New Bookmarks
Year 2019 Quarter 3:  July 1 - September 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm 
Tidbits Directory --- http://faculty.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://faculty.trinity.edu/rjensen/threads.htm

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

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Bob Jensen's New Additions to Bookmarks

September 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




Videos hosted by the American Accounting Association have been authorized by their respective presenters / rightsholders. Access to presentation video content from the 2019 Annual Meeting is a Member Benefit ---
https://aaahq.org/Meetings/2019/Annual-Meeting/Video-Gallery

Jensen Comment
I suspect that we have to be careful about what we disclose about the presentations since all but one was a paid speaker who owns the rights to content.

I disagree with some of the points made by Terry Shevlin, but I will not elaborate much at this time except to say that he incorrectly trivialized classroom flipping, ignored the real problems of relevance of academic accounting research, and glossed over the genuine problem of lack of replication in accounting research. In fairness he did make some other very good points. Watch the video.

If I were to pick one of the big thing he overlooked it's that there are almost no academic bloggers in accountancy, and he failed to mention the AECM listserv. Ouch! Than hurts, because monthly we've address points he made and points he overlooked. He apparently never pays any attention to the AECM. But he's not unique. Virtually all AAA Presidents in history have ignored both the AECM and blogging in general. I think ignoring bloggers is a necessary condition to becoming an AAA President.

What really hurts is that over the past ten or so years the AAA Presidents have totally ignored the AAA Commons that the AAA is paying a huge amount of money to support the AAA Commons. When was there an AAA President that even used the AAA Commons for communications after the first two years of the Commons?

I think nearly every academic discipline has leading bloggers except for accounting . Where are the bloggers in academic accounting? It isn't just blogging. I don't think the AAA presidents in general have done much for education technology and promotion of research relevancy in the accounting profession itself.

I won't be looking for any communications of the AAA Commons from Terry Shevlin in his year as AAA President, and I most certainly won't be looking for any of his replies to our AECM messaging. Like virtually all accountics researchers, with one sort-of exception, he lives in a different world.


Pro Forma --- https://en.wikipedia.org/wiki/Pro_forma

EY:  Pro forma financial information A guide for applying Article 11 of Regulation S-X (over 100 pages) ---
http://www.ey.com/Publication/vwLUAssetsAL/ProForma_06549-171US_30November2017/$FILE/ProForma_06549-171US_30November2017.pdf

Aggressive use of non-GAAP numbers is creating a crisis in how investors, analysts, and the media report financial performance and value companies ---
https://www.cfo.com/gaap-ifrs/2019/09/has-non-gaap-reporting-become-an-accounting-chasm/

Bob Jensen's threads on non-GAAP measures ---
http://faculty.trinity.edu/rjensen/theory02.htm#ProForma

September 26, 2019 reply from Tom Selling

Bob,

Your reference to the EY publication on Article 11 of Regulation S-X is not correct.  Although Article 11 of Regulation S-X addresses “pro forma” information, it is for information that is required in filings – for example: the pro forma effect of an acquisition of a “significant subsidiary” (see Reg S-X, Rule 1-02w); or the issuance of debt securities..

For voluntary disclosures of non-GAAP measures of performance, which issuers sometimes refer to as “pro forma” information (this is the source of your confusion), two sets of rules can be applicable, depending on the circumstances:  Regulation G and Item 10(e) of Regulation S-K, Use of non-GAAP financial measures in Commission filings.

On the day, I consider myself even.  Earlier, there was the glaring mistake about your climate change retraction post.  Now, at least I got to make amends!

Best,

Tom

September 27, reply from Bob Jensen

I used to have a foot-long erasure on my desk that read:
"I
never make big misteaks"

The problem was that it was too big to erase most of my writing mistakes. Now that most of my writing is on my Website my readers are tolerant of my little writing mistakes and grateful that I have friends like you to correct my big mistakes. And I even have some readers who like to correct the mistakes I didn't make. This makes AECM debates even more fun!

When it comes to mistakes there are two kinds:  Lots of little ones and occasional big ones

I rely on experts like you when it comes to Regulation S-X that is not my forte.

Thanks,

Bob


In general I don't like "best" lists on most any topic because there are so many criteria for defining best. Unless the criterion or short list of criteria the list of "best" things may be more misleading than helpful.

Required reading: These are the books top professors at the best business schools in the country are having their MBA students read ---
https://www.businessinsider.com/books-mba-professors-business-school-harvard-stanford-kellogg-recommend

Jensen Comment
No accounting books are mentioned in the above article even though accounting is part and parcel to literally every MBA program in the world.  This begs the question of what accounting book would be your first choice to add to the list of above books. What about naming one in financial accounting and another in managerial accounting?
Here's one list ---
https://www.blog.consultants500.com/accounting-audit-advisory/top-15-accounting-books-recommended-most-times-by-business-owners-students-or-accounting-pros/
This points out a typical problem when recommending "best books." The problem is that there are so many subtopics like accounting theory, elementary accounting, accounting history, employee fraud, financial statement fraud, managerial decisions, investment decisions, small business accounting, etc. Another problem is that accounting interacts with so many other disciplines, especially economics and finance. Here's a list that shows some of this interaction
https://www.wikiaccounting.com/10-best-accounting-books-recommended-by-readers/

The above article's list of "Required Reading" is weak on taxation even though taxation does appear in some of the recommended books. If you had to recommend a taxation book what book would you recommend?

The above article's list of "Required Reading is weak on accounting information systems, artificial intelligence, and internal controls.  If you had to recommend an AIS book what book would you recommend?

Message from Ed Scribner on September 9, 2019

Ed's candidate:

Core Concepts of Accounting Information Systems by Simkin, at al.

https://www.vitalsource.com/products/core-concepts-of-accounting-information-systems-mark-g-simkin-james-l-v9781119373544?duration=120&gclid=CjwKCAjw8NfrBRA7EiwAfiVJpWhmV9ZZzKa7vLyT9ME_tYQa3ik7vgu5YoA_LOG--4278xtmWdJP1hoC2BgQAvD_BwE

Message from Bob Jensen on September 10, 2019

Paul,

It's ironic (eerie?) this morning that immediately after writing the following tidbit I would open your message recommending the works of Karl Polanyi.

Are some events in our lives predestined?

It may be a good idea in a business history course or an accounting history or theory course to compare the works of Polanyi and Drucker after reading the following tidbit.

Bob

 

When Corporations Changed Their Social Role—and Upended Our Politics
By Nicholas Lemann
The Wall Street Journal
September 6, 2019

https://www.wsj.com/articles/when-corporations-changed-their-social-roleand-upended-our-politics-11567782178?mod=searchresults&page=1&pos=1

 

Presidential elections in the U.S. are traditionally about economics. Next year’s vote, and others around the world, have the feeling, however, of being not just about how the economy is performing in the moment but about something more fundamental: the economic system. What drove the rise of Donald Trump and politicians like him elsewhere was the promise that a new government with new policies could restore a fondly remembered (by some) economic and social order from the past. Those politicians’ opponents on the left have a similar interest, though with completely different specifics, in remaking the political economy. It seems like centuries ago, though it was actually only four or five election cycles, when immediate economic conditions were a political issue but not the basic design of the economy.

 

What brought about this dramatic shift? To understand that, it’s necessary first to recall what the American economic order used to be and what made it come apart.

A good place to begin is at Bennington College in Vermont during the worst years of World War II. Two émigré Viennese intellectuals, Peter Drucker and Karl Polanyi, had holed up there to teach. Drucker, who went on to become probably the world’s most famous management consultant, was then in his early 30s, orderly and ambitious; Polanyi, more than a decade older, was messy and voluble and considerably to the left of Drucker politically. Each of them was working on a book proposing a large social vision for the second half of the 20th century.

 

Through the long Vermont winters, Drucker and Polanyi would trudge between each other’s houses in the snow so they could argue about their books. Polanyi’s “The Great Transformation” treated the rise of unimpeded modern capitalism as a vast, long-running social disaster. “At the heart of the Industrial Revolution of the 18th century,” he wrote, “there was an almost miraculous improvement in the tools of production, which was accompanied by a catastrophic dislocation of the lives of the common people.” The only possible lasting solution to the problem of capitalism, he believed, was for government to make itself such a forceful presence that the economy would be made the servant of society instead of society being the servant of the economy.

 

Drucker’s book was called “The Future of Industrial Man: A Conservative Approach.” The subtitle was apt. He saw the end product of the Industrial Revolution as the modern corporation, which was an institution he very much admired. Drucker thought government control of the economy would lead to “centralized bureaucratic despotism.” Instead, the corporation, on its own rather than under the government’s direction, must invent something heretofore unknown: “a functioning industrial society.”

 

Not long after “The Future of Industrial Man” was published, Drucker was surprised to get a call from an executive at General Motors —at that point, the ne plus ultra of corporations. How would he like to come to Detroit for a couple of years and find out how GM actually worked? Drucker eagerly accepted the offer, and in 1946 he published a book about what he had found, called “Concept of the Corporation.” There he reprised his theory in much more florid terms. “The large industrial unit has become our representative social actuality,” he declared, “and its social organization, the large corporation in this country, is our representative social institution.”

During his research, Drucker became friendly with GM’s president, Charles E. Wilson. (He’s the man remembered for saying, “For years I thought what was good for our country was good for General Motors, and vice versa.”) The two of them, according to Drucker, had conversations about GM’s social role that helped nudge Wilson toward negotiating, in 1950, the Treaty of Detroit, a five-year contract with the United Auto Workers that established annual raises, company-provided health insurance and pensions, and a measure of job security for workers as norms of American corporate life.

 

It was during this period that President Harry Truman was failing to achieve most of his Fair Deal, a proposed ramping up of the welfare state that included a prototype version of what liberal politicians would now call “Medicare for all.” That failure left government playing a role inconsistent with Karl Polanyi’s ideas and the corporation playing a role consistent with Drucker’s. Corporate employment was an American exceptionalist version of the welfare state.

 

It is stating the obvious to point out that this system no longer exists. One often hears calls for big corporations to be socially responsible—last month, the Business Roundtable added its voice in a statement signed by 181 corporate chief executives—but not for them to serve collectively as the major American social (rather than economic) institution. For a quarter-century or so during the mid-20th century, however, this was lived reality for millions of Americans who dutifully served the corporations where they worked until they retired at 65 on generous defined-benefit pensions, suppressing whatever independent or entrepreneurial impulses they may have had in exchange for the company’s loyalty to them. And a coterie of establishment-oriented liberal intellectuals trumpeted the arrangement as a not-half-bad social and political order, since a Western European welfare state seemed unachievable in the U.S.

 

So what happened? Besides being vulnerable because it was a product more of custom than of law, the corporation-based welfare state, in retrospect, had two major weaknesses. It mainly excluded large groups with rising aspirations, like racial and ethnic minorities and women, so they felt little stake in preserving the system. Even more consequentially, it depended on the corporation’s economic invulnerability and the quiescence of its shareholders.

Continued in article

Friedrich Hayek --- https://en.wikipedia.org/wiki/Friedrich_Hayek

September 10, 2019 Reply from Paul Williams

Bob, It might also be a good idea to have students read Hayek and Henry Simons.

The history of the ascension of neoliberalism as the dominant order first in Anglo Saxon countries (US and UK) and increasingly all over the world (even China) would be a classic example of the power of ideas and how the purposeful misrepresentation of those ideas can have bad intended consequences. Henry Simons, dean of the law school at U. of Chicago was a great admirer of Hayek and was instrumental in his coming to reside in the U.S. What both Simons and Hayek were concerned about was concentrated economic power. If people actually read Hayek they would know his argument about markets was not about economic efficiency but was a moral argument about liberty Ironically, Hayek envisioned a role for government that required government to be very powerful since its responsibility was to maintain a competitive order.

For Hayek a competitive order meant competition was quite literally human vs human. The greatest evil in Hayek's competitive order was monopoly, the evils of which he wrote about at great length. He went so far as to advocate that if any power became so concentrated it was the government's responsibility to essentially take over that business.

If one were to read Simons today, he sounds more like the Democratic candidates for president than he does today's vocal champions of "free markets." This story is an interesting one in that the Chicago folks (most notably Friedman and Director) who championed Hayek's ideology omitted a key principle in that they ignored completely the problem for a competitive order posed by the corporate form. Hayek would have included any concentrated economic power as being on the road to serfdom (see Elizabeth Anderson's Private Government, which chronicles how much control corporations have over peoples' lives).

Harcourt has written a history of this strange omission by the Chicago folks of Hayek's (and Adam Smith's) strong aversion to concentrated economic power (The Wealth of Nations, which the great admirers of Smith have also apparently never read, is a screed against concentrated economic power) titled The Illusion of Free Markets. Apparently the eliding of a central premise of Hayek and Smith was conveniently ignored because corporations were providing substantial monetary support to research coming out of Chicago in the 50s and 60s.

An excellent example of what Lessig labels dependence corruption. Note the funding of Chicago's Center for Research into the Behavior of Security Prices funded by Merrill-Lynch. You don't have to be a rocket scientist to connect those dots to see where accountics had its origins. I regard all those who have faith in markets intellectually questionable until they advocate for the abolition of the corporate form.

The irony of the self-proclaimed champions of Adam Smith's legacy being the creators of a world now dominated by concentrated economic power would be a valuable education for tomorrow's business leaders. That was Jack Behrman's reason for having us read Polanyi who showed us that the establishment of capitalism as the dominant social order was accomplished only by great violence and not as the result of the workings of some natural order. He also points out that the problem for capitalism is its inability to make commodities of labor, money, and nature.

Also ironic is how completely the ideas of the Friedman generation at Chicago have taken over the US academy. Accounting, whose essential function in society is a regulatory one (FASB, GASB, rule makers ad nausea) adopts as its fundamental perspective a hostility to regulation!! No wonder we are still not yet a "learned profession."

Jensen Comment

And yet today the best models of economic attainment in practice are the Scandinavian nations that are proudly capitalist with pressures to deregulate monopolies that have formed ---
https://www.decanter.com/wine-news/scandinavian-monopolies-will-last-five-years-102364/

Having said this, I hesitate to go deeply into comparison of any Scandinavian nation with the USA. The differences are immense beginning with both land mass and population mass of 350+ million residents versus nations with barely over 5 million residents. Smaller nations are uniquely able to implement democratic controls of capitalism abuses.

Capitalism movements seem to be doing more larger economies like China and India, although both of those nations seem unable to control corruptions lingering stubbornly on from their socialist histories.

I always ask the question of where there has been something better than underlying capitalism in the history of nations having more than a million people?

Why didn't any Scandinavian nation turn socialist?


Management Science:  Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis
https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2018.3202


Excel:  Excel in Your Work ---
https://www.aicpastore.com/CareerPersonalDevelopment/excel-for-accounting-professionals-webcast-series/PRDOVR~PC-CL2EXAPSERIES/PC-CL2EXAPSERIES.jsp?utm_source=mnl:cpald&utm_medium=email&utm_campaign=27Sep2019

Excel:  Spreadsheet modellers can use the MOD function to obtain residuals and handle calculations at regular time intervals.---
https://www.fm-magazine.com/news/2019/aug/microsoft-excel-mod-function-forecast-models-201921634.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=27Aug2019

Excel:  A guide to key features in Excel for Office 365 ---
https://www.computerworld.com/article/3428640/excel-for-office-365-cheat-sheet.html

Excel:  How to Work with Trendlines in Microsoft Excel Charts ---
https://www.howtogeek.com/429126/how-to-work-with-trendlines-in-microsoft-exce


Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis

Big Four accounting firms bungle a third of US audits but are rarely fined ---
https://qz.com/1705744/big-four-accounting-firms-are-bungling-a-third-of-us-audits/?utm_source=google-news

Jensen Comment
This article is a bit misleading and should probably read bungled "parts" of the audits. For example, it's relatively common for audit firms to not do enough detail testing of some accounts and internal controls. But that certainly does not mean that insufficient detail testing led to losses incurred by creditors or shareholders. It is true, however, that audit firms are not paying enough attention to their PCAOB bad report cards. Audit firms are caught between clients resisting increased audit fees and the PCAOB wanting more time and money invested in audits.

What we don't want is for the audit firms to follow Andersen's (a now defunct huge auditing firm) path of almost totally bypassing detail testing. The PCAOB should probably be given more resources and power to enforce better audits.

Auditing became more difficult with the loss of paper trails --- making detail testing more technical and complicated when auditing in the clouds. This complexity is compounded by the increasingly complicated cybercrime that changes almost at the speed of light. Exhibit A is the explosion in the use of cryptocurrency (think bitcoin) that facilitates crime and greatly complicates traditional auditing. Also financial contracts have become much more complicated (think of the many innovations in leasing, investing, and insurance).

Auditors are also under pressures for fast decisions in circumstances calling for more delayed diagnostics.

Bob

 Achilles heels of the emergency room doctors: Delayed or missed diagnoses ---
https://www.reliasmedia.com/articles/26532-achilles-heels-of-the-ed-delayed-or-missed-diagnoses

But for the ED, such models suffer from three major drawbacks. The first is an assumption that decisions are made under optimal conditions, by rational beings, who understand and apply principles of probability theory. The second is that such models do not take into account the prevailing intrinsic and systemic error-producing conditions (EPCs) in most EDs, or violation-producing behaviors (VPBs) of clinical staff (see Table 1), that typically confuse and confound this approach. The third is that there is an incomplete appreciation of the widespread use of heuristics, the abbreviated shortcuts that permeate ED decision making. Many heuristics are driven by a cognitive disposition to respond (CDR) to a particular patient, in a particular situation.6,7 They are a necessary feature in this setting; but, in some cases, will prove insufficient for the task. When they fail, the outcome may be catastrophic. The influence of such CDRs, biases, and failed heuristics is beginning to enter medical decision-making models,8 and a recent catalogue has been . . .

Added Jensen Comment
One huge problem is that academic accountancy, unlike medicine and engineering, tends to ignore practical problems of the profession in favor of challenges more amenable to research methods and models that are not conducive to the real world ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong
Accounting and auditing practitioners virtually gave up in looking to academic accounting journals for professional help. Similar problems arise where politicians and bureaucrats are not getting professional help from esoteric political science.

Chronicle of Higher Education:  How Political Science Became Irrelevant
The field turned its back on the Beltway

https://www.chronicle.com/article/How-Political-Science-Became/245777?utm_source=cr&utm_medium=en&cid=cr

In a 2008 speech to the Association of American Universities, the former Texas A&M University president and then-Secretary of Defense Robert M. Gates declared that "we must again embrace eggheads and ideas." He went on to recall the role of universities as "vital centers of new research" during the Cold War. The late Thomas Schelling would have agreed. The Harvard economist and Nobel laureate once described "a wholly unprecedented ‘demand’ for the results of theoretical work. … Unlike any other country … the United States had a government permeable not only by academic ideas but by academic people."

Gates’s efforts to bridge the gap between Beltway and ivory tower came at a time when it was growing wider, and indeed, that gap has continued to grow in the years since. According to a Teaching, Research & International Policy Project survey, a regular poll of international-­relations scholars, very few believe they should not contribute to policy making in some way. Yet a majority also recognize that the state-of-the-art approaches of academic social science are precisely those approaches that policy makers find least helpful. A related poll of senior national-security decision-makers confirmed that, for the most part, academic social science is not giving them what they want.

The problem, in a nutshell, is that scholars increasingly privilege rigor over relevance. That has become strikingly apparent in the subfield of international security (the part of political science that once most successfully balanced those tensions), and has now fully permeated political science as a whole. This skewed set of intellectual priorities — and the field’s transition into a cult of the irrelevant — is the unintended result of disciplinary professionalization.

The decreasing relevance of political science flies in the face of a widespread and longstanding optimism about the compatibility of rigorous social science and policy relevance that goes back to the Progressive Era and the very dawn of modern American social science. One of the most important figures in the early development of political science, the University of Chicago’s Charles Merriam, epitomized the ambivalence among political scientists as to whether what they did was "social science as activism or technique," as the American-studies scholar Mark C. Smith put it. Later, the growing tension between rigor and relevance would lead to what David M. Ricci termed the "tragedy of political science": As the discipline sought to become more scientific, in part to better address society’s ills, it became less practically relevant.

When political scientists seek rigor, they increasingly conflate it with the use of particular methods such as statistics or formal modeling. The sociologist Leslie A. White captured that ethos as early as 1943:

We may thus gauge the ‘scientific-ness’ of a study by observing the extent to which it employs mathematics — the more mathematics the more scientific the study. Physics is the most mature of the sciences, and it is also the most mathematical. Sociology is the least mature of the sciences and uses very little mathematics. To make sociology scientific, therefore, we should make it mathematical.

Relevance, in contrast, is gauged by whether scholarship contributes to the making of policy decisions.

That increasing tendency to embrace methods and models for their own sake rather than because they can help us answer substantively important questions is, I believe, a misstep for the field. This trend is in part the result of the otherwise normal and productive workings of science, but it is also reinforced by less legitimate motives, particularly organizational self-interest and the particularities of our intellectual culture.

While the use of statistics and formal models is not by definition irrelevant, their edging out of qualitative approaches has over time made the discipline less relevant to policy makers. Many pressing policy questions are not readily amenable to the preferred methodological tools of political scientists. Qualitative case studies most often produce the research that policy makers need, and yet the field is moving away from them.

Continued in article

Jensen Comment
This sounds so, so familiar. The same type of practitioner irrelevancy commenced in the 1960s when when academic accounting became "accountics science" --- About the time when The Accounting Review stopped publishing submissions that did not have equations and practicing accountants dropped out of the American Accounting Association and stopped subscribing to academic accounting research journals.

An Analysis of the Contributions of The Accounting Review Across 80 Years: 1926-2005 --- http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm 
Co-authored with Jean Heck and forthcoming in the December 2007 edition of the Accounting Historians Journal.

Unlike engineering, academic accounting research is no longer a focal point of practicing accountants. If we gave a prize for academic research discovery that changed the lives of the practicing profession who would practitioners choose to honor for the findings?

The silence is deafening!

September 12, 2019 reply from Beryl D. Simonson

This continues to be a misunderstood topic. For a truly “bungled” audit follow the number of restatements that occur based on a PCAOB inspection report. That is not saying that the audit was well performed just because the numbers didn’t change. The great majority of inspection comments are not necessarily failures by the audit firm rather than surrenders because the PCAOB holds all of the cards if you fight to hard and there is no third part that reviews and affirms the PCAOB reports. Many of the comments deal with subjective matters as to how much work needs to be done in an area. It is as if the district attorney is always correct in bring charges.

Beryl

Beryl D. Simonson CPA

September 12, 2019 reply from Dennis Beresford

Bob,

I would add that the headline, which is often all that readers pay attention to, is erroneous. As the first line of the article states, the one-third error rate relates to the audits examined by the PCAOB while the headline implies the error rate is for all audits. I don’t know the actual percentage of Big 4 audits inspected each year but I suspect it is pretty small. And the PCAOB chooses those it inspects based on its beliefs about which ones are likely to be the most risky.

Finally, when you read the inspection reports it is clear that a fairly large number of the inspection findings are matters of judgment in which reasonable people could easily disagree. I know that the firms find it easier to accept most of these findings rather than fight them and create an adversarial relationship with the PCAOB. One or more of the firms tried taking hard line positions in early years of the inspections program and they quickly learned that it was a big mistake to do so.

Denny


Lease Accounting Change Makes EBITDA an Even Muddier Metric ---
https://news.bloombergtax.com/daily-tax-report/lease-accounting-change-makes-ebitda-an-even-muddier-metric


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

MIT:  China is about to launch its own digital currency. Here’s what we know so far ---
https://www.technologyreview.com/f/614314/china-is-about-to-launch-its-own-digital-currency-heres-what-we-know-so-far/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=76870798&_hsenc=p2ANqtz-9VujTcfuBpRY3fjRSFY-zTMLHyat8y68SrWKkpESDMsy622KwODAdbvCzlqDWNQ-lhp3jz-Pr7CF5rQQA0RbaYosaXXQ&_hsmi=76870798


Debt --- http://en.wikipedia.org/wiki/Debt

History of Money and Debt --- http://en.wikipedia.org/wiki/History_of_money

Mezzanine Debt/Equity --- https://en.wikipedia.org/wiki/Mezzanine_capital

Convertible Bond --- https://en.wikipedia.org/wiki/Convertible_bond

The Fuzzy Zone Between Debt and Equity
From the CFO Journal's Morning Ledger on October 6, 2014

U.S. companies including Tesla Motors Inc., Twitter Inc. and Priceline Group Inc. are selling bonds that can later be converted into stock shares at the fastest clip since 2008, the WSJ’s Mike Cherney reports. Businesses like to sell them because it gives them access to capital at lower rates, and the buyers like them because it provides the possibility of a considerable profit if the company’s share value increases. 

Violin Memory Inc., a data-storage firm in Santa Clara, Calif., for instance, sold $105 million in convertible notes last month. Chief Financial Officer Cory Sindelar said the company opted to sell the bonds instead of stock because it wanted to minimize the impact on existing shareholders, who would’ve seen their shares immediately diluted. 

Meanwhile, a group of 12 banks is aiming to streamline the process of buying corporate bonds by creating a one-stop-shop for the debt instruments, the WSJ’s Katy Burne reports. The initiative, called “Neptune,” won’t be for executing trades, but rather will link up banks and investors in the market, just as a mall would bring together several shops under one roof

 

"An Update on the FASB’s and IASB’s Joint Project on Financial Instruments With Characteristics of Equity,"  by Magnus Orrell and Ana Zelic, Deloitte & Touche LLP Heads Up, April 15, 2010 --- http://www.iasplus.com/usa/headsup/headsup1004liabequity.pdf

Entities have long struggled with the question of whether instruments they issue to raise capital should be reported as liabilities or equity when those instruments possess characteristics of both debt and equity. The demand for a set of accounting principles that clearly distinguishes between equity and nonequity instruments is greater than ever in this era of increasing sophistication and rapid change in financial markets. The current accounting requirements governing the classification of financial instruments as liabilities or equity under both IFRSs and U.S. GAAP have been criticized for lacking a clear and consistently applied set of principles and for not distinguishing between equity and nonequity in a manner that best reflects the economics of the transactions involving those instruments. 

Responding to these concerns, in February 2006, as part of their Memorandum of Understanding, the IASB and FASB agreed to undertake a joint project on financial instruments with characteristics of equity to improve and simplify the financial reporting for financial instruments considered to have one or more characteristics of equity.1 In this project, the two boards have developed a new classification approach (see the Decisions Reached to Date section below) that we expect will be exposed for public comment in June 2010. The boards have agreed that the exposure draft will have a 120-day comment period and hope to publish a final standard in the first half of 2011; the effective date is yet to be determined. 

The classification approach contemplated by the two boards would, if finalized, significantly affect the manner in which entities determine whether to classify many financial instruments as liabilities or equity and account for exercises of options and conversions of debt into equity instruments. Entities are well-advised to begin assessing the implications of, and planning for, these changes and their effect on debt and equity, interest coverage, and other financial ratios; earnings; and compliance with debt covenants.

Continued in article

2019:  FASB makes 2nd effort to improve balance sheet debt classification ---
https://www.journalofaccountancy.com/news/2019/sep/fasb-balance-sheet-debt-classification-201922019.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=13Sep2019


2019 Tax Software Survey ---
https://www.journalofaccountancy.com/issues/2019/sep/2019-tax-software-survey.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Sep2019


2019 Trends in in the supply of accounting graduates and the demand for public accounting recruits ---
https://www.aicpa.org/content/dam/aicpa/interestareas/accountingeducation/newsandpublications/downloadabledocuments/2019-trends-report.pdf?utm_source=mnl:cpald&utm_medium=email&utm_campaign=06Sep2019
Keep in mind that there are many accountants who are not "public accountants" (think of accounting careers in government, business firms, schools, etc.). Having said this, many (certainly not most) of those "non-public accountants" commenced their post-graduate careers for a time as public accountants before going non-public. And not all public accountants are Certified Public Accountants (or chartered accountants) such as all those accountants and accounting firms who offer tax return preparation services but are not licensed to conduct audits ---
https://en.wikipedia.org/wiki/Certified_Public_Accountant

Key insights

Accounting Enrollments Total projected accounting enrollments are down 4% from the highs of 2016, but are still among the highest on record. Master’s enrollments are down 6% from 2016. Racial/ethnic diversity has increased in the 2017-18 academic year. Universities have reported increases in Hispanic or Latino enrollees of 3 and 8 percentage points at the bachelor’s and master’s levels, respectively. Seventy-two percent of bachelor’s of accounting programs and 65% of master’s of accounting programs expect to have the same or higher enrollment in 2019.

Accounting Graduates Projected accounting graduates trended downward in the 2017-18 academic year, with decreases of 4% at both the bachelor’s and master’s levels and overall. In 2018, female accounting graduates outnumbered male graduates at the master’s level. Racial/ethnic diversity has increased in accounting graduates, with a 7 percentage point increase in Hispanic or Latino accounting graduates.

Hiring In 2018, new hires assigned to audit-related services increased by 4 percentage points, while new graduates assigned to taxation declined by 4 percentage points. Hiring of new accounting graduates slowed 11%. Across the last two Trends reports, we have experienced an approximate 30% decline in hiring of new accounting graduates. Non-accounting hires as a percentage of all new graduate hires are up 11 percentage points to 31%. See footnote for more information.

Hiring Expectations Of firms that hired one or more accounting graduates in 2018, 58% expect to hire the same number or more in 2019. Ninety percent of all U.S. CPA fi rms expect to have the same number or more CPAs on staff in 2019.

CPA Examination The number of CPA Exam takers increased in 2015 and 2016 in preparation of the new CPA Exam that launched in April 2017. CPA Examination candidates decreased 7% between 2017 and 2018. The number of CPA Exam candidates who passed their 4th section of the exam decreased 6% between 2017 and 2018.

How Are Public Accounting Salaries Stacking Up for 2020?
https://goingconcern.com/public-accounting-salaries-2020/
One problem in reporting salaries is that so many public accountants own their own practices or are in small partnerships. Many have no salaries and instead rely on profits. I have a CPA friend who did not finish his Ph.D. and was denied tenure. However, he was a great CPA who started up his own firm, specialized in accounting and tax services for wealthy physicians and Texas ranchers, and made a fortune. However, before he retired he had no "salary" to report in surveys like the one above. Similar problems arise when reporting the "salaries" of physicians and lawyers who own their own practices or share partnership profits.

Jensen Comment
Accounting major numbers often decrease in times of economic prosperity with the best example arising in the roaring 1990s when so many college students became finance majors (intending  make millions on Wall Street before the Enron bubble burst in 1999) and computer science majors (at a time when new technology firms were sometimes offering million-dollar signing bonuses in stock options that later turned worthless when the technology bubble burst). In recessions many students find their way to accountancy because of the relative stability of accountancy job offerings.

Becoming a CPA became somewhat more difficult and expensive as states across the USA commenced to require 150 credits to sit for the CPA examination with most aspiring CPAs today now getting masters degrees because of the 150-credit requirement. Of course accounting graduates not aspiring to be CPAs can still graduate in four years and enter the job market as non-CPAs. 

The problem with non-public accounting entry level jobs (think FBI agents and corporate accountants)  is that experience is often required, whereas large CPA firms have a tradition of hiring top graduates who do not yet have experience beyond very brief internships while they are still in college. There's a huge attraction for undergraduates in accounting to go on to get masters degrees and start out in public accounting firms. Their intent is to gain experience needed in public accounting to land those non-public accounting job offers. Many public accountants do in fact end up jumping ship to work for audit and tax clients of CPA firms. CPA firms even consider them as their "alumni."

One exception is the IRS that, unlike the FBI and other government agencies, will hire inexperienced accounting majors and train them for their jobs. The IRS, however, in recent years has been hobbled by declining budgets.

Because of the short supply (slightly over 200 per year)  of new accounting Ph.D.s hoping to get tenure-track jobs, new Ph.D.s in accountancy are often the highest-paid new assistant professors on campus. However, one of the factors holding down the supply of new accounting Ph.D.s is the requirement by accounting doctoral programs that applicants have professional accounting experience. Whereas STEM majors in science can enter doctoral programs immediately after earning BS degrees, this is not usually the case for new accounting doctoral students ---
http://www.jrhasselback.com/AtgDoctInfo.html

\

Bob Jensen's threads on careers are at
http://faculty.trinity.edu/rjensen/Bookbob1.htm#careers


David Middendorf, former national managing partner for audit quality and professional practice at KPMG, was sentenced this morning in Manhattan federal court to one year and one day in federal prison ---
https://goingconcern.com/ex-kpmg-partner-david-middendorf-was-spared-a-lengthy-prison-sentence/

Fired KPMG Audit Head: How Did Scott Marcello Fall From Grace? ---
https://www.wsj.com/articles/fired-kpmg-audit-head-how-did-scott-marcello-fall-from-grace-1492371198

Scott Marcello was supposed to be the man to redeem KPMG LLP’s audit business. Instead, the 54-year-old and other top partners became the center of a scandal that tarnished the firm’s reputation

 

Scott Marcello was supposed to be the man to redeem KPMG LLP’s audit business. Instead, he and other top partners became the center of a scandal that tarnished the firm’s reputation.

 

The accounting world was stunned last week when Mr. Marcello, KPMG’s top audit official, was fired over a leak of confidential information. The firm said Mr. Marcello, who turns 54 this month, and four other partners were let go over the mishandling of a tip that gave the firm improper advance word about which of its audits its regulator planned to scrutinize in its annual inspections.

 

Mr. Marcello, a three-decade veteran at the firm, was a highly regarded and technically accomplished auditor, specializing in the intricate financial statements of banks and insurers. He climbed the ladder at KPMG to become the Big Four accounting firm’s vice chair of audit, managing a workforce of thousands of auditors. After his 2015 promotion from national leader of the firm’s financial-services practice, he faced the challenge of satisfying KPMG’s regulator, the Public Company Accounting Oversight Board, which in recent years had scored KPMG’S auditing performance below that of other big firms.

 

People who know Mr. Marcello said they were surprised such an experienced, knowledgeable auditor—someone who volunteered as a mission hospital consultant in Africa, and has chaired a Christian school in Connecticut—is accused of having gotten into such a fix.

“It’s a huge and disappointing thing to happen to such a fine individual,” said Dennis Beresford, former chairman of the Financial Accounting Standards Board, the U.S. accounting rule-writing panel, who knows Mr. Marcello from common ties to a professional organization. He called Mr. Marcello “personable and extremely competent.”

 

Mr. Marcello declined to comment to a Wall Street Journal reporter at his Connecticut home. KPMG and the accounting board declined to comment.

Details of the leak to KPMG are still unclear, as are the precise roles that Mr. Marcello and his deputy David Middendorf, who also was fired, are alleged to have played in the process. But they were aware that others at KPMG had received leaked information and “failed to report the situation in a timely manner,” KPMG said in a statement Tuesday.

 

Lynne Doughtie, the firm’s chairman and CEO, said KPMG has “zero tolerance for such unethical behavior,” and KPMG has said it told the accounting board about the matter as soon as top management learned of it.

The leaked information could have given KPMG a leg up in preparing for the PCAOB’s inspection, widely seen as a key report card on the quality of the firm’s audits. Among the Big Four accounting firms, KPMG has had the highest number of deficiencies cited by the accounting board in each of the past two years.

 

The leak reflects the tension between the Big Four accounting firms and the rigorous demands of the accounting board, which was created in the wake of the Enron Corp. scandal.

