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

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

Stanford’s d.school is redesigning the world we live in ---
https://story.californiasunday.com/stanford-dschool

Lawsky's Free Income Tax Problem Generator ---
https://www.lawskypracticeproblems.org/about

FASB addressing liabilities and equity complexity, goodwill ---
https://www.journalofaccountancy.com/news/2019/dec/fasb-liabilities-equity-complexity-goodwill-201922621.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=11Dec2019

PCAOB’s 2020 inspection focus and audit quality tips revealed ---
https://www.journalofaccountancy.com/news/2019/dec/pcaob-inspection-focus-2020-audit-quality-tips-201922630.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Dec2019

Harvard To Pay $50 Million Tax Due To Trump Tax Reform ---
https://www.insidehighered.com/quicktakes/2019/10/25/50-million-tax-bill-harvard

Harvard University expects to pay $49.8 million in federal taxes as a result of the tax reform package passed in 2017.

Most of the tax bill, $37.7 million, comes from the Tax Cuts and Jobs Act’s new tax on net investment income -- the so-called endowment tax. The other $12.1 million is from a net investment income tax on operational revenues, unrelated business taxable income and excise taxes on executive compensation.

The nearly $50 million tax bill is still an estimate, Harvard said in its annual financial report for the fiscal year ending in June 2019, which the university released Thursday. The federal government hasn’t issued final guidance that would allow the exact amount of tax to be calculated, but accounting principles require Harvard to book expenses in the year they were incurred.

Dozens of the country’s wealthiest colleges and universities are expected to be hit by the endowment tax, a 1.4 percent tax on earnings, although federal estimates anticipate 40 or fewer being affected immediately. Some institutions’ leaders have lobbied hard for a repeal of the tax, without any success to this point.

 Continued in article

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

Barack Obama's 19 Favorite Books of 2019 ---
https://www.businessinsider.com/barack-obama-favorite-books-2019-list-2019-2019-12

The Atlantic:  The 15 Best Books of 2019 ---
https://www.theatlantic.com/entertainment/archive/2019/12/15-best-books-of-2019/603880/

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

Bitcoin is Less Secure than Most People Think ---
https://marginalrevolution.com/marginalrevolution/2019/01/bitcoin-much-less-secure-people-think.html

Three Men Arrested in $722 Million Cryptocurrency Fraud Scheme ---
https://www.justice.gov/usao-nj/pr/three-men-arrested-722-million-cryptocurrency-fraud-scheme

Cryptocurrencies Could Eliminate Banking’s Easiest Moneymaker ---
https://www.gsb.stanford.edu/insights/cryptocurrencies-could-eliminate-bankings-easiest-moneymaker?utm_source=Stanford+Business&utm_medium=email&utm_campaign=Stanford-Business-Issue-176-12-1-2019&utm_content=alumni

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

Blockchain:  How the CPA Exam is poised to change ---
https://www.journalofaccountancy.com/podcast/cpa-exam-changes.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=25Nov2019

Stanford University study finds that almost half of California's 2012 income tax increase was eroded by people who moved away or lowered their taxable income --- 
https://www.gsb.stanford.edu/insights/has-california-hit-limit-tax-rates?utm_source=Stanford+Business&utm_medium=email&utm_campaign=Stanford-Business-Issue-176-12-1-2019&utm_content=alumni

Think 20Twenty
Issue 3 Fall 2019
https://gallery.mailchimp.com/5495a4445eeeac3036b25fdd7/files/a43b975d-5385-438e-98c3-123d5897dc5f/Fall_2019_Issue.pdf

OpenClassrooms Online Vocational Training --- https://en.wikipedia.org/wiki/OpenClassrooms

Among the prestigious firms using OpenClassrooms for retraining are Amazon, Microsoft, and PwC ---
https://www.businessinsider.com/how-openclassrooms-is-helping-corporations-like-amazon-retrain-workers-2019-11

Bob Jensen's threads on fee-based online training and education programs ---
http://faculty.trinity.edu/rjensen/Crossborder.htm

Google Sheets --- https://corporatefinanceinstitute.com/resources/excel/study/google-sheets/
Also see
https://en.wikipedia.org/wiki/Google_Sheets

Difference Between Microsoft Excel and Google Sheets ---
https://www.difference.wiki/microsoft-excel-vs-google-sheets/
Google Sheets is cheaper, but unlike Excel, an Internet connection is mandatory for Google Sheets. Internet connects are not only costly for users who aren't online for one reason or another, and Internet connections increase risks such as viruses, malware, etc.
More importantly, those with Internet Connections can disconnect from the Internet and still use Excel. For example, using Internet Connections in a hotel room is very risky when using the hotel's Internet service. You can work with Excel without having to connect to the Internet in your hotel room or elsewhere.

