_SimplificationProject_14May2019.pdf

EY:  SEC proposes changing disclosure requirements for acquisitions and disposals of businesses ---
https://www.ey.com/Publication/vwLUAssetsAL/TothePoint_06176-191US_SEC3-05_7May2019/$FILE/TothePoint_06176-191US_SEC3-05_7May2019.pdf




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.

Read the full guidance here


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.


LIBOR Scandal --- https://en.wikipedia.org/wiki/Libor_scandal

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 ---
https://www.pbs.org/newshour/show/why-the-teamsters-president-supports-trumps-new-tariffs
The problem for Judy is that she feels obligated to argue against Trump even when he's right about something.
 


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.

Bob Jensen's (neglected) threads on reporting intangibles and contingencies ---
http://faculty.trinity.edu/rjensen/theory01.htm#TheoryDisputes

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 has revamped 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 wantedTorque 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

The biggest 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 is in 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 misconduct in 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.

Bob Jensen's threads on the two faces of KPMG ---
http://faculty.trinity.edu/rjensen/fraud001.htm


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

The Trump administration moved to allow 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 the Dodd-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 accounting go 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 Commission has opened an investigation into 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.

Also see
https://markets.businessinsider.com/currencies/news/facebook-is-building-a-cryptocurrency-with-secret-project-libra-2019-5-1028165006


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 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.

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 levels should 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



Teaching Cases from the IMA for Quarter 1 of 2019 (these cases are not open shared for free)
Volume 12 Issue 1
https://www.imanet.org/educators/ima-educational-case-journal/iecj-index/2019/volume-12-issue-1?ssopc=1

BabyFreedom: Stakeholders and Strategy

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.

Keywords: Qualitative analysis, technology adoption, strategic fit, corporate social responsibility, stakeholders, consumer privacy

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.

Keywords: master budget, subsidiary budgets, budget analysis, ethics, sales-mix, Excel

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.

Keywords: strategy, strategy map, balanced scorecard, performance evaluation

 


Teaching Case From The Wall Street Journal Weekly Accounting Review on May 3, 2019

Google Ad Arm Begins To Show Cracks

By Rob Copeland | Apr 30, 2019

TOPICS: Earnings, Cost Behavior

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Google Ad Arm Begins To Show Cracks," by Rob Copeland, The Wall Street Journal, April 30, 2019
https://www.wsj.com/articles/google-parent-posts-rare-misses-as-revenue-comes-up-short-11556569259

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 Alphabet Inc. 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 Facebook Inc. and Twitter Inc. previously posted strong earnings, while Amazon.com Inc. 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

Foxconn Tore Up a Small Town to Build a Big Factory-Then Retreated

By Valerie Bauerlein | Apr 30, 2019

TOPICS: Capital Budgeting, Capital Expenditures

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

 "Foxconn Tore Up a Small Town to Build a Big Factory-Then Retreated," by Valerie Bauerlein, The Wall Street Journal, April 30, 2019
https://www.wsj.com/articles/foxconn-tore-up-a-small-town-to-build-a-big-factorythen-retreated-11556557652

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.

One thing largely missing: Foxconn.

President Trump and Foxconn Chairman Terry Gou hatched the factory plan in 2017, and both attended last summer’s gold-shovel groundbreaking in Mount Pleasant, 20 miles south of Milwaukee.

As of Dec. 31, the Taiwanese manufacturing giant, famous as an Apple Inc. 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.”

Communities across America are in an incentives race for marquee projects, but some big ones have collapsed. Amazon.com Inc. walked away from a $2.5 billion package from New York City. General Electric Co. returned $87 million in incentives after significantly scaling back its headquarters in Boston because it no longer needed the space.

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 spaceshiplike Silicon Valley headquarters, with light rail shuttling workers. Foxconn said the video was for illustration purposes.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on May 3, 2019

Walmart to Develop Its Own Supply Chain for Angus Beef

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Walmart to Develop Its Own Supply Chain for Angus Beef," by Jacob Bunge and micah Maidenberg, The Wall Street Journal, April 24, 2019
https://www.wsj.com/articles/walmart-to-develop-its-own-supply-chain-for-angus-beef-11556121364

Retail giant to source cattle from family farms and ranches, has agreements with firms to butcher cows and process and package meat

Walmart Inc. 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 Wholesale Corp.’s COST 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 Foods Inc., Cargill Inc. and Pilgrim’s Pride Corp. , 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

Boeing Suppliers Seek to Manage Uncertainty as 737 MAX Remains Grounded

By Nina Trentmann | Apr 29, 2019

TOPICS: Supply Chains

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Boeing Suppliers Seek to Manage Uncertainty as 737 MAX Remains Grounded," by Nina Trentmann, The Wall Street Journal, April 29, 2019
https://www.wsj.com/articles/boeing-suppliers-seek-to-manage-uncertainty-as-737-max-remains-grounded-11556569093

‘It is not an easy supply chain to switch on and off,’ a parts maker says

Suppliers to Boeing Co. 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 International Inc., 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.

Safran SA, 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 Electric Co. 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

Ford Faces U.S. Probe of Emissions

By Mike Colias and Allison Prang | Apr 27, 2019

TOPICS: Contingent Liabilities

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?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Ford Faces U.S. Probe of Emissions By Mike Colias and Allison Prang , The Wall Street Journal, April 27, 2019
https://www.wsj.com/articles/ford-discloses-justice-department-probe-into-vehicle-emission-certifications-11556285920

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

Qualcomm to Get at Least $4.5 Billion in Apple Settlement

By Asa Fitch | May 01, 2019

TOPICS: Contingent Assets

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.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

 "Qualcomm to Get at Least $4.5 Billion in Apple Settlement," by Asa Fitch, The Wall Street Journal, May 1, 2019