Some auditors have long felt stressed by the board’s inspections, feeling their careers could be set back if the regulator finds problems with too many of their audits. “They are all feeling the pain and the frustration,” said Bob Conway, a former KPMG partner who later ran the accounting board’s Southern California office.

 

Mr. Marcello took over as KPMG’s vice chair of audit aft

er several years in which the firm’s inspection results had steadily worsened. The rate of deficient audits found by the PCAOB had risen from 22% for 2010 to 54% for 2014.

 

Several months before Mr. Marcello’s appointment, the accounting board unsealed previously confidential criticisms that the firm had failed to sufficiently evaluate information that could have contradicted its audit conclusions—a public rebuke of the firm, similar to what the regulator had done with other Big Four firms.

 

Mr. Marcello cast the image of an auditor well prepared for the job: He had deep knowledge of accounting practices through his auditing of complex financial companies as well as a two-year fellowship at the FASB, which also gave him experience as a rule maker and in dealing with the Securities and Exchange Commission.

 

He was “straight out of central casting,” said a person who had worked with him. He was an everyman, “the exact opposite of flashy,” the person said.

 

Mr. Marcello wanted to find a way to provide more timely services to companies and investors than an auditor’s typical annual audit opinion on a company. “We’ve got to get to this place where we are really dealing in the real time with the things that people use to make important decisions,” he told an industry conference last August.

 

Outside the accounting world, Mr. Marcello has volunteered as a consultant for missionary hospitals in Africa and contributed to the construction of a clinic for HIV-infected Kenyans, said Jon Fielder, president of the African Mission Healthcare Foundation

Continued in article

KPMG's Fall From Grace (many times) ---
http://faculty.trinity.edu/rjensen/fraud001.htm


The Current State of Sales Tax on Digital Products
https://www.bakerinstitute.org/media/files/files/ff22e639/bi-report-080719-cpf-salestaxdigital.pdf


Apple is mounting a legal challenge against the European Commission over a 2016  order to pay $14.4 billion in back taxes ---
https://www.businessinsider.com/apple-takes-fight-against-13-billion-euro-eu-tax-order-to-court-2019-9


Hedges of Recognized Foreign Currency–Denominated Assets and Liabilities ---
https://www.cpajournal.com/2019/09/04/hedges-of-recognized-foreign-currency-denominated-assets-and-liabilities/


XBRL US 2nd (2019) release of CAFR taxonomy for municipal reporting in public exposure review ---
https://www.truthinaccounting.org/news/detail/xbrl-us-2nd-release-of-cafr-taxonomy-for-municipal-reporting-in-public-exposure-review


Science Alert, Some of The World's Most-Cited Scientists Have a Secret That's Just Been Exposed:---
https://www.sciencealert.com/some-of-the-world-s-most-cited-scientists-have-a-secret-that-s-just-been-exposed

Jensen Comment
Surely our accountics scientists are too honorable to play that game. But if accounting practitioners and business employees aren't reading those highly-cited academic accounting articles how why are their citations soaring?


Charitable Donation Deductions Plummet After Tax Reform ---
https://www.forbes.com/sites/kellyphillipserb/2019/08/28/charitable-donation-deductions-plummet-after-tax-reform/#7e5f878b5ac5

According to the most recent data  available from the Internal Revenue Service (IRS), just 12,177,779 taxpayers claimed the charitable donation deduction for the 2018 tax year, totaling $102.7 billion. That compares to 33,629,985 taxpayers who claimed the charitable donation deduction for the 2017 tax year, totaling $160 billion. That’s a difference of 21,452,206 taxpayers claiming nearly $37 billion less in donations.

This data reflects forms 1040 processed by the IRS on or before week 30 of each calendar year. It's worth noting that while the total taxpayer returns processed from year too year are similar (141,156,150 for the tax year 2018 versus 140,456,686 for the tax year 2019), the kinds of returns may be different. Specifically, the returns which have not been processed include taxpayers who may have filed for extension. Typically, taxpayers who file for extension are those with more complicated returns. For this year, that likely includes those who might have been waiting for state and local tax (SALT) or other Schedule A related guidance; that could translate into a slight uptick in taxpayers who also claim a charitable deduction.

(You can read more about the changes to Schedule A here.)

Still, it's telling that the numbers have declined. Initially, the change in the standard deduction amounts was meant to simplify the deduction scheme. Analysts predicted that the number of taxpayers who would itemize their deductions would drop from one-in-three taxpayers to one-in-ten. That’s pretty close to what happened. For the 2017 tax year, 42,156,751 taxpayers itemized their deductions - about 30%. In contrast, for the 2018 tax year, only 14,662,008 taxpayers itemized their deductions - about 10%.

. . .

The more concerning question is whether taxpayers who did itemize for the 2018 tax year may choose to scale back their giving. The irony of lower tax rates is that they also make deductions less valuable. Remember, deductions are reductions in your taxable income (unlike credits which are dollar-for-dollar reductions to your total tax bill). So, when tax rates dipped, your home mortgage deduction was not subsidized as much as before; the deduction is smaller meaning that the after-tax cost of your home is higher. The same is true for other Schedule A deductions; for some taxpayers, a decrease in rates actually boosted the after-tax price of charitable donations. In fact, the Tax Policy Center had predicted that “the TCJA will reduce the marginal tax benefit of giving to charity by more than 30 percent in 2018, raising the after-tax cost of donating by about 7 percent.”

While it’s true that not all donors make their decisions based solely on tax, it’s clear that tax incentives do play a role in the decision to give as well as how much and how often to give. For donors looking to maximize the tax benefits of being charitable, it’s a good idea to check with your tax professional. You can also find some charitable giving tips here.

Jensen Comment
It needs to be stressed that in tens of millions if instances loss of the tax deduction does not mean entire loss of charitable giving. Those who donated to to their churches or to their other favorite charities often continued giving without getting a tax break for such gifts.

It's also true that in the first year of tax reform many taxpayers weren't certain whether they would be itemizing their deductions --- at least not until they actually filed their tax returns for 2018 in the first few months of 2019. The telling year with be the full 2019 for those that discovered in early 2019 that they did not get a charitable-giving  tax break on their 2018 returns after tax reform. Many who now do not anticipate a tax break for charitable giving may reduce their charitable giving for 2019 and beyond. This is the big worry for organizations dependent upon charitable giving. Alumni checks to universities, for example, may not be reduced to zero, but they might be reduced somewhat due to loss of a tax break on those donations. We should not beat down on fund managers for losses that were out of their control.

Probably the biggest damage tax reform will do to charities is make taxpayers reluctant to increase their annual donations that they no longer anticipate will give them a tax break.

Keep in mind that 45% the taxpayers who file tax returns pay little or no income taxes due mostly to the extremely progressive nature of USA income taxes that provides almost total relief for income taxation to lower income tax payers. Those folks who pay nearly zero in income taxes are pretty much not impacted by tax reform and will continue to give their little bits to their churches and other charities. The problem lies more with higher income taxpayers who now no longer get a tax break for their usual gifts to charities.
https://www.marketwatch.com/story/45-of-americans-pay-no-federal-income-tax-2016-02-24
Those who pay little or no income taxes pay other taxes (payroll deductions, sales taxes, property taxes, etc.), but those taxes were not impacted by loss of charitable-giving  tax breaks in income tax reforms.

Actually the number of Americans who do not pay any income taxes is much higher than 45% due to the enormous underground cash economy where incomes are not reported on any tax returns. There are no reliable estimates on how much income goes unreported in the underground economy, but I once saw a guestimate in USA Today of $2 trillion dollars in unreported income of the underground economy. Incidentally, authorities often look the other way when it comes to the underground economy. Millions of children would lose their family income support if law enforcement shut off the only jobs available to their poor parents. In the case of higher income participants in the underground economy (think robbers and drug dealers and fraudulent professionals) it's very hard to detect those black market cash dealings. When these criminals are caught the money to pay back taxes is usually gone. One of the best ways to hinder the underground economy is to move to a cashless economy. Crooked legislators will never allow that in the USA.

Case Studies in Gaming the Income Tax Laws
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


Do you have a self-actualised personality? Maslow revisited ---
https://aeon.co/ideas/do-you-have-a-self-actualised-personality-maslow-revisited?utm_source=Aeon+Newsletter&utm_campaign=06b3a991f3-EMAIL_CAMPAIGN_2019_08_29_03_16&utm_medium=email&utm_term=0_411a82e59d-06b3a991f3-68951505


SEC on Twitter --- https://twitter.com/SEC_DERA

Jensen Comment
There's a ton of information for students, researchers, and practitioners at this SEC DERA site.


WSJ: Companies Say They Can Ignore Cost Of U.S. Tax Rules For Financial Reporting Purposes ---
https://taxprof.typepad.com/taxprof_blog/2019/09/wsj-companies-say-they-can-ignore-cost-of-us-tax-rules-for-financial-reporting-purposes.html

Jensen Comment
What should their auditors be doing?
Will investors and the government also sue the auditors?


Marginal Tax Rates For Pass-through Businesses Vary By State: 32.7% In TX, FL; 46.1% In CA ---
https://taxprof.typepad.com/taxprof_blog/2019/09/marginal-tax-rates-for-pass-through-businesses-vary-by-state-327-in-tx-fl-461-in-ca.html


Sorry Bernie, workers’ wages have lately been rising faster than their bosses’ wages ---
https://taxprof.typepad.com/taxprof_blog/2019/09/wsj-collapse-of-the-income-and-wealth-inequality-argument-.html


The Atlantic:  Tomorrow’s wars will be faster, more high-tech, and less human than ever before. Welcome to a new era of machine-driven warfare ---
https://www.theatlantic.com/technology/archive/2019/09/killer-robots-and-new-era-machine-driven-warfare/597130/


Chicago reaps revenue bonanza with cloud computing tax ---
https://www.statedatalab.org/news/detail/chicago-reaps-revenue-bonanza-with-cloud-computing-tax


City Combined Taxpayer Burden Report 2019 ---
https://www.truthinaccounting.org/news/detail/city-combined-taxpayer-burden-report-2019

City Combined Taxpayer Burden Report 2019

May 14, 2019

Truth in Accounting has released a new report on the 10 largest U.S. cities. The City Combined Taxpayer Burden report analyzes the finances of each city, its county, state, and underlying government units.

This report was necessary because most cities do not include several underlying government units, such as school districts, transit agencies, housing authorities, etc., in their annual financial reports. New York City’s accounting practice is an exception. 

The City Combined Taxpayer Burden report takes into account these underlying government entities and provides residents and taxpayers in these cities with a more accurate and holistic view of their respective city’s finances. When the unfunded debt of these local government units is combined with both the municipal and state debt, city taxpayers are the hook for much more than they think.

The report also breaks down each government's debt to a per-Taxpayer Burden, which is each taxpayer's share of the government's bills after assets have been tapped. Here are the ten largest cities ranked from worst to best based on their Taxpayer Burden: 

·         Chicago’s combined Taxpayer Burden: -$119,110

·         New York City’s combined Taxpayer Burden: -$85,600

·         Los Angeles’ combined Taxpayer Burden: -$56,390

·         Philadelphia’s combined Taxpayer Burden: -$50,120

·         San Jose’s combined Taxpayer Burden: -$43,120

·         San Diego’s combined Taxpayer Burden: -$35,410

·         Dallas’ combined Taxpayer Burden: -$33,490

·         Houston’s combined Taxpayer Burden: -$22,940

·         San Antonio’s combined Taxpayer Burden: -$16,660

·         Phoenix’s combined Taxpayer Burden: -$13,290

Click on the city name to see its two-page report or view the full report here. This report was based on the latest available information for all of the government entities (FY 2017). 


The US is burying young people and the unborn under a mountain of government debt ---
https://www.truthinaccounting.org/news/detail/the-us-is-burying-young-people-and-the-unborn-under-a-mountain-of-government-debt

Bob Jensen's threads on debt and entitlements ---
http://faculty.trinity.edu/rjensen/Entitlements.htm


Do the Rich Get Richer in the Stock Market? Evidence from India ---
https://scholar.harvard.edu/files/campbell/files/dotherichgetricher_31july2018_01.pdf

We have studied wealth held in equity accounts in India, a large developing country that is important for the evolution of global wealth inequality. We have shown that heterogeneous risky log investment returns have important e⁄ects on the cross-sectional distribution of account size: large accounts result not only from large contributions, but also from high log returns. The e⁄ect of log return heterogeneity accounts for 84% of the increase in the cross-sectional variance of log account size during our sample period from March 2002 to May 2011. Return heterogeneity increases the inequality of account size through two main channels, both of which are related to the prevalence of undiversied accounts that own relatively few stocks. The rst is that some undiversied portfolios randomly do well, while others do poorly. The second is that larger accounts tend to earn higher average log returns. They do so not by earning higher average simple returns, but by limiting uncompensated idiosyncratic risk which lowers the average log return for any given average simple return.

Our paper partially supports Pikettys (2014) concern that the rich get richer by earning high investment returnssubject to the distinction, central in nance theory, between simple and log returns. Our results also highlight the importance for developing countries of investment vehicles, such as mutual funds and exchange traded funds, that are already common in developed countries and that give small investors an a⁄ordable way to diversify r

Jensen Comment
I might speculate that India has less effective regulation for enforcing stock market efficiencies ---

https://en.wikipedia.org/wiki/Efficient-market_hypothesis


Rhode Island Is Still Holding a Grudge Against Deloitte ---
https://goingconcern.com/rhode-island-is-still-holding-a-grudge-against-deloitte/


A group of ophthalmology researchers in China got caught trying to pull the wool over the eyes of readers by falsely claiming to have used a therapy that doesn’t exist. ---
https://retractionwatch.com/2019/09/16/the-problem-is-that-there-is-no-il-26-gene-in-the-mouse-an-exasperated-letter-leads-to-a-retraction/


FBI is investigating after computer hackers stole $4.2 million in funds from the Oklahoma State Highway Patrol Pension Fund ---
https://techxplore.com/news/2019-09-oklahoma-pension-fund-million-cyber.html 


Amtrak accounting tricks cover up losses ---
https://www.truthinaccounting.org/news/detail/amtrak-accounting-tricks-cover-up-losses


Accountants Behaving Badly: FUBARed Over FBARs, Fake Returns, Landscaping Larceny ---
https://goingconcern.com/accountants-behaving-badly-fubared-over-fbars-fake-returns-landscaping-larceny/

EY Executive Assistant Sukhbir Mawkin and her husband, Anil Mawkin, were sentenced on Sept. 11 for carrying out a £76,000 over four years, using credit card and personal details stolen from a large number of EY employees.---
https://goingconcern.com/accountants-behaving-badly-ey-gal-pleads-guilty-to-fraud-pwcer-fired-for-upskirt-pics-grand-theft-guilt/

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


Targeted Taxes: Localities Take Aim at Large Employers to Solve Homelessness and Transportation Challenges ---
https://poseidon01.ssrn.com/delivery.php?ID=269126002097094115101106070100094068122032049015054052117086126094066078121117116101033022034012040098112080066106124118115124111029057079021093028065068071120082127095033045004070020070021093027112070029104089116090007126077020120114107124119110017005&EXT=pdf

Many localities are facing unprecedented challenges—such as a dramatic rise in homelessness and insufficient transportation infrastructure—that have reached crisis levels.  These localities are in a precarious position.  If they do not solve these problems quickly, or if they impose overbearing and poorly designed taxes, there will be dire economic and social repercussions.  

 In response to these challenges, several localities recently enacted or proposed taxes targeted directly at large businesses, with revenues allocated explicitly for a designated purpose.  Localities are gravitating toward targeted taxes for several reasons.  Some assert that the success of large employers within the locality contributed to, or even directly created, these challenges.  Perhaps most importantly, targeted tax laws serve a clear expressive function.  Depending on the locality’s primary objective, targeted taxes may be problematic and counterproductive.  

 This Article begins by examining the recent local targeted tax provisions, which have crucial distinctions in motivations and mechanics.  The Article then undertakes a tax policy and constitutional analysis of these targeted taxes, and considers whether they are properly characterized as a tax or a fee.  The Article concludes with several proposed alternatives that will generate the requisite revenue—and may serve an expressive function—more effectively than targeted taxes.  

 INTRODUCTION ...

I. TARGETED TAX LANDSCAPE .

A. Seattle Homelessness Tax ..

B. San Francisco Business Taxes

C. Mountain View Transportation Infrastructure Tax .

D. Cupertino Transportation Infrastructure Tax ...

E. New York City Transit Taxes ..

F. “Millionaire” Taxes ...

G. Portland Clean Energy & Excessive CEO Compensation Taxes 21

II. THE TROUBLE WITH TARGETED TAXES

A. Negative Economic Impact ...

B. Complicating Tax Regimes and the Business Environment ..

C. Constitutional Considerations ...

D. Additional Policy Considerations – Crises and Revenue Raising Constraints .................................................................................. 33 E. Blurring the Tax Versus Fee Distinction .................................... 35

III. SUPERIOR ALTERNATIVES ..

A. Partnering to Foster Voluntary Contributions ..

B. One Comprehensive Local Business Tax ..

C. Improving Target Accuracy ..

IV. CONCLUSION .

 Jensen Comment
The most important thing to note is that taxable business firms do not pay taxes.
Taxes imposed on those firms are ultimately paid by customers.

The first thing to ask is what customers?
For example, consider a gross receipts tax imposed upon all revenues of a company headquartered in a city such as a gross receipts tax imposed by Seattle or Washington State on all worldwide revenues received by Amazon headquartered in Seattle. Or similarly suppose the tax is on all net profit of Amazon. What's wrong with this is hugely wrong taxation without representation When Bob Jensen buys a shirt from Amazon online from New Hampshire he in effect is being taxed by Seattle or the State of Washington. He has no vote regarding the amount of tax included in the price of the shirt. Similarly, if this is for Seattle or Washington Schools most worldwide customers of Amazon end up paying for Seattle or Washington schools while in the same year they are also supporting school taxes in their own countries, states, and cities of residence. Of course Bob Jensen can protest and  elect to no longer by anything from Amazon, which in turn could wipe out Amazon if virtually all customers of Amazon worldwide protest a headquarters tax imposed in this manner.

A gross receipts tax is not the same as a local sales tax. A local sales tax can and is imposed on sales transactions within a city or state, but local sales taxes in Seattle cannot be imposed on sales transactions taking place in Sugar Hill, New Hampshire. Recent legislation forces Seattle residents who buy online from certain out-of-state vendors (think online buying from Walmart headquartered in Arkansas) to pay a Seattle sales tax but not residents outside Seattle. Seattle voters can vote regarding if and how much they pay in such local sales taxes.

Another thing that's wrong with a gross receipts tax is that non-taxable entities can end up paying a gross receipts tax. For example, if New Hampshire tax-exempt public schools pay for cloud computing space rented by Amazon New Hampshire schools end up paying a Seattle gross receipts tax.

You can find out other things that are wrong with gross receipts taxes in the above article.

Cities and states are becoming more and more innovative about how to tax big companies, taxes that are not seemingly so overtly unconstitutional as a gross receipts tax. The above article discusses some of those innovations. But at the same time those cities run the risk of driving part or all of those businesses elsewhere and creating more unemployment and property value losses. Cities that impose targeted taxes end up triggering loaded guns that can backfire.

The attribution of homelessness and welfare dependency to being laid off by a local big business is overstated.
Firstly layoffs occur in firms of all sizes and locales. It's common for people laid off or divorced in small rural towns to migrate as homeless people to the big city, e.g., they were laid off by a local contractor in a small town rather than Amazon in Seattle. Secondly, a homeless person more often than is unemployed due to being mentally ill or alcoholic or a heroine addict or all three. Yeah a percentage of Seattle's homeless addicts may be traced back to illegal acts of doctors, pharmacies, and Big Pharma, but Amazon did not cause the pain medication addiction of some of Seattle's homeless people.


Macbeth in Bloom ---
https://www.insidehighered.com/views/2019/09/06/review-harold-bloom-macbeth-dagger-mind?utm_source=Inside+Higher+Ed&utm_campaign=64813187b5-WNU_COPY_01&utm_medium=email&utm_term=0_1fcbc04421-64813187b5-197565045&mc_cid=64813187b5&mc_eid=1e78f7c952

Harold Bloom -- whose latest book is Macbeth: A Dagger of the Mind (Simon & Schuster) -- is the preeminent votary of what has been called "an insane worship of Shakespeare which has no rational foundation." It is a cult that ignores Shakespeare's role in perpetuating a culture of violence, domination and nakedly elitist attitudes. "The fundamental inner cause of Shakespeare's fame," one critic has suggested, "was and is this: that his dramas … corresponded to the [oppressive] frame of mind of the upper classes of his time."

Typical tenured-radical political correctness! More of the endless trashing of the canon of literary masterpieces, right? Actually I'm quoting Leo Tolstoy, whose spot in the pantheon of dead white European male authors seems reasonably secure. But in his mid-seventies, after some five decades of accumulated bewilderment at Shakespeare's reputation and influence, the novelist finally exploded into print with his considered opinion.

"Several times," he wrote, "I read the dramas and the comedies and historical plays" -- in the original language, mind you as well as German and Russian translations -- "and I invariably underwent the same feelings: repulsion, weariness and bewilderment." The plots and characters were all ridiculous or disgusting, or both, with everything on stage presented in an overblown manner: "[T]he actions are exaggerated, so are their consequences, the speeches of the characters are exaggerated, and therefore at every step the possibility of artistic impression is interfered with … Shakespeare might have been whatever you like, but he was not an artist."

By this late stage in life Tolstoy himself was more sage than artist, and it is the privilege of a sage to forego tact yet still count on a respectful hearing. He proclaimed Shakespeare's vast renown to be one of the great outbreaks of mass delusion in human history, just like belief "in witches [and] in the utility of torture for the discovery of the truth, the search for the elixir of life, the philosopher's stone or the passion for tulips valued at several thousand guldens a bulb which took hold of Holland." Alas, the Shakespearean fever was more persistent than most crazes and involved something far worse than an aberration of taste. Readers and writers "discover in him non-existent merits," Tolstoy said, "thereby distorting their esthetic and ethical understanding."

Bardolatry led people to believe that "for the purpose of the drama the representation of human passions and characters was quite sufficient," and that art "should represent events quite independently of any judgment of good and evil." Shakespeare's work was a source of spiritual pollution, and not to see it was a matter either of succumbing to mass delirium or wallowing in the innate depravity of sinful mankind. I get the sense that Tolstoy had no expectation of changing many people's minds, but nonetheless felt morally obliged to go on the record.

Tolstoy refers to Macbeth a few times but directs most of his critical complaints at Hamlet and (especially) King Lear. They are reckoned as the Shakespearean masterpieces par excellence. But "the Scottish play" embodies most of what offends Tolstoy. In it we find prophecy-spouting witches, one or two rather preposterous "reveals" (the woods have moved!), and a string of jokes about drinking, urination and impotence; they come as a jolt, following as they do a vividly described murder. The eloquence of Macbeth and his Lady is turned solely to justifying their psychopathy or expressing their descents into madness. True art, as Tolstoy sees it, generates a kind of moral clarity through "the exhibition of a definite view of life corresponding to the highest religious understanding of a given time." But the plot of Macbeth is so driven by the imperatives of destiny that it is difficult to think of the characters as, in any sense, morally accountable, even for cold-blooded murder.

I have seen Macbeth performed a couple of times and (unrepentant sinner that I am) enjoyed it. But in revisiting the play via Bloom's recent book, I found myself occasionally granting Tolstoy's points. The witches prophesy that "none of woman born/Shall harm Macbeth," who is eventually killed by a character delivered through a post-mortem C-section? That's more of a B-movie plot twist than evidence of literary genius.

Bloom has been reading and teaching Shakespeare for so long that he could probably dictate a book on Macbeth in his sleep. Given the publisher's characterization of Bloom as "the greatest Shakespeare scholar of our time" and other such hype, it is tempting to say that we now have the transcript. Bloom's method here is to quote passages of various lengths by way of a synopsis of the play while providing the occasional clarification or recalling something he remembers seeing on stage or discussing with someone. When Lady Macbeth tries to overcome her husband's hesitancy about career advancement through assassination by asking if he is going to

live a coward in thine own esteem,
Letting 'I dare not' wait upon 'I would,'
Like the poor cat i'th' adage?

Bloom explains, that the proverbial feline "want[ed] to devour fish, but dar[ed] not get his feet wet," and notes that "'assassination' may have been a Shakespearean coinage." He remarks on the dramatic significance of certain turning points: "Macbeth, accusing himself of poor malice or inadequate slaughter, rouses himself to an apocalyptic ambition to tear apart the universe itself, destroying this world and the world to come." We learn that Bloom "lunched several times with the late critic Owen Barfield in London," though not how many times. Much of this is interesting, and some of it is useful. But Macbeth: A Dagger of the Mind is hardly "an extraordinarily moving argument for literature as a path to and a measure of our humanity," the Simon and Schuster publicity department notwithstanding. It is a profoundly okay book -- of some value to people who have not yet read or seen the play, while anyone who has will find the relevant chapter of Marjorie Garber's Shakespeare After All far more cogent.

"Long ago," Bloom writes, "I remember characterizing the Macbeths as the happiest marriage in Shakespeare. That can seem a grim jest, yet it is veracious. Their passion for each other is absolute in every way, as much metaphysical as erotic. The lust for power fuses with mutual desire and enhances the turbulence of their ecstasy."

Continued in article


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

Many companies should consider blockchains because they coordinate information, processes, and payments without a central intermediary, says EY ---
https://www.cfo.com/it-value/2019/09/5-tests-for-deciding-whether-to-use-blockchain/

Learning From Silicon Valley About Blockchain Adoption ---
https://readwrite.com/2019/09/06/learning-from-silicon-valley-about-blockchain-adoption/


Why the tax community should get more knowledgeable about Islamic finance ---
https://www.internationaltaxreview.com/article/b1h355hc8ttqqr/tax-impact-ignorance-of-sharia-finance-transactions-troubling


ACCOUNTS PAYABLE AUTOMATION: The multitrillion-dollar accounts payable market is finally digitizing ---
https://www.businessinsider.com/the-accounts-payable-automation-report-2019-8


Repurchase Agreement --- https://en.wikipedia.org/wiki/Repurchase_agreement

The   Confusing Repo Market ---

https://mobile.twitter.com/NathanTankus/status/1174992669040422912


Earned Income Tax Credit --- https://en.wikipedia.org/wiki/Earned_income_tax_credit

. . .

The direct cost of the EITC to the U.S. federal government was about $56 billion in 2012. The IRS has estimated that between 21% and 25% of this cost ($11.6 to $13.6 billion) is due to EITC payments that were issued improperly to recipients who did not qualify for the EITC benefit that they received.[38] For the 2013 tax year the IRS paid an estimated $13.6 billion in bogus claims. In total the IRS has overpaid as much as $132.6 billion in EITC over the last ten years.[39] 
The direct fiscal cost of the EITC may be partially offset by two factors: any new taxes (such as payroll taxes paid by employers) generated by new workers drawn by the EITC into the labor force; and taxes generated on additional spending done by families receiving earned income tax credit. 
Some economists have noted that the EITC might conceivably cause reductions in entitlement spending that result from individuals being lifted out of poverty by their EITC benefit check. However, because the pre-tax income determines eligibility for most state and federal benefits, the EITC rarely changes a taxpayer's eligibility for state or federal aid benefits. 
In his book The Rise of Big Government: How Egalitarianism Conquered America, political economist Sven R Larson notes that when the EITC is combined with other welfare programs it can have substantial marginal-tax effects. By 2016 tax rates, for a family of four making $30,000, a $5,000 rise in income would result in a rise in the federal income tax and a reduction in EITC and other benefits equal to the marginal tax rate on an income of $467,000. 

The EITC and the Extensive Margin: A Reappraisal
by Henrik Kleven.  Princeton University and NBER---

https://www.henrikkleven.com/uploads/3/7/3/1/37310663/kleven_eitc_sep2019.pdf

This paper reconsiders the impact of the Earned Income Tax Credit (EITC) on labor supply at the extensive margin. I investigate every EITC reform at the state and federal level since the inception of the policy in 1975. Based on event studies comparing single women with and without children, or comparing single mothers with different numbers of children, I show that the only EITC reform associated with clear employment increases is the expansion enacted in 1993.

The employment increases in the mid-late nineties are verylarge, but they are influenced by the confounding effects of welfare reform and a booming macroeconomy. Based on different approaches that exploit variation in these confounders across household type, space and time, I show that the employment effects align closely with exposure to welfare reform and the business cycle. Single mothers who were unaffected by welfare reform (but eligible for the EITC) did not respond.

Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile. I highlight the presence of informational frictions, widely documented in the literature, as a natural explanation for the absence of extensive margin responses.

Jensen Comment
Possibly some of the reduced benefit of the EITC over the years is due to the simultaneous explosion of fraud in the program that like Medicare became a piñata for criminals.


Accounting for Skewed or One-Sided Measurement Error in the Dependent Variable

IZA Discussion Paper No. 12576
SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3449571

58 Pages Posted: 9 Sep 2019

Daniel Millimet

Southern Methodist University (SMU) - Department of Economics

Christopher Parmeter

University of Miami - School of Business Administration - Department of Economics

Abstract

While classical measurement error in the dependent variable in a linear regression framework results only in a loss of precision, non-classical measurement error can lead to estimates which are biased and inference which lacks power. Here, we consider a particular type of non-classical measurement error: skewed errors. Unfortunately, skewed measurement error is likely to be a relatively common feature of many outcomes of interest in political science research. This study highlights the bias that can result even from relatively "small" amounts of skewed measurement error, particularly if the measurement error is heteroskedastic. We also assess potential solutions to this problem, focusing on the stochastic frontier model and nonlinear least squares. Simulations and three replications highlight the importance of thinking carefully about skewed measurement error, as well as appropriate solutions.

Keywords: nonlinear least squares, stochastic frontier, measurement error

JEL Classification: C18, C51


One Anomaly to Explain Them All

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444342
62 Pages
Posted: 7 Sep 2019

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Terry Zhang

Australian National University (ANU)

Date Written: August 28, 2019

Abstract

We argue that conditional on the existence of momentum, many other asset pricing anomalies are not particularly anomalous. First, empirically, we show that portfolios within which conditional momentum strategies (ie buying winners and selling losers) are unprofitable, tend to have significantly higher unconditional average returns than portfolios within which momentum strategies are profitable. Second, we rationalize this in a standard model to which we add momentum; the intuition is that assets with more conditional trading opportunities are bid up by speculators and tend to have higher prices and lower unconditional returns. Third, we show that for many asset pricing anomalies, a momentum strategy tends to be unprofitable within the long leg, but profitable within the short leg. Thus, according to our model, the long leg should earn higher unconditional average returns, which explains the anomaly. Once accounting for this effect, the average Fama French 3 factor alpha across 36 prominent anomalies falls by up to 47%. Finally, we show that although the CAPM beta is negatively related to the average unconditional return of a large set of portfolios, it is strongly positively related to the average conditional return of the same set of portfolios, which helps explain the apparent empirical failure of the CAPM.


The Impact of Auditors’ Use of Industry Norms on Management Evaluations of Audit Quality

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3428596
39 Pages
Posted: 7 Sep 2019

Erik S. Boyle

University of Cincinnati

Date Written: July 29, 2019

Abstract

Interactions between auditors and client management affect audit quality on an engagement because those interactions influence and incentivize auditor behavior and decision-making. I investigate whether an auditor’s use of professional judgment or industry norms to justify proposed adjustments increases client management’s evaluation of the quality of audit work. I find evidence that, although management views industry norms to be a more credible justification method, management disregards the justification method and evaluates audit quality based on underlying accounting attributes when their client reports under an accounting standard that is more precise (i.e., more rules-based). However, when an accounting standard is less precise (i.e., more principles-based), an auditor’s use of industry norms positively influences management perceptions of audit quality. Thus, when standards are less precise, auditors may be incentivized to engage in herding behavior by defaulting to the use of industry norms when determining appropriate accounting treatment for client transactions. This study makes important contributions toward a more complete understanding of the incentives and motivations faced by auditors relative to their interactions with client management and provides insights to regulators about the impact of the level of precision in accounting standards.

Keywords: Management perceptions of audit quality, Industry norms, Auditor incentives, Principles-based vs. rules-based accounting frameworks

JEL Classification: M40, M42


Accountant as Digital Innovator: Roles and Competencies in the Age of Automation


SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3449720
34 Pages
Posted: 7 Sep 2019

Julia Kokina

Babson College

Ruth Gilleran

Babson College

Shay Blanchette

Babson College

Donna Stoddard

Babson College

Date Written: September 7, 2019

Abstract

In this paper we explore how Robotic Process Automation (RPA) is changing the work of accountants, identify the roles that accountants will play in their organizations’ digital transformations, and categorize the skills and competencies that accountants will need to develop in order to successfully work alongside their digital colleagues. We employ a multiple case study methodology and collect interview data from eight organizations undergoing RPA implementation for their accounting and finance tasks. Our analysis reveals that accountants play important roles as identifiers, explainers, trainers, sustainers, and analyzers of their organizations’ automation initiatives. To prepare to undertake these five roles, accountants will need to acquire new technical skills. Therefore, the paper concludes with a mapping of the skills needed for each role that the accountant is expected to play in RPA implementations.

Keywords: robotic process automation; software robots, digital workforce; accounting automation; accounting innovation; accounting digitalization; robotics; digital competencies


Machine Valuation

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3447683
56 Pages
Posted: 7 Sep 2019

Paul Geertsema

University of Auckland - Department of Accounting and Finance

Helen Lu

University of Auckland - Department of Accounting and Finance

Date Written: September 4, 2019

Abstract

We present a machine learning approach to firm valuation that requires only historical accounting data as input. The machine learning model generates a median absolute percentage error of 17.2% in out-of-sample firm value predictions. The model out-performs a sample of final-year finance students (41.3%) and individual analyst forecasts of one-year-ahead firm value (22.4%). We show that subsequent market valuations move towards the model valuation, generating return predictability over horizons of up to five years.

Keywords: valuation; asset pricing; return predictability; machine learning; gradient boosted trees

JEL Classification: G12; G14; C38


Supply and Demand of Information for Firm Valuation

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3445446
29 Pages
Posted: 6 Sep 2019

Zane L. Swanson

University of Central Oklahoma

Date Written: August 2019

Abstract

The concept that accounting represents the information economics of the firm is a premise for the allocation of scarce resources. The analysis starts with a clean surplus model as a basis for the conceptual framework. Then theoretical firm information economic supply-and-demand features are incorporated within a path diagram. This framework is investigated empirically with simultaneous regression equations and a structural equation model (SEM). Equations have explanatory power. And, a latent variable measure of internally generated intangible assets positively and significantly affects net income. Thus, the study expands the research frontier for SEM financial accounting research.

Keywords: Information Economics, SEM, Intangible Assets


Perceptions of Robotic Process Automation in Public Accounting

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3445005
34 Pages
Posted: 5 Sep 2019

Lauren Cooper

West Virginia University

Kip Holderness

West Virginia University

Trevor Sorensen

West Virginia University - Department of Accounting and Management Information Systems

David A. Wood

Brigham Young University - School of Accountancy

Date Written: August 29, 2019

Abstract

We examine how the adoption and use of Robotic Process Automation (RPA) is affecting the work experience of employees in the public accounting industry. Specifically, we compare how top and bottom-level employees perceive RPA. To do so, we interview 14 RPA leaders and survey 139 lower-level employees from Big 4 accounting firms. Unlike other situations where an expectation gap exists between executives and lower-level employees, we find that the two groups generally agree that RPA is having a positive influence on the profession. Specifically, both groups believe that RPA is positively changing the work employees perform and improves employee career prospects. However, while firm leaders believe RPA will improve work satisfaction, lower-level employees report no such improvements. These insights will assist the profession as it increases the use of RPA and provide direction for future research studies examining related issues.