How to automatically convert Excel to Google Sheets ---
https://blog.sheetgo.com/how-to-solve-with-sheetgo/automatically-convert-excel-to-google-sheets/

Google Sheets Functions ---
https://www.geckoboard.com/blog/part-1-6-google-sheets-functions-you-probably-dont-know-but-should/

Google Sheets Functions You Won't Find in Excel ---
https://www.ablebits.com/office-addins-blog/2019/09/26/google-sheets-functions-not-xl/

Excel:  A guide to Excel's XLOOKUP function ---
https://www.fm-magazine.com/news/2019/nov/excel-xlookup-new-argument-201922382.html

Excel:  Prorating over time in Excel Avoid building a complicated formula in your model with a ‘step it out’ approach ---
https://www.fm-magazine.com/news/2019/dec/microsoft-excel-prorate-over-time-201921877.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=13Dec2019

Excel:  A quick guide to 16 Excel shortcuts ---
https://www.smartbrief.com/s/2019/12/quick-guide-16-excel-shortcuts-0

Excel:  How to apply shading to alternate rows in Excel ---
https://www.howtogeek.com/442857/how-to-apply-shading-to-alternate-rows-in-excel/

Financial Transparency Scores of the 50 State Governments ---
https://www.truthinaccounting.org/news/detail/financial-transparency-score-2019
Truth in Accounting's Full Report ---
https://www.truthinaccounting.org/library/doclib/Financial-Transparency-Score-2019.pdf

Jensen Comment
This is pretty much a red (conservative) versus blue (liberal) outcome in the top 10 versus bottom 10 outcomes, although the red versus blue dichotomy does not hold as well for the rankings of the other 30 states in the middle. Virginia became more of a bluish state in 2019.

Not all states with the heaviest taxpayer burdens are in the bottom 10 (least transparent) accounting rankings. The states with the heaviest taxpayer burdens are shown in red at
https://www.statedatalab.org/ 

The U.S. Dept Valuation Puzzle ---
https://marginalrevolution.com/marginalrevolution/2019/12/the-u-s-public-debt-valuation-puzzle-uh-oh.html
 

Negative Interest Rates --- https://en.wikipedia.org/wiki/Interest_rate#Negative_interest_rates

Miles Kimball's Presentation on Negative Interest Rate Policy to the National Association of Business Economists ---
https://blog.supplysideliberal.com/post/2019/12/5/miless-presentation-on-negative-interest-rate-policy-to-the-national-association-of-business-economists

Library Systems Technology:  What Are the Larger Implications of Ex Libris Buying Innovative?
https://sr.ithaka.org/blog/what-are-the-larger-implications-of-ex-libris-buying-innovative/

Jensen Comment
One of the chronic worries of capitalism is the tendency to reduce competition in the frequent rise of oligopolies and monopolies. When competition is in jeopardy price gouging should be controlled either by forced breakups (as in the case of AT&T) or by government regulation (as in the case of electric utility companies). Sadly government controls are subject to political corruption. Socialism, however, is not the answer since that is a monopoly subject to more tempting political corruption.  Exhibit A is Venezuela.

The biggest weapon we have to fight corruption on both fronts is freedom of the press where there are countless examples of political corruption being exposed by local newspapers. This is why I really, really hate to see the decline in newspapers across the USA.