Audit Retendering and Mandatory Auditor Rotation

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444676
62 Pages
Posted: 5 Sep 2019

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Jing Li

The University of Hong Kong - Faculty of Business and Economics

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: August 29, 2019

Abstract

Building on an auction model, we examine the economic consequences of audit retendering, under which the incumbent auditor in auction possesses both an information advantage and knowledge advantage over outside auditors. Audit retendering allows the firm to retain the incumbent auditor with positive probability, but expect to pay information rent to the incumbent auditor due to his information advantage over outside auditors. In equilibrium, auditor switching (or no switching) under audit retendering conveys additional information to investors, and therefore the informativeness of the audit report under audit retendering is always greater than that under mandatory auditor rotation. We identify conditions under which client firms may benefit from audit retendering. Our findings shed light on the recent European Union Audit Reform, which adopts audit retendering as an alternative to auditor rotation, and have implications to the Public Company Accounting Oversight Board, which are evaluating the proposed mandatory auditor rotation.

Keywords: Audit Retendering; Auditor Rotation; Audit Fee; Audit Quality; EU Audit Reform


Trust and Disclosure Transparency in Financial Reporting of Government Agencies

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444477
60 Pages
Posted: 5 Sep 2019

Kristian D. Allee

University of Arkansas - Department of Accounting

Bok Baik

Seoul National University

Seung-Youb Han

Seoul National University

Bong Hwan Kim

Seoul National University - Graduate School of Public Administration

Date Written: August 28, 2019

Abstract

This study examines the impact of trust on disclosure transparency in financial reporting of government agencies. Using unique data from Korean central government agencies for the period of 2011-2015, we provide evidence that trust enhances government agencies’ financial disclosure transparency. Specifically, we document that high-trust agencies are more likely to classify their accounting errors as material and recognize these errors (as a separate line item) in financial statements. This contrasts with the practice of low-trust agencies that classify similar-magnitude accounting errors as immaterial, obfuscating the information from potential scrutiny. We further find that high-trust (low-trust) agencies tend to provide more disaggregated (aggregated) service cost information. In cross-sectional analyses, we find that the impact of trust on both disclosure of accounting errors and disaggregation of service cost information is amplified when agencies have an outsider head, are more decentralized, and face higher parliamentary inspection pressures, the situations in which more information coordination is required. Taken together, our findings suggest that trust contributes to higher disclosure transparency of government financial reporting by facilitating active information production and dissemination within an organization.

Keywords: Government Accounting, Trust, Culture, Transparency, Accounting errors, Disaggregation


EVA Approach versus BCG Approach: Evidence from Tehran Stock Exchange (TSE)

Archives Des Sciences Vol 65, No. 9; Sep 2012

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444030
14 Pages
Posted: 5 Sep 2019

Nahid Maleki Nia

Department of accounting and management, Bilesavar branch, Islamic Azad University, Bilesavar, Iran

Hosein Asgari Alouj

Islamic Azad University (IAU) - Bilesavar branch

Ayyoub Sarafraz Pireivatlou

Islamic Azad University (IAU) - Bilesavar branch

Date Written: September 1, 2012

Abstract

Financial performance measurement of companies in decision-making process is one of the most important subjects in financial and economic scope regarding development and importance of market role. Economic value added (EVA), refined economic value added (REVA), market value added (MVA) as EVA-based measures, also Cash Value Added(CVA) and Cash Flow Return on Investments(CFROI) as BCG-based measures and traditional performance measures(ROI,ROE and EPS) are among the most important criteria of financial performance measurement. The most important purpose of the present research is to make clear the theoretical indices of financial performance measurement, test the relationship between these indices with intrinsic value of firm and offer necessary evidences using simple and multivariate regression and compared by rank order of adjusted R2 in order to get appropriate performance measurement and to help the Iranian capital market participants to make rational decision in investment process. Finding shows although the contributions of measures are statistically significant separately, all are not economically significant when combined into the various measures, also explains traditional accounting measures are not able outperform VBM indicators and the EVA-based measures are able to outperform the BCG -based measures.

Keywords: Cost of Capital, EVA-based measures, BCG-based measures, market value of the firm, traditional accounting performance measures


The Information Content of Real Operating Performance Measures

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3443979
50 Pages
Posted: 4 Sep 2019

Paul Borochin

University of Miami

Date Written: August 28, 2019

Abstract

I use daily flight delay data for all publicly held domestic airlines to measure the effect of high frequency operating performance updates on price and accounting outcomes. Airline performance is priced in the cross-section of cumulative market- and industry-adjusted returns, with significant drift. Quarterly aggregates of performance predict post-earnings announcement drift. The sensitivity of individual airline operations to those of the entire industry, measured using a beta approach, carries a negative premium consistent with systemic operating risk being a liability rather than a positively priced risk factor with implications for the accounting beta literature. Return on sales reflects the quarter's real operating performance better than other common ROA measures, contributing to the measure selection literature.

Keywords: Market efficiency, operating performance measures, return predictability

JEL Classification: G12, G14, M41


The Traditional Rationale of the Arm's Length Approach to Transfer Pricing – Should the Separate Accounting Model Be Maintained for Modern Multinational Entities?

(2004) 7(2) Journal of Australian Taxation 196-250

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442030
55 Pages
Posted: 4 Sep 2019

Kerrie Sadiq

Queensland University of Technology - School of Accountancy

Date Written: September 1, 2004

Abstract

This article examines the current transfer pricing regime to consider whether it is a sound model to be applied to modern multinational entities. The arm’s length price methodology is examined to enable a discussion of the arguments in favour of such a regime. The article then refutes these arguments concluding that, contrary to the very reason multinational entities exist, applying arm’s length rules involves a legal fiction of imagining transactions between unrelated parties. Multinational entities exist to operate in a way that independent entities would not, which the arm’s length rules fail to take into account. As such, there is clearly an air of artificiality in applying the arm’s length standard. To demonstrate this artificiality with respect to modern multinational entities, multinational banks are used as an example. The article concludes that the separate entity paradigm adopted by the traditional transfer pricing regime is incongruous with the economic theory of modern multinational enterprises.


A Content Based Assessment of the Relative Quality of Leading Accounting Journals

 

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438405
34 Pages
Posted: 3 Sep 2019

William M. Cready

University of Texas at Dallas - Naveen Jindal School of Management

Bo Liu

Susquehanna University - School of Business

Di Wang

University of Texas at Dallas, Naveen Jindal School of Management, Students

Date Written: August 14, 2019

Abstract

This analysis advances faithful representation of statistical evidence as a substantive basis for assessing accounting journal research quality. The analysis builds upon recent work by Cready et al. (2019) indicating that accounting research articles commonly misrepresent null outcomes in their abstracts. Our analysis exploits this reporting deficiency to objectively assess journal reporting quality. The analysis determines misrepresentation rates for five leading general interest academic accounting journals based on direct review of article abstract contents. While all five of these journals commonly publish articles with containing such misrepresentations, the relative frequencies with which they do so differ considerably among them. Moreover, the resulting rankings vary from those commonly reported in existent accounting journal quality and impact assessments. The analysis also finds that financial and archival studies are less prone to statistical evidence misrepresentation while audit and experimental studies are more prone to engaging in such misrepresentation.

 

 

Keywords: Representational Faithfulness, Accounting Quality


Do Financially Distressed Firms Engage in Earnings Management? The Role of IFRS Mandatory Adoption in Emerging Markets

38 Pages Posted: 29 Aug 2019 Last revised: 1 Sep 2019

Dante Viana Junior

ISCTE-IUL University Institute of Lisbon

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442782
Date Written: August 26, 2019

Abstract

This study analyzes the role of IFRS mandatory adoption in emerging markets on the association between financially distressed firms and earnings management. Based on an international sample of firms from 15 emerging markets, I predict and find that financially distressed firms engage more in earnings management than non-financially distressed firms, and that IFRS mandatory adoption moderate this association in order to reduce earnings management by financially distressed firms in post-IFRS period. The findings are robust to several earnings management and financial distress measures. Overall, this paper contributes to previous literature shedding light to a controversial subject (firm’s financial distress and earnings management), in a particular setting (emerging markets) regarding one of the most important issues to international accounting research (IFRS adoption) for both practitioners and academics.

Keywords: Financial distress, Earnings management, IFRS, Emerging markets

JEL Classification: M41, G33, G15, K42


The Differential Impact of IFRS Adoption on Aspects of Seasoned Equity Offerings in the UK and France

Accounting in Europe, Vol. 16, No. 1, 2019.

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442238
Posted: 24 Aug 2019
Last revised: 26 Aug 2019

Mostafa Harakeh

Lebanese American University

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: October 31, 2018

Abstract

We examine the potential for IFRS to influence the market for SEOs in the UK and France. The divergence between the UK domestic accounting standards and IFRS is minor (low-divergence firms) whereas domestic accounting standards in France differ materially from IFRS (high-divergence firms); however, both countries have similar legal enforcement and institutional settings that might confound the effect of IFRS adoption. We argue that IFRS adoption serves to mitigate information asymmetry and improve accounting quality. Accordingly, we find that, following IFRS adoption, earnings management activities decrease among high-divergence firms prior to issuing SEOs. As a result of the lower levels of earnings management and information asymmetry, we predict and find that the market reaction to issuing SEOs improves significantly for high-divergence firms following IFRS. Given that equity financing becomes less costly, we find that the propensity to issue new SEOs increases among high-divergence firms after IFRS adoption. We find no similar changes among low-divergence firms. The results persist after running a matched-sample analysis and controlling for potential self-selection bias.

Keywords: IFRS, Information Asymmetry, Earnings Management, Seasoned Equity Offerings, Equity Financing

JEL Classification: G30, M40


The Effect of U.S. Audit Partner Identification on Real Earnings Management

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3448800
28 Pages
Posted: 14 Sep 2019

Lawrence Abbott

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

William L. Buslepp

Louisiana State University, Baton Rouge - Department of Accounting

Katherine Gunny

University of Colorado at Denver

Aaron Mandell

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Date Written: September 5, 2019

Abstract

After a lengthy and protracted debate, the Public Company Accounting Oversight Board (PCAOB) adopted Rule 3211 (commonly referred to as “Form AP”) and related amendments to its auditing standards regarding the identification of audit engagement partner and other accounting firms who take part in a public company audit (PCAOB 2015). The rules require disclosure of the engagement partner’s name and information about other accounting firms on the new PCAOB Form AP, Auditor Reporting of Certain Audit Participants. The PCAOB argued that disclosing audit partner identity would create greater accountability among audit partners, thereby increasing audit quality. Public accounting firms, most notably Big Four audit firms, voiced their dissent to the regulation, expressing doubt about incremental accountability and citing concerns about incremental, partner-specific legal liability. Extant, outcome-based, archival research using accruals as a proxy for audit quality to examine the effect of Rule 3211 on audit quality has produced decidedly mixed evidence. Our paper examines this issue from a different perspective. We examine whether Rule 3211 engendered differential audit partner accruals-based audit behavior, which would, in turn, impact client real earnings management. We find that real earnings management increased in the post-3211 regulatory environment. Our evidence speaks to the effects and unintended consequences of Rule 3211.

Keywords: audit partner identification, auditor reporting, real earnings management

JEL Classification: M41, M42, M48


How Will Blockchain Technology Impact Auditing and Accounting? Permissionless Vs. Permissioned Blockchain

Liu, M., Wu, K., & Xu, J. (2019). How Will Blockchain Technology Impact Auditing and Accounting: Permissionless Vs. Permissioned Blockchain. Current Issues in Auditing.

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3448058
18 Pages
Posted: 12 Sep 2019

Manlu Liu

Rochester Institute of Technology (RIT) - Saunders College of Business

Kean Wu

Rochester Institute of Technology

Jennifer Xu

Bentley University

Date Written: July 8, 2019

Abstract

Blockchain offers a drastically new way to record, process, and store financial transactions and information, and has the potential to fundamentally change the landscape of the accounting profession and reshape the business ecosystem. In this article, we introduce two types (i.e. permissionless and permissioned) of blockchain and layout their technological features. We further discuss implication of blockchain to auditing and elaborate opportunities and challenges of two types of blockchain to auditors. We conclude by making specific recommendations for auditors to adapt, adjust, and elevate themselves to the role of strategic partners in blockchain implementation.

Keywords: permissionless blockchain, permissioned blockchain, internal control, auditing, accounting

JEL Classification: M15, M41, M42, O14, O33, O55


ThinkTWENTY20 (Summer 2019 Issue) from Gerald Trites (think Zorba) --- http://www.thinktwenty20.com/
This new magazine has a subscription fee (think about ordering for your campus library and assigning some of the articles in courses
I like Jerry's intent here of helping to close the gap between academe and practice in a time of great changes taking place
(think about submitting an article to Jerry)

TABLE OF CONTENTS

Editorial..........................................................................................................................Pg 1
Think yltnereffiD

Making Auditing Standards Fit-for-Purpose in a High-Tech World

By Gregory Shields, CPA.............................................................................................Pg 2

Auditing standards urgently need to change, both to reflect that the vast

majority of entities being audited already make significant use of technology

in preparing their financial statements and to strongly promote the use of

automated audit procedures, including data analytics.

Jensen Comment
This article makes a case for changing how accounting standards are set

 

Enhancing Relevance: Shaping the Future of Corporate Reporting

By Alan Willis, FCPA, FCA...........................................................................................Pg 11

While financial statements are an important component of corporate reporting,

they cannot alone provide the wider spectrum of relevant information necessary

either for investor or other stakeholder assessment of enterprise performance in

today’s business environment.

Jensen Comment
This article discusses various supplementary reporting alternatives when financial statements alone are not enough.

 

Data Privacy and Confidentiality

An Ethical Primer for Professional Accountants in Business and Private Practice

By Eric E. Cohen, CPA..................................................................................................Pg 24

What impact might emerging accounting and audit technologies have on a

practitioner’s ethical responsibilities for data confidentiality and privacy?

Quote
There’s a joke going around: “My wife asked me why I was speaking so softly at home. I told her I was afraid Mark Zuckerberg1 was listening. She laughed. I laughed. Alexa laughed. Siri laughed.”

 

How to Succeed in Business in a Disruptive World

By Gundi Jeffrey, Managing Editor, ThinkTWENTY20..........................................Pg 32

There are ten major political, social, environmental and technological

transformations that will have profound implications for Canada’s

business community and those who serve it. Although challenging,

they also offer new opportunities for those willing to seize the day.

Quote
According to Canada 2030: The Defining Forces Disrupting Business, there are 10 major forces that will shape our collective future, presenting both challenges and opportunities.

 

Advanced Technologies in Financial Accounting

By Gerald Trites, FCA, FCPA, CISA............................................................................Pg 40

The use of the Internet of Things in business is not new. What has changed is the

scope, sophistication and sheer volume of data produced by these applications

and the huge extent to which the IoT has been adopted by business.

Jensen Comment
A nice summary of new technologies that will shape the future of accounting in general

 

 

Book Review of Meltdown - Why Our Systems Fail and What We Can Do

About It, by Chris Clearfield and Andras Tilcsik (Penguin Books, 2019).

By Jonathan Andrews, CPA........................................................................................Pg 46

Meltdown is both entertaining and instructive, particularly for those with an

interest in risk and risk mitigation.

 

 

Think yltnereffiD

Gerald Trites, Editor in Chief

Keeping up with change is something we all have to do. The times, after all, are changing. This is

not new. Fifty or sixty years ago, the profession talked about change being the new constant –

and how we needed to adapt to it.

In recent years, the pace of change has sped up, largely because of technology, but also

because of changing social customs and mores. Virtually all aspects of our professional and

private lives have been affected, and keeping up with the changes is a challenge.

We focus on the impact of change in this magazine. But we recognize that the pace of change

calls for new solutions to the way we work and live. The old ways of finding solutions no longer

work.

 

All of the authors in this issue illustrate how to think differently.

Gregory Shields points out that audit standards are falling short of the ever-changing needs of

society. Although important work is being done by groups like the Audit Data AnalytIcs group,

to understand the growing volumes of data available to auditors and how they can go about

using it to enhance their work, there seems to be a reluctance within the profession to update

the standards to keep up. They say the old analytics will work. But they need to think differently

about data analytics.

 

Similarly, Allan Willis points to the need for corporate reporting to extend beyond financial

reporting, in particular the need for more effective reporting to recognize the growing impact

of environmental concerns on corporate well-being. Companies have been providing

environmental information for years, but they need to think differently.

 

And Eric Cohen shows how rules around data privacy and confidentiality need to be updated to

reflect the new challenges of the age of technology. Privacy and confidentiality have been

concerns for centuries, but now we need to think differently about them.

 

Audit standards, reporting standards, data privacy and confidentiality – all are fundamental to

the accounting profession. All are areas in which a failure to keep pace with the changing

demands of society could be fatal. Different ways of thinking are needed.


EY:  A Closer Look at Asset Acquisitions ---
https://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_07403-191US_AssetAcquisitions_26September2019/$FILE/TechnicalLine_07403-191US_AssetAcquisitions_26September2019.pdf

EY:  2019 Financial Reporting Briefs ---
https://www.ey.com/Publication/vwLUAssetsAL/FinancialReportingBriefs_06873-191US_12September2019/$FILE/FinancialReportingBriefs_06873-191US_12September2019.pdf

EY:  How the new revenue recognition standard affects automotive entities ---
https://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_04050-171US_RevRec_Auto_5September2019/$FILE/TechnicalLine_04050-171US_RevRec_Auto_5September2019.pdf




From the CFO Journal's Morning Ledger on September 26 2019

The U.S. Federal Trade Commission has sued online-dating service Match Group for allegedly using fake love-interest advertisements to trick hundreds of thousands of users into buying subscriptions on Match.com.

Jensen Comment
This reminds me a bit about the exuberant product reviews on Amazon. I sometimes read them for reasons given, but I also consider most of them written by friends and family if they give the product a lot of stars. On the other hand, those reviews giving only one or two stars can be revealing, but beware that these might be written by competitors. I buy a lot of things on Amazon, and my anecdotal experience is that the product reviews are usually right on except for book reviews.

I wonder if any of those Match Group love-interest advertisements admit such things as "I'm bipolar and chronically depressed," "I'm mainly interested in a sugar daddy who's about to croak," or "I want to sell our pictures to porn companies."

I've never had any experience with online dating, but several friends told me it's a lot like looking online for used cars without any warranty contracts. I did attend a wedding some years back where the son (in the Navy) of a close friend met his bride on Craigslist, and what a wonderful marriage that became.


From the CFO Journal's Morning Ledger on September 25 2019

Google and Starbucks scored legal victories against European Union regulators Tuesday, in court rulings that restrict the reach of the bloc’s privacy orders and deal a blow to its competition czar as she prepares to expand her regulatory powers.

The European Court of Justice ruled that Google doesn’t generally have to apply the EU’s “right to be forgotten” to versions of its search engine accessed outside the bloc’s borders, though judges left the door open for European regulators to order it to do so in specific cases. 

Starbucks won an appeal against an order handed down in 2015 by EU Competition Commissioner Margrethe Vestager that had required the coffee giant to pay Dutch authorities €25.7 million ($28.27 million) in allegedly unpaid taxes.


From the CFO Journal's Morning Ledger on September 25 2019

Comscore Inc. and its former chief executive settled charges with the U.S. Securities and Exchange Commission that claim they inflated the analytics company’s revenue  by about $50 million over a two-year period.

The SEC said that Comscore overstated revenue through entering into nonmonetary deals and that Comscore and Serge Matta, its former CEO, “made false and misleading public disclosures.” The activity took place from February 2014 through February 2016.

Comscore, the internet’s traffic judge, settles fraud charges for $5 million ---
https://www.theverge.com/2019/9/24/20882240/comscore-sec-serge-matta-financial-fraud-charges-settlement

Comscore, the influential analytics firm that measures web traffic, has been formally accused of falsely reporting its own revenue and customer numbers. The US Securities and Exchange Commission (SEC) charged Comscore and its former CEO Serge Matta with fraud today. Matta and Comscore agreed to settle the case for a total of $5.7 million without admitting wrongdoing.

The SEC writes that between 2014 and 2016, Comscore padded its public revenue filings with an extra $50 million by misreporting the value of data-swapping contracts with other companies. It also allegedly misreported its customer numbers and growth percentages, giving the impression that new signups and revenue growth were increasing when the opposite was actually true.

As part of the settlement, Comscore and Matta will respectively pay penalties of $5 million and $700,000. Matta will also repay $2.1 million to Comscore and be banned from serving as an officer or director of a public company for 10 years.

This is a major step in a long-running controversy. The Wall Street Journal first reported on Comscore’s sketchy accounting (The majority of comScore’s second-quarter revenue growth came from “nonmonetary” transactions with no cash attached) in late 2015, noting that its bartering system “warrants scrutiny.” Comscore began an audit in 2016 — leading to years of instability as it corrected the false numbers, including a temporary delisting from Nasdaq. A March 2018 filing revealed that it was cooperating with the SEC on an investigation. Earlier this year, the company’s CEO Bryan Wiener and president Sarah Hofstetter both resigned due to “irreconcilable differences.” Matta left the company in 2016.

Despite these problems, Comscore is one of the core companies responsible for measuring success online — similar to Nielsen ratings for television.

 


PwC Fined $7.9 Million By the SEC for Making Pretty Dumb and Obvious Independence Violations ---
https://goingconcern.com/pwc-fined-7-9-million-by-the-sec-for-making-pretty-dumb-and-obvious-independence-violations/

 


From the CFO Journal's Morning Ledger on September 24 2019

Good morning. Nissan and its former chairman, Carlos Ghosn, have settled civil charges with the U.S. Securities and Exchange Commission stemming from an investigation into pay disclosures. Nissan agreed to pay a $15 million civil penalty to settle charges that it and Mr. Ghosn filed false financial disclosures that omitted more than $140 million slated to be paid to Mr. Ghosn in retirement, the SEC said. 

Mr. Ghosn agreed to a $1 million civil penalty and a 10-year prohibition from serving as an officer or director for a company that files financial statements with the SEC. “Simply put, Nissan’s disclosures about Ghosn’s compensation were false,” said Steven Peikin, co-director of the SEC’s division of enforcement, in a statement. “Through these disclosures, Nissan advanced Ghosn and Kelly’s deceptions and misled investors, including U.S. investors.”

In a separate settlement, PricewaterhouseCoopers is preparing to pay about $8 million to settle claims of improper professional conduct and violating auditor independence rules, the SEC said Monday. 

The regulator said it also charged Brandon Sprankle, a partner at the Big Four audit firm, for causing the firm to violate independence rules. The allegations of improper conduct were in connection to a total of 19 engagements with 15 unidentified companies over a three-year period ending in 2016, CFO Journal's Mark Maurer reports.

The activity violated a rule issued by the Public Company Accounting Oversight Board—which regulates U.S. audit firms and is overseen by the SEC—which required the firm obtain preapproval from an audit client’s audit committee to perform nonaudit services related to internal controls over financial reporting.


From the CFO Journal's Morning Ledger on September 23 2019

Mortgage-finance companies Fannie Mae and Freddie Mac are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department.


From the CFO Journal's Morning Ledger on September 23 2019

A new Congressional bill proposes to offer cash bounties to people who voluntarily provide original information on potential audit-related violations to the U.S. regulator of audit firms. The bill, called “PCAOB Whistleblower Protection Act of 2019,” proposes to establish a whistleblower program at the Public Company Accounting Oversight Board that will be similar to the whistleblower program at the U.S. Securities and Exchange Commission.

The proposed PCAOB whistleblower program would have a similar structure to the one at the SEC. A tipster, or joint tipsters, who have original information on potential violations of rules related to how public companies prepare and issue audit reports and the responsibilities of the auditors could receive a monetary reward for their information. 

Under the proposed rules, a tipster is entitled to between 10% and 30% of the monetary penalties when their tips result in a disciplinary proceeding by PCAOB and when the monetary penalties are more than $250,000, according to the bill.


From the CFO Journal's Morning Ledger on September 20 2019

Good morning. The Securities and Exchange Commission doesn’t mind when companies go public using a cheaper “direct listing” on exchanges instead of a traditional offering, where investment banks underwrite the deal, the agency’s chairman said.

“If a direct listing is providing the same kind of fair information and fair access to the market as your more traditional underwritten IPO, who are we to judge if one is better than the other?” Chairman Jay Clayton said at a CNBC conference.

The SEC was initially concerned in 2017 that direct listings could open the door for riskier and less-seasoned companies to access public investors, without giving them as much information or providing some safeguards. In an IPO, investment banks perform a gatekeeping function in which they are responsible for due diligence on the company selling shares. Banks also help stabilize prices on the first day of trading by intervening to buy shares.

Companies such as Slack Technologies Inc. and Spotify Technology SA have listed existing shares directly on U.S. stock exchanges. The direct pathway saves tens of millions of dollars in investment-banking fees, while still giving employees and early investors a chance to cash out.

Direct listings are one consequence of the growth of private capital markets, in which younger companies get most of the money they need from venture capitalists and institutional investors. Many of these companies have deferred public offerings until they need a way to sell stock to the broader public and enable insiders and early investors to cash out.


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

Audit Partner ID Rule Doesn’t Improve Audits, Researchers Say

A rule requiring public companies to identify an individual audit partner in financial reporting has had little impact on audit quality, CFO Journal reports, citing new research. 

The Public Company Accounting Oversight Board in 2017 began requiring U.S. public companies to disclose the names of individuals overseeing independent audits—so-called audit engagement partners—in an effort to promote accountability and transparency. Companies have since named the lead audit engagement partner on a form that must be filed within 35 days of the annual report.

The rule was divisive when it was proposed. Public accounting firms argued it would likely increase individual partners’ legal exposure and audit costs without improving the quality of an audit. 


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

SEC Charges Former CEO for Alleged Misstatements About Existence of CFO

The Securities and Exchange Commission charged the former chief executive of oil-and-gas production company Viking Energy Group Inc. with fraud for allegedly falsifying the existence of its previous finance chief.  Tom Simeo was charged with violating the antifraud provisions of securities laws, the regulator said Tuesday.

For at least an 18-month period ending in May 2016, the company made materially misleading disclosures in public filings indicating Guangfang “Cecile” Yang served as its CFO and had signed off on its internal controls and financial statements, the SEC alleged. Mr. Simeo repeatedly attached Ms. Yang’s purported signature to the company’s periodic reports, according to the SEC. The agency said it found no evidence Ms. Yang performed any activities as CFO until her purported resignation in July 2016. The company’s auditors had never communicated with her, the SEC said.

The SEC said it is seeking civil fines and a bar from Mr. Simeo serving as a public-company officer or director. A message seeking a comment from Mr. Simeo wasn’t immediately returned. A representative for Viking didn’t immediately respond to a request for comment.


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

Good day. Companies preparing for a new auditing rule are unearthing knotty internal issues, and these revelations are prompting executives to strengthen internal controls, CFO Journal’s Mark Maurer reports.

The Public Company Accounting Oversight Board rule, which began taking effect in phases this summer, requires independent auditors to disclose what they found to be the most challenging in reviewing companies’ financial statements.

The auditor’s letter in a company’s annual report has long followed a pass/fail model and has been known to rely on boilerplate language. The pass/fail model remains, but the now-expanded auditor’s report is more tailored, giving investors a window into issues that may not have been previously apparent. The PCAOB, which regulates U.S. audit firms, uses the term “critical audit matters,” or CAMs, to classify issues highlighted through the application of the new standard.

Forty-three percent of employees at large companies said audit committees identified additional types of controls requiring implementation during a practice run, while 19% of employees said their companies are still considering controls, according to a survey from compliance data company Intelligize Inc., which polled about 170 employees at U.S. public companies.


From the CFO Journal's Morning Ledger on September 16, 2019

Good morning. General Motors Co. stands to lose as much as $100 million a day if the nationwide strike of auto workers continues. Auto-industry analysts estimate the walkout—which began Monday and involves roughly 46,000 full-time workers in more than 30 factories across 10 states—could dent GM’s profit by between $50 million and $100 million daily. Stalled production could slash more than a tenth of GM’s expected third-quarter operating profit of about $3.5 billion by the weekend, although GM could make up some lost production once the workers return, analysts say.

The strike presents a challenge for the company’s leadership team under Chief Executive Mary Barra and Chief Financial Officer Dhivya Suryadevara as they face calls from investors to cut costs amid declining sales in the U.S. and important overseas markets such as China, says Stephen Brown, a senior director at Fitch Ratings leading the firm’s coverage of the North American auto industry. GM’s last U.S. strike took place in 2007, meaning that today’s leaders only have limited experience managing such a situation, Mr. Brown tells CFO Journal’s Nina Trentmann. “This doesn’t happen very frequently, and each time it creates unique challenges for management.”

A prolonged walkout can take a toll on car companies because they book revenue only when a vehicle is shipped to a dealership. An assembly-plant shutdown can cost an auto maker an estimated $1.3 million every hour, according to the Center for Automotive Research in Ann Arbor, Mich. GM’s management is expected to try to offset some of the financial fallout by operating additional and longer shifts, Mr. Brown said. “There are ways to regain lost volume,” he said.

The U.S. business is GM’s most profitable, but the strike comes at a delicate time for both the nation’s largest auto maker and the United Auto Workers union. Executives at other U.S. car makers, including at Fiat Chrysler Automobiles NV and Ford Motor Co. will be paying close attention to how GM manages the situation, as they also are negotiating new contracts with the UAW, Fitch’s Mr. Brown said. “Each contract is unique, but there will be the same broad terms across all three automakers,” he said.

Jensen Comment
I question the $100 million a day figure. GM dealers are clearing out inventories and will be placing larger orders when the strike is over. Of course there are going to be huge losses, but accounting numbers should always be viewed skeptically. The union has a lot at stake here, because any concessions gained from GM will likely be gained from other auto manufacturers with having to strike. There will most certainly be spillover benefits to workers outside the UAW.  Consumers ultimately pay the price all up and down the line.

In any case the price of cars is probably going up at a time when the price of fuel is dramatically rising due to recent escalation of the war between Iran and Saudi Arabia. The GM losses due the recent UAW strike are difficult to separate out from losses (possibly longer-term losses) due to fuel price increases. Fewer miles put on a vehicle each year often translates for keeping the vehicle longer before replacing it. This makes GM sad.

The timing of the bombings in Saudi Arabia could not have been worse for auto companies, auto workers, labor unions, and suppliers of the materials purchased by auto manufacturers. Higher fuel prices mean lower GM profits for the UAW to tap into for higher wages. Life is very complicated.


From the CFO Journal's Morning Ledger on September 16, 2019

Purdue Pharma LP filed for bankruptcy protection Sunday night with a partial deal aimed at resolving thousands of lawsuits filed by states and local municipalities accusing it of fueling the opioid crisis.

The filing, made in federal bankruptcy court in White Plains, N.Y., marks a remarkable downfall for the closely held company started more than five decades ago in New York by three physician brothers. After it launched the prescription opioid OxyContin in the 1990s, Purdue became one of the most recognizable names in treating pain, a characteristic that later helped make it a target for blame for the opioid crisis.

Purdue faces lawsuits from virtually every state, as well as some 2,600 cities, counties, Native American tribes, hospitals and others seeking to recoup costs incurred from opioid addiction. The U.S. Justice Department also has civil and criminal probes into the company.


From the CFO Journal's Morning Ledger on September 16, 2019

Good morning. Companies relying on oil and other natural resources are set to closely monitor developments in Saudi Arabia, where a missile attack knocked out about half of the country’s oil production, sending oil prices sharply higher.

In the near term, many analysts expect the biggest effects to be felt in Asia, estimating that China, Japan, India, Korea and Taiwan account for about four million barrels a day of consumption of crude from Saudi Arabia. “The oil price could move up $5 to $10 a barrel if it turns out the damage is extensive,” said Andy Lipow, president of Houston-based consulting firm Lipow Oil Associates.

While the attack may not lead to long-term outages—Saudi Arabia is working on restoring its production—it could rekindle market angst about the power of geopolitical risks and the potential fallout of future attacks if tensions between Saudi Arabia and its regional rivals continue to escalate. A loss of 5% of global capacity for several months could cause crude prices to double without emergency steps such the release of stockpiled crude in the U.S., said Ed Hirs, a natural-resources fellow for accounting and advisory firm BDO USA LLP.

The Saudi oil-field attack adds a new factor to consider for U.S. Federal Reserve officials, who have been weighing how a variety of geopolitical risks will influence the economic outlook, including the U.S.-China trade war, unrest in Hong Kong and Britain’s impending departure from the European Union. The risks of a chill over business investment and the global growth slowdown are big reasons officials cut their benchmark rate in July and are on track to do so again this week.


Charlie's Been a Bad Boy
From the CFO Journal's Morning Ledger on September 12, 2019

StarKist Co. has been ordered to pay a $100 million criminal penalty for its role in conspiring to fix prices for canned tuna sold in the U.S.


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

Deloitte’s Global Revenue Grows, but Segments Slow, in 2019

Deloitte Touche Tohmatsu reported global revenue of $46.2 billion for fiscal 2019, up 6.9% from the previous fiscal year. Revenue during the year ended May 31 rose 9.4% in local-currency terms, which is how major accounting firms prefer to measure their growth.

Despite the boost in total revenue, the company’s five core businesses saw slowing or no growth year over year. The audit division’s revenue stayed flat at $10.2 billion, following an 8.5% increase in 2018. Consulting, financial advisory, risk advisory, and tax and legal departments gained revenue but at a slower pace than the previous year. Tax and legal, for example, rose 5.1% to $8.3 billion; the increase was 8.2% the previous year.

The Big Four—which also include PricewaterhouseCoopers, Ernst & Young and KPMG—are international networks of private partnerships. They disclose revenue but not profit. Because companies rely heavily on them for audit and consulting services, finance chiefs tend to pay close attention to their financial health.

Deloitte’s results follow Ernst & Young’s global revenue announcement last week, in which revenue climbed 4.7% to $36.4 billion.

PricewaterhouseCoopers is expected to release revenue in the next few weeks.

KPMG typically reports its numbers later in the year.

 


From the CFO Journal's Morning Ledger on September 10, 2019

The Securities and Exchange Commission is stepping up pressure on exchanges to finish a huge, long-delayed database designed to help detect market manipulation and investigate episodes of anomalous trading. The exchanges would face financial penalties if they miss further deadlines for building the database project, called the Consolidated Audit Trail, or CAT, according to a proposal released Monday by the SEC.


From the CFO Journal's Morning Ledger on September 10, 2019

Good morning. Starbucks Corp. has agreed to provide additional disclosures on how it recognizes revenue after the U.S. Securities and Exchange Commission questioned some of its accounting practices, CFO Journal reports.

The Seattle-based coffee chain is one of many U.S. companies adjusting to new accounting guidelines that came into effect at the start of last year for most public companies. The new rules aim to standardize how companies from different industries account for revenue from sales and services.

At least 208 companies received letters from the SEC about their revenue-recognition practices in 2018, according to regulatory filings and data compiled by consulting firm Audit Analytics Inc. That’s up about 56% over the annual average during the previous two years. As of the end of June, 50 companies had received letters on the subject, down slightly from 53 during that period a year earlier.

The SEC, in letters sent between May and August as a part of a routine review, questioned Starbucks management’s approach to recognizing revenue in its quarterly earnings filing ended March 31. The regulator sought clarification on Starbucks’ revenue-recognition policy.

One question from the SEC was why the company believed it was appropriate to recognize pre-opening services, such as reviewing architectural plans and training employees, upon completion of the services. The regulator also asked Starbucks to explain the way it recognized Nestlé SA’s $7 billion upfront payment in 2018 for the rights to sell Starbucks products.


From the CFO Journal's Morning Ledger on September 9, 2019

San Francisco offered $2.5 billion to acquire PG&E Corp.’s electrical lines serving the city, a first step toward separating from the troubled utility that is facing billions of dollars in liabilities for starting a series of deadly wildfires ---
https://www.wsj.com/articles/san-francisco-offers-to-buy-pg-e-wires-in-city-11567960938?mod=djemCFO

Jensen Comment
Questions include how to raise the expensive annual money needed to maintain those lines and poles, including the cost of replacing them after a disaster such as another San Francisco earthquake.

Other questions include how to get enough electricity to feed into those lines day-to-day. Ironically, San Francisco may have to by power on the grid that is supplied at higher prices by PG&E.

 


From the CFO Journal's Morning Ledger on September 6, 2019

Alexandria Chairman Capitalizes on ‘Best Debt Environment’ in Years

Alexandria Real Estate Equities Inc. tapped the bond market for a second time this year, joining other U.S. companies that are exploiting falling benchmark interest rates and strong investor demand.

Alexandria on Tuesday sold $400 million of debt maturing in 2029 and $200 million that will become due in 2050. The company’s average interest rate for the two tranches was 3.0%, Chairman Joel Marcus said. “This is the best debt environment that I have seen in the past 25 years,” he said. “You’d be a fool not to raise capital."

Alexandria was able to extend the average maturity of its debt portfolio to more than 10 years, while also bringing down the cost of capital, Mr. Marcus said. “It was a unique moment in history to tap the investment-grade bond market,” he said. The company doesn’t have additional capital requirements this year, Mr. Marcus said. Taken together with a bond sale earlier this year, the company has raised nearly $2 billion in 2019.

Uncertainty about the economy and the reaction by markets played a role, he said. “In capital planning, one always looks at the worst-case scenario,” Mr. Marcus said, pointing to a potential recession in the U.S. “For issuers and bondholders, if there is a recession in 2021, people will look back and see this year as a great time for bond issuances.”


From the CFO Journal's Morning Ledger on September 5, 2019

Ernst & Young Plans New Technology Strategy Amid Revenue Boost

As technology is increasingly integrated into corporate accounting processes, companies’ expectations of accounting firms have changed. That is causing Ernst & Young to rethink its strategy, CFO Journal’s Mark Maurer reports

The Big Four accounting firm, which is about halfway through a two-year plan to invest $1 billion in technology across its four main businesses, is planning to unveil a new strategy focused on heightened technological investment, said Carmine Di Sibio, EY’s global chairman and chief executive.

“A lot of the raw work in corporate tax work is around data and technology, so that warrants an investment in that type of technology,” Mr. Di Sibio said in an interview. “Corporates are saying, ‘That’s not really what I do. It is what the Big Four firms do, so let them invest in the technology, and then it’ll be more efficient for us.’ So that’s what we’ve been doing.”


From the CFO Journal's Morning Ledger on September 3, 2019

CFOs Say They Underestimated New Lease-Accounting Standard

Many U.S. public companies underestimated the difficulties of complying with a new lease-accounting standard, finance chiefs say. Their stumbles could inform private companies that are now preparing for the transition.

The Financial Accounting Standards Board in the past year began requiring public companies to report operating leases on their balance sheets in an effort to increase transparency for investors and lenders, CFO Journal's Mark Maurer reports.

About two-thirds of companies in the later stages of implementing the standard—those evaluating and deploying software and migrating data—have experienced difficulties, according to a study from LeaseQuery, an Atlanta accounting software company.




Teaching Case from IAE:  Unmasking the Fraud at Toshiba
by Dennis H. Caplan, Saurav K. Dutta, and David J. Marcinko
Issues in Accounting Education
Volume 34, Issue 3 (August 2019)

https://aaajournals.org/doi/full/10.2308/iace-52429

Following its purchase of Westinghouse Electric Company 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. Second, it inappropriately applied price masking to account for transfers of components between itself and contract manufacturers. 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.

. . .

V. AFTERMATH

Following the scandal, Ernst & Young ShinNihon was fined $17.3M (¥2.1 billion) by Japan's Financial Services Agency for negligence in connection with the firm's audit of Toshiba. Also, Ernst & Young ShinNihon was suspended from taking on new business for three months. The regulatory agency also suspended seven individuals from working as auditors for a period of one to six months.

On March 29, 2017, Westinghouse, a once-proud name that symbolized American supremacy in nuclear power, filed for bankruptcy protection. In 2018, Toshiba sold Westinghouse to Brookfield Business Partners for $4.6 billion. With the sale of Westinghouse, Toshiba plans to discontinue its overseas nuclear power business. Toshiba reported a net loss of $9.6 billion for fiscal 2016. Also in 2018, Toshiba sold one of its crown jewels, the memory chip business, to a group led by Bain Capital for approximately $18 billion.

 Jensen Comment
This is a very well-written case with a lot of helpers on how to use it in courses.

Current and past editions of my blog called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Teaching Case from IAE:  Is a Reported Goodwill Impairment Loss Really a Goodwill Impairment Loss? A Financial Reporting Case on Evaluating the Efficacy of Authoritative Guidance
by Casey J. McNellis and Walter R. Teets
Issues in Accounting Education
Volume 34, Issue 3 (August 2019)
https://aaajournals.org/doi/full/10.2308/iace-52460

While undergraduate financial reporting courses focus primarily on the application of generally accepted accounting principles and the mechanics of accounting treatments, graduate-level courses should motivate students to explore standard-setting's theoretical perspective and to develop a more rigorous understanding of accounting issues not necessarily discussed in textbooks, but included, implicitly or explicitly, in the authoritative guidance. Anecdotal evidence suggests that accounting students face difficulties transitioning from the undergraduate setting to the higher expectations common in graduate accounting programs and the workplace. This hypothetical case provides an interesting scenario on goodwill impairment to facilitate the development of students' understanding of accounting theory and its connection to professional research skills. While students are accustomed to computing goodwill impairment losses from knowledge acquired in undergraduate financial accounting courses, this topic contains interesting theoretical and practical issues and serves as a salient example of the analysis of interesting accounting issues possible at the graduate level.

. . .

f the case is used in practice or theory courses after the latest effective date for ASU 2017-04, minor modifications of the case and requirements could be made. Instead of dealing with the first formal quantitative goodwill impairment testing process, the case could focus on comparing the process used for impairment testing in the then-current year with impairment testing in the “last year where a formal quantitative test was performed,” and assuming that last test was done using the two-step test required prior to adoption of ASU 2017-04. Students would be required to use the Archive tabs of the Codification to support conclusions about impairment tests made in previous years, thereby keeping the issues relating to the two-step versus one-step test relevant, and giving students an opportunity to learn about the Archive feature.

Evidence of Efficacy

The case was tested in a graduate-level theory and practice course at a private university. When the case was first assigned to the class, the instructor asked students to complete seven complex multiple-choice questions, partially adapted from McNellis et al. (2015), to assess their understanding of the goodwill impairment process and four scale questions to assess their level of practical and conceptual understanding of the topic. After students completed the requirements, they were provided with the same questions and items.

Regarding the multiple-choice assessment, the post-case average (Mean = 0.456, Standard Deviation = 0.184) is significantly higher (p < 0.001) than the pre-case average (Mean = 0.177; Standard Deviation = 0.095). This result indicates that students' understanding of goodwill was enhanced by completion of the case. It should be noted that the post-case average was still below 50 percent, a result that warrants further discussion. From one standpoint, the scores may be reflective of a scaling issue, as the questions were very detailed and complex in nature, in some cases beyond the scope of typical intermediate-level instruction. For example, a few of the questions compelled students to understand specific details related to the grouping of subsidiaries into reporting units for the purposes of goodwill impairment testing. This level of complexity may have contributed to the relatively low pre-case score. A commonly missed question during both the pre-case and post-case administration was one that required students to select a number of activities to be performed prior to a quantitative test of goodwill impairment. The correct response contained three of the six possible choices in the problem. While most students identified one or two of the correct activities, very few students selected the correct combination of activities and, thus, the majority of students were marked down for an incorrect response. Furthermore, the post-case questions were completed approximately one week after the second class discussion, and the time lag may have been a factor in student recall of the most detailed and complex points related to goodwill in the post-case assessment. Accordingly, the nature of the questions and the relative timing of the assessment requiring detailed recall likely lowered both the pre-case and post-case scores. Finally, and perhaps most importantly, the questions were not part of a larger classroom assessment for course points. As such, the context in which the students answered the questions may have resulted in a lack of urgency in scrutinizing the various choices in the questions. Nevertheless, the significant difference suggests improvement on the part of the students and complements the survey results, which are presented in Table 1.

Bob Jensen's threads on goodwill and impairment are at
http://faculty.trinity.edu/rjensen/theory02.htm#Impairment

KPMG’s “Unusual Twist”
While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.
 
See  http://faculty.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud

Punch Line
This "foresight of top management" led to a 25-year prison sentence for Worldcom's CEO, five years for the CFO (which in his case was much to lenient) and one year plus a day for the controller (who ended up having to be in prison for only ten months.) Yes all that reported goodwill in the balance sheet of Worldcom was an unusual twist.


Teaching Case from IAE: Evaluating Risk and Processing Integrity Controls over Spreadsheets: An Educational Case
by Penelope L. Bagley, Beau Grant Barnes, and Nancy L. Harp
Issues in Accounting Education
Volume 34, Issue 3 (August 2019)
https://aaajournals.org/doi/full/10.2308/iace-52426

This case requires students to create a spreadsheet inventory, assess the risk related to each spreadsheet inventoried, and perform internal control testing on the spreadsheet deemed to be of the highest risk. Completing the case will benefit students in many ways. First, the case will familiarize students with creating a spreadsheet inventory. Second, it will familiarize students with the risks associated with spreadsheet errors by requiring them to evaluate and consider such risks. Third, the case will provide students with practice in evaluating spreadsheet controls and detecting spreadsheet errors. Finally, the case will increase students' awareness of the pervasiveness and potentially negative impact that spreadsheet errors can have on financial reporting.

. . .

 

Task 2—Test Spreadsheet Controls.

The head of your internal audit team has asked you to test the spreadsheet controls over the most risky Excel spreadsheet you identified in Task 1. He has provided you with general internal audit guidance that instructs you on which spreadsheet controls (e.g., access control, change control; see below) you need to evaluate and a more detailed “Internal Audit Program” (Exhibit 7) designed to evaluate those controls. Your internal audit guidance, adapted from the detailed guidance provided by the IT Governance Institute (2006) and informed by the more recent Information Systems Audit and Control Association's guidance (ISACA 2014), instructs you to evaluate controls over each of the following areas:

A.       Access control—evaluate whether user access is properly limited to the spreadsheet. The spreadsheet should be stored on a network server with appropriate user access restrictions.

B.       Change control—evaluate whether a process for making changes to the spreadsheet exists and whether the users document changes they have made within a tab in the spreadsheet.

C.        Documentation—evaluate whether sufficient and current documentation exists about the objectives and functions of the spreadsheet. This documentation should be updated by the spreadsheet preparer as changes to the objective and functions of the spreadsheet occur.

D.       Testing—evaluate whether the spreadsheet functions as intended, based on its documented purpose. A person independent of the spreadsheet (such as internal audit) should perform a detailed review.

E.        Input control—confirm whether data input into the spreadsheet is complete and accurate by reconciling the inputs to source documents.

F.        Security and integrity of data—evaluate whether certain important cells are “locked” or protected from unauthorized or inadvertent changes to the spreadsheet.

G.       Logic inspection—examine the spreadsheet's logic. A person independent of the spreadsheet's development or use (such as internal audit) should carefully inspect and document the spreadsheet logic.

To test the spreadsheet controls, you will need to follow the audit program provided in Exhibit 7 and document any errors/issues noted, details about your procedures, and your conclusions and/or recommendations based on your testing within the space provided in the program. You will also need to sign off when you have completed each step. The first two steps in the audit program have already been performed by another member of the internal audit team.

Task 3—Critical-Thinking Questions.

After reflecting on the procedures you performed in Task 1 and Task 2, answer the following critical-thinking questions.

1.        When beginning a spreadsheet-based calculation for a month-end adjusting journal entry, SprintyPrint often uses the previous month's spreadsheet as a starting point. That is, the previous month's Excel file (e.g., Allowance_Calculation) is copied into a new folder (e.g., “December calculation folder”). Alternatively, SprintyPrint could create a template that contains logical formulas for making the calculation with no accounts receivable detail, and require their staff to start with this blank template for each month's calculation.

a.        Why would someone choose to use a prior month's Excel file as a starting point rather than a template? What are some of the costs and benefits of using the prior month's file instead of a template?

b.        Do you think that calculations would be less prone to errors if a template was used instead of the prior month's Excel file?

2.        In the spreadsheet that you tested, what was the most complex formula used? Provide a detailed and technical suggestion to simplify the formula. What are the benefits to having simpler formulas in Excel workbooks?

3.        Which cells are locked in the spreadsheet that you tested? Why do you think these cells are locked? Do other cells exist that would benefit from being locked? Could any of the errors that you identified be prevented by locking additional cells?

4.        For the spreadsheet you tested, what additional control activities could you add to the “controls&maintenance” worksheet to detect and prevent the errors that you identified?

5.        Does any evidence that exists in the spreadsheet that you tested suggest that SprintyPrint has an ineffective control environment?

 


Teaching Cases from the IMA

Volume 12 Issue 2

IMA Educational Case Journal (not free)

ISSN 1940-204X

Articles

A Reporting Dilemma: Hiring Freeze Headcount

Bruce Bettinghaus, Associate Professor, Grand Valley State University
Stephen R Goldberg, Professor, Grand Valley State University
Lara Kessler, Associate Professor, Grand Valley State University


 

THIS CASE PRESENTS A SITUATION THAT A MANAGER MIGHT FACE when there is a conflict among the personal values of a CMA® (Certified Management Accountant) and the interests of the manager, employing company, and the public. Sam, the controller of an international startup production operation in Penang, Malaysia, is asked to understate the operation’s headcount. Big Electronics Company International (BECI) is a large multinational company that is laying off employees worldwide in response to a global recession. Max, the vice president to whom the Penang operation re¬ports, requested Sam to understate headcount to avoid challenges of a BECI global hiring freeze. All financials and other reporting are accurate. Students have the opportunity to compare basic ethical decision-making approaches, examine personal and professional values, and consider personal biases that might influence the decision.

 

Keywords: Utilitarianism, deontology, virtue ethics, behavioral ethics, codes of professional conduct

À Votre Santé (B): Process Costing and Decision Analysis in the Wine Industry

Roopa Venkatesh, Associate Professor, University of Nebraska – Omaha
Amy Fredin, Associate Professor, St. Cloud State University
Jennifer Riley, Associate Professor, University of Nebraska – Omaha

 

“À VOTRE SANTÉ (B): PROCESS COSTING AND DECISION ANALYSIS IN THE WINE INDUSTRY” is an extension of “À Votre Santé: Product Costing and Decision Analysis in the Wine Industry.”1 This case uses the same context of the original case, the wine-making industry, which lends itself well to explain the concepts of process costing. This case requires students to prepare process costing production reports using the weighted average and the first-in, first-out (FIFO) methods to follow the wine making process from start to finish, capturing the costs of each key activity (pro¬cess) along the way. Furthermore, the case allows students to understand the consequence of ignoring the costs of normal spoilage and consider the costs of normal spoilage when calculating the cost of a bottle of wine.

 

Keywords: Process costing, decision analysis, ethics

Football Stadium: A Diamond in the Rough?

Cameron Lee, Goizueta Business School Emory University
Usha Rackliffe, Goizueta Business School Emory University

 

OVER THE YEARS, GEORGIA STATE UNIVERSITY (GSU) HAS transformed from a commuter school to an urban, residential research university with more than 30,000 students in downtown Atlanta. In 2010, GSU began a football program that shared the Georgia Dome with the Atlanta Falcons. In 2017, the Falcons moved into their new home, the Mercedes Benz stadium. With the Georgia Dome set for demolition, GSU football was homeless. In response, university management acquired the recently vacated Atlanta Braves baseball home, Turner Field, to house its football program. The case focuses on two primary issues: What factors should be considered in deciding whether to start a new football program? In its quest for a new football facility, should the University repurpose the baseball stadium into a football stadium or build a new football stadium? The case allows students to determine the best option based on total costs, relevant costs, and nonfinancial factors.

 

Keywords: Total cost, relevant cost, sustainability, repurpose, athletic facility, capital budgeting

Tracking Manufacturing Costs on a Continuous Flow of Identical Products

Christine Jonick, University of North Georgia
Jennifer Schneider, University of North Georgia

 

THE PURPOSE OF THIS SHORT CASE IS TO PROVIDE a hands-on activity where students experience systematic allocation of a whole among various parts, a concept that is prevalent in many areas of accounting. It illustrates the flow of the accounting cycle from one period to the next and provides opportunities for students to practice decision-making and critical thinking skills. The subject of the case is the managerial topic of process costing. The scenario extends over a three-month cycle to illustrate continuity from period to period and track changes in perfor-mance over time. The context involves the continuous manufacture of identical products and the costs that accrue in production. The foundational concept of allocation can then transfer to a better understanding of service entity costing, revenue recognition, partnerships, depreciation, budgeting, and other financial analyses.

 

Keywords: Process costing, product costs, continuous manufacturing, allocation, manufacturing accounting


 

Teaching Case From The Wall Street Journal Weekly Accounting Review on August 30, 2019

Federal Deficits to Grow More Than Expected in Next Decade, CBO Says

 

By Kate Davidson | August 21, 2019

Topics: Governmental Accounting , Budget Deficit

Summary: The Congressional Budget Office (CBO) projects that federal budget deficits will rise to $12.2 trillion over the next decade. That level is nearly the highest relative to the overall U.S. economy since World War II and reflects an estimated increase since the CBO’s most recent such projection. “The projected…increase primarily reflects higher federal spending under the new two-year budget agreement” finalized by lawmakers and the White House in July 2019.

Classroom Application: The article may be used in a governmental accounting class to discuss U.S. federal budget deficit and its overall status in relation to the U.S economy. The purpose of, and methods used by, the Congressional Budget Office also may be discussed. Congressional actions leading to the deficit supported by both Republicans and Democrats as well as concerns about the deficit overall are discussed by Gerald F. Seib, executive Washington editor and former Washington bureau chief, in the video linked in the article.

Questions:

·         Define the term budget deficit.

·         What is the role of the Congressional Budget Office (CBO)?

·         Summarize the CBO forecast discussed in this article. Comment on your understanding of the reason for the forecast and the last time the forecast was made.

·         How does the reporting make the size of the federal budget deficit comparable over time?

Read the Article

Reviewed By: Judy Beckman

 

"Federal Deficits to Grow More Than Expected in Next Decade, CBO Says," y Kate Davidson, The Wall Street Journal, August 21, 2019
https://www.wsj.com/articles/cbo-boosts-10-year-forecasts-for-budget-deficits-by-809-billion-11566399611

CBO boosts 10-year forecasts for budget deficits by $809 billion, citing two-year budget deal

WASHINGTON—Federal deficits are projected to grow much more than expected over the next decade after a budget agreement struck last month, pushing government debt as a share of the economy closer to the highest level since World War II, the Congressional Budget Office said.

The deal agreed upon by congressional leaders and the White House will add roughly $1.7 trillion to deficits between 2020 and 2029, assuming federal spending continues to rise by the rate of inflation beyond 2021. Much of that increase will be offset by lower-than-expected interest rates, which will reduce the cost of servicing the government’s swelling debt by $1.4 trillion over the next decade, the CBO said in the updated budget projections.

In total, deficits are now expected to rise $809 billion more than the agency projected just a few months ago, bringing total deficits over the next decade to $12.2 trillion.

Annual deficits as a share of economic growth are expected to average 4.7% over that period, higher than the 4.4% the CBO estimated in May and well above the 2.9% average over the past 50 years.

Overall, the CBO said government debt as a share of the economy is expected to rise from 79% this year to 95% in 2029—up from 92% when the agency released its 10-year forecasts in May and the highest level since just after World War II, when debt exceeded the size of the economy.

“The nation’s fiscal outlook is challenging,” CBO Director Phillip Swagel said. “To put it on a sustainable course, lawmakers will have to make significant changes to tax and spending policies—making revenues larger than they would be under current law, reducing spending below projected accounts, or adopting some combination of those approaches.”

Lawmakers have shown little appetite, however, for reining in federal spending or raising taxes. Investors are unfazed by the rising government red ink. The latest budget deal, which lifts spending by roughly $320 billion over the next two years above spending caps enacted in 2011, received broad bipartisan support, even as fiscal hawks warned it would enshrine trillion-dollar deficits.

Higher spending on disasters and border security in 2019 also boosted projected deficits by $255 billion over the next 10 years, assuming that spending continues to grow, the CBO estimated.

The latest projections come as White House officials have begun discussing potential stimulus measures that would help cushion the U.S. economy from a potential downturn and likely add billions more to government debt.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 30, 2019

Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth

 

By Richard Rubin | August 27, 2019

Topics: Presidential Election , Individual Taxation , Capital Gains Tax

Summary: Potential changes to the U.S. tax system proposed by Democratic candidates for the U.S. presidency, and Congressional leaders who would take control in the event of a change in the majority party, are discussed in the article. Ideas include a shift to taxing wealth rather than income of the top levels of taxpayers. Noting that economic studies find that most of the value of estates over $100 million lie in unrealized capital gains which might never be taxed under current tax law, Senator Wyden proposes an annual “mark-to-market” system. Senator Warren would “impose a 2% tax each year on individuals’ assets above $50 million and a further 1% on assets above $1 billion”; Senator Sanders proposes a wealth tax to finance Medicare-for-All.

Classroom Application: This article offers an opportunity to discuss tax policy issues and proposals by Democratic candidates for the U.S. presidency. Counterarguments and proposals by Republicans and/or conservatives in general also are discussed. It may be used in an individual income tax class.

Questions:

·         The WSJ question at the bottom of the article invites readers to discuss the question “should income inequality be addressed through tax policy?” What is tax policy? What are the overall objectives of tax policy?

·         What is the difference between taxing income and taxing wealth?

·         For which taxpayers do political candidates propose to change taxation from an income tax to a wealth tax?

·         What tax policy objectives might be achieved by changing to a wealth tax for certain taxpayers?

·         What are some of the concerns by those opposing Democrats' proposals? Make a list of concerns using terms as brief as you can.

·         “At the end of 2017, U.S. households had $3.8 trillion in unrealized gains in stocks and investment funds, plus more in real estate, private businesses and artwork…Most of the value of estates over $100 million consists of unrealized gains…much [of which] has never been touched by individual income taxes and may never be.” What are unrealized gains? How is it possible that a large part of wealth in estates may never be taxed under our U.S. income tax system?

·         Senator Ron Wyden (D, Oregon) claims that our current income tax system works in one way “for a cop and a nurse and another for highfliers to pay what they want to, when they want to…” How is it possible for a taxpayer to decide when to pay taxes? In your answer, also comment on Senator Wyden’s discussion of tax avoidance and differentiate avoidance from tax evasion.

Read the Article

Reviewed By: Judy Beckman

 

"Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth." b Richard Rubin, The Wall Street Journal, August 27, 2019
https://www.wsj.com/articles/democrats-emerging-tax-idea-look-beyond-income-target-wealth-11566916571

. . .

The Warren Plan

The most ambitious plan comes from Sen. Warren of Massachusetts, whose annual wealth tax would fund spending proposals such as universal child care and student-loan forgiveness.

The ultra-rich would pay whether they make money or not, whether they sell assets or not and whether their assets are growing or shrinking.

Ms. Warren, who draws cheers at campaign events when she mentions the tax, would impose a 2% tax each year on individuals’ assets above $50 million and a further 1% on assets above $1 billion. Fellow candidate Beto O’Rourke has also backed a wealth tax, and it is one of Vermont Sen. Bernie Sanders ’ options for financing Medicare-for-All.

Ms. Warren’s plan appeals to some Democrats because it would raise a lot of money from a tiny number of people. According to economists working with her campaign, it would generate $2.75 trillion over a decade from 75,000 households. That would be roughly a 6% boost in federal revenue from under 0.1% of households.

For Democrats, the Warren plan has advantages: Money would come only from the very wealthiest. The IRS could focus enforcement on very few people. Revenue would come quickly.

“Look at Mark Zuckerberg, ” said Gabriel Zucman, an economist at the University of California, Berkeley, who advised Ms. Warren, speaking of the Facebook Inc. founder. “Are you going to wait 50 years before you start taxing him through the estate tax?”

 

In the real world, a wealth tax would emerge from Congress riddled with gaps that the tax-planning industry would exploit, said Jason Oh, a law professor at the University of California, Los Angeles. For example, if private foundations were exempted, the wealthy might shift assets into them.

“We’ve never seen in the history of taxation a pristine tax of any form,” Mr. Oh said. “People who want to pursue a wealth tax for the revenue may be a little disappointed when we see the estimates roll in.”

European countries tried—and largely abandoned—wealth taxes. They struggled because rich people could switch countries and because some assets were exempt. Mr. Zucman said Ms. Warren’s tax would escape the latter problem by hitting every kind of asset, from artwork to stock to privately held businesses to real estate.

While he and fellow economist Emmanuel Saez assume 15% of the tax owed would be avoided, former Treasury Secretary Larry Summers and University of Pennsylvania law professor Natasha Sarin wrote a paper estimating the plan would raise less than half what Mr. Zucman projects, based on how much wealth escapes the estate tax.

A paper by economists Matthew Smith of the Treasury Department, Eric Zwick of the University of Chicago and Owen Zidar of Princeton University contends top-end wealth is overstated. Acccording to their preliminary estimate, the top 0.1% have 15% of national wealth, instead of the 20% estimated by Mr. Zucman. Their findings imply that Ms. Warren’s tax might raise about half of what’s promised.

For an investment yielding a steady 1.5% return, a 2% wealth levy would be equivalent to an income-tax rate above 100% and cause the asset to shrink. That leads to the criticism that wealth taxes could push people to seek higher returns, possibly discouraging productive investment and adding risk to the financial system.

“You hear 1%, 2%, doesn’t sound that much. Paying 1%, 2% on an asset you have every single year, that can add up,” said Ben Ritz of the Progressive Policy Institute, a centrist Democratic-affiliated think tank. “You’re basically having the asset shed money over time.”

To audit 30% of wealthy taxpayers, as Mr. Zucman recommends, would involve tens of thousands of complex investigations, a challenge even if the IRS were beefed up as Ms. Warren proposes. The agency already struggles with similar calculations for estate taxes, engaging in long battles over valuing such things as fractional shares of family businesses. Under the wealth tax, those once-per-lifetime audits would become annual affairs.

The wealth tax also has an extra asterisk: it would be challenged as unconstitutional.

The Constitution says any direct tax must be structured so each state contributes a share of it equal to the state’s share of the population. A state such as Connecticut has far more multimillionaires per capita than many others, so its share of the wealth tax would far exceed its share of the U.S. population. How Ms. Warren’s wealth tax might be categorized or affected is an unsettled area of law relying on century-old Supreme Court precedents.

Still, the wealth tax polls well, and Democratic candidates are eager to draw a contrast with President Trump, a tax-cutting billionaire.

Republicans will push back. Rep. Tom Reed (R., N.Y.) says tax increases aimed at the top would reach the middle class. “It easily goes down the slippery slope,” he said. “If it’s the 1%, it’s the top 20%.” he said.

 

Continued in article

The Washington Post:  How Much Would a Wealth Tax Raise?  Maybe 1/8 of Democratic Party estimates?
https://www.washingtonpost.com/opinions/2019/04/04/wealth-tax-presents-revenue-estimation-puzzle/?utm_term=.ab0f70a968a9 
Jensen Comment
I think it will be even less because of all the things wealthy people can do to reduce or eliminate wealth taxes. Exhibit A is George Soros. Exhibit B is Bill Gates.

Jensen Comment
In her most optimistic dreams the Elizabeth Warren wealth tax would only raise $275 billion a year even if it is deemed constitutional (which seems unlikely at this point). The problem with the 2020 Democratic Party candidates (other than Biden) at this point is that their spending promises exceed $20 trillion per year for the green initiatives, free medical care, free nursing homes, free medicines, free college, guaranteed annual income with open borders and on and on and on. The $275 billion per year is a drop in the bucket when paying over $20 trillion per year. To pay for all the free stuff promised both the wealthy and middle class will be wiped out. Of course the wealthy will not be wiped out, because they will move to tax havens.

The Role and Design of Net Wealth Taxes in the OECD:  Why Countries Have Moved Away From Wealth Taxes --
http://www.oecd.org/ctp/the-role-and-design-of-net-wealth-taxes-in-the-oecd-9789264290303-en.htm

This report examines and assesses the current and historical use of net wealth taxes, defined as recurrent taxes on individual net assets, in OECD countries. It provides background on the use of wealth taxes over time in OECD countries as well as on trends in income and wealth inequality. It then assesses the case for and against the use of a net wealth tax to raise revenues and reduce inequality, based on efficiency, equity and tax administration considerations. The effects of personal capital income taxes and taxes on wealth transfers are also discussed to understand how these taxes interact with net wealth taxes. Finally, the report looks at practical tax design issues and shows that the way a net wealth tax is designed can have a significant impact on the effectiveness and fairness of the tax. The report concludes with a number of practical tax policy recommendations regarding net wealth taxes.

Continued in article

Also See
Why Have Other Countries Been Dropping Their Wealth Taxes? 
http://conversableeconomist.blogspot.com/2019/02/why-have-other-countries-been-dropping.html


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 30, 2019

IRS to Cryptocurrency Owners: Come Clean, or Else!

 

By Laura Saunders | August 16, 2019

Topics: Individual Income Taxation , Cryptocurrency

Summary: “In late July [2019], the IRS said it had started to send warning letters to more than 10,000 people who may not have complied with tax rules on virtual currencies….The IRS is focusing on cryptocurrencies because their use is expanding…An IRS analysis found that for 2013, 2014, and 2015…fewer than 1,000 e-filed returns each year reported transactions appearing to use virtual currencies. Coinbase said at the end of 2013 that it had 650,000 accounts…[T]he IRS classifies cryptocurrencies as property akin to stocks or a home. If someone uses bitcoin to buy a car or lunch, that is typically a taxable sale…” which could either involve a capital gain or loss. A Los Angeles CPA quoted in the article has developed a specialty in cryptocurrencies in his tax preparation practice.

Classroom Application: The article may be used in an individual income tax class with a focus on IRS treatment of cryptocurrencies. It may be used in any class discussing professional development for a CPA practice with individuals as tax preparation clients. Developing expertise in cryptocurrencies to expand a tax practice and advising clients to respond to IRS letters can be the focus in those cases.

Questions:

·         Based on the information in the article, what information has led the IRS to issue warning letters to “10,000 people who may not have complied with tax rules on virtual currencies”?

·         What do you think was required for Los Angeles CPA Jordan Bass to develop expertise in cryptocurrencies to build his tax preparation practice?

·         What types of advisers are helping clients who have received letters from the IRS stating that their returns indicate they may not have complied with tax law related to cryptocurrencies?

·         What sections of the tax code apply to transactions involving cryptocurrencies?

·         Consider the example in the article of an individual taxpayer using bitcoin to buy a car. If bitcoin value had appreciated in since its acquisition and use for purchase of the car, explain the tax treatment that should be given to the transaction.

Read the Article

Reviewed By: Judy Beckman

 

"IRS to Cryptocurrency Owners: Come Clean, or Else!," by Laura Saunders, The Wall Street Journal, August 16, 2019
https://www.wsj.com/articles/irs-to-cryptocurrency-owners-come-clean-or-else-11565956801

Tax specialists warn those who aren’t in compliance with rules to act quickly to avoid more woes

The Internal Revenue Service is on the war path against Americans who haven’t reported income from cryptocurrencies like bitcoin.

In late July, the IRS said it had started to send warning letters to more than 10,000 people who may not have complied with tax rules on virtual currencies. Agency officials have said criminal tax indictments involving cryptocurrencies are expected soon, and other enforcement letters are going out.

Tax specialists are urging crypto users who aren’t in compliance to act quickly. While coming clean involves a maze of tricky decisions, ignoring the agency could cost a crypto holder dearly.

“I tell them, ‘It’s time to put your running shoes on.’ You must get to the IRS before they find you, especially if you got a letter,” says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink in New York.

Dealing with the IRS disclosure maze is Mr. Skarlatos’s specialty: He guided nearly 2,000 U.S. taxpayers through it when they confessed secret offshore accounts between 2009 and 2018. He performed triage for more, telling those with cases that wouldn’t land them in prison about simpler solutions.

The IRS’s crypto crackdown has similarities with its offshore-account campaign. Mr. Skarlatos has handled about a dozen high-dollar cryptocurrency cases.

Mr. Skarlatos says people in possible violation of IRS rules should first look for signs of tax fraud. It must involve intentional disobedience of the law. One clear sign is a large amount of unpaid tax, say above $15,000, he adds.

Other signs of fraud can be efforts to disguise cryptocurrency ownership, as by using an assumed name; using a “tumbler” service that mixes some cryptocurrency with others to obscure the original source; and lying to a prior tax preparer—because the IRS will ask.

If there was fraud, the crypto owner will need a lawyer to provide attorney-client privilege. The owner should probably apply to the IRS’s Voluntary Disclosure program, which often levies large civil penalties but protects against criminal prosecution.

If the wrongdoing wasn’t fraudulent, the crypto owner can often file what is called a qualified amended return, typically through an accountant. This will avoid some penalties but not interest.

There is an important exception for crypto owners who weren’t fraudulent but are already known to the IRS. This category includes people who were outed when a federal court required Coinbase, the leading cryptocurrency exchange, to turn over information on about 14,000 customers to the agency.

Continued in article

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

MIT:  China is about to launch its own digital currency. Here’s what we know so far ---
https://www.technologyreview.com/f/614314/china-is-about-to-launch-its-own-digital-currency-heres-what-we-know-so-far/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=76870798&_hsenc=p2ANqtz-9VujTcfuBpRY3fjRSFY-zTMLHyat8y68SrWKkpESDMsy622KwODAdbvCzlqDWNQ-lhp3jz-Pr7CF5rQQA0RbaYosaXXQ&_hsmi=76870798


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 6, 2019

U.S. Growth Slows, Corporate Profits Rise

 

By Harriet Torry | August 29, 2019

Topics: Profitability , Economy

Summary: The article discusses both financial statement measures of revenues, growth, and profitability as well as overall economic output measured by gross domestic product. The focus of the article is the performance during the second quarter of calendar 2019 but longer-term trends also are mentioned. Earnings discussed in the article are sourced from the U.S. Commerce Department which uses a measure of “after-tax profits without inventory valuation and capital consumption adjustments, adjusted for seasonality.”