Gigafactory Plan:  US automaker GM and South Korean battery manufacturer LG Chem announced a $2.3 billion joint venture (JV) to create an electric vehicle (EV) battery plant near Lordstown, Ohio.---
https://www.businessinsider.com/gm-lg-chem-partner-for-us-electric-vehicle-battery-foundry-2019-12
 

The PCAOB also adopted a new standard in 2017 to enhance the usefulness of the standard auditor's report by providing additional and important information to investors, such as the critical audit matters (CAMs) that auditors communicate to the audit committees of the public companies they are auditing. These are matters that are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. The CAMs requirement goes into effect in 2019 and 2020. Beginning in 2017, the updated auditor's report also includes the tenure of the auditor with that company ---
https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board

Critical Audit Matters: The Games Are On ---
https://www.jamesrpeterson.com/home/2019/12/critical-audit-matters-ii-the-games-are-on.html

Based on existing research, “the strongest predictor of (student) evaluations is grade expectations,” he said ---
https://www.insidehighered.com/news/2019/12/09/study-attempts-debunk-criticisms-student-evaluations-teaching?utm_source=Inside+Higher+Ed&utm_campaign=bd09d7a331-DNU_2019_COPY_01&utm_medium=email&utm_term=0_1fcbc04421-bd09d7a331-197565045&mc_cid=bd09d7a331&mc_eid=1e78f7c952

Jensen Comment
The results are consistent with RateMyProfessors.com millions of evaluations where the highest evaluations tend to go to easy graders.

This also supports the contention that having student evaluations affect performance and tenure decisions led to massive grade inflation across the USA  ---
http://faculty.trinity.edu/rjensen/assess.htm#RateMyProfessor

The Atlantic:  Has College Gotten Too Easy? Time spent studying is down, but GPAs are up ---
https://www.theatlantic.com/education/archive/2019/07/has-college-gotten-easier/594550/

Statement Against Student Evaluations for Promotion and Tenure Decisions (American Sociological Association) ---
https://www.asanet.org/sites/default/files/asa_statement_on_student_evaluations_of_teaching_sept52019.pdf

Revenue recognition tips from the SEC staff ---
https://www.journalofaccountancy.com/news/2019/dec/revenue-recognition-tips-from-sec-20122615.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Dec2019

How critical audit matters relate to critical accounting estimates ---
https://www.journalofaccountancy.com/news/2019/dec/how-critical-audit-matters-relate-to-critical-accounting-estimates.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Dec2019

Salesforce's soaring goodwill balance shows how far the company is willing to go for acquisitions — and the potential risk that comes with it ---
https://www.businessinsider.com/salesforce-goodwill-balance-shows-premium-for-acquisitions-2019-12

IASB proposes broad changes focused on financial performance ---
https://www.fm-magazine.com/news/2019/dec/iasb-proposes-changes-financial-performance-201922658.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=18Dec2019

Aequitas investors score major victory with $234.6 million (with Deloitte paying the unknown lion's share) ---
https://www.oregonlive.com/business/2019/07/aequitas-investors-score-major-victory-with-2346-million-settlement.html

Bob Jensen's threads on Deloitte's woes over the years ---
http://faculty.trinity.edu/rjensen/fraud001.htm

Threat to California’s credit grows from troubled $1 billion state accounting program ---
https://www.sacbee.com/news/politics-government/the-state-worker/article238474128.html

A growing number of California state agencies are missing budget deadlines because of a $1 billion accounting program that has major problems remaining unaddressed despite its escalating cost, according to a new state audit.

Up to 62 state government departments missed an October 2019 deadline to submit financial statements to the State Controller’s Office, up from 48 for the 2017-2018 fiscal year, according to the audit published Tuesday.

Those delays threaten the state’s ability to produce its annual financial report on time, which could undermine California’s credit, potentially driving up borrowing costs by billions of dollars, according to the audit.

Continued in article

New FASB standard aims to simplify accounting for income taxes ---
https://www.journalofaccountancy.com/news/2019/dec/fasb-standard-simplify-accounting-for-income-taxes-201922669.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=19Dec2019

Derivatives are more popular than ever with some changed risks and accounting rules ---
https://blog.aicpa.org/2019/12/derivatives-are-back-but-are-the-risks.html#sthash.eCO1QKxe.dpbs

Jensen Comment
There probably is no better standard to use as a basis for teaching accounting theory. But the accounting rules for derivatives are still very technical and very complicated --- mostly because derivative instrument contracts are so varied and complicated ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

Monitoring of Fair Value Reliability by Third-Party Specialists: A Review and Integration of Empirical Research

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3496001
36 Pages Posted: 18 Dec 2019