Classroom Application: This article may be used in any level of financial accounting class to tie reported financial statement amounts to overall measures of U.S. economic output. For example, the article mentions slowing investment in inventories impacting measured GDP. Also discussed are revenues versus corporate profitability and factors impacting the longer-term economic outlook.

Questions:

·         What is the difference between measuring corporate profits and measuring reported growth? Answer with specific financial statement amounts reported by individual companies, not measures of the overall U.S. economy.

·         How is reported growth of the U.S. economy related to each of the financial statement amounts you gave in answer to question 1 above?

·         What measures of the status of the U.S economy given in the article are not shown in specific financial statement line items? Cite one example and explain your answer.

Read the Article

Reviewed By: Judy Beckman

 

 

"U.S. Growth Slows, Corporate Profits Rise," by Harriet Torry, The Wall Street Journal, August 29, 2019 ---
https://www.wsj.com/articles/economic-growth-revised-to-2-in-second-quarter-11567081908

Turnaround in profits, stronger consumer spending nudged economy as expansion reached 10th anniversary

WASHINGTON—The U.S. economic expansion cooled as it reached its 10th anniversary, despite strong pickups in corporate profits and consumer spending in the second quarter, with longer-run forces weighing on the outlook ahead.

U.S. gross domestic product—the broadest measure of the nation’s output of goods and services—rose at a seasonally adjusted annual rate of 2.0% in the second quarter, a solid pace but down from a 3.1% rate in the first quarter and 2.9% overall in 2018, the Commerce Department said Thursday.

U.S. corporate profits rebounded in the second quarter as companies cut investment. A broad measure of corporate earnings—after taxes, without inventory valuation and capital consumption adjustments—rose 4.8% from the prior quarter. That came after corporate profits, which are often volatile on a quarterly basis, dropped 1.5% in both the first quarter of this year and the fourth quarter of 2018.

Looking over a longer period, they were up a more muted 1.7% in the second quarter from the same period a year before.

American companies faced earnings pressure earlier in the year for a number of reasons, including rising labor costs, limited pricing power and a strong dollar that makes U.S. exports more expensive.

“Whatever the numbers show for any individual quarter, we have to expect a weaker trend in corporate earnings growth in the next year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Analysts noted that the level of U.S. corporate profits has barely changed over the past five years.

“For every dollar they sell, [companies] are not getting a lot back,” said Joseph Carson, a former chief economist at Alliance Bernstein who is now an independent consultant. “Consumer spending is strong but remember it’s the companies that pay their salaries and offer them jobs.”

The concern among economists is that future weakness in profits at American companies could spell trouble for the labor market if boardrooms slow hiring or even lay off workers to cut costs.

Weakness in inventory investment and trade exerted bigger drags on growth in the April-through-June period than previously thought, causing the Commerce Department to lower slightly its estimate of total second-quarter GDP growth to a 2.0% annual rate from the 2.1% pace previously estimated.

A closely watched gauge of business investment declined in the second quarter for the first time since early 2016. Nonresidential fixed investment—which reflects spending on software, research and development, equipment and structures—fell at a 0.6% rate.

Still, consumers’ spending drives about two-thirds of U.S. economic output, and an improving labor market has helped them provide continued fuel for economic growth.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 6, 2019

Honeywell Won’t Face SEC Charges Related to Asbestos Accounting

 

By Micah Maidenberg | August 29, 2019

Topics: Foreign Corrupt Practices Act , Contingent Liabilities

Summary: In the third quarter of 2018, “Honeywell revised its asbestos liabilities tied to Bendix, the vehicle-brakes business it sold several years ago, increasing them by $1.1. billion to $2.61 billion….” Disclosure of the matter is discussed in Note 20, Commitments and Contingencies, to the 2018 Form 10-K, available at https://www.sec.gov/cgi-bin/viewer?action=view&cik=773840&accession_number=0000930413-19-000366&xbrl_type=v# The company states that the “revision followed the Securities and Exchange Commission (SEC) Division of Corporation Finance review of [their] Annual Report on Form 10-K for 2017, which included review of…prior accounting for liability for unasserted Bendix-related asbestos claims.” According to that footnote, “the prior accounting treatment applied a five-year time horizon; the revised treatment reflects the full term of…projections through 2059. Previously issued financial statements have been revised for this correction...."

Classroom Application: This article may be used to discuss recording contingent environmental liabilities particularly in this circumstance in which it has sold the business from which they stem. As well, it may be used to discuss the workings of the FCPA given that the “company has said that it and its representatives comply with all laws in the countries in which it conducts business.” Both subjects are most appropriate for an advanced level class in financial reporting. The article is short but questions refer extensively to Honeywell's financial statement footnote disclosures.

Questions:

·         Access the 2018 annual report of Honeywell Corporation filed on Form 10-K with the Securities and Exchange Commission and available at https://www.sec.gov/cgi-bin/viewer?action=view&cik=773840&accession_number=0000930413-19-000366&xbrl_type=v# Click on Notes to Financial Statements on the left-hand side of the page, then scroll down to click on COMMITMENTS AND CONTINGENCIES. Read the opening paragraphs of the disclosure related to Bendix Products. To whom does Honeywell make payments for this estimated liability? For what reason?

·         Honeywell no longer owns nor operates Bendix Friction Materials since the company was sold in 2014. Why do you think Honeywell must continue to make payments to resolve claims related to Bendix products?

·         What is the total amount of estimated liability for claims associated with asbestos-related products accrued by Honeywell as of December 31, 2018? What portion of that liability is short-term and what portion is long-term? Explain how you identify this answer.

Read the Article

Reviewed By: Judy Beckman

 

"Honeywell Won’t Face SEC Charges Related to Asbestos Accounting," by Micah Maidenberg, The Wall Street Journal, August 29, 2019
https://www.wsj.com/articles/honeywell-wont-face-sec-charges-related-to-asbestos-accounting-11567095870

Company last year had increased its asbestos liabilities tied to Bendix, its former vehicle-brakes business

Honeywell HON 0.46% International Inc. said securities regulators have decided not to pursue any actions related to an investigation into how it accounted for asbestos-related liabilities.

The Securities and Exchange Commission told the Charlotte, N.C.-based conglomerate that it concluded a probe into those accounting practices and won’t recommend enforcement steps, Honeywell said Thursday.

A spokeswoman for the SEC declined to comment.

Last year, Honeywell revised its asbestos liabilities tied to Bendix, the vehicle-brakes business it sold several years ago, increasing them by $1.1 billion to $2.61 billion as of Dec. 31, 2017. The company said at the time that the SEC had opened an investigation into the matter and that it was cooperating with regulators.

Honeywell said in July that it was cooperating with U.S. and Brazilian authorities looking into whether it violated the Foreign Corrupt Practices Act and similar laws in Brazil.

Authorities are examining Honeywell’s use of outside parties that worked for its oil-products business, which worked with state-owned oil producer Petróleo Brasileiro . The company has said that it and its representatives comply with all laws in the countries in which it conducts business.


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 6, 2019

Dell Reports Record Revenue in PC Division

 

By Maria Armental | August 29, 2019

Topics: Segment Reporting , Earnings Per Share , Non-GAAP Reporting

Summary: “Dell Technologies Inc. swung to a quarterly profit bolstered by a large tax benefit and record revenue at the division selling everything from laptops to computer workstations.” The company reported profit of $3.63 billion, earnings per share (EPS) of $4.83, and unusual data point: adjusted earnings of $2.15 per share, lower than EPS according to U.S. GAAP. The news release on Form 8-K for Dell Technologies Inc. (ticker: Dell) is available at https://www.sec.gov/cgi-bin/browse-edgar?CIK=0001571996&action=getcompany Select Form 8-K interactive data filed on 8/29/2019. Note that an EDGAR search for Dell lists filings for many companies and for Dell Computer Corp. from before the company went private then re-floated its shares.

Classroom Application: The article may be used to discuss non-GAAP reporting, the accounting impact of a tax benefit, earnings per share, stock market reactions to quarterly earnings announcements, segment reporting, and/or the impact of tariffs on technology companies. These topics may be covered at the intermediate or an advanced financial accounting level.

Questions:

·         What are non-GAAP earnings? Cite your source for this definition.

·         How do Dell Technologies Inc. non-GAAP earnings compare to the company’s earnings determined on the basis of U.S. GAAP? Which is higher? Do you think this situation is common?

·         Access the press release containing the financial reporting on which this https://www.sec.gov/cgi-bin/browse-edgar?CIK=0001571996&action=getcompany Select the Form 8-K, Interactive Data, filed on 8/29/2019. Scroll down to the Condensed Consolidated Statements of Income. Describe their financial performance for the three months ended August 2, 2019.

·         How does your description to answer question 3 compare to the newspaper write up and the wording of the press release?

·         What are operating segments? Cite your source for this definition.

·         Based on the information in the article, list the Dell Technologies Inc. operating segments.

Read the Article

Reviewed By: Judy Beckman

 

"Dell Reports Record Revenue in PC Division," by Maria Armental, The Wall Street Journal, August 29, 2019
https://www.wsj.com/articles/dell-reports-record-revenue-in-pc-division-11567112321

Company swung to profit; orders, excluding China, rose 4%

Dell Technologies Inc. DELL 0.83% swung to a quarterly profit bolstered by a large tax benefit and record revenue at the division selling everything from laptops to computer workstations.

Dell on Thursday reported a profit of $3.63 billion, or $4.83 a share. On an adjusted basis, Dell said profit rose to $2.15 a share, beating analysts’ projection of $1.50 a share, according to FactSet.

“We are in the early stages of a technology-led investment cycle,” said Jeff Clarke, vice chairman at Dell. Orders during the quarter, excluding China, rose 4%, he said.

Dell’s stock, which closed up 3% at $46.77, jumped over 9% in after-hours trading. Tech investors in recent weeks have become concerned about a slowdown in technology spending, but Dell’s earnings signaled it was able to still grow earnings despite a difficult commercial environment.

Still, Mr. Clarke said sales in China, particularly of server equipment, would likely remain soft for the rest of the year.

Dell also is having to deal with dueling import tariffs imposed by the U.S. and China in recent months.

Mr. Clarke said the company “has successfully mitigated that cost impact” across the majority of its products, and where it hasn’t, it has raised prices.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 13 2019

SEC Questions Starbucks About Revenue-Recognition Policy

 

By Mark Maurer | September 10, 2019

Topics: Securities and Exchange Commission , Revenue Recognition

Summary: This article discusses a comment letter by the SEC Division of Corporation Finance regarding Starbucks revenue recognition practices. In the wake of the sweeping changes to methods of accounting for revenues, data available through Audit Analytics shows that that at least 208 companies received comment letters about revenue recognition practices in 2018. “Starbucks’ historic disclosure wasn’t robust enough to relay the info that investors need to assess where the revenues are coming from,” said Audit Analytics Research Manager Derryck Coleman. Topics addressed in the SEC comment letter included “why the company believed it was appropriate to recognize pre-opening services, such as reviewing architectural plans and training employees, upon completion of the services”; further explanation of how Starbucks ‘recognized Nestlé SA’s $7 billion upfront payment in 2018 for the rights to sell Starbucks products;” and a change in accounting for gift cards.

Classroom Application: This article may be used to discuss the process of Securities and Exchange Commission review of public companies’ filings as well as to discuss revenue recognition accounting implementation issues. These topics may be covered in intermediate, advanced, or graduate-level financial reporting classes.

Questions:

·         What is the function of the U.S. Securities and Exchange Commission Division of Corporation Finance? (Hint: access the SEC web page at www.sec.gov then click on Divisions and Offices, then finally Corporation Finance. Alternatively, go directly to https://www.sec.gov/page/corpfin-section-landing) Summarize the division’s role in the review of filings to support the provision of useful financial information to securities market participants.

·         What topics are discussed in the letter sent from the U.S. Securities and Exchange Commission to Starbucks Corp. about its financial reporting practices? Explain your understanding of each of the areas mentioned in this Wall Street Journal article.

·         How has this questioning been resolved?

·         Consider specifically the $7.15 billion payment made by Nestlé SA. Access the Starbucks Corp 10-Q filing for the fiscal third quarter ended June 30, 2019 at https://www.sec.gov/cgi-bin/viewer?action=view&cik=829224&accession_number=0000829224-19-000036&xbrl_type=v Click on Notes to Financial Statements on the left-hand side of the page, then Revenue Recognition, Scroll down to read the section entitled Deferred Revenue. Summarize your understanding of the accounting for the payment.

·         What accounting standard requires the accounting treatment described in your answer above? Cite the authoritative guidance in the Accounting Standards Codification.

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Reviewed By: Judy Beckman

 

"SEC Questions Starbucks About Revenue-Recognition Policy," by Mark Maurer, The Wall Street Journal, September 10, 2019
https://www.wsj.com/articles/sec-questions-starbucks-about-revenue-recognition-policy-11568066841

Coffee chain agrees to provide additional disclosure related to gift cards and Nestlé deal

Starbucks Corp. has agreed to provide additional disclosures on how it recognizes revenue after the U.S. Securities and Exchange Commission questioned some of its accounting practices.

The Seattle-based coffee chain is one of many U.S. companies adjusting to new accounting guidelines that came into effect at the start of last year for most public companies. The new rules aim to standardize how companies from different industries account for revenue from sales and services.

At least 208 companies received letters from the SEC about their revenue-recognition practices in 2018, according to regulatory filings and data compiled by consulting firm Audit Analytics Inc. That’s up about 56% over the annual average during the previous two years. As of the end of June, 50 companies had received letters on the subject, down slightly from 53 during that period a year earlier.

“When there are issues around revenue recognition, the SEC takes it very seriously because it’s an area that management can manipulate,” said Derryck Coleman, research manager at Audit Analytics.

Representatives for the SEC declined to comment.

The SEC regularly sends comment letters to companies with questions about disclosures made in securities filings. The letters usually focus on accounting practices and can result in additional disclosures in future filings, revisions to previously filed disclosures or a simple response with extra details that help the SEC better understand a disclosure.

The SEC, in letters sent between May and August as a part of a routine review, questioned Starbucks management’s approach to recognizing revenue in its quarterly earnings filing ended March 31. The regulator sought clarification on Starbucks’ revenue-recognition policy. One question from the SEC was why the company believed it was appropriate to recognize pre-opening services, such as reviewing architectural plans and training employees, upon completion of the services. The regulator also asked Starbucks to explain the way it recognized Nestlé SA ’s $7 billion upfront payment in 2018 for the rights to sell Starbucks products.

A change in accounting for gift cards also made it harder for the SEC to discern the amount of deferred revenue allocated to the Nestlé deal.

“Starbucks’ historic disclosure wasn’t robust enough to relay the info that investors need to assess where the revenues are coming from,” Mr. Coleman said.

Starbucks’ responses on its approach led the regulator to ask the company to make additional disclosures in its forthcoming annual report for the fiscal year ended Sept. 29, which the company usually releases in November.

Starbucks, in a response to the SEC, said it would expand its disclosures to clarify the new revenue-recognition standard’s impact on financial line items, including its income from breakage, which refers to gift-card balances that a company can claim once they think they’re unlikely to be redeemed.

The back-and-forth between a company and the SEC stops once the regulator deems the matter resolved. The SEC judged the Starbucks matter resolved Aug. 8, according to a letter the regulator sent to the company. The letters are typically made public about 20 days after a matter is resolved.

“The SEC has made similar inquiries to companies across different industries, including the retail and quick-service restaurant sector,” a Starbucks spokesman said, adding, “We do not expect further SEC dialogue on this matter.”

The accounting shift in gift-card breakage inflated the year-over-year increase in gross margins at Starbucks’ Americas division, a Cowen Inc. research report said in April. Cowen analysts wrote their “excitement has been tempered” from Starbucks’ disclosure on what was driving the increase.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 13, 2019

The New Tax Math for People Living in High-Tax States

 

By Brian J. O’Connor | September 10, 2019

Topics: Individual Income Tax , State and Local Taxes

Summary: This article discusses high earning individuals recently facing the full extent of the 2017 tax law change limiting the deductibility of state and local income taxes. Many are trying to establish residency in states with no income taxes but could fail to meet tests established in law and precedent in high tax states. The article concludes with a comment from a state with no income tax. “Catherine Frank, executive director of the North Carolina Center for Creative Retirement, suggests one solution for people who own homes in two states: Move full time to the lower-tax state. It’s simpler than figuring out how to split time between two homes without running afoul of the higher-tax state’s rules, and it cuts down on living expenses.”

Classroom Application: The article may be used in individual income tax classes to discuss tax return filing extensions and the impact of 2017 tax law changes.

Questions:

·         What tax law change in 2017 affects taxpayers from locations with the highest state and local taxes?

·         Why are people just now starting to see the effect of this change in tax law?

·         How are people responding to this tax effect?

·         What are some factors that make it difficult to establish residency in a new state, particularly in reaction to this tax law change?

Read the Article

Reviewed By: Judy Beckman

 

"The New Tax Math for People Living in High-Tax States," by Brian J. O’Connor, The Wall Street Journal, September 10, 2019
https://www.wsj.com/articles/the-new-tax-math-for-people-living-in-high-tax-states-11568137115

The limit on deductions for state income taxes and property taxes costs some taxpayers tens of thousands

More snowbirds are expected to make a permanent move as the curbs on state and local tax deductions are starting to be felt.

The Tax Cuts and Jobs Act of 2017 clamped a $10,000 limit on the amount of state and local taxes—including income and property taxes—that joint filers can deduct from their income for federal taxes.

Financial planners say that as high-net-worth taxpayers finalize their 2018 returns to meet the October tax-extension deadline, they expect many residents of New York, New Jersey, California and other relatively high-tax states will decide to spend more time in Florida, Texas, Nevada or other states that don’t collect income taxes, or move there outright.

“People are just starting to see the effect,” says Daniel Bernard, an attorney with Twomey Latham in Riverhead, N.Y. “Over the coming months we’re going to see a lot more people looking to establish Florida residency.”

An analysis conducted by Connecticut projected that residents of the state would pay an additional $2.8 billion in federal taxes on their 2018 returns because of the change in deduction rules. New York State Gov. Andrew Cuomo has complained that the deduction limit and other tax changes are prompting residents to flee to Florida.

Ed Wollman, a founding partner who handles taxes and estates with Wollman, Gehrke & Associates in Naples, Fla., says a New York City snowbird couple with taxable income of $500,000 would pay about $50,000 in state and city income taxes. A couple with the same taxable income in Illinois would escape a tax bill of close to $25,000 by moving to a no-income-tax state, he says. In New Jersey, the savings would be nearly $32,000, in California more than $46,000 and in Connecticut more than $32,000.

Nevada has seen an influx of California residents fleeing the state’s income tax for years, but the new limit on the federal deduction has pushed even more Californians to look at Nevada or other no-tax states, says Christopher Manes, a tax planner with Manes Law in Palm Springs, Calif. “Most of my clients are high-income individuals, so changing their residency from California has obvious benefits,” Mr. Manes says. “But for people in the $500,000 bracket, the state and local tax issues can be the straw that broke the camel’s back.”

In Texas, estate attorney Virginia Hammerle of the Hammerle Finley Law Firm in Lewisville reports an influx of snowbird clients wanting to move their tax residences from California and the East Coast. “This has become a very hot topic,” Ms. Hammerle says. “I’ve had clients who tell me they realize savings of $50,000 to $100,000 annually.”

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 13, 2019

GE to Give Up Majority Control of Baker Hughes

 

By Thomas Gryta | September 10, 2019

Topics: Investments , Consolidation

Summary: The article follows on a previous one covered in this review in which whistleblower Harry Markpolos accuses GE of improperly accounting for its investment in Baker Hughes, among other matters. GE has now sold that investment at a loss; the investment was not written down to current market value because GE has been consolidating this subsidiary. GE owned a 62.5% stake in Baker Hughes in 2017 and 2018, then reduced its ownership to 50.2% in a sale that generated a loss of $2.2 billion. The current sale, combined with an offering by Baker Hughes and subsequent share buyback, will leave GE holding less than a 40% interest in the company. The sale “…is the latest move by Chief Executive Larry Culp to raise cash and pay down GE’s more than $100 billion in debt.” As of this writing, GE has made a tender offer to repurchase existing debt. The press release announcing the tender offer has been furnished to the SEC on Form 8-K available at https://www.sec.gov/Archives/edgar/data/40545/0001

Classroom Application: This article may be used in a financial reporting class covering consolidations and/or accounting for sale of investments. The technical level is high so that the review is appropriate for classes at the intermediate, advanced, or graduate level.

Questions:

·         How long has GE held a controlling interest in Baker Hughes?

·         According to the article, why is GE selling this investment?

·         What is the accounting implication of GE selling ownership in Baker Hughes to reduce its ownership interest to about 40% of Baker Hughes’s outstanding shares?

·         Following the transaction described in this article, what accounting method do you think will be used by GE to account for its investment in Baker Hughes Co?

·         Support your answer to question above by providing a reference to the FASB Accounting Standards Codification.

Read the Article

Reviewed By: Judy Beckman

 

"GE to Give Up Majority Control of Baker Hughes," by Thomas Gryta, The Wall Street Journal, September 10, 2019
https://www.wsj.com/articles/ge-to-give-up-majority-control-of-baker-hughes-11568154610

Conglomerate will raise nearly $3 billion in cash from oil investment but trigger a more than $7 billion charge

General Electric Co. GE +0.49% is giving up majority control of Baker Hughes , BHGE -0.18% selling shares in the oil-field services firm that will raise about $3 billion cash but trigger a more-than-$7 billion accounting charge.

GE executives have said they planned to wind down their stake in the business, which GE acquired when it merged its struggling oil and gas division with Baker Hughes in a 2017 deal. The combination created a new public company that was 62.5% owned by GE.

GE has been selling its stake to both exit the business and raise cash to pay down its debt load. Last year, GE sold a $4 billion stake and recorded a $2.2 billion loss on the transaction, which reduced its ownership from 62.5% to 50.2%.

Based on the current share price of Baker Hughes, GE could bring in about $2.9 billion from the latest sale. With a 105-million-share secondary offering and a $250 million stock- buyback by Baker Hughes, GE’s stake will fall below 40%.

GE will no longer include the financial results of Baker Hughes with its own and will have to take an accounting charge estimated to be $7.4 billion as of July 24. The final proceeds and size of the charge will depend on the offering’s pricing.

The charge is necessary because the market value of the Baker Hughes stake has dropped compared with how GE was carrying it. GE’s stake was worth about $12.5 billion at Tuesday’s closing price.

Baker Hughes shares closed Tuesday at $24.11; two years ago the stock traded at almost $37. The stock fell nearly 4% in late trading.

A GE spokeswoman pointed to Baker Hughes’ regulatory filing and prior public comments.

The stake sale is the latest move by Chief Executive Larry Culp to raise cash and pay down GE’s more than $100 billion in debt. It recently reached a deal to sell its airplane finance arm of GE Capital to Apollo Global Management , and has sold its transportation business. It is in the process of selling its biotech business to Danaher Corp for $21 billion.

Shortly after Mr. Culp became CEO in October 2018, GE reached a deal with Baker Hughes to start selling its stake earlier than planned. GE had been prevented from selling its stake in Baker Hughes until July 2019 as part of the merger agreement.

GE also will lose its control of the Baker Hughes board, giving it only a single seat instead of the previous five. It expects GE veteran John Rice to stay on the board, while departing finance chief Jamie Miller and former director James Mulva will resign.

Former GE-appointed directors Lorenzo Simonelli, who is Baker Hughes’ chief executive, and former GE director Geoffrey Beattie will stay on the board but won’t be GE appointees. If GE’s stake falls below 20%, it will lose its single remaining seat on the board.

GE’s core business is making jet engines, turbines, MRI machines and other heavy-duty industrial equipment, and the oil and gas operations long weighed on financial results.

GE spent more than $14 billion on deals in the sector over a decade under former CEO Jeff Immelt, but the timing of the investment was poor. In 2014, GE told investors that its assumptions of growth were based on oil prices at around $100 a barrel just as prices collapsed. Oil closed Tuesday at around $58 a barrel.

Last month, Harry Markopolos, the accounting expert who raised red flags about Bernard Madoff’s Ponzi scheme, accused GE of improperly accounting for the Baker Hughes stake.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 20, 2019

Ex-KPMG Partner Gets a Year and a Day in ‘Steal the Exam’ Scandal

 

By Jean Eaglesham | September 11, 2019

Topics: Auditing , KPMG , PCAOB

Summary: “The former No. 2 auditor at KPMG LLP was sentenced to a prison term of one year and one day for his role in a “steal the exam” scandal…in which partners and staff learned which audits would be subject to inspection by the Public Company Accounting Oversight Board (PCAOB).”

Classroom Application: Questions relate this internal issue at KPMG LLP to the firm's ability to audit internal controls. The article may be used in an auditing course or courses devoted to internal controls and/or fraud.

Questions:

·         In conducting audits, what does it mean for an auditor to consider a client’s “tone at the top”? Cite your source for this information.

·         Of what actions was former KPMG partner David Middendorf convicted?

·         How do those actions reflect on “tone at the top” of the firm itself?

·         Does this guilty verdict make you question this firm’s ability to conduct audits? Explain your answer.

·         What were the professional implications of the arrest, criminal trial, and guilty verdict against Mr. Middendorf as an individual?

Read the Article

Reviewed By: Judy Beckman

 

"Ex-KPMG Partner Gets a Year and a Day in ‘Steal the Exam’ Scandal," by Jean Eaglesham, The Wall Street Journal, September 11, 2019
https://www.wsj.com/articles/ex-kpmg-partner-sentenced-to-a-year-and-a-day-in-steal-the-exam-scandal-11568217009

Auditors got advance information from oversight board about which audits would be reviewed

The former No. 2 auditor at KPMG LLP was sentenced to a prison term of one year and one day for his role in a “steal the exam” scandal that exposed serious weaknesses at one of the Big Four accounting firms.

David Middendorf, the former second-in-command of KPMG’s U.S. audit practice, was convicted for his role in a scheme to steal the names of the firm’s clients whose audits were going to be reviewed by the nation’s accounting regulator.

“As the trial made clear, there were systemic problems at KPMG regarding the use of confidential [regulatory] information,” the government said in a court filing this month. The scheme “could have corrupted KPMG to its core,” prosecutors said.

Mr. Middendorf, 55 years old, said at his sentencing hearing in New York on Wednesday that “never in my wildest imagination” did he imagine that what he did might be criminal conduct. He said what had already happened to him was enough to deter any auditor in the world from similar conduct, adding he had been arrested at 5:45 a.m., taken to court in leg shackles “and been in this nightmare ever since.” His lawyer told the court the case had ended Mr. Middendorf’s 30-year career at KPMG, tarnished his reputation, damaged his finances and left him unemployable as a certified public accountant.

In relaying the sentence, U.S. District Judge J. Paul Oetken said the criminal conduct was serious because it involved the corruption of a regulatory process. “It did involve cheating by employees…to give their company a leg up,” he said. He added that be believed Mr. Middendorf “knew what he was doing was wrong.”

The punishments imposed on the firm’s former auditors are unusual in their severity. Mr. Middendorf is the second former KPMG partner or employee sentenced to prison time because of the scheme. Another two have pleaded guilty and await sentencing. One former partner, who denies wrongdoing, is due to go on trial this fall.

“It’s very rare for a Big Four audit partner to face any kind of criminal penalty,” said Stephen Sorensen, a Venice, Calif., attorney who specializes in suing accounting firms. “This is an extreme case: they were trying to defraud a regulator.”

The year-and-a-day sentence means Mr. Middendorf is potentially eligible for early release on the grounds of good conduct. “He was probably fortunate to have received the sentence he did, given the unprecedented conduct he was convicted of and the prosecutors’ recommendation he serve at least 37 months,” said Michael Shaub, accounting professor at Texas A&M University.

Mr. Middendorf’s lawyer, prosecutors and accounting-industry observers agree problems at the firm were widespread.

Some said the $50 million penalty KPMG was ordered to pay by the Securities and Exchange Commission, while one of the highest imposed on an audit firm, was too little.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 20 2019

Google Pays More Than $1 Billion to Settle French Tax Cases

 

By Sam Schechner | September 12, 2019

Topics: Google , France , International Taxation

Summary: Alphabet Inc. subsidiary Google is paying more than $1 billion in fines and back taxes to settle tax disputes in France based on that country’s assessment of taxes on operations within its borders. “The settlements amount to 2.9% of Alphabet’s revenue” for the quarter ended June 30, 2019. Other countries “stretching from the U.K. to South Korea contend that companies like Google have long declared too little profit in the countries where they do business.” Until these countries “agree on new rules on how to allocate corporate profit globally, and over strong objections from the U.S. potentially leading to retaliatory tariffs, France will impose a tax of 3% on “certain types of digital revenue in the country from companies with more than €750 million in annual global revenue, including at least €25 million in France.”

Classroom Application: The article may be used in an international or corporate tax class. Topics addressed include the basis for allocating revenues and profits across geographic locations, negotiations among countries pushing to change the global tax system, and negotiations to settle tax bills.

Questions:

·         Why is Google paying “more than $1 billion in fines and back taxes” to France?

·         What legal entity does France claim owed these back taxes?

·         What new tax has France imposed in 2019?

·         What change will indicate it is time for the French tax imposed in 2019 to be discontinued?

·         How can multi-national entities "report too little profit in countries in which they operate"? What rules could allocate corporate profits globally apppropriately? Explain your answer.

Read the Article

Reviewed By: Judy Beckman

 

"Google Pays More Than $1 Billion to Settle French Tax Cases," b Sam Schechner, The Wall Street Journal, September 12, 2019
https://www.wsj.com/articles/google-pays-more-than-1-billion-to-settle-french-tax-cases-11568301918

Company has faced years of probes over whether it has properly declared its activity in France

PARIS—Google is paying more than $1 billion in fines and back taxes to settle a pair of tax disputes in France, where it has faced years of investigations into whether it has properly declared all of its activity in the country.

France’s financial prosecutor said Thursday that a court has approved a €500 million ($553 million) fine the Alphabet Inc. GOOG -0.56% subsidiary agreed to in a settlement of a tax-related criminal probe. The prosecutor has been investigating Google for aggravated tax evasion since 2015, after a complaint from the French tax authority related to the four previous years.

Google confirmed the agreement, and said that said it had also previously agreed to pay €465 million in back taxes to France’s tax authority, which has for years argued that Google was underpaying.

The settlements, which prosecutors said were related, were a surprise because a French court two years ago threw out an earlier €1.11 billion tax bill that France’s tax authority had issued the company for the years from 2005 to 2010. In that bill, the tax authority had alleged that Google had declared too little revenue and profit in France.

But Google says it wanted to settle its pending cases and move forward. “We have now settled tax and related disputes in France that have persisted for many years,” a Google spokesman said, adding that the prior settlement with the French tax authority was already substantially reflected in Alphabet’s prior financial results.

The settlements amount to 2.9% of Alphabet’s revenue last quarter. France has started levying a new tax against large companies with significant digital revenue in the country, retroactive to the start of 2019. France implemented the tax over strong objections from the U.S., which has opened an investigation that could eventually lead to retaliatory tariffs.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 20, 2019

UAW Strike Could Cost GM $100 Million a Day

 

By Mike Colias | September 16, 2019

Topics: Managerial Accounting , Capacity Utilization

Summary: The nationwide strike of United Auto Workers Union “…involves roughly 46,000 full-time workers in more than 30 factories across 10 states.” Its impact could amount to between $50 million and $100 million daily according to estimates by banks Credit Suisse and Citigroup Inc. as well as analyst firm Morningstar Inc. “GM entered talks determined to hold the line on its labor costs…That is usually a priority…but is viewed by GM executives as especially important this time because they are trying to prepare for a potential cyclical downturn.”

Classroom Application: The article may be used in a managerial accounting class to discuss labor union negotiations and their connection to financial statements and reporting. As well, the concept of idle capacity is questioned.

Questions:

·         Why have GM factory workers gone on strike? What specific items of concern are cited in the article?

·         According to the article, what factors are being considered by management while negotiating with the UAW labor union?

·         Refer to the graphic entitled “Profit Warning.” Specifically, describe the earnings measure given the in the footnote. Is this exactly equal to annual pretax profit? Explain.

·         How does the inclusion of profit measures in the article help to give context around the amount of costs being incurred by GM, estimated at $50 million to $100 million per day?

·         If GM workers are not producing anything, then why is GM incurring costs? Specifically comment on the impact of idle capacity on production costs.

Read the Article

Reviewed By: Judy Beckman

 

"UAW Strike Could Cost GM $100 Million a Day," by Mike Colias, The Wall Street Journal, September 16, 2019
https://www.wsj.com/articles/with-no-vehicles-being-made-uaw-strike-could-cost-gm-100-million-a-day-11568653935

Walkout comes at delicate time for both auto maker and union

General Motors Co. GM -0.45% stands to lose as much as $100 million a day if the nationwide strike of auto workers continues.

Auto-industry analysts estimate that the walkout—which began Monday and involves roughly 46,000 full-time workers in more than 30 factories across 10 states—could dent GM’s profit by between $50 million and $100 million daily. Stalled production could slash more than a tenth of GM’s expected third-quarter operating profit of about $3.5 billion by the weekend, though GM could make up some lost production once workers return, analysts say.

The U.S. business is GM’s most profitable, but the strike comes at a delicate time for both the nation’s largest auto maker and the United Auto Workers union.

GM is seeking to recover lost market share in the lucrative pickup-truck category, with the continuing rollout of its most extensively redesigned pickups in two decades. The Detroit company is also confronting eroding profit in China, its largest market in terms of sales, and a stalled stock price.

GM also has been cutting costs in the U.S. to try to insulate the company from a potential U.S. sales downturn after a long, healthy run.

It is on track to eliminate $4.5 billion in costs by late next year as part of a restructuring announced last November, company officials have said. GM in addition has shuttered multiple plants, affecting 3,300 jobs. GM has said most of those workers were hired at other company factories.

GM does not set aside a fund specifically to guard against the impact of a strike but relies on its cash cushion and lines of credit to weather any sharp drop in its production, a spokesman said.

The economic impact of the strike isn’t expected to be as large as during previous walkouts because the car company’s union workforce has shrunk dramatically in recent decades as it built more factories overseas. For example, in 1996, a supplier strike forced GM to temporarily lay off 177,000 union members, nearly four times the size of its union workforce today.

Bargainers for the UAW are pressing GM to keep the idled plants open, increase pay and benefits for workers with less seniority and provide better job protection for temporary workers.

The sides are further apart on a range of issues than is typical at this point in the negotiations, people close to the talks said. Sticking points include health care and the use of temporary workers.

The job-security issue was stoked by GM’s decision late last year to shutter four U.S. factories, although the company in negotiations has floated saving one, its Detroit-Hamtramck plant, to eventually produce electric pickup trucks, according to people close to the talks.

GM entered talks determined to hold the line on its labor costs, people familiar with its strategy have said. That is usually a priority for Detroit auto makers but is viewed by GM executives as especially important this time because they are trying to prepare for a potential cyclical downturn.

Continued in article

Jensen Comment
I question the $100 million a day figure. GM dealers are clearing out inventories and will be placing larger orders when the strike is over. Of course there are going to be huge losses, but accounting numbers should always be viewed skeptically. The union has a lot at stake here, because any concessions gained from GM will likely be gained from other auto manufacturers with having to strike. There will most certainly be spillover benefits to workers outside the UAW.  Consumers ultimately pay the price all up and down the line.

In any case the price of cars is probably going up at a time when the price of fuel is dramatically rising due to recent escalation of the war between Iran and Saudi Arabia. The GM losses due the recent UAW strike are difficult to separate out from losses (possibly longer-term losses) due to fuel price increases. Fewer miles put on a vehicle each year often translates for keeping the vehicle longer before replacing it. This makes GM sad.

The timing of the bombings in Saudi Arabia could not have been worse for auto companies, auto workers, labor unions, and suppliers of the materials purchased by auto manufacturers. Higher fuel prices mean lower GM profits for the UAW to tap into for higher wages. Life is very complicated.

 


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27 2019

Public Companies Consider New Controls to Prepare For Audit Rule

 

By Mark Maurer | September 17, 2019

Topics: critical audit matters

Summary: The article discusses implications of the new audit reporting model which requires “independent auditors to disclose what they found to be the most challenging in reviewing companies’ financial statements”—labeled critical audit matters (CAMs). “Auditors have certainly been requesting to have a dialogue with the audit committees,” according to the executive director of the Center for Audit Quality (CAQ), Julie Bell Lindsay. “Practice runs resulted in companies addressing existing internal controls or considering new controls and reporting procedures….”

Classroom Application: The article may be used in an auditing class to discuss the new form of audit report and/or internal controls over financial reporting.

Questions:

·         What does the author Mr. Maurer mean when he writes that “the auditor’s letter in a company’s annual report has long followed a pass/fail model”? Specifically, what is meant by a “pass/fail model”?

·         What has changed in the new form of the audit report? When is this new form being implemented?

·         What steps did companies and their auditors take in preparing for this change in the auditor’s report?

·         What was the result of these preparation steps? In most cases, how long did the process take?

Read the Article

Reviewed By: Judy Beckman

 

"Public Companies Consider New Controls to Prepare For Audit Rule," by Mark Maurer, The Wall Street Journal, September 17, 2019
https://www.wsj.com/articles/public-companies-consider-new-controls-to-prepare-for-audit-rule-11568728801

Expanded auditor report offers investors a window into a company’s most complicated issues

Companies preparing for a new auditing rule are unearthing knotty internal issues, and these revelations are prompting executives to strengthen internal controls.

The Public Company Accounting Oversight Board rule, which began taking effect in phases this summer, requires independent auditors to disclose what they found to be the most challenging in reviewing companies’ financial statements.

The auditor’s letter in a company’s annual report has long followed a pass/fail model and has been known to rely on boilerplate language. The pass/fail model remains, but the now-expanded auditor’s report is more tailored, giving investors a window into issues that may not have been previously apparent.

The PCAOB, which regulates U.S. audit firms, uses the term “critical audit matters,” or CAMs, to classify issues highlighted through the application of the new standard.

Forty-three percent of employees at large companies said audit committees identified additional types of controls requiring implementation during a practice run, while 19% of employees said their companies are still considering controls, according to a survey from compliance data company Intelligize Inc., which polled about 170 employees at U.S. public companies.

The rule first went into effect for large accelerated filers, or companies with a “public float”––the market value of shares held by the public—of at least $700 million. Large accelerated filers whose fiscal years ended on or after June 30 were the first group required to feature CAMs in annual reports.

For most other public businesses, the rule takes effect the fiscal year ending on or after Dec. 15, 2020. Emerging growth companies—businesses with less than $1 billion in annual gross revenue—are exempted, according to the PCAOB.

During implementation practice runs, auditors worked on identifying and drafting CAMs and conveying them to audit committees. For most large firms, the process took up to six months, respondents said.

Although the auditor does most of the preparation, the company is still on the hook for the disclosure, which investors are likely to scrutinize.

“Auditors have certainly been requesting to have a dialogue with the audit committees and with CFOs and management of companies well in advance of the CAMs going live, because you don’t want any surprises in the moment,” said Julie Bell Lindsay, executive director of the Center for Audit Quality, a nonprofit that represents public-company auditors.

Practice runs resulted in companies addressing existing internal controls or considering new controls and reporting procedures, particularly for compliance with new accounting standards from the Financial Accounting Standards Board.

Large companies identified income tax, revenue recognition and lease accounting as the main CAM topics during their dry run, the Intelligize study found. A separate Deloitte Touche Tohmatsu study this month, based on 52 large companies, found that goodwill was the most prevalent critical matter in filings so far.

“The most disruptive [tax] matters would be exposure on a tax basis or a type of emerging litigation with a liability attached to it,” said Phillip Austin, national assurance managing partner at professional services firm BDO USA LLP. “That would attract the most investor attention.”

Some companies determined they didn’t have enough time to prepare for the new rule. QuinStreet Inc., a Foster City, Calif.-based online marketing company, qualified as a large accelerated filer after its second-quarter filing, released in February. The company’s fiscal year ended June 30, meaning it would be among the first batch of companies required to disclose CAMs, along with companies such as Microsoft Corp. and Estée Lauder Co s.

QuinStreet and its auditor, PricewaterhouseCoopers, decided approximately four months would be inadequate for a dry run, said Natalie Zimmer, QuinStreet’s controller and vice president of finance. PwC identified two CAMs, related to deferred tax assets and the valuation of intangible assets from a company acquisition, the annual filing showed.

“Our auditor had to do a significant amount of incremental work,” Ms. Zimmer said. A PwC spokesman declined to comment, citing a restriction on commenting about audit engagements.

The PCAOB plans to produce an interim analysis on the initial implementation of the CAMs standard and, once it goes into full effect, a review of its costs and benefits, a spokeswoman for the regulator said

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27, 2019

SEC’s Clayton Says SEC Doesn’t Judge Direct Listings

 

By Dave Michaels | September 19, 2019

Topics: Initial Public Offering (IPO) , Direct Listing

Summary: At a CNBC conference on Thursday, September 19, 2019, Securities and Exchange Commission (SEC) Chairman Jay Clayton said that the SEC does not “mind when companies go public using a…’direct listing’ on exchanges instead of a traditional offering, where investment banks underwrite the deal…. The SEC was initially concerned in 2017 that direct listings could open the door for riskier and less-seasoned companies to access public investors, without giving them as much information or providing some safeguards….[in the case of the Spotify Technology SA initial public offering,] the SEC asked the company in 2018 to add a disclosure that said the ‘company’s direct listing of its ordinary shares on the NYSE is a novel method for going public, and as a result, the trading volume and price of the ordinary shares may be more volatile than if the ordinary shares were initially listed in connection with a traditional initial public offering.’”

Classroom Application: The article may be used to discuss the process of an initial public offering with a focus on the role of the SEC and disclosures. It can be used in financial reporting classes when discussing forms of business organization or stock issuances.

Questions:

·         What is different about how Slack Technologies, Inc. and Spotify SA have listed their shares on U.S. stock exchanges?

·         What did the Securities and Exchange Commission (SEC) require Spotify to state in its public offering document?

·         How has the SEC apparently changed its perspective on this novel process for listing securities such as followed by Slack Technologies, Inc. and Spotify SA?

·         Based on the discussion in the article, summarize the reasoning behind this apparent change in the SEC’s “attitude.”

Read the Article

Reviewed By: Judy Beckman

 

"SEC’s Clayton Says SEC Doesn’t Judge Direct Listings," by Dave Michaels, The Wall Street Journal, September 19, 2019
https://www.wsj.com/articles/secs-clayton-says-sec-doesnt-judge-direct-listings-11568904829

When comparing direct listings versus more traditional IPOs, the agency chairman asks, ‘Who are we to judge if one is better than the other?’

The Securities and Exchange Commission doesn’t mind when companies go public using a cheaper “direct listing” on exchanges instead of a traditional offering, where investment banks underwrite the deal, the agency’s chairman said.

“If a direct listing is providing the same kind of fair information and fair access to the market as your more traditional underwritten IPO, who are we to judge if one is better than the other?” Chairman Jay Clayton said at a CNBC conference Thursday.

The SEC was initially concerned in 2017 that direct listings could open the door for riskier and less-seasoned companies to access public investors, without giving them as much information or providing some safeguards. In an IPO, investment banks perform a gatekeeping function in which they are responsible for due diligence on the company selling shares. Banks also help stabilize prices on the first day of trading by intervening to buy shares.

Companies such as Slack Technologies Inc. and Spotify Technology SA have listed existing shares directly on U.S. stock exchanges. The direct pathway saves tens of millions of dollars in investment-banking fees, while still giving employees and early investors a chance to cash out.

In Spotify’s case, the SEC asked the company in 2018 to add a disclosure that said the “company’s direct listing of its ordinary shares on the NYSE is a novel method for going public, and as a result, the trading volume and price of the ordinary shares may be more volatile than if the ordinary shares were initially listed in connection with a traditional initial public offering.”

 

Direct listings are one consequence of the growth of private capital markets, in which younger companies get most of the money they need from venture capitalists and institutional investors. Many of these companies have deferred public offerings until they need a way to sell stock to the broader public and enable insiders and early investors to cash out.

Airbnb Inc. is weighing a direct listing for its offering, which is expected to take place in 2020, according to people familiar with the home-sharing company’s plans.

Mr. Clayton has lamented the trend of companies staying private longer, saying it walls off some of the most promising investments from ordinary investors. Only the wealthiest households and institutions, such as pension funds, are allowed to invest in private markets.

Direct listings provide another option for companies that have different reasons and needs to go public, Mr. Clayton said. At the same time, they can provide another way for shares to get into the portfolios of ordinary investors.

“The growth opportunities have shifted, not all the way, but to a substantial extent into our private markets,” he said. “Ordinary investors don’t have access to them. That’s not good.”

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27 2019

Hemp CFO’s Quest: Educate Banks, Auditors on the Benefits of CBD

 

By Nina Trentmann | September 22, 2019

Topics: Initial Public Offering (IPO) , Public Accounting , Chief Financial Officer

Summary: John Philpott is the new chief financial officer of Vertical Wellness which plans to go public on the New York Stock Exchange or NASDAQ in the future. The challenges facing Mr. Philpott in growing the company and preparing it for a public stock listing are discussed in the article; these challenges are exacerbated because of the product the company makes--cannabidiol, or CBD, products such as creams, lotions and other nonconsumable items. These products were legalized by inclusion in the Agriculture Improvement Act of 2018. “Some banks and accounting firms have kept their distance from the sector because of a previous federal ban on growing hemp. The ban still exists for tetrahydrocannabinol or THC, an ingredient of the cannabis plant, which means companies focused on products containing THC rather than CBD can’t list on U.S. stock exchanges.”

Classroom Application: The article may be used in a financial reporting class to discuss the role of a CFO, the process of obtaining bank financing, or the process of taking a company public on a U.S. stock exchange. It also may be used in an auditing class to discuss public accounting firms’ concerns with association with financial statements in this industry.

Questions:

·         What does the company Vertical Wellness do?

·         Why is the company’s industry so young? Were the products it makes just recently developed? Explain.

·         What challenges does the company face as it plans to undertake an initial public offering of its stock?

·         What tasks must the Vertical Wellness chief financial officer, John Philpott, do to help alleviate the challenges faced by the company?

Read the Article

Reviewed By: Judy Beckman

 

"Hemp CFO’s Quest: Educate Banks, Auditors on the Benefits of CBD," by Nina Trentmann, The Wall Street Journal, September 22, 2019
https://www.wsj.com/articles/hemp-cfos-quest-educate-banks-auditors-on-the-benefits-of-cbd-11569157200

John Philpott faces a host of challenges as finance chief of Vertical Wellness

John Philpott’s new job is much like that of any other finance chief guiding a growing company to a public-market debut. He needs to get the books in order, bolster the finance team and develop relationships with bankers, all while keeping tabs on operations and emerging competitors.

But something makes the initial public offering process at Vertical Wellness a little more challenging: The fact that cannabidiol, or CBD, is the main product of the Agoura Hills, Calif., company, which Mr. Philpott joined as CFO this month.

Vertical Wellness works with farmers to grow hemp on about 2,500 acres of farmland in Kentucky, Tennessee and California. It processes the flowers, leaves and stems of the hemp plant and turns them into CBD oil, which serve as the basis for a variety of products such as pain creams, lotions, pain patches and shampoo.

CBD was legalized in the U.S. last year when it was included in the Agriculture Improvement Act of 2018, which enabled the growing of hemp and opened up the market for CBD-products such as creams, lotions and other nonconsumable items.

Although legalization has paved the way for a growing industry, there are still difficulties: Auditors are hard to find, competition is stiff and the stock prices of their trade rivals are volatile. And banking relationships with national or even international lenders are hard to come by.

Some banks and accounting firms have kept their distance from the sector because of a previous federal ban on growing hemp. The ban still exists for tetrahydrocannabinol or THC, an ingredient of the cannabis plant, which means companies focused on products containing THC rather than CBD can’t list on U.S. stock exchanges.

Some U.S. states permit the cultivation and consumption of THC, but companies operating in this space have resorted to listing in Canada, where the regulation of cannabis is looser and consumption of the product for both medicinal and recreational use is legal.

Many people struggle to differentiate between CBD and THC, which forces Mr. Philpott—who was introduced to hemp products about nine months ago, when his nephew recommended a cream to treat a shoulder inflammation—to provide additional explanations to allay concerns.

“When I meet with a bank, I first need to make sure they understand what kind of company we are,” he said. Some of the banks Mr. Philpott recently talked to still have to verify whether they can do business with Vertical Wellness, which works with a local bank in Kentucky but wants a national or international bank going forward.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27, 2019

 

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Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27 2019

 

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Teaching Case From The Wall Street Journal Weekly Accounting Review on September 27 2019

 

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Humor for September  2019

There’s a joke going around: “My wife asked me why I was speaking so softly at home. I told her I was afraid Mark Zuckerberg1 was listening. She laughed. I laughed. Alexa laughed. Siri laughed.”
Eric Cohen

The funniest coach in college football ---
https://twitter.com/NickPetraccione/status/1170204223197388802

Ted Talk:  Free World Needs Satire ---
https://www.ted.com/talks/patrick_chappatte_a_free_world_needs_satire?utm_source=newsletter_weekly_2019-09-20&utm_campaign=newsletter_weekly&utm_medium=email&utm_content=talk_of_the_week_image

Georges Simenon wrote nearly 200 novels. Hitchcock telephoned one day and was told, "Sorry, he’s just started a novel." "I’ll wait,’ came the reply
https://www.spectator.co.uk/2019/08/if-only-georges-simenon-had-been-a-bit-more-like-maigret/

Jokes Under Stalin ---
https://www.themoscowtimes.com/2019/08/03/its-only-a-joke-comrade-a66683

Two Amish men and a 12-pack
A couple of Amish dudes were drinking alcohol, carrying a 12-pack of beer and driving their horse and buggy in Ohio. When authorities attempted to question them about drinking and driving, the men made a run for it and escaped into the woods. The authorities have turned the horse over to a local farmer until the two men come forward. Tell me: Did they at least grab the beer?

https://www.cnn.com/2019/09/18/us/amish-men-drinking-and-driving-trnd/index.html


What's the greatest movie quote of all time?
https://www.theatlantic.com/magazine/archive/2019/09/q-what-is-the-greatest-movie-quote-of-all-time/594748/
Jensen Comment
Here are some of my favorite quotes (not from movies)

Joe Biden:  Poor Kids Are Just as Smart as White Kids ---
https://www.businessinsider.com/joe-biden-gaffe-poor-kids-just-smart-white-kids-2019-8

If you don't know where you're going, you might not get there.
Yogi Berra

I learned long ago never to wrestle with a pig. ... You get dirty and besides the pig likes it ---
George Bernard Shaw

You can get a lot farther with a smile and a gun than you can with just a smile.
Al Capone


Leroy Troy :  Ghost Chickens in the Sky ---
https://www.youtube.com/watch?v=Pkdci55adqk

Leroy Troy:  Grandfather's Clock ---
https://www.youtube.com/watch?v=lZTRpS3wAzQ


Giant tortoise in 'world's slowest police chase' ---
https://www.bbc.com/news/uk-england-beds-bucks-herts-49221581
Herbert was just looking for love

People Have Jokes About President Trump’s Reported Wish to Buy Greenland ---
https://time.com/5653167/trump-buy-greenland-memes/?utm_source=newsletter&utm_medium=email&utm_campaign=the-brief-pm&utm_content=20190816&xid=newsletter-brief

The A-Hed – the Quirky Side of the Wall Street Journal ---
https://jborden.com/2019/08/15/the-a-hed-the-quirky-side-of-the-wall-street-journal/


Forwarded by Paula

Lesley Stahl did a story on gender roles in Kabul, Afghanistan,  several years before our involvement in the Afghan conflict. She noted  that women customarily walked five paces behind their husbands. She recently returned to Kabul and observed that women still walk behind their husbands.
 
Despite the overthrow of the oppressive Taliban regime, the women now seem to, and are happy to, maintain the old customs.
 
Ms. Stahl approached one of the Afghani women and asked, "Why do you now seem happy with an old custom that you once tried so desperately to change?"
 
The woman looked Ms. Stahl straight in the eyes, and without  hesitation said, "Land mines.”
 
No matter what language you speak or where you go the moral of the story is:   
BEHIND EVERY MAN, THERE'S A REALLY SMART WOMAN.




Humor September 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0919.htm 

Humor August 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0719.htm 

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 September 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

 

 

 

 

August 2019

 

 

Bob Jensen's New Additions to Bookmarks

August 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




Yield Curve --- https://en.wikipedia.org/wiki/Yield_curve

The Entire German Yield Curve is Trading Below Zero (Go Figure)---
https://marginalrevolution.com/marginalrevolution/2019/08/the-entire-german-yield-curve-is-trading-below-zero.html

The German government could today borrow billions of Euro and in a decade they could give back to investors less than they borrowed and the investors would be happy.

A Danish bank is offering mortgages at a 0.5% negative interest rate — meaning it is basically paying people to borrow money
https://www.businessinsider.com/danish-bank-offers-mortgages-at-negative-interest-rates-2019-8

Jensen Comment
As a challenge to students you might have them try to imagine reasons for this. Accounting students should imagine the journal entries and use of Excel to derive amortization tables.


Attorneys and physicians are disciplined at a rate at least seven times that of CPAs ---.
https://link.springer.com/article/10.1007/s10551-017-3738-5

Jensen Comment
CPAs can buy green eyeshades with halos attached.


Sarah Li Cain:  My mom was an accountant, and I still use the 4 best money lessons she taught me today ---
https://www.businessinsider.com/best-money-lessons-from-my-mother-the-accountant-2019-8

Jensen Comment
Sarah's mother was a bookkeeper, and there's sometimes a difference between a bookkeeper and an accountant. Firstly, accountants working as auditors of big firms must make materiality decisions. Sometimes it's too costly to pursue "small numbers."
Secondly, there are times when you should not pay for a skilled professional. I'm not a big fan of financial advisers who charge substantial fees. Firstly, you can get a lot of free financial advising from large investment firms like Vanguard, Fidelity, and TIAA. Secondly, if you pay a little more for tax return filing you can sometimes get some valuable "free" investing advice thrown in. For example, hire a reputable CPA or law firm to do your taxes rather than go cheap with H&R Block. And lastly becoming financially literate is not rocket science ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


Cybertext --- https://www.cybertext.com/

I used cybertext online textbooks when I was teaching accounting information systems. Now Cybertext is also offering some free tutorials ---
https://www.cybertext.com/DataAnalytics.aspx


FASB tackles difficult liabilities and equity topic---
https://www.journalofaccountancy.com/news/2019/jul/fasb-difficult-liabilities-equity-201921725.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Aug2019

The proposal seeks to improve FASB’s guidance on both convertible instruments and the derivatives scope exception for contracts in a company’s own equity. The proposal would:

Comments on the proposal will be accepted through Oct. 14 at FASB’s website

Jensen Comment
There has to be information loss with such simplifications. For example, reducing the "number of accounting models for convertible debt instruments and convertible preferred stock" may increase rather than decrease the number of finance models used in practice. The analogy here is when the FASB had two models for leases --- operating leases and financing leases. Over time the FASB then learned that the two models as applied in practice for leases was being abused --- thereby leading the FASB to issue a much more complicated leasing standard that firms are now trying to implement. The challenge whenever simplifying reporting standards is that companies will take advantage to a point where the FASB must go back to more complicated updates to standards. There's a complicated game in taxation and financial reporting where new rules are issued that trigger devious lawyers and accountants to circumvent the new rules with innovative contract clauses. This behavior makes rule simplification very difficult in the interactive "game" of standard setting.

Debt to equity conversion contracts are especially complicated by dependence upon contingency formulas that depend upon happenings that are very difficult to predict such as dependency on future price movements of common stock. Simplifying conversion accounting does not simplify the economics of conversion formulas themselves. The simple debt versus equity dichotomy for levels of financing now becomes more and more complicated by those uncertain mezzanine levels.


Brickbat: Big Money --- https://reason.com/2019/08/12/brickbat-big-money/

Jensen Comment
Auditors would say:  Where were the internal controls?


Where Were the Auditors and Attorneys during the Sustainability Charade of Volkswagen on Diesel Emissions? ---
https://www.cpajournal.com/2019/07/22/9187/


The COSO Internal Control Framework and Sustainability Reporting ---
https://www.cpajournal.com/2019/07/29/the-coso-internal-control-framework-and-sustainability-reporting/


Sallie Mae expects significant impact from loan loss accounting rules ---
https://news.bloombergtax.com/financial-accounting/sallie-mae-warns-it-may-triple-loan-loss-reserves-in-2020
Sallie holds lots of student loans that have lots of losses


What cost Verizon $1.1 billion and sold three six later for $10 million?
https://www.newsweek.com/verizon-sells-tumblr-wordpresscom-owner-fraction-sites-previous-price-1453946
Note the criticisms at
https://en.wikipedia.org/wiki/Tumblr


Transactions Cost Analysis --- https://en.wikipedia.org/wiki/Transaction_cost_analysis

Why Transaction Cost Analysis is Attractive, and Very Flawed ---

https://mises.org/wire/why-transaction-cost-analysis-attractive-and-very-flawed?utm_source=Mises+Institute+Subscriptions&utm_campaign=b67b7d7ee0-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-b67b7d7ee0-228708937


Excel:  Spreadsheet modellers can use the MOD function to obtain residuals and handle calculations at regular time intervals.---
https://www.fm-magazine.com/news/2019/aug/microsoft-excel-mod-function-forecast-models-201921634.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=27Aug2019

Excel:  A guide to key features in Excel for Office 365 ---
https://www.computerworld.com/article/3428640/excel-for-office-365-cheat-sheet.html

Excel:  How to Work with Trendlines in Microsoft Excel Charts ---
https://www.howtogeek.com/429126/how-to-work-with-trendlines-in-microsoft-excel-charts/


How banks are striking back against Quicken Loans and other digital-first lenders in the $9 trillion US mortgage market ---
https://www.businessinsider.com/the-online-mortgage-lending-report-2019-7


Here’s Your Scorecard For KPMG U.K. Fines So Far In 2019 ---
https://goingconcern.com/heres-your-scorecard-for-kpmg-u-k-fines-so-far-in-2019/

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


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

Chinese Government Cryptocurrency ---
https://www.forbes.com/sites/michaeldelcastillo/2019/08/27/alibaba-tencent-five-others-to-recieve-first-chinese-government-cryptocurrency/#453196f21a51

The biggest cryptocurrency scams and arrests of 2019 so far ---
https://www.businessinsider.com/the-biggest-cryptocurrency-scams-and-arrests-of-2019-so-far-2019-8

Crypto to make your head spin ---
https://marginalrevolution.com/marginalrevolution/2019/08/crypto-to-make-your-head-spin.html

New York Times:  Terrorists Turn to Bitcoin for Funding, and They’re Learning Fast ---
https://www.nytimes.com/2019/08/18/technology/terrorists-bitcoin.html?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=75816110&_hsenc=p2ANqtz-_7BbInKEbtP-dckYRGIEvAs6TscEp_NHjBHcojSJoTDrBZK3ByMPPbFkerQW2JR1870cy6uzYyxtCznjp4z7WuQo5NGw&_hsmi=75816110

MIT: North Korea is funding its weapons program with stolen cryptocurrency State-sponsored hackers have mostly been hitting up South Korean targets ---
https://www.technologyreview.com/f/614149/north-korea-is-funding-its-weapons-program-with-stolen-cryptocurrency/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=75676743&_hsenc=p2ANqtz--nsDAqPfn4ArkAt0Aot77uubUdgxiGxMkiI6T-rPdluvUmZP6TryabK4u4hog0Qp92dD0oc2KA070Nr0efF6I_iUCjvg&_hsmi=75676743 

Companies Revolutionizing the Crypto Space with New Innovations ---
https://readwrite.com/2019/08/08/5-companies-revolutionizing-the-crypto-space-with-new-innovations/

MIT:  “Crypto rogue” nations want to use blockchains to undermine the US dollar ---
https://www.technologyreview.com/s/614054/crypto-rogue-nations-want-to-use-blockchains-to-undermine-the-us-dollar/?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=75295087&_hsenc=p2ANqtz-_EeRPg0LnJg9wTtd1lR96gKSxT71-kL3ZhUS6CvcsOZkl8tsrcJgSiz5z3Z4FT6eTCNDF4wO_lTGFt3RW0jxVfttq1Eg&_hsmi=75295087
 

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

Building a Blockchain Business ---
https://www.journalofaccountancy.com/issues/2019/aug/blockchain-services-jagruti-solanki-cpa.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=02Aug2019


Boeing's $5 Billion Charge For Grounding 737 Max Planes Will Generate Max NOL Due To 2017 Tax Law Change ---
https://taxprof.typepad.com/taxprof_blog/2019/08/boeings-5-billion-charge-for-grounding-737-max-planes-will-generate-max-nol-due-to-2017-tax-law-chan.html


Prop. 106 is the wrong answer to Phoenix’s pension debt ---
https://www.statedatalab.org/news/detail/prop-106-is-the-wrong-answer-to-phoenixs-pension-debt


Illusion of a Balanced Budget:  Gov. Cuomo’s fiscal games could hurt him ---
https://www.statedatalab.org/news/detail/from-the-right-gov-cuomos-fiscal-games-could-hurt-him


Stanford:  What Happens to Local Jobs When State Taxes Go Up?
https://www.gsb.stanford.edu/insights/what-happens-local-jobs-when-state-taxes-go?utm_source=Stanford+Business&utm_medium=email&utm_campaign=Stanford-Business-Issue-168-8-11-2019&utm_content=alumni

 . . .

A Race to the Bottom

Does that mean states will increasingly find themselves in competition to reduce corporate tax rates?

Not exactly, says Rauh. At the moment, he says, many states are actually setting high tax rates and then offering generous targeted tax subsidies to individual companies.

“It seems that the race is happening in very targeted tax incentives, the prime example being the competition for Amazon’s second headquarters,” he says. “State authorities are setting high statutory rates and then doling out tax breaks to companies that they judge as having value to their state.

“This is in a way an even worse kind of race to the bottom,” Rauh adds. “It leaves substantial discretion in the hands of government officials, who may offer tax breaks only to companies of their choosing, with political considerations possibly affecting their decisions. Tax policy should not tilt the level playing field of economic competition.



Stanford:  Good News and Bad News on Tax Evasion
---

https://www.gsb.stanford.edu/insights/good-news-bad-news-tax-evasion?utm_source=Stanford+Business&utm_medium=email&utm_campaign=Stanford-Business-Issue-168-8-11-2019&utm_content=alumni

 


Lowe’s Lays Off Thousands of Store Workers ---
https://www.wsj.com/articles/lowes-lays-off-thousands-of-store-workers-11564680676
Jensen Comment
Many of those laid off assemble products like BBQ grills and lawn equipment. Now there's little reason to buy it in a box a Lowe's at a higher price (maybe) and pay a delivery charge for a boxed product when Amazon will deliver the same boxed item for free. Getting things assembled in why I often shop at Lowe's and Home Depot.

August 4, 2019 reply from Dennis Beresford

Bob,
As I understand what Lowes is doing, they are laying off full-time employees but will engage contractors to do the same assembly work. You and I can still buy an assembled product from them, presumably at the same price as before. But Lowes expects its costs will go down as the contractors are less expensive than regular employees.
Denny


Certain cognitive biases pose threats to audit work, but it’s possible to recognize and overcome them ---
https://www.journalofaccountancy.com/issues/2019/aug/biases-jeopardize-audit-quality.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=05Aug2019


Helpful References from David Giles:  Including More History in Your Econometrics Teaching ---
https://davegiles.blogspot.com/2019/08/including-more-history-in-your-teaching.html

From David Giles on Econometrics ---
https://davegiles.blogspot.com/2019/08/book-series-on-statistical-reasoning-in.html

Book Series on "Statistical Reasoning in Science & Society"

Back in early 2016, the American Statistical Association (ASA) made an announcement in its newsletter, Amstat News, about the introduction of an important new series of books. In part, that announcement said:

"The American Statistical Association recently partnered with Chapman & Hall/CRC Press to launch a book series called the ASA-CRC Series on Statistical Reasoning in Science and Society. 

'The ASA is very enthusiastic about this new series,' said 2015 ASA President David Morganstein, under whose leadership the arrangement was made. 'Our strategic plan includes increasing the visibility of our profession. One way to do that is with books that are readable, exciting, and serve a broad audience having a minimal background in mathematics or statistics.' 

The Chapman & Hall/CRC press release states the book series will do the following:

·                     Highlight the important role of statistical and probabilistic reasoning in many areas

·                     Require minimal background in mathematics and statistics

·                     Serve a broad audience, including professionals across many fields, the general public, and students in high schools and colleges

·                     Cover statistics in wide-ranging aspects of professional and everyday life, including the media, science, health, society, politics, law, education, sports, finance, climate, and national security

·                     Feature short, inexpensive books of 100–150 pages that can be written and read in a reasonable amount of time."

Seven titles have now been published in this series -

 

Measuring Society, by Chaitra H. Nagaraja (2019)
Measuring Crime: Behind the Statistics, by Sharon L. Lohr (2019)
Statistics and Health Care Fraud: How to Save Billions, by Tahir Ekin (2019)
Improving Your NCAA® Bracket with Statistics, by Tom Adams (2018)
Data Visualization: Charts, Maps, and Interactive Graphics, by Robert Grant (2018)
Visualizing Baseball, by Jim Albert (2017)
Errors, Blunders, and Lies: How to Tell the Difference, by David S. Salsburg (2017)

Readers of this blog should be especially interested in Chaitra Nagaraja's recently published additionto this series. Chaitra devotes chapters in her book to the topics of  Jobs, Inequality, Housing, Prices, Poverty, and Deprivation. I particularly like the historical perspective that Chaitra provides in this very readable contribution, and I recommend her book to you (and your non-economist friends). 


Fraud:  The Collapse Of A Hospital Empire — And Towns Left In The Wreckage ---
https://khn.org/news/rural-hospital-empire-collapse-missouri-town-fallout-jorge-a-perez-empowerhms/


Journal Entries in the Equity Method of Accounting for Investments ---
https://smallbusiness.chron.com/journal-entries-equity-method-accounting-investments-76227.html

Also see
https://www.brainscape.com/flashcards/cost-and-equity-method-5807635/packs/8830144

Also see
https://www.ey.com/Publication/vwLUAssets/FinancialReportingDevelopments_BB2634_EquityMethodInvestments_16December2015/$FILE/FinancialReportingDevelopments_BB2634_EquityMethodInvestments_16December2015.pdf


EY:  Lease accounting - Accounting Standards Codification 842, Leases ---
https://www.ey.com/ul/en/accountinglink/frd-00195-171us-lease-accounting

EY:  Equity Method Investments
https://www.ey.com/Publication/vwLUAssets/FinancialReportingDevelopments_BB2634_EquityMethodInvestments_16December2015/$FILE/FinancialReportingDevelopments_BB2634_EquityMethodInvestments_16December2015.pdf

EY:  Comment letter on ASB proposed revision to definition of materiality ---
https://www.ey.com/Publication/vwLUAssetsAL/CommentLetter_06672-191US_MaterialityED_2August2019/$FILE/CommentLetter_06672-191US_MaterialityED_2August2019.pdf

EY:  Comment letter on the SEC’s proposal on disclosures about acquisitions and disposals of businesses ---
https://www.ey.com/Publication/vwLUAssetsAL/CommentLetter_06636-191US_AcquisitionsDispositions_29July2019/$FILE/CommentLetter_06636-191US_AcquisitionsDispositions_29July2019.pdf

EY:  Updated FRD on derivatives and hedging ---
https://www.ey.com/ul/en/accountinglink/frd-05712-191us-derivatives-and-hedging

EY:  Updated FRD on Consolidation ---
https://www.ey.com/ul/en/accountinglink
/frd-02856-161us-consolidation


How Aflac fraudulently goosed its sales
From the CFO Journal's Morning Ledger on August 23, 2019

Insurer Aflac Inc. shares slid on news reports that a scandal at Japan Post Holdings Co. included improper sales of Aflac products

 




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

AICPA Proposes Clarifying Auditors’ Role in Private-Company Financial Statements

The auditing standards board of the American Institute of Certified Public Accountants on Wednesday proposed a further clarification of the responsibilities auditors face for private company financial statements.

The organization, which sets the standards for the audits of private companies in the U.S., wants to make changes to three types of financial statements—special purpose, single and summary—that aren’t based on generally accepted accounting principles.

The proposal is intended to align certain existing standards with a new standard, SAS No. 134, which the board enacted in May to provide insight into auditors’ opinions in their reports on private company financial statements, the AICPA said.

“Stakeholders felt there was not enough clarity around whether it was management or the auditor’s responsibility to prepare certain financial statements,” Robert Dohrer, AICPA’s chief auditor, told CFO Journal. “We wanted to make sure we included the level of assurance in an audit opinion and the responsibility for errors and fraud.”

For example, the proposal would clarify that, in all audits of special-purpose financial statements, the auditor is required to conclude whether substantial doubt exists about a company’s ability to operate. If substantial doubt exists, the auditor is required to evaluate the adequacy of disclosures.

The proposal, which would affect AU-C sections 800, 805 and 810 of SAS No. 122, is open to a 60-day public comment period. The AICPA expects the rule to be effective for reporting periods on or after Dec. 15, 2020.


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

The wild grand opening of Costco Wholesale Corp.’s first store in China on Tuesday demonstrated solid consumer demand for U.S. products, if the price is right.


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

Deutsche Bank AG has agreed to pay $16 million to settle charges by the Securities and Exchange Commission that it violated U.S. foreign bribery law by hiring relatives of foreign government officials.


Why is it so hard to replace China with other nations (think Viet Nam) willing to take on more manufacturing?

From the CFO Journal's Morning Ledger on August 23, 2019

Good morning. With the U.S. and China tangled in a nasty trade fight, this should be Vietnam’s time to shine. Instead, it is becoming increasingly clear that it will be years, if ever, before this Southeast Asian nation and other aspiring manufacturing destinations are ready to replace China as the world’s factory floor.

The specialized supply chains that made China a production powerhouse for smartphones and aluminum ladders and vacuum cleaners and dining tables are nowhere near as developed in Vietnam. Factories with U.S.-focused safety certifications and capital-intensive machinery aren’t as easy to find. And Vietnam, with less than one-tenth China’s population, is already running into labor shortages as global manufacturers rush to set up shop there to avoid U.S. tariffs.