Kyrre Kjellevold

Norwegian School of Economics (NHH), Department of Accounting, Auditing and Law

Date Written: November 30, 2019

Abstract

This paper reviews the academic literature on the effectiveness of third-party specialists in monitoring the reliability of fair value measurements (FVMs). Research indicates that companies’ use of third-party specialists to provide FVMs reduces investors’ information risk. Management may lack the necessary valuation expertise for measuring fair values and has been shown to provide biased FVMs. The use of a third-party specialist intends to compensate for these deficiencies. By integrating findings in the accounting, economics, and finance literature, the review provides novel insights into the monitoring role of third-party specialists and suggests directions for future research. Overall; the literature shows that third-party specialists are associated with more reliable FVMs across both financial and nonfinancial assets. This supports that specialists have an important monitoring role to secure reliable FVMs. Next, research suggests that the effectiveness of specialists as monitors is moderated by specialists’ economic incentives and by client pressure to inflate FVMs. Further, the monitoring effectiveness of specialists interacts with corporate governance mechanisms such as board independence. Finally, research shows that the financial statement audit only marginally affect the reliability of FVMs above the contribution of third-party specialists. Future research will benefit from a better understanding of specialists’ economic incentives and how these influence specialists’ monitoring effectiveness, as well as investigate how specialists’ monitoring role interacts with relevant governance mechanisms.

Keywords: Fair value, third-party specialists, specialists, management

JEL Classification: G10, G20, M41, M42

Ten universities that have officially joined a UK network set up to tackle the issue of reproducibility in research ---
https://www.timeshighereducation.com/news/ten-uk-universities-create-reproducibility-focused-senior-roles#survey-answer

Each university has created a role that will feature a senior academic leading on practical steps the institution is taking to bolster research quality, such as better training, open data practices and assessing the criteria used in recruitment and promotion decisions

Jensen Comment
Leading academic accounting journals publish neither commentaries on their articles nor replications of research. It's almost rare for academic accounting research to be independently reproduced  or otherwise verified. It's not that accounting researchers are more accurate and honest than scientists. It's more of a problem with lack of relevance of the research in the profession of accountancy ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

It's doubtful that the UK network mentioned above will affect schools of business in general.

What Drives Differences in Audit Pricing Around the World?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3494511
65 Pages Posted: 17 Dec 2019

Brigitte Eierle

University of Bamberg

Sven Hartlieb

University of Bamberg

David Hay

University of Auckland - Business School

Lasse Niemi

Aalto University - School of Business

Hannu Ojala

Tampere University; Aalto University - School of Business

Date Written: December 2019

Abstract

Audit pricing, along with its determinants, forms one of the most extensively investigated areas in audit research. Recent years have seen increasing interest in the macro-level determinants of audit fees related to differences in audit environments around the world. To answer the resultant call for further investigation, we firstly provide a comprehensive synthesis of macro-level determinants that have been considered in empirical cross-country auditing research. Secondly, we provide evidence that audit prices vary substantially across different institutional settings. Thirdly, employing the comprehensive set of country variables identified in our literature review, we examine the relative importance of country factors in accounting for these cross-country differences. We find that economic and regulatory characteristics contribute most to explaining such variations, while the results also demonstrate the sociological environment’s significance. In times when auditing is becoming more globalized, our study should be of interest to a wide range of readers including researchers, practitioners and regulators.

Keywords: auditing, audit fees, literature review, cross-country research

JEL Classification: M40, M42

Creating Relevance of Accounting Research (ROAR) Scores to Evaluate the Relevance of Accounting Research to Practice

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3501871
49 Pages Posted: 17 Dec 2019

F. Greg Burton

Brigham Young University - School of Accountancy

Scott L. Summers

Brigham Young University - School of Accountancy

T. Jeffrey Wilks

Brigham Young University

David A. Wood

Brigham Young University - School of Accountancy

Date Written: December 10, 2019

Keywords: Research Relevance, Accounting Rankings, Practice-Oriented Research, Journal Rankings

JEL Classification: M40, M41, M49, M00

Abstract

The relevance of accounting academic research to practice has been frequently discussed in the accounting academy; yet, very little data has been put forth in these discussions. We create relevance of accounting research (ROAR) scores by having practitioners read and evaluate the abstract of every article published in 12 leading accounting journals for the past three years. The ROAR scores allow for a more evidence-based evaluation and discussion of how academic accounting research is relevant to practitioners. Through these scores, we identify the articles, authors, journals, and accounting topic areas and methodologies that are producing practice-relevant scholarship. By continuing to produce these scores in perpetuity, we expect this data to help academics and practitioners better identify and utilize practice-relevant scholarship.

V. CONCLUSIONS

This research provides empirical data about the contribution accounting academics are making to practice. Specifically, we had nearly 1,000 professionals read the abstract of academic accounting articles and rate how relevant the articles are to practice. We then present the data to rank journals, universities, and individual scholars. Overall, we interpret the results to suggest that some of the research that is currently produced and published in 12 accounting journals is relevant to practice, but at the same time, there is room to improve. Our hope is that by producing these rankings, it will encourage journals, institutions, and authors to produce and publish more relevant research, thus helping to fulfill the Pathways charge “to build a learned profession.”

We now take the liberty to provide some normative comments about our research findings in relation to the goal of producing a learned profession. One of the key findings in this study is that the traditional top 3 and top 6 journals are not producing the most or the greatest average amount of practice relevant research, especially for the distinct accounting topic areas. Prior research shows that the collection of a small group of 3/6 journals is not representative of the breadth of accounting scholarship (Merchant 2010; Summers and Wood 2017; Barrick, et al. 2019). Given the empirical research on this topic, we question why institutions and individual scholars continue to have a myopic focus on a small set of journals. The idea that these 3/6 journals publish “the best” research is not empirically substantiated. While many scholars argue that the focus is necessary for promotion and tenure decisions, this seems like a poor excuse (see Kaplan 2019). Benchmarking production in a larger set of journals would not be hard, and indeed has been done (Glover, Prawitt, and Wood 2006; Glover, Prawitt, Summers, and Wood 2019). Furthermore, as trained scholars, we could read and opine on article quality without outsourcing that decision to simple counts of publications in “accepted” journals. We call on the 18 We recognize that only looking at 12 journals also limits the scope unnecessarily. The primary reason for the limitation in this paper is the challenge of collecting data for a greater number of journals. Thus, we view 12 journals as a start, but not the ideal. academy to be much more open to considering research in all venues and to push evaluation committees to do the same.

A second important finding is that contribution should be a much larger construct than is previously considered in the academy. In our experience, reviewers, editors, and authors narrowly define the contribution an article makes and are too often unwilling to consider a broad view of contribution. The current practice of contribution too often requires authors to “look like everyone else” and rarely, if ever, allows for a contribution that is focused exclusively on a practice audience. We encourage the AACSB, AAA, and other stakeholders to make a more concerted effort to increase the focus on practice-relevant research. This may entail journals rewriting mission statements, editors taking a more pro-active approach, and training of reviewers to allow articles to be published that focus exclusively on “practical contributions.” This paper has important limitations. First, we only examine 12 journals. Ideally, we would like to examine a much more expansive set of journals but access to professionals makes this challenging at this time. Second, measuring relevance is difficult. We do not believe this paper “solves” all of the issues and we agree that we have not perfectly measured relevance. However, we believe this represents a reasonable first attempt in this regard and moves the literature forward. Third, the ROAR scores are only as good as the professionals’ opinions. Again, we limited the scores to 5 professionals hoping to get robust opinions, but realize that some articles (and thus authors and universities) are not likely rated “correctly.” Furthermore, articles may make a contribution to practice in time and those contributions may not be readily apparent by professionals at the time of publication. Future research can improve upon what we have done in this regard.

We are hopeful that shining a light on the journals, institutions, and authors that are excelling at producing research relevant to practice will encourage increased emphasis in this area.

Jensen Question
Is accounting research stuck in a rut of repetitiveness and irrelevancy?

"Accounting Craftspeople versus Accounting Seers: Exploring the Relevance and Innovation Gaps in Academic Accounting Research," by William E. McCarthy, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 833-843 --- 
http://aaajournals.org/doi/full/10.2308/acch-10313 

Is accounting research stuck in a rut of repetitiveness and irrelevancy? 
I (Professor McCarthy) would answer yes, and I would even predict that both its gap in relevancy and its gap in innovation are going to continue to get worse if the people and the attitudes that govern inquiry in the American academy remain the same. From my perspective in accounting information systems, mainstream accounting research topics have changed very little in 30 years, except for the fact that their scope now seems much more narrow and crowded. More and more people seem to be studying the same topics in financial reporting and managerial control in the same ways, over and over and over. My suggestions to get out of this rut are simple. First, the profession should allow itself to think a little bit normatively, so we can actually target practice improvement as a real goal. And second, we need to allow new scholars a wider berth in research topics and methods, so we can actually give the kind of creativity and innovation that occurs naturally with young people a chance to blossom.