A new global manufacturing landscape is starting to take shape, executives say. Production leaving China is getting divvied up among developing countries, with a small portion going to the U.S. on the back of automation. The reordering of supply chains is likely to leave China with a diminished but still significant share of the pie.

The creation of new industrial clusters won’t happen overnight. Vietnam offers cheap labor, but its 100-million population is small compared with China’s 1.3 billion, and its roads and ports are already clogged. India has the manpower, but skill levels fall short and government rules are relatively restrictive.


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

Tesla Inc., better known for making electric cars, is once again offering to rent solar panels to homeowners.

Jensen Comment
I don't have much hope for renting on very long-term contracts  products that will quickly become obsolete. It's not that the panels will not keep producing electricity for 30 or more years. But recent experience is such that older panels become quickly obsolete in terms of improved efficiencies and lower costs. Also the solar industry faces a huge risk that competing alternatives will be developed such as cheap hydrogen fuel cells that produce power at night and on very cloudy days.

Home owners will probably like the idea of renting under the new Tesla deal that makes getting out of the rental obligation quite simple and cheap when new technology comes along. However, Tesla itself may be stuck with having to take back millions of obsolete panels before Tesla even recovered the cost of building them

The bottom line is that Tesla rather than customers is taking on nearly all the risk of highly probable obsolescence of rented solar panels. By then Elon Musk may be living on Mars.


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

Home-sharing company Airbnb Inc.’s most-recent financial data shows its strong cash position and a first-quarter growth rate above 30%, both key metrics that will draw investors as the startup positions itself to go public next year.


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

Good morning. Airbus SE is using artificial intelligence to squeeze cost out of its finance function, an experiment launched in the aircraft maker’s Americas division that could save the corporation millions of dollars annually if rolled out in other regions, CFO Journal's Mark Maurer reports.

It’s one of the latest examples of how companies across sectors are digitizing operations to increase efficiency, reduce human error and free up employees for tasks that require more human judgment, such as strategic planning, analysis and audits.

Less than two years ago, four Airbus Americas Inc. employees would review about 25,000 travel-and-expense reports filed annually by employees in Texas, Virginia, Florida and Mexico, according to Richard Masci, the head of financial system services and compliance at Airbus Americas.

Today, a human only needs to review details the AI-based system deems noncompliant, typically one or two lines in a 30-line report. If the report passes muster, it is automatically validated and payment can be initiated. The average time between submission to approval has gone from a couple weeks to a few days, and the workload for human reviewers has been cut by more than half, Mr. Masci said.

Jensen Comment
I wonder if our accounting courses (think managerial accounting) are keeping up to date with the implementations of technology like AI in the real world. For example, do we teach how to review a cost analysis AI system for noncompliance? Or are we still teaching about horses and buggies in the jet age?

Accounting professors can start learning more about AI by searching for "artificial intelligence" at the free Khan Academy ---
https://www.khanacademy.org/

Managerial accounting professors should develop documentaries and cases by contacting companies like Airbus SE in an effort to find out how AI has changed accounting systems. It's so much easier to do regression analysis of purchased databases, but these databases won't have the latest information about AI in cost accounting. Professors need to get off their butts and develop their own databases.


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

Good morning. General Electric Co.’s share price dropped following a report by an accounting expert who alleged the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with regulators.

Harry Markopolos, who raised red flags about Bernie Madoff’s Ponzi scheme, said his group found GE’s insurance unit will need to bolster its reserves by $18.5 billion in cash, and he faulted the way the company is accounting for its oil-and-gas business. All told, he said, the accounting problems amount to $38 billion, or 40% of the conglomerate’s market value.

“This is market manipulation—pure and simple,” GE Chief Executive Officer Larry Culp said in a statement. GE stood by its financial reporting and said the Markopolos report was produced to help short sellers by creating volatility in GE shares.

GE, which is currently searching for a new finance chief, is already under investigation by the U.S. Securities and Exchange Commission and the Justice Department for potential accounting issues that have come to light in the past two years related to its insurance holdings and problems in its power division.

CNBC:  GE plunges after whistleblower calls it a bigger fraud than Enron ---
https://www.msn.com/en-us/money/companies/ge-plunges-after-whistleblower-calls-it-a-bigger-fraud-than-enron/ar-AAFQjYf?ocid=se

Another possible  KPMG embarrassment in the making!

GE Claims It's No Enron
From the CFO Journal's Morning Ledger on August 20, 2019

Good morning. General Electric Co.’s finance and investor relations team pushed back further on Monday against claims by accounting expert Harry Markopoulos who accused the industrial conglomerate of masking its financial problems and filing inaccurate or fraudulent information with regulators, The Wall Street Journal reports.

In a new investor update, the company said it believes the current reserves for its long-term-care insurance business are well supported by its portfolio of investments. GE also defended the accounting for its oil-and-gas business.

The company said it has “been up front and transparent about the long-term liabilities,” and there are “a lot of viewpoints in the market regarding the risks and financial obligations across the entire [long-term-care] industry.” It said that as a reinsurer, it isn’t responsible for 100% of every risk in that business. GE also said the “adverse differences” between its policies and those from other companies are significantly overstated.

Mr. Markopolos’s group estimated, in its report, that GE will need to increase its insurance reserves by $18.5 billion in cash and take a $10.5 billion charge because of an accounting change in 2021. GE said Monday it wouldn’t need to make a cash contribution of $29 billion to the long-term-care insurance business.

 


From the CFO Journal's Morning Ledger on August 15, 2019

Sealed Air, Under Federal Investigation, Switches Audit Firms

Sealed Air Corp. has dismissed audit firm Ernst & Young LLP and hired PricewaterhouseCoopers LLP, CFO Journal reports, citing dissatisfaction over the audit-firm selection process and a possibility it could be forced by the government to change auditors, the company disclosed.

The replacement took effect Aug. 7 but was disclosed this week in a securities filing. It is the latest development related to federal investigations into the company’s financial practices and audit-firm selection process.


From the CFO Journal's Morning Ledger on August 15, 2019

Good morning. Warning signs pointing to a deepening global economic slowdownand the risk of recession—are flashing more brightly. Many of the biggest troubles are showing up overseas. But markets are signaling that the threat of a downturn is spreading to the U.S., the world’s largest economy, now in its longest expansion on record.

Economic output in Germany, the world’s fourth-largest economy, contracted in the second quarter, according to a report Wednesday, while a report on factory output in China, the world’s second-largest economy, was lower than expected. Earlier this week, Argentina’s currency and stock market tumbled, stoking fears over one of South America’s largest economies.

The Dow Jones Industrial Average fell about 800 points, or some 3.1%, in its biggest loss of the year. Another wave of buying in the U.S. government-bond market pushed the yield on the 30-year Treasury note to a record low.

Meanwhile, the cost to borrow cash overnight using Treasurys as collateral is fueling concern among investors that bond dealers could become inundated with U.S. debt as the government funds widening budget deficits.


From the CFO Journal's Morning Ledger on August 13, 2019

Accounting Firms Increasingly Hire Non-Accounting Graduates

For many public accounting firms, a prospective new hire’s technology skills have become more relevant than their accounting knowledge, according to a report from the American Institute of Certified Public Accountants.

Non-accounting graduates comprised 31% of all new-graduate hires in public accounting in 2018, up 11 percentage points from when it was last tracked in 2016, according to the organization.

 The proportion of non-accounting graduates hired was larger than that of new hires with a master’s degree in accounting (25%), but smaller than that of hires with a bachelor’s degree in accounting (43%) in the 2017-18 school year, the study said.

The report, released every two years, found that total projected enrollment for accounting programs—either bachelor’s, master’s or doctoral degrees—fell 4% to 241,873 since the 2015-16 school year.

The 2014-15 and 2015-16 school years saw the highest enrollment—both about 253,000—since the organization began tracking it in 1993.

See
https://www.journalofaccountancy.com/news/2019/aug/accounting-firm-hiring-trends-201921801.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=14Aug2019

Jensen Comment
I suspect there's considerable variation with respect to size of the accounting firm. Many of the smallest accounting firms specialize in tax and bookkeeping services where the owners and employees are experienced accountants who picked up computing skills along the way. The hiring of non-accounting graduates most likely increases with the size of the firms, especially firms that offer non-accounting services or accounting services liked to technology.


From the CFO Journal's Morning Ledger on August 13, 2019

A new arrival to Wall Street and former student-body president at New York University’s Stern School of Business was charged with insider trading tied to a $1.7 billion buyout. Bill Tsai, a 23-year-old analyst at RBC Capital Markets, was arrested and charged with criminal securities fraud, according to federal prosecutors in New York.

Current and past editions of my blog called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm


From the CFO Journal's Morning Ledger on August 13, 2019

PineBridge CFO on Adjusting to Revenue Recognition and Tax Laws

Tracie Ahern, finance chief of New York-based asset manager PineBridge Investments, spoke with CFO Journal about tax challenges and the new accounting standard on revenue recognition.

Q:

What kind of impact has the new revenue-recognition standard had on PineBridge?

A:

It’s been a big change, given that we have a reasonably sized private-equity and private-credit book. Looking at performance fees, we have some clients even in our long-only book that have complex performance arrangements. Being able to now schedule our revenue is quite a bit different on a GAAP basis. In certain cases, we won't be able to recognize revenue.

Q:

How has a global business like yours adjusted to new corporate tax laws?

A:

There have been a lot of changes in regulation around the globe, particularly how some jurisdictions are now requiring economic substance. Anyone running a global businesses is now looking at areas in which they’ll gain the biggest tax benefits over time. It’s been a pretty big shift in the last several years, especially for organizations that may have older tax structures, or certain combinations of U.S. and non-U.S. assets. It’s been a pretty big undertaking for us.


From the CFO Journal's Morning Ledger on August 13, 2019

Good morning. There is a paradox in auditing, new research indicates: Audit firms that do a thorough job examining clients’ financial statements could be doing so at their own peril.

Audit firms, on average, suffer a drop in future client and revenue growth after detecting a material weakness in a company’s financial reporting, according to a study of more than 350 U.S. audit firms over 13 years.

Companies appear to avoid hiring auditors that have a history of critical audits at other companies, though firings made because an auditor found a material weakness aren’t as apparent, according to the study led by University of Arkansas accounting professor Stephen Rowe and accounting Ph.D. candidate Elizabeth Cowle.

The study tracked the issuance of “internal control material weaknesses,” or ICMWs, which are critical of management, from 2004 to 2016. If a regional office of an audit firm issues a single ICMW, for example, it leads to a 2.5% lower growth in the number of clients and an 8% decline in year-over-year revenue for that office, the study found.

Mr. Rowe, the co-author, tells CFO Journal that he hopes the study will effect change among audit committees. “When audit committees are working with management to choose an auditor, it would be nice if they were more aware of the company’s bias and evaluated all factors when making the decision,” he said.


From the CFO Journal's Morning Ledger on August 9, 2019

Good morning. Stock-price-related impairment charges, such as the one booked by Kraft Heinz Co., are expected to increase amid ongoing market turbulence and an uncertain economic outlook.

Kraft Heinz said it booked a charge of $1.22 billion for the first six months of its fiscal year. The bulk of the charge was related to the declining values of brands and businesses, but $474 million of it reflected the company’s lower stock price. Kraft Heinz’s stock has fallen 38% since the beginning of the year. It was down 8.6% Thursday at the market close. 

Companies have to take an impairment charge if their stock price falls and remains low after a transaction. H.J. Heinz Co. merged with Kraft Foods Group Inc. in 2015.

U.S. stock prices have been high for years, and market turbulence or a sustained correction because of weakening economic sentiment could force more companies to book charges in response to a decline in their share prices, impairment analysts said.

“The expectation is that if the general economic trend continues and market valuations decline, impairment charges connected to stock price falls increase,” said Greg Franceschi, a managing director at advisory firm Duff & Phelps LLC and global leader of its financial reporting valuation advisory practice.

Bob Jensen's threads on impairment charges ---
http://faculty.trinity.edu/rjensen/theory02.htm#Impairment


From the CFO Journal's Morning Ledger on August 8, 2019

Growth Rate for U.S. Salaries to Remain Stable, Report Says

Most U.S. employers plan to give raises next year, but don’t expect significant base-salary bumps next year—despite a tight labor market and historically low unemployment, according to a survey due out today by advisory firm Willis Towers Watson PLC.

 Pay at U.S. companies is set to rise by 3% in 2020, in line with the growth rate in 2019, which was also 3%, and that of previous years, according to the survey of 858 firms. The last year employers provided larger increases was in 2008, when salaries rose by an average of 3.8%.

Instead of boosting base pay, employers are looking to spend more on bonuses, especially for top-performing workers.

Uncertainty about the economic outlook, which makes companies want to hold their fixed costs down, is part of the reason, said Catherine Hartmann, talent and rewards director for North America at Willis Towers Watson. “Companies are getting more specific about different elements of their pay,” she said, adding that bonuses and equity are becoming more central in companies’ pay structure.


From the CFO Journal's Morning Ledger on August 8, 2019

Good morning. Inflated bond ratings were one cause of the financial crisis. A decade later, there is evidence they persist. In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share.

All six main ratings firms have since 2012 changed some criteria for judging the riskiness of bonds in ways that were followed by jumps in market share, at least temporarily, a Wall Street Journal examination found. These firms compete with one another to rate the debt of borrowers, who pay for the ratings and have an incentive to pick rosier ones. There are signs some investors are skeptical. 

Some bonds in markets where ratings criteria have been eased don’t trade at the high bond prices their ratings suggest they should. Investors have also shown skepticism about ratings on some corporate and government bonds.

The problem is particularly acute in the fast-growing market for “structured” debt—securities using pools of loans such as commercial and residential mortgages, student loans and other borrowings. The deals are carved into different slices, or “tranches,” each with varying risks and returns, which means rating firms are crucial to their creation.


From the CFO Journal's Morning Ledger on August 5, 2019

An accounting scandal has disrupted dozens of initial public offerings and other fundraising plans in China, intensifying investor concerns about the amount of trust they can place in audited financial results in the country


From the CFO Journal's Morning Ledger on August 5, 2019

Bubble Wrap Maker’s Auditor Selection Process Under Scrutiny.

Sealed Air Corp., under investigation by federal regulators for its financial practices and audit-firm selection process, is now facing a related U.S. Justice Department probe, Maria Armental and Dylan Tokar report.

The Charlotte, N.C.-based maker of packaging products such as bubble wrap said in a regulatory filing Friday it received a grand jury subpoena seeking information related to the firing of its finance chief and the selection process of its independent audit firm beginning in fiscal year 2015.

Sealed Air in June said it fired Chief Financial Officer Bill Stiehl for cause after receiving subpoenas in 2018 and 2019 from the Securities and Exchange Commission.


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

 The U.K.’s Financial Reporting Council levied a total of £5.05 million ($6.1 million) in fines against KPMG LLP and one of its partners for failings related to regulatory reports the firm created and submitted on behalf of Bank of New York Mellon Corp. entities, the latest action by the regulator against the Big Four accounting firm.

The regulation at the center of the KPMG case, the client assets sourcebook, or CASS, involved BNY Mellon’s role as a custodian of client assets valued at their peak at more than £1 trillion. KPMG’s work didn’t meet certain regulatory standards, the FRC said.

“The misconduct consisted of a failure to understand and to apply fundamental rules of CASS,” an FRC tribunal said in a statement. KPMG didn’t ensure appropriate training, support and supervision of the 2011 audits of the bank’s client assets sourcebook, according to the regulator.

Here’s Your Scorecard For KPMG U.K. Fines So Far In 2019 ---
https://goingconcern.com/heres-your-scorecard-for-kpmg-u-k-fines-so-far-in-2019/

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


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

MetLife Inc. nearly doubled its second-quarter profit, helped by improved investment results and derivative gains on a financial hedging program. At rival Prudential Financial Inc., net income rose to $708 million from $197 million a year ago. 

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


From the CFO Journal's Morning Ledger on July 31, 2019

FASB Proposes Change to Accounting for Investments and Securities

The Financial Accounting Standards Board wants to clarify the relationship between accounting standards on equity securities, investments under the equity method and forward contracts to buy securities.

The board issued a proposal that would serve as an update to FASB guidance that allowed companies to recognize certain equity securities—usually investments in private companies—unless there was also an apparent transaction for an identical or similar security.

A FASB task force conceived the proposal after the standard-setter received questions about the application of a 2016 standard, “Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”

The proposal would affect companies that elect to apply the measurement alternative, which is cost minus impairment, or enter into a forward contract or purchase option to buy securities that would be accounted for under the equity method, an accounting technique for evaluating profit from investments in other companies. 

The board is allowing public feedback on the proposal until Aug. 29. To read the exposure draft, click here.


From the CFO Journal's Morning Ledger on July 31, 2019

The U.K.’s regulator for accounting and audit imposed higher fines and opened more new enforcement cases during the year that ended March 31, a finding that comes ahead of a potential overhaul of the sector. The Financial Reporting Council issued £42.9 million ($52.2 million) in fines to audit and accounting firms, up from £15.5 million during the same period a year earlier, according to the regulator’s annual enforcement review.

The FRC in the past year stepped up enforcement amid concerns about audit quality in the U.K. A series of high-profile corporate failures has resulted in calls from U.K. lawmakers and other watchdogs to make significant changes to how the industry operates. Regulators and lawmakers are focusing on potential conflicts of interest within audit firms as well as the level of scrutiny with which auditors test clients’ financial statements.

 




Teaching Case From The Wall Street Journal Weekly Accounting Review on August 9, 2019

FASB Votes to Delay Credit Loss Standard for Some Lenders

By Mark Maurer | Jul 17, 2019

TOPICS: Banking, Loan Loss Allowance

SUMMARY: Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, was issued June 16, 2016. The standard implements the current expected credit loss (CECL) model for loan loss estimation. The method essentially requires considering a forward-looking estimation process for loan losses, in contrast to the historical view of loss rates under a general contingent liability approach to estimation. The new standard was adopted in response to criticism that financial institutions record losses too slowly during the 2008 financial crisis. The FASB has now voted to delay implementation of this model by smaller financial institutions amid criticism about its implementation cost and effort required.

CLASSROOM APPLICATION: The article may be used in a class covering banking, contingent liabilities, or accounting for receivables valuation allowances. ASU 2016-13 is available online at https://asc.fasb.org/imageRoot/39/84156639.pdf and can be accessed without a FASB Accounting Standards Codification subscription. FASB ASC subscription available to academics allows students to find the codification sections associated with these requirements.

QUESTIONS: 

 

1. (Introductory) When was the accounting standard on "current expected credit losses" (or CECL) established by the Financial Accounting Standards Board (FASB)?

 

2. (Advanced) What was the driving reason behind establishing this accounting requirement? What are the major provisions of this accounting standard? Hint: In addition to reading this WSJ article, you can access the FASB Accounting Standards Update at https://asc.fasb.org/imageRoot/39/84156639.pdf

 

3. (Introductory) How much time has been given by the FASB for financial institutions to implement this accounting standard? Specifically state the original timing for implementation that must be followed by large public banks.

 

4. (Introductory) What is the proposed delay in implementation? For what types of bank entities?

 

5. (Advanced) According to the article, what factors are leading to the delay in implementing the current expected credit loss (CECL) model of accounting by financial institutions?

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"FASB Votes to Delay Credit Loss Standard for Some Lenders." by Mark Maurer, The Wall Street Journal, July 17, 2019
https://www.wsj.com/articles/fasb-votes-to-delay-credit-loss-standard-for-some-lenders-11563401755

Small public banks would receive an extra three years to prepare for accounting change

The Financial Accounting Standards Board is poised to give lenders more time to prepare for the implementation of a new rule that would require them to record expected future losses as soon as loans are issued.

The FASB, which sets U.S. accounting standards, adopted the “current expected credit losses” standard, or CECL, in 2016, amid criticism that banks and other financial institutions had recorded losses too slowly following the 2008 financial crisis.

The board on Wednesday voted for a proposal to extend the implementation deadline for small public lenders, private lenders and nonprofits, such as credit unions.

For large public banks, which the FASB defines as SEC filers excluding small reporting business entities, CECL would still take effect in the fiscal year and interim periods beginning after Dec. 15, 2019.

The board also proposed to delay implementation by three years for small public lenders; two years for all non-SEC-filing public lenders; and one year for private and nonprofit lenders. Those benefiting from the delay will have to implement CECL for fiscal year and interim periods beginning after Dec. 15, 2022. The delay would have no effect on early adoption, which all lenders have been permitted to do since December.

“Additional time would give the stakeholders more ability to learn from larger lenders, more ability to have resource providers available, and more ability to look at best practices for disclosures and controls,” FASB Chairman Russell Golden said in an interview.

The proposal will undergo a 30-day public comment period next month. If the public’s comments are mostly favorable, the board will issue a final document on the decisions.

Lawmakers in the U.S. Senate and the House of Representatives introduced bills in recent months to delay CECL and conduct a study on the standard’s potential impact. The FASB didn’t discuss the possibility of a study at the meeting Wednesday, and FASB spokeswoman Christine Klimek declined to comment about the possibility.

The delay and the lack of a study drew mixed reaction from the banking community. CECL would force some banks to increase loan-loss reserves, which could reduce earnings and regulatory capital. Banks have argued that the need to book losses up front would discourage lending.

The American Bankers Association, an industry group that represents large and small banks, said the required efforts to implement the standard were larger than the board had led banks to believe.

“The delay should apply to banks of all sizes, and should be used to conduct a rigorous quantitative impact study to properly assess the effect this new standard will have on their ability to serve their customers and the broader economy, particularly during an economic downturn,” Rob Nichols, the ABA’s chief executive, said in a statement.

Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, applauded the delay and said that CECL, “though well-intended, represents a significant change from the prior standard’s approach and more time is needed for implementation.”

Libor shift

The FASB also voted Wednesday to provide additional relief for U.S. companies affected by global reference rate reforms, including a planned shift away from the London interbank offered rate, or Libor.

Relief measures, which are also expected to undergo a 30-day public comment period prior to approval, include no longer requiring a critical terms change for companies using hedge accounting.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 9, 2019

After U.S. Tax Overhaul, Corporate Rates Fall but Unevenly

By Theo Francis and Richard Rubin | Jul 22, 2019

TOPICS: Corporate Income Tax, Disclosures, Effective Tax Rates

SUMMARY: The article is based on a WSJ analysis assessing the effective tax rates incurred by S&P 500 companies following the 2017 tax law change. "The median effective global tax rate for S&P 500 companies declined to19.8% in the first quarter of 2019 from 25.5% two years earlier. That [result]...is consistent with the goals and structure of the tax overhaul..." conclude the authors. The analysis is presented in graphs showing median rates as well as their distributions. A supporting discussion describes the WSJ methodology for dealing with outliers which arise because "individual companies' tax rates can swing dramatically from quarter to quarter for a variety of reasons...."

CLASSROOM APPLICATION: The article may be used when discussing effective tax rates or the impact of the 2017 tax law change in a corporate/entity tax class. A final question addresses tax disclosures in financial reporting.

QUESTIONS: 

 

1. (Advanced) Define the term "effective tax rate."

 

2. (Introductory) Over what time periods did the Wall Street Journal examine effective tax rates for this article? What types of companies were included in the analysis?

 

3. (Advanced) How did the WSJ analysis support the assessment that the observed effective tax rates for S&P 500 companies are "consistent with the goals and structure of the tax overhaul"?

 

4. (Advanced) Refer to the explanation in the online article of the method used by the WSJ to determine effective tax rates for this analysis, entitled WSJ Methodology. What methods were used to standardize the data and eliminate the impact of outliers on the analysis?

 

5. (Advanced) According to the author, "Companies typically don't make public what they pay the Internal Revenue Serve each tax year." Do you agree with this statement? Describe the income tax disclosures made by companies as required by U.S. Generally Accepted Accounting Principles. Cite your source for this answer.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"After U.S. Tax Overhaul, Corporate Rates Fall but Unevenly," by Theo Francis and Richard Rubin , The Wall Street Journal, July 22, 2019
https://www.wsj.com/articles/after-u-s-tax-overhaul-corporate-rates-fall-but-unevenly-11563701403

Many companies have seen sharp reductions, while many with lightest loads are largely unaffected

The U.S. tax overhaul has lowered tax rates for many companies, and many others that were already toward the bottom of the scale have been able to stay there so far, a Wall Street Journal analysis shows.

The lower rates follow tax-law changes Congress passed at the end of 2017. Since then, the Journal analysis shows, the median effective global tax rate for S&P 500 companies declined to 19.8% in the first quarter of 2019 from 25.5% two years earlier.

That marked the third straight quarter below 20% and is consistent with the goals and structure of the tax overhaul, which lowered the federal corporate rate to 21% from 35%. The law’s authors wanted to help U.S. multinationals compete in foreign markets and aid domestic companies with high tax burdens, while reducing the value of tax breaks and making it harder to achieve single-digit tax rates.

Much of the decline is coming because fewer firms are paying rates at the highest end, according to the Journal analysis. Just 28 companies, including mining giant Freeport-McMoRan Inc. FCX -3.66% and Chevron Corp. , reported a global tax rate above 32% in the first quarter, down from 143 before the overhaul.

The Tax Cuts and Jobs Act of 2017 limited deductions and introduced new minimum taxes on overseas income, though some of the bite of those changes was delayed to beyond 2020. Thus, 119 S&P companies including Adobe Inc. and General Motors Co. paid global tax rates below 12% in the first quarter. That is up from 93 companies before the overhaul.

 

Companies typically don’t make public what they pay the Internal Revenue Service each tax year. But public companies do disclose their effective tax rates: the measure of taxes incurred under generally accepted accounting principles as a share of pretax income.

Those rates reflect global results and include foreign and state taxes, not just what companies owe the U.S. Treasury Department. Quarterly results can bounce around, swayed by one-time events. For many big companies, however, U.S. federal taxes are the most important component.

A quarter of S&P 500 companies reported effective global tax rates below 21% in each of the past four quarters, the Journal analysis found. Companies can wind up paying less than the statutory rate, even on U.S. income, thanks to a variety of breaks that lower their tax bills, including a deduction for exports and credits for corporate research.

The Journal’s analysis, using figures from financial-data firm Calcbench Inc., omits tax rates reported for the last three months of 2017 and the first three months of 2018—quarters in which many companies booked big, one-time changes driven by the tax law. Results were similar when real-estate companies, which tend to report very low tax rates, were omitted. (See methodology note for more detail.)

A separate analysis, from S&P Dow Jones Indices, found similar shifts in income-tax rates for S&P 500 companies since the tax law’s enactment.

Outside the U.S., companies pay local tax rates that can be much lower than what the IRS charges. In some cases, those low foreign rates will trigger a new residual U.S. tax. The Global Intangible Low-Taxed Income, or GILTI, provision is intended to ensure companies pay at least 10.5% on most foreign income. Those factors create variation among companies, as do periodic settlements with tax authorities, the mix of countries where profits are booked and other anomalies.

The decline in the median effective tax rate points to what could be an even more significant shift: The range of tax rates reported by most big companies has contracted following the new law.

In a broad sense, compressing corporate tax rates was one of the goals of the overhaul. Those paying the most, including heavily domestic companies such as retailers and utilities, could expect to pay less, while those with the lowest rates, often tech and pharmaceutical companies that some say engaged in offshore tax-avoidance maneuvers, could expect to pay more because of GILTI.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 9, 2019

SEC Plan Gives Audit Relief to Firms That Wiped Out Over $290 Million

By Dave Michaels | Jul 26, 2019



 

TOPICS: Audit, Internal Controls, Sarbanes Oxley, Securities and Exchange Commission

SUMMARY: The U.S. Securities and Exchange Commission (SEC) has proposed exempting smaller public companies-those with revenue of less than $100 million and public float less than $700 million-from the Sarbanes-Oxley initiated requirement for an internal controls audit. "Opponents of the requirement argue it costs hundreds of thousands of dollars even for businesses that have yet to generate revenue." Analysis by accounting professors who are proponents of the internal controls audit requirement and have written a comment letter to the SEC forms the basis for the article.

CLASSROOM APPLICATION: The article may be used in an auditing or accounting systems course discussing requirements to audit internal controls. It also may be used to discuss the regulatory process or the move towards deregulation to reduce compliance costs with the intent of potentially increasing the number of companies publicly traded in U.S. markets.

QUESTIONS: 

 

1. (Introductory) From what audit requirement is the Securities and Exchange Commission (SEC) planning to exempt certain companies? When were the requirements to have these audits established?

 

2. (Advanced) What types of companies are proposed for being exempted from these audit requirements? Was this exemption aimed explicitly at allowing relief to the companies "that wiped out over $290 million" in equity value? Explain your answer, identifying the reasoning behind the exemption.

 

3. (Advanced) What are financial restatements? Does the occurrence of a restatement necessarily indicate fraud has been committed? Explain your answer.

 

4. (Advanced) Does the occurrence of a financial restatement necessarily indicate a weakness in internal control over financial reporting? Support your answer.

 

5. (Advanced) The SEC's process for rulemaking involves examining comment letters submitted in response to the proposal. One such letter was submitted by four academic accounting professors. Their comment letter is linked in the discussion comments following the article: it is https://www.sec.gov/comments/s7-06-19/s70619-5802113-187069.pdf Read the letter and summarize the cost/benefit analysis these professors describe.

READ THE ARTICLE



 

Reviewed By: Judy Beckman, University of Rhode Island

 

"SEC Plan Gives Audit Relief to Firms That Wiped Out Over $290 Million," by Dave Michaels, The Wall Street Journal, July 26, 2019
https://www.wsj.com/articles/sec-plan-gives-audit-relief-to-firms-that-wiped-out-over-290-million-11564141784

Proposed exemption has drawn criticism from accountants but praise from businesses

A government proposal to exempt more companies from audit requirements would give relief to 11 companies that restated financial results in 2018 and wiped out more than $290 million in market value.

The Securities and Exchange Commission’s proposal, which is open for public comment until Monday, has drawn criticism from accountants and praise from businesses. A key aspect of the plan is that more public companies wouldn’t need to undergo the audit that probes for weaknesses that could allow fraud or accounting blunders to go undetected.

The audit, which tests accounting systems and safeguards known as internal controls, was required in the wake of the Enron and WorldCom scandals of the early 2000s. Businesses with weak internal controls are often forced to restate their financial results during the same period or later, according to academic research.

The U.S. Chamber of Commerce has lobbied the SEC and lawmakers for years to reduce the cost of compliance with internal-controls provisions. Opponents of the requirement argue it costs hundreds of thousands of dollars even for businesses that have yet to generate revenue. 

Hester Peirce, a Republican SEC commissioner who supported the proposal, tweeted after the agency issued the plan in May: “If an investor in a small biotech company had the option of having her money go to an audit of internal controls or the hiring of another scientist, what would she choose?”

The five-member SEC could vote to adopt the proposal after studying the comments it receives.

The SEC’s plan would allow public companies with revenue of less than $100 million and a public float below $700 million to skip the audit. Company insiders would still have to review the effectiveness of accounting systems. And the businesses would still be required to get an annual audit of their financial statements.

Proponents of the internal-controls-audit requirements say the SEC is gutting an important investor safeguard. “There should be no question that this will unambiguously lead to weaker internal controls, greater restatements and greater destruction of shareholder wealth,” said Daniel Taylor, an accounting professor at the University of Pennsylvania’s Wharton School.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 16, 2019

Kraft Heinz Writes Down $1.2 Billion as Brands Wither

 

By Heather Haddon Micah Maidenberg | August 8, 2019

Topics: Intangible Assets , Impairment , Restatements , Zero-Based Budgeting

Summary: On Thursday, August 8, 2019, Kraft Heinz Co. announced an impairment charge of $1.22 billion during the first 6 months of 2019, its second charge in six months. “The bulk of the charge was related to the declining values of brands and businesses [attributed to challenges in satisfying changing consumer tastes], but $474 million of it reflected the company’s lower stock price.” Mergers and acquisitions involving U.S. targets have risen during 2019 and future impairment charges may result.

Classroom Application: The article may be used when discussing impairment charges for intangible assets by companies with previously highly-valued packaged food brands such as Kraft’s Oscar Meyer and Heinz. The related article ties the impairment analysis and forecasting of these charges to the companies’ own stock prices that are outside the company’s control. Also mentioned are both an ongoing investigation into Kraft’s accounting misstatements that understated cost of goods sold and zero-based budgeting.

Questions:

·         Define the term “impairment charge” and summarize how it is calculated.

·         How long has Kraft Heinz spent analyzing whether, and by how much, it must take impairment charges in the current period? Is the company done with this analysis?

·         Kraft Heinz is also under investigation for understating cost of goods sold across three years. Could this misstatement also influence the impairment test analysis? Explain.

·         What is zero based budgeting? How could a budgeting system be part of the drivers behind losses of brand values for corporate intangible assets?

Read the Article

Reviewed By: Judy Beckman, University Of Rhode Island

 

"Kraft Heinz Writes Down $1.2 Billion as Brands Wither," by Heather Haddon Micah Maidenberg, The Wall Street Journal, August 8, 2019 ---
https://www.wsj.com/articles/kraft-heinz-books-1-22-billion-in-impairment-charges-11565267075

Food maker says further charges could follow as sales and shares fall

Kraft Heinz Co. KHC 1.40% reported falling sales and wrote down the value of its brands for the second time in six months, as the food maker struggles to improve its products to satisfy shifting consumer tastes.

Chicago-based Kraft Heinz said on Thursday that it had booked charges reducing the values of its assets by $1.22 billion for the first six months of its fiscal year. That included $744 million related to businesses including international divisions and its U.S. refrigerated-foods unit, along with $474 million in declining value reflecting the company’s lower stock price.

“We’ve been too focused on the present and literally on firefighting,” Chief Executive Miguel Patricio told investors on a call. “We need to work on our competencies for the future.”

Kraft Heinz’s shares fell nearly 9% to $28.22. The stock is down about 34% this year.

Big food makers are facing enormous pressure to improve their products and add new brands as consumers gravitate toward foods they perceive as fresher and healthier. General Mills Inc., GIS 1.27% Kellogg Co. K 0.41% and Campbell Soup Co. are some of the companies that have seen sales suffer in recent years as customers eschew their cereals, soups and other packaged foods. They have also been affected by competition from private-label products and higher costs for ingredients and other inputs.

Kraft Heinz, one of the world’s largest packaged-food makers, has been hit harder than most. Some former employees and suppliers say the company’s cost-cutting drive left well-known brands too diminished to compete. Kraft Heinz also hasn’t acquired smaller brands more focused on healthfulness or natural ingredients or updated its products to the same degree as some competitors.

Kraft Heinz in February wrote down the value of its Oscar Mayer and Kraft Heinz brands by $15.4 billion and slashed its dividend. The food giant said in June that Velveeta, Cool Whip, A1 steak sauce and many other brands could also face downward revisions if sales continue to deteriorate. The maker of Oscar Mayer hot dogs, Heinz ketchup and Kraft macaroni and cheese said its net sales fell 5% in the first half of this year compared with the first two quarters of 2018 to $12.37 billion. Organic sales, which exclude currency fluctuations and the impact of deals, dropped about 2%.

Weaker sales in the U.S. reflected lower prices that Kraft Heinz implemented for some products in an effort to gain market share and reflect lower prices for some ingredients, including nuts and coffee, the company said. Other food makers, including Mondelez International Inc. and Hershey Co. , posted strong sales in the latest quarter after raising prices.