 

Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest. In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major. In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme. The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes. Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.

But despite the funding crunch, it’s a bull market for academic economists. According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists. For the top 10 per cent of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering. These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)

Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline. Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories. Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect. In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’. What is the basis of this collective faith, shared by universities, presidents and billionaires? Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?

In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.

Real Science versus Pseudo Science --- 
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Pseudo-Science

Jensen Comment
Academic accounting (accountics) scientists took economic astrology a step further when their leading journals stopped encouraging and publishing commentaries and replications of published articles --- 
How Accountics Scientists Should Change:  
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

Times are changing in social science research (including economics) where misleading p-values are no longer the Holy Grail. Change among accountics scientist will lag behind change in social science research but some day leading academic accounting research journals may publish articles without equations and/or articles of interest to some accounting practitioner somewhere in the world --- 
 See below

 

Academic accounting researchers sheilded themselves from validity challenges by refusing to publish commentaries and refusing to accept replication studies for publication ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

Scientific Method in Accounting Has Not Been a Method for Generating New Theories
The following is a quote from the 1993 President’s Message of Gary Sundem, President’s Message. Accounting Education News 21 (3). 3.
 

Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.

Message from Bob Jensen to Steve Kachelmeier in 2015

Hi Steve,

As usual, these AECM threads between you, me, and Paul Williams resolve nothing to date. TAR still has zero articles without equations unless such articles are forced upon editors like the Kaplan article was forced upon you as Senior Editor. TAR still has no commentaries about the papers it publishes and the authors make no attempt to communicate and have dialog about their research on the AECM or the AAA Commons.

I do hope that our AECM threads will continue and lead one day to when the top academic research journals do more to both encourage (1) validation (usually by speedy replication), (2) alternate methodologies, (3) more innovative research, and (4) more interactive commentaries.

I remind you that Professor Basu's essay is only one of four essays bundled together in Accounting Horizons on the topic of how to make accounting research, especially the so-called Accounting Sciience or Accountics Science or Cargo Cult science, more innovative.

The four essays in this bundle are summarized and extensively quoted at http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays 

• "Framing the Issue of Research Quality in a Context of Research Diversity," by Christopher S. Chapman ---
  
   
• "Accounting Craftspeople versus Accounting Seers: Exploring the Relevance and Innovation Gaps in Academic Accounting Research," by William E. McCarthy ---
  
   
• "Is Accounting Research Stagnant?" by Donald V. Moser ---
  
   
• Cargo Cult Science "How Can Accounting Researchers Become More Innovative? by Sudipta Basu ---
   

I will try to keep drawing attention to these important essays and spend the rest of my professional life trying to bring accounting research closer to the accounting profession.

I also want to dispel the myth that accountics research is harder than making research discoveries without equations. The hardest research I can imagine (and where I failed) is to make a discovery that has a noteworthy impact on the accounting profession. I always look but never find such discoveries reported in TAR.

The easiest research is to purchase a database and beat it with an econometric stick until something falls out of the clouds. I've searched for years and find very little that has a noteworthy impact on the accounting profession. Quite often there is a noteworthy impact on other members of the Cargo Cult and doctoral students seeking to beat the same data with their sticks. But try to find a practitioner with an interest in these academic accounting discoveries?

Our latest thread leads me to such questions as:

1. Is accounting research of inferior quality relative to other disciplines like engineering and finance?
   
    
2. Are there serious innovation gaps in academic accounting research?
   
    
3. Is accounting research stagnant?
   
    
4. How can accounting researchers be more innovative?
   
    
5. Is there an "absence of dissent" in academic accounting research?
   
    
6. Is there an absence of diversity in our top academic accounting research journals and doctoral programs?
   
    
7. Is there a serious disinterest (except among the Cargo Cult) and lack of validation in findings reported in our academic accounting research journals, especially TAR?
   
    
8. Is there a huge communications gap between academic accounting researchers and those who toil teaching accounting and practicing accounting?
   