Mr. Patricio said the company hasn’t done enough to advertise its brands to potential new consumers, such as Hispanic customers. It also needs to do more to come up with products for international markets, such as condiments in China, he said.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 16, 2019

Bond Deals Dress Up Unusual Assets

 

By Ben Eisen | August 8, 2019

Topics: Securitization , Debt financing

Summary: The article describes whole business securitizations in which companies pile all of their cash-generating assets “into a distinct entity that is used to issue bonds. By dedicating essentially the entire business to repaying the debt, the company obtains a better credit rating and lowers its borrowing costs….Many of the companies that sell this debt wouldn’t be able to get an investment grade rating if they simply issued unsecured bonds." They also might have trouble raising an IPO.

Classroom Application: The article may be used when discussing debt issuance or asset securitization transactions, helping students to understand that the present value of dedicated cash flow streams is an asset that can be isolated from a company. The article catches student interest with a photo of singer Adele, but royalties from her music is just one example of the type of cash flow being securitized through these deals. Other revenue streams discussed in the article include franchising royalties.

Questions:

·         What is an asset securitization?

·         As described in this article, what assets are being securitized to support issuance of debt?

·         How do these “whole business securitizations” help companies raise funds through debt offerings that they otherwise would not be able to accomplish?

Read the Article

Reviewed By: Judy Beckman, University Of Rhode Island

 

"Bond Deals Dress Up Unusual Assets," by Ben Eisen,The Wall Street Journal, August 8, 2019 ---
https://www.wsj.com/articles/adele-auto-parts-and-massages-debt-deals-dress-up-unusual-assets-11565258400

Private-equity firms are turning to a complex type of debt to dress up their companies.

The latest to pursue this type of deal is Sesac Inc., a Blackstone Group BX 3.30% LP-owned company that collects royalties on behalf of music artists including Bob Dylan, Neil Diamond and Adele. The company last week raised more than $500 million, according to financial-technology firm Finsight.

In the Sesac deal and others like it, all of the company’s cash-generating assets are piled into a distinct entity that is used to issue bonds. By dedicating essentially the entire business to repaying the debt, the company obtains a better credit rating and lowers its borrowing costs. That can make financially weak companies look stronger.

Many of the companies that sell this debt wouldn’t be able to get an investment grade rating if they simply issued unsecured bonds. They also might have trouble raising money through an initial public stock offering. But they can sell these so-called whole-business securitizations because their businesses typically generate steady streams of cash to cover the debt payments. They typically obtain ratings that are investment grade, but just a smidgen above junk.

“Because of the [investment grade] triple-B rating and the structure and assets, as an investor you’re more willing to buy at a lower spread or yield than you would be buying an unsecured bond by the same company,” said Evan Shay, an asset-backed securities analyst at money manager T. Rowe Price, which didn’t invest in the Sesac deal.

Sesac’s deal priced last week at a yield of 5.25%. The bonds, which are backed by royalty fees and other assets, had a rating of triple-B from Morningstar Inc. and triple-B minus from Kroll Bond Rating Agency Inc. Junk bonds, which have ratings below triple-B minus, yielded around 6% at the time of the sale.

By using this debt structure, Sesac will save 1.5 percentage points in interest versus the previous debt that the company refinanced through this deal, according to a person familiar with the matter.

Whole-business deals are a small but growing piece of the market for unusual assets. So far this year, companies have done $6.3 billion worth of whole-business securitizations, according to Finsight, on pace to hit the highest since at least 2008. Additionally, Pet Supplies Plus, a franchiser of specialty retail stores, and Primrose Schools, a franchiser of child-care facilities and preschools, are currently in the market with deals, according to Kroll presale reports from this week.

Others that raised money using this structure in 2019 include wellness chain Massage Envy Franchising LLC and automotive firm Driven Brands Inc., according to Finsight. Both are owned by Atlanta-based private-equity firm Roark Capital Group.

Companies owned by private-equity firms Apollo Global Management LLC and Sentinel Capital Partners have both completed whole-business securitizations in the past few years. Independently-owned and public companies have done whole-business deals as well.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 16, 2019

Companies Appear to Avoid Hiring Auditors With a History of Critical Audits, Research Shows

 

By Mark Maurer | August 12, 2019

Topics: Auditing , Internal Controls , Audit Committee , Board of Directors

Summary: The academic paper discussed in this article is being presented in the American Accounting Association meetings in San Francisco during the week of August 12-15, 2019. This research by a University of Arkansas faculty member, Stephen Rowe, and Ph.D. student, Elizabeth Cowle, analyzes 13 years of data

Classroom Application: The paper is entitled “Don't Make Me Look Bad: How the Audit Market Penalizes Auditors for Doing Their Job” and is available on SSRN at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3228321 The article may be used to introduce academic research and its use by professionals, in this case in an Auditing course (likely graduate). It also may be used to discuss professional concerns about the impact of finding internal control weaknesses in practice and the board of directors audit committee

Questions:

·         What is academic research? How does it differ from professional accounting and auditing research?

·         According to this WSJ article, what have academic researchers found about the implications to their business practice of an auditor detecting and issuing a report about a material weakness in internal control over financial reporting (ICFR)?

·         What entity do the researchers says is responsible for solving the problem of negative consequences for auditors who do a thorough job in their work by finding and reporting material weaknesses?

·         How can this entity address this problem?

Read the Article

Reviewed By: Judy Beckman, University Of Rhode Island

 

"Companies Appear to Avoid Hiring Auditors With a History of Critical Audits, Research Shows, by Mark Maurer,  The Wall Street Journal, August 12, 2019 ---
https://mail.google.com/mail/u/0/#inbox/FMfcgxwDqfNXXlFVgLLNnBQlHlPZkJnB

Audit committees need to do more to prevent companies from acting on bias, according to researchers who examined data from more than 350 U.S. audit firms over 13 years

There is a paradox in auditing, new research indicates: Audit firms that do a thorough job examining clients’ financial statements could be doing so at their own peril.

Audit firms, on average, suffer a drop in future client growth and revenue growth after detecting a material weakness in a company’s financial reporting, according to a study of more than 350 U.S. audit firms over 13 years.

Companies appear to avoid hiring auditors that have a history of critical audits at other companies, though firings because an auditor found a material weakness aren’t as apparent, the study said. Therefore, some auditors have trouble attracting new clients, according to the study, which was led by University of Arkansas accounting professor Stephen Rowe and accounting Ph.D. candidate Elizabeth Cowle.

The authors were scheduled to present their findings Tuesday at an annual American Accounting Association conference in San Francisco, the organization said.

The study tracked the issuance of “internal control material weaknesses,” or ICMWs, which are critical of management, from 2004 to 2016. If a regional office of an audit firm issues a single ICMW, for example, it leads to a 2.5% lower growth in the number of clients and an 8% decline in year-over-year revenue for that office, the study found.

Rather than criticize company executives for acting on bias, the study lays the blame on boards of directors, whose audit committees make decisions on hiring or firing auditors. “The committee has ultimate responsibility in determining how effective the auditor is at the job,” said Daniel Goelzer, a retired partner at Baker & McKenzie and former interim chairman of the Public Company Accounting Oversight Board.

Mr. Rowe, the co-author, said he hopes the study will effect change among audit committees.

“When audit committees are working with management to choose an auditor, it would be nice if they were more aware of the company’s bias and evaluated all factors when making the decision,” he said in an interview.

Companies avoiding diligent audit firms could have a detrimental impact on investors’ access to relevant company information, Mr. Rowe and Ms. Cowle wrote.

“If the market for audit services penalizes auditors for providing the public with value-relevant information that is critical of management (i.e., ICMWs), then the market actively undermines the potential value of auditors’ direct-to-investor communications,” the researchers wrote.

One regulator has made an effort to make audits more detailed. The PCAOB, which regulates the U.S. accounting industry, this year began requiring that auditors for large companies include information on the most complex issues about a company in their annual letter in financial statements.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

GE Is New Target of Madoff Whistleblower

 

By Mark Maremont Thomas Gryta | August 15, 2019

Topics: Investments , Consolidation , Insurance , Contingent Liabilities , Forensic Accounting

Summary: Harry Markopolos is known as the accounting expert who warned the U.S. Securities and Exchange Commission about the Bernie Madoff Ponzi scheme but was ignored. He has now issued a report claiming GE’s financial reports are fraudulent and contain inadequate reporting about insurance operations among other matters. Related WSJ and Barron’s articles can be found by looking at the WSJ site news for General Electric Company; these articles cite opposing views by Goldman Sachs, ratings firm Fitch, and others.

Classroom Application: The article may be used when covering accounting issues described in the article: investment accounting versus consolidation of Baker-Hughes; contingent liabilities related to insurance claims, in this case, long-term care insurance, and the coming move to the current expected credit loss (CECL) accounting model; and, more generally, forensic accounting.

Questions:

·         Who are Harry Markopolos and Bernie Madoff? Cite your source for this information if obtained from outside this WSJ article.

·         What concerns has Mr. Markopolos raised in regard to GE’s accounting practices? What was his reason for issuing the report claiming these concerns?

·         GE Chief Executive Officer Larry Culp claims that Mr. Markopolos’s assessment of the company’s accounting practices amounts to “market manipulation—pure and simple.” How can an investor benefit from bad news about a corporate entity?

·         What benefits could Harry Markoplos reap if his claims about GE’s financial reporting prove to be well-founded?

Read the Article

Reviewed By: Judy Beckman

 

 

"GE Is New Target of Madoff Whistleblower," by Mark Maremont and Thomas Gryt, August 15, 2019 , The Wall Street Journal, August 15, 2019
https://www.wsj.com/articles/ge-is-new-target-of-madoff-whistleblower-11565866617

Harry Markopolos, who warned securities regulators about the Madoff investment scheme, is taking issue with how GE accounts for its long-term-care insurance holdings and for its Baker Hughes oil and gas business.

An accounting expert who raised red flags about Bernie Madoff ’s Ponzi scheme has a new target: General Electric Co. GE -2.69%

In a research report posted online Thursday, Harry Markopolos alleges the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with regulators. The report, which numbers more than 170 pages, is a mixture of detailed financial analysis and sweeping claims.

In an interview, Mr. Markopolos said his group found GE’s insurance unit will need to bolster its reserves by $18.5 billion in cash, and he faulted the way the company is accounting for its oil-and-gas business. All told, he said, the accounting problems amount to $38 billion, or 40% of the conglomerate’s market value.

“This is market manipulation—pure and simple,” GE Chief Executive Officer Larry Culp said in a statement that was released midday Thursday. “Mr. Markopolos’s report contains false statements of fact, and these claims could have been corrected if he had checked them with GE before publishing the report.”

GE stood by its financial reporting and said the Markopolos report was produced to help short sellers by creating volatility in GE shares. Mr. Culp accused Mr. Markopolos of being motivated by personal profit rather than accurate financial analysis.

GE’s shares dropped 11% to $8.01, a seven-month low, in Thursday’s trading. That is the largest percentage decrease since April 2008. Mr. Culp bought $2 million of GE stock at $7.93 a share Thursday, after buying $3 million worth at $9.03 Monday. A spokeswoman said the purchases reflect his confidence in the company.

Mr. Markopolos said he and his colleagues are working with an undisclosed hedge fund, which is betting GE’s share price will decline. Mr. Markopolos’s group gave the investor access to the research before publication and will receive a portion of any trading proceeds. He declined to identify the hedge fund. The group also is sharing its findings with securities regulators, hoping to collect a cash reward as part of a whistleblower program, Mr. Markopolos said.

Asked Thursday to respond to GE’s criticism of his motivation and methods, Mr. Markopolos was dismissive. “Who contacts the bad guys so they can cover it up,” he said.

The group’s research indicates that GE is short on working capital—a key measure of liquidity—and that its cash situation is far worse than disclosed in its regulatory filings.

GE responded that it has a “strong liquidity position, committed credit lines, and several executable options to monetize assets.” The company said it ended the second quarter with $16.9 billion of cash at its industrial business, excluding Baker Hughes, and $12.5 billion of liquidity at GE Capital.

The Boston-based investor-turned-investigator warned the Securities and Exchange Commission about the Madoff investment scheme years before it became public, but was ignored. In a more recent campaign, Mr. Markopolos helped expose a foreign-currency trading scandal at several banks. He has helped spawn a cash-for-tips whistleblower industry.

GE is already under investigation by the SEC and Justice Department for potential accounting issues that have come to light in the past two years related to its insurance holdings and problems in its power division. The company has denied accounting fraud in response to lawsuits and said it is cooperating with investigators. GE has said it is considering switching auditors after using KPMG LLP for more than a century.

The Markopolos group said it plans to present its report to the SEC and to meet with federal prosecutors and investigators about its findings. In the report, the group says some information will be given exclusively to law enforcement.

An SEC spokesman declined to comment.

Continued in article

GE Claims It's No Enron
From the CFO Journal's Morning Ledger on August 20, 2019

Good morning. General Electric Co.’s finance and investor relations team pushed back further on Monday against claims by accounting expert Harry Markopoulos who accused the industrial conglomerate of masking its financial problems and filing inaccurate or fraudulent information with regulators, The Wall Street Journal reports.

In a new investor update, the company said it believes the current reserves for its long-term-care insurance business are well supported by its portfolio of investments. GE also defended the accounting for its oil-and-gas business.

The company said it has “been up front and transparent about the long-term liabilities,” and there are “a lot of viewpoints in the market regarding the risks and financial obligations across the entire [long-term-care] industry.” It said that as a reinsurer, it isn’t responsible for 100% of every risk in that business. GE also said the “adverse differences” between its policies and those from other companies are significantly overstated.

Mr. Markopolos’s group estimated, in its report, that GE will need to increase its insurance reserves by $18.5 billion in cash and take a $10.5 billion charge because of an accounting change in 2021. GE said Monday it wouldn’t need to make a cash contribution of $29 billion to the long-term-care insurance business.

 


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

Stopping Red Ink Tops WeWork’s To-Do List

 

By Eliot Brown Heather Somerville | August 15, 2019

Topics: Fixed Costs , Variable Costs , IPO , Capital Expenditures

Summary: WeWork is headed towards an initial public offering. However, on Wednesday, August 14, 2019, the company disclosed in its IPO filing with the U.S. Securities and Exchange Commission “…operating losses that ballooned 102% to $1.37 billion for the first six months, compared with a year earlier.” We’s losses imply that “the nine-year-old company isn’t wringing out enough cost savings as it gets bigger…[W]ith each new office, it has certain fixed costs, such as putting in desks and building conference rooms.”

Classroom Application: The article may be used in a managerial accounting class discussing types of costs: fixed, variable, and those that follow a step function approximating each of these types in the long run. Financial reporting concepts of capital versus period costs also are addressed.

Questions:

·         Define the terms fixed cost and variable cost. Cite your source for these definitions.

·         What types of cost follow a step function? Explain your answer.

·         As described in the article, Wework states in its IPO offering document that it expects to “gain economies of scale.” What are economies of scale? Are the types of costs incurred by the company subject to obtaining economies of scale? Explain.

·         Define the terms “period cost” and “capital expenditure.” Cite your source for these definitions and identify an example of each type of cost incurred by Wework in opening new locations.

Read the Article

Reviewed By: Judy Beckman

"Stopping Red Ink Tops WeWork’s To-Do List," by Eliot Brown Heather Somerville, The Wall Street Journal, August 15, 2019
https://www.wsj.com/articles/stopping-the-red-ink-tops-weworks-to-do-list-11565881081

We Co.’ s growing losses suggest office-space company will need large sums of cash for years

As WeWork heads toward an initial public offering, the office-space company faces a fundamental problem: Its losses are growing as fast as its revenue.

WeWork’s parent company, We Co., whose main business is renting and remodeling offices to sublease to other companies, disclosed in its IPO filing on Wednesday operating losses that ballooned 102% to $1.37 billion for the first six months, compared with a year earlier.

Large losses are hardly anomalous among recent IPOs. Ride-hailing firm Uber Technologies Inc. UBER -1.68% posted a $1.8 billion operating loss for the last six months of 2018 leading up to its May IPO. But Uber had still trimmed its losses by 23% from a year earlier.

We’s losses, however, are also doubling along with its revenue, which suggests the nine-year-old company isn’t wringing out enough cost savings as it gets bigger. The lack of scaling is a potentially troubling sign for a company that has commanded a valuation more akin to a tech company than a real-estate firm.

“If [the losses] keep going up, it’s a problem,” said Alex Castelli, managing partner of emerging markets at financial-advisory firm CohnReznick. “At the end of the day, they need to move toward profitability.”

Much of We’s costs go toward leasing and renovating office space and outfitting it with furniture. As it grows, the company expects to gain economies of scale—a phrase We mentions nine times in its IPO filing, and something one of its executives has long promised.

While software companies can cut the cost of adding and retaining new users as they grow, We, which has a lot of physical assets, doesn’t enjoy this type of scale. With each new office, We has certain fixed costs, such as putting in desks and building conference rooms.

Continued in article

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Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

Earnings Outlook for S&P 500 Companies Looks Bleak

 

By Michael Wursthorn | August 15, 2019

Topics: Analysts' Forecasts , Earnings Forecasts

Summary: “Wall Street analysts have cut their third-quarter profit estimates in recent weeks…[as] the latest round of tariffs on Chinese imports compounds the problems already facing many companies and threaten to erode their profit margins…At best, earnings for the companies in the S&P 500 will grow 1.5% this year…far short of estimates from analysts in January for growth of more than 6%.”

Classroom Application: The article may be used in a financial reporting class to discuss the use of reports that accountants produce, the earnings forecasting process and its horizon, and the interaction of analyst forecasts with management guidance.

Questions:

·         Who are “Wall Street analysts”? For whom do they work? Cite your source for this information.

·         What is the S&P 500? Include in your answer the size of these companies and cite your source for this information.

·         What is the end of the third quarter 2019 for companies that follow calendar year reporting?

·         What has happened to analysts’ forecasts of 2019 profits—both for the full year and for just the third quarter--for companies in the S&P 500?

·         What factors are leading to these changes in analyst forecasts for 2019 results?

·         As described in the article, how do these estimates impact the overall U.S. stock market performance we have seen in July and August 2019?

Read the Article

Reviewed By: Judy Beckman

"Earnings Outlook for S&P 500 Companies Looks Bleak," by Michael Wursthorn, The Wall Street Journal, August 15, 2019
https://www.wsj.com/articles/earnings-outlook-for-s-p-500-companies-looks-bleak-11565861402

Wall Street analysts cut third-quarter profit estimates, adding to concerns including trade dispute

Investors counting on a corporate earnings rebound in the second half of the year are risking disappointment.

Wall Street analysts have cut their third-quarter profit estimates in recent weeks, painting a bleak picture for investors already grappling with a simmering trade war, pockets of economic weakness and ominous signs from the bond market.

Despite this week’s partial reprieve from the Trump administration, the latest round of tariffs on Chinese imports compound the problems already facing many companies and threaten to stifle their profit margins. Especially vulnerable are manufacturers, miners and retailers.

At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.

Dozens of companies, including Eastman Chemical Co. EMN -4.88% , Macy’s Inc., M -3.98% Caterpillar Inc. CAT -3.25% and Cisco Systems Inc., have issued downbeat outlooks, contributing to the pullback in profit expectations.

“Everyone in April and through the beginning of May thought that the economy was going to get better in the back half of the year, trade war was going to sort of settle, certainly not escalate,” Eastman Chemical Chief Executive Mark Costa said on an earnings call last month. “And now we’re just in a very different world where I don’t think that’s true…There’s not a lot of signs of economic recovery coming in the second half.”

To be sure, surprises to the upside are fairly common with earnings reports because analysts tend to be conservative with their estimates. The first and second quarters were no different in that regard. And other companies, such as retail giant Walmart Inc., have offered more optimistic outlooks on the rest of the year as they take market share from struggling competitors, bucking the broader trend.

Still, analysts said investors shouldn’t take the slowdown in earnings growth lightly, especially as the outlook for later quarters dims. Hanging over the stock market is a diverging U.S. economy. Manufacturing activity in the U.S. has slowed for four straight months. Service activity, which includes companies in the health-care, finance and restaurant industries, has held up better as Americans maintain a solid spending appetite and as employment remains strong.

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article


Teaching Case From The Wall Street Journal Weekly Accounting Review on August 23, 2019

 

", The Wall Street Journal, August
 

 

Continued in article

 




Humor for August 2019

Humor for June 2019

What's the greatest movie quote of all time?
https://www.theatlantic.com/magazine/archive/2019/09/q-what-is-the-greatest-movie-quote-of-all-time/594748/
Jensen Comment
Here are some of my favorite quotes (not from movies)

Joe Biden:  Poor Kids Are Just as Smart as White Kids ---
https://www.businessinsider.com/joe-biden-gaffe-poor-kids-just-smart-white-kids-2019-8

If you don't know where you're going, you might not get there.
Yogi Berra

I learned long ago never to wrestle with a pig. ... You get dirty and besides the pig likes it ---
George Bernard Shaw

You can get a lot farther with a smile and a gun than you can with just a smile.
Al Capone


Leroy Troy :  Ghost Chickens in the Sky ---
https://www.youtube.com/watch?v=Pkdci55adqk

Leroy Troy:  Grandfather's Clock ---
https://www.youtube.com/watch?v=lZTRpS3wAzQ


Giant tortoise in 'world's slowest police chase' ---
https://www.bbc.com/news/uk-england-beds-bucks-herts-49221581
Herbert was just looking for love

People Have Jokes About President Trump’s Reported Wish to Buy Greenland ---
https://time.com/5653167/trump-buy-greenland-memes/?utm_source=newsletter&utm_medium=email&utm_campaign=the-brief-pm&utm_content=20190816&xid=newsletter-brief

The A-Hed – the Quirky Side of the Wall Street Journal ---
https://jborden.com/2019/08/15/the-a-hed-the-quirky-side-of-the-wall-street-journal/


Forwarded by Paula

Lesley Stahl did a story on gender roles in Kabul, Afghanistan,  several years before our involvement in the Afghan conflict. She noted  that women customarily walked five paces behind their husbands. She recently returned to Kabul and observed that women still walk behind their husbands.
 
Despite the overthrow of the oppressive Taliban regime, the women now seem to, and are happy to, maintain the old customs.
 
Ms. Stahl approached one of the Afghani women and asked, "Why do you now seem happy with an old custom that you once tried so desperately to change?"
 
The woman looked Ms. Stahl straight in the eyes, and without  hesitation said, "Land mines.”
 
No matter what language you speak or where you go the moral of the story is:   
BEHIND EVERY MAN, THERE'S A REALLY SMART WOMAN.




Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0719.htm 

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 August 31, 2019 with a little help from my friends.

 

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

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

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

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

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

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

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

 

 

 

 

 

 

July 2019

 

Bob Jensen's New Additions to Bookmarks

July 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




The CPA Journal:  Fraud in the World of Advanced Technologies ---
https://www.cpajournal.com/2019/07/01/fraud-in-a-world-of-advanced-technologies/

Bob Jensen's Archives on Frauds ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Amazon Third Party Liability Ruling Could Have Enormous Implications for All Retailers and Consumer Prices
Amazon could be exposed to huge risk after a court ruled that it's liable for faulty third-party products ---
https://www.businessinsider.com/amazon-ruled-to-be-liable-for-third-party-products-2019-7

Jensen Comment
This could have an enormous impact on virtually all consumer prices. For example, suppose Walmart sells Ring front porch security cameras onsite as well as online. If a camera fails when robbers are breaking in the front door home owners might now sue Walmart for the value of all possessions stolen and the murders of all occupants inside the house. The liability could be monumental considering the millions of products sold be Amazon, Walmart, and the locally-owned stores on main street who might now also be sued for faulty products.

Hundreds of small town residents can now sue a hapless local Kroger grocery store that bought sweet corn from a nearby farmer who secretly used Roundup weed killer.

It's no wonder that millions of lawyers have a special reason to celebrate this July 4 holiday. A privately-owned local grocer store may not be worth much in bankruptcy, but you can sue Kroger (or Walmart) for billions.

This Amazon ruling will raise product liability insurance rates enormously. And remember that companies like Amazon, Walmart, Kroger and your locally-owned stores do not pay insurance costs and other costs like taxes. They pass their expenses along to customers such that this Amazon ruling in effect is a tremendous wealth transfer from customers like you and me to lawyers and insurance companies.


AICPA issues forensic accounting standards ---
https://www.journalofaccountancy.com/news/2019/jul/forensic-accounting-aicpa-standards-201921580.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Jul2019


This Social Security scam is just evil ---
https://www.msn.com/en-us/money/personalfinance/this-social-security-scam-is-just-evil/ar-AAFHbH9?ocid=spartandhp

Imagine you’re retired and your primary source of income is your monthly Social Security check.

Your telephone rings and an automated message says your Social Security number has been “suspended” because of some suspicious activity. You may even be threatened with arrest if you don’t call the telephone number provided in the automated message.

If someone calls saying that your Social Security number and the benefits connected to it may be in jeopardy, it’s understandable that you might panic. You’re told that to “reactivate” your Social Security number, you have to pay a fee or buy gift cards. You have reservations, but fear of being cut off from the money you so desperately need overtakes any reservations you may have.

So you call the number.

What comes next can be devastating.

“My mother is 76 and has early Alzheimer’s,” one reader wrote. “She received a call saying that her Social Security information was compromised and that the only way to rectify the situation was to buy $3,200 in gift cards to Target and GameStop and give the codes to an ‘employee.’ She was told the money would be deposited back into her bank account. Obviously, the majority of people would understand that this is a scam, but she is easily confused and gave away all of the money in her checking account. And once it was gone, there was no way to help her or recover the money.”

This Texas woman’s daughter, who wrote to me, said one store employee warned her mother that she was probably being scammed.

“In the defense of the stores, GameStop tried to talk her out of purchasing the gift cards,” the daughter said. “They knew it seemed sketchy. I guess in a perfect world they would have called the police before running the transaction, but they did try. Target was helpful in trying to gather information after the fact, and we appreciated that too.”

“Evil” is all I can think of to describe the people behind this particular scam. It’s especially heinous when you consider that many of the victims are retirees on fixed incomes.

“I wish that we would have known about the scam ahead of time, so we could have talked about it with her and warned her,” the daughter said. “My mother never could have even imagined that someone would impersonate a government employee.”

Continued in article

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

 


BDO Puerto Rico Managing Partner Resigns After Indictment In Massive Corruption Scandal ---
https://goingconcern.com/bdo-puerto-rico-managing-partner-resigns-after-indictment-in-massive-corruption-scandal/

Bob Jensen's threads on the BDO accounting firm ---
http://faculty.trinity.edu/rjensen/fraud001.htm


Excel:  How to Reduce Data Input and Typos in Excel ---
https://www.techrepublic.com/article/how-to-reduce-data-input-and-typos-in-excel/

Excel:  How to reference formulas in same Excel worksheet ---
https://www.fm-magazine.com/news/2019/jul/how-to-reference-formulas-in-excel-worksheet.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=22Jul2019

Excel:  A Quick Tip for Breaking Links in Excel ---
https://www.journalofaccountancy.com/issues/2019/jul/break-links-in-excel.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Jul2019

Excel;  How to stop hackers from exploiting an Excel vulnerability ---
https://www.zdnet.com/article/microsoft-excel-power-query-feature-can-be-abused-for-malware-distribution/


Corzine Accepts Prop Trading Ban in His Wall Street Resurrection ---
https://www.bloomberg.com/news/articles/2019-07-15/corzine-accepts-prop-trading-ban-in-his-wall-street-resurrection?cmpid=BBD071519_BIZ&utm_medium=email&utm_source=newsletter&utm_term=190715&utm_campaign=bloombergdaily

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


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

The Tax Treatment Of Cryptocurrency Hard Forks ---
https://taxprof.typepad.com/taxprof_blog/2019/07/the-tax-treatment-of-cryptocurrency-hard-forks.html

IRS Sending Warning Letters to More Than 10,000 Cryptocurrency Holders ---
https://www.wsj.com/articles/irs-sending-warning-letters-to-more-than-10-000-cryptocurrency-holders-11564159523

Libra --- https://en.wikipedia.org/wiki/Libra_(cryptocurrency)#Libra_Association

Why LIbra is Likely to Fail as a Payments Network ---
https://www.creditslips.org/creditslips/2019/07/libra-and-financial-inclusion.html

Libra's Unsolved Puzzles ---
https://www.alt-m.org/2019/07/02/libras-unresolved-puzzles/

College’s IT system was attacked by hackers demanding $2 million in Bitcoin ---
https://www.insidehighered.com/news/2019/07/15/hackers-demand-2-million-monroe-college-ransomware-attack?utm_source=Inside+Higher+Ed&utm_campaign=af9a6d96b1-WNU_COPY_01&utm_medium=email&utm_term=0_1fcbc04421-af9a6d96b1-197565045&mc_cid=af9a6d96b1&mc_eid=1e78f7c952 Jensen Question
Why can't blockchain identify the hackers if the college pays the ransom?
https://en.wikipedia.org/wiki/Blockchain

 

It's No Bitcoin: Facebook's Libra Currency Is Tied to Government Currencies ---
https://mises.org/wire/its-no-bitcoin-facebooks-libra-currency-tied-government-currencies?utm_source=Mises+Institute+Subscriptions&utm_campaign=02c16713e8-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-02c16713e8-228708937

Bitcoin’s energy consumption equals that of Switzerland ---
https://www.bbc.com/news/technology-48853230?utm_campaign=the_download.unpaid.engagement&utm_source=hs_email&utm_medium=email&utm_content=74342438&_hsenc=p2ANqtz-_QTMj8_y5jtwtAM_USkqTQiQIlyruTsjzHBrlsQeyd4QBd-755ijJpq2hh_uFhZbfd3CYHgLNZFtepWCfHiU9zcINFYA&_hsmi=74342438

Bitcoin uses as much energy as the whole of Switzerland, a new online tool from the University of Cambridge shows.

The tool makes it easier to see how the crypto-currency network's energy usage compares with other entities.

However, one expert argued that it was the crypto-currency's carbon footprint that really mattered.

Currently, the tool estimates that Bitcoin is using around seven gigawatts of electricity, equal to 0.21% of the world's supply.

That is as much power as would be generated by seven Dungeness nuclear power plants at once.

Over the course of a year, this equates to roughly the same power consumption as Switzerland.

§  Bitcoin energy use in Iceland set to overtake homes

§  Iran seizes 1,000 Bitcoin mining machines after power spike

"We want to use comparisons that set the narrative," said the tool's co-creator Michel Rauchs, from the university.

"Visitors to the website can make up their own mind as to whether it seems large or small."

Reply from a reader

Hello Bob,

There are some alternatives to Bitcoin that don’t require mining. Bitcoin uses Proof of Work, which is where the mining comes in. There are crypto currencies that use Proof of Stake instead. Cardano is the most impressive, and it’s the only crypto asset that’s peer reviewed by computer scientists. Not sure if you’re interested, I just thought I would reach out. Nano is also another currency that doesn’t require mining. Here are some links:

https://www.cardano.org/en/ouroboros/

https://nano.org/en/ 

Best regards,

George Tudor

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

How IoT, Big Data, AI and Blockchain all Tie in Together ---
http://www.thinktwenty20.com/index.php/blog-issues-forum/350-how-iot-big-data-ai-and-blockchain-all-tie-in-together

Five Ways Blockchain Startups Can Appeal to Enterprises ---
https://readwrite.com/2019/07/13/5-ways-blockchain-startups-can-appeal-to-enterprises/

 

Blockchain: Introduction and Application in Financial Accounting

the Journal of Corporate Accounting & Finance (2018)

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3258504
21 Pages
 Posted: 15 Jul 2019

Ting Yu

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students

Stanley Lin

Shenzhen University

Qingliang Tang

Western Sydney University - School of Business

Date Written: February 19, 2018

Abstract

Blockchain, as a decentralised ledger technology with characteristics of transparent, secure, permanent and immutable, has been applied in many fields such as cryptocurrency, equity financing and corporate governance. However, the blockchain technology is in the experimental stage and has several problems to be solved including limited data processing capacity, information confidentiality and regulatory difficulties. This study sheds light on the potential application of blockchain technology in financial accounting and its possible impacts. We argue that in the short run the public blockchain could be used as a platform for firms to voluntarily disclose information. In the long run, the application could effectively reduce errors in disclosure and earnings management, increase the quality of accounting information and mitigate information asymmetry. We also discuss potential impacts that the application will have on independent auditors and financial accountants.

Keywords: Blockchain, Information Asymmetry, Financial Accounting, Auditing

JEL Classification: D82, G14, M40, O33

 


The Marriage Penalty Persists After The 2017 Tax Act ---
https://taxprof.typepad.com/taxprof_blog/2019/07/wsj-the-marriage-penalty-persists-after-the-2017-tax-act.html


Inside Deutsche Bank's brutal $8.3 billion overhaul, which will cost 18,000 bankers their jobs ---
https://markets.businessinsider.com/news/stocks/what-we-know-about-deutsche-bank-restructuring-plan-2019-7-1028333237


Subchapter S Corporation --- https://en.wikipedia.org/wiki/S_corporation

WSJ: Biden Made 'Aggressive' Use Of Edwards-Gingrich Sub S Loophole To Skirt $500k In Taxes ---
https://taxprof.typepad.com/taxprof_blog/2019/07/wsj-biden-made-aggressive-use-of-edwards-gingrich-sub-s-loophole-to-skirt-500k-in-taxes.html

Wall Street Journal, Joe Biden Used Tax-Code Loophole Obama Tried to Plug:

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% self-employment tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Bidens would have owed if paid directly or if the Obama proposal had become law.

“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

The technique is known in tax circles as the Gingrich-Edwards loopholefor former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes. ..

Jensen Comment
I've nothing against minimizing taxes with tax strategies that are legal.  This tidbit shows how a lot of folks are using the Subchapter S provision.
There are a lot of charities, and nothing says you have to pay extra taxes to Uncle Sam in lieu of other charities.


An Arm of the World Bank Has Been Implicated in Latin America's Biggest Corruption Scandal ---
https://time.com/5618835/world-bank-international-finance-corporation-graft-grupo-aval/?utm_source=time.com&utm_medium=email&utm_campaign=the-brief&utm_content=2019070210am&xid=newsletter-brief


Minimum Wage Employment Effects and Labor Market Concentration ---
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3416016
Jensen Comment
This, along with most studies of minimum wage increases, ignores the impact of job growth in the underground economy. It's especially common for small firms (think landscapers and day care centers in San Antonio) to shift more to the underground economy where minimum wages are sometimes paid in cash without any benefits whatsoever, including no medical benefits, no unemployment insurance, now social security benefits, no paid vacations, etc. Some estimates of the underground economy claim that this economy pays over $2 trillion per year. Authorities often look the other way, because closing down the underground labor market locally directly impacts children and families who need those cash wages desperately (think immigrants and refugees). Many of the small-time employers will simply stop hiring completely if they have to pay benefits and relatively high hourly wages. Hourly wages themselves vary with skills vary in the underground economy (e.g., mechanics may make $25 an hour without benefits). For a short while we had a dentist in NH that give suspiciously huge cash discounts (no checks or paper trail receipts to get the discounts). I think he was working as a professional in the underground economy where workers seldom pay income or other taxes.


Just how much is changing in the world of asset management?  ---
https://www.rte.ie/brainstorm/2019/0712/1061684-just-how-much-is-changing-in-the-world-of-asset-management/

Opinion: there may be generational and economic challenges for the sector, but the big picture is still about big returns versus small risks