    
9. Why do our accountics scientists virtually ignore the AECM and the AAA Commons and the Pathways Commission Report?
   http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

One fall out of this thread is that I've been privately asked to write a paper about such matters. I hope that others will compete with me in thinking and writing about these serious challenges to academic accounting research that never seem to get resolved.

Thank you Steve for sometimes responding in my threads on such issues in the AECM.

Respectfully,
Bob Jensen

Sadly Steve like all other accountics scientists (with one sort of exception) no longer contributes to the AECM

April 22, 2012 reply from Bob Jensen

Steve Kachelmeier wrote:
"I am very proud to have accepted and published the Magilke, Mayhew, and Pike experiment, and I think it is excellent research, blending both psychology and economic insights to examine issues of clear importance to accounting and auditing. In fact, the hypocrisy somewhat amazes me that, amidst all the complaining about a perceived excess of financial empirical-archival (or what you so fondly call "accountics" studies), even those studies that are quite different in style also provoke wrath."

July 8, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

Bob,

I read the first 25 or so pages of the paper. As an actual audit committee member, I feel comfortable in saying that the assumptions going into the experiment design make no sense whatsoever. And using students to "compete to be hired" as audit committee members is preposterous.

I have served on five audit committees of large public companies, all as chairman. My compensation has included cash, stock options, restricted stock, and unrestricted stock. The value of those options has gone from zero to seven figures and back to zero and there have been similar fluctuations in the value of the stock. In no case did I ever sell a share or exercise an option prior to leaving a board. And in every case my *only *objective as an audit committee member was to do my best to insure that the company followed GAAP to the best of its abilities and that the auditors did the very best audit possible.

No system is perfect and not all audit committee members are perfect (certainly not me!). But I believe that the vast majority of directors want to do the right thing. Audit committee members take their responsibilities extremely seriously as evidenced by the very large number of seminars, newsletters, etc. to keep us up to date. It's too bad that accounting researchers can't find ways to actually measure what is going on in practice rather than revert to silly exercises like this paper. To have it published in the leading accounting journal shows how out of touch the academy truly is, I'm afraid.

Denny Beresford

Bob Jensen's Reply
Thanks Steve, but if if the Maglke, Mayhew, and Pike experiment was such excellent research, why did no independent accountics science researchers or practitioners find it worthy of being validated?

The least likely accountics science research studies to be replicated are accountics behavioral experiments that are usually quite similar to psychology experiments and commonly use student surrogates for real life professionals? Why is that these studies are so very, very rarely replicated by independent researchers using either other student surrogates or real world professionals?

Why are these accountics behavioral experiments virtually never worthy of replication?

Years ago I was hired, along with another accounting professor, by the FASB to evaluate research proposals on investigating the impact of FAS 13. The FASB reported to us that they were interested in capital markets studies and case studies. The one thing they explicitly stated, however, was that they were not interested in behavioral experiments. Wonder why?

Bob Jensen's threads on what went wrong with academic accounting research?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

The Bottom Line
As with so many disciplines academic research ceased being relevant to the outside world --- like 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!

Using Machine Learning to Detect Misstatements

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3496297
53 Pages Posted: 17 Dec 2019

Jeremy Bertomeu

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

Edwige Cheynel

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

Eric Floyd

University of California San Diego

Wenqiang Pan

Columbia University - Columbia Business School

Date Written: December 1, 2019

Abstract

Machine learning offers empirical methods to sift through accounting data sets with a large number of variables and limited a priori knowledge about functional forms. In this study, we show that these methods help detect and interpret patterns present in ongoing accounting misstatements. We use a wide set of variables from accounting, capital markets, governance, and auditing datasets to detect material misstatements. A primary insight of our analysis is that accounting variables, while they do not detect misstatements well on their own, become most important with suitable interactions with audit and market variables. We also analyze differences between misstatements and irregularities, compare algorithms, examine one-year and twoyear ahead predictions, and interpret groups at greater risk of misstatements.

Investments in Accounting Resources and the Implications for External Reporting and Disclosure

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3496434
69 Pages Posted: 17 Dec 2019

Jacquelyn Gillette

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Gabriel Pündrich

Bocconi University

Date Written: December 1, 2019

Abstract

We propose a novel measure of the investment in accounting resources and study the extent to which firms’ investments in (internal) accounting resources influence external reporting and disclosure. Specifically, we use grammatical violations (GVs) in financial statements – a parsimonious and widely available feature for all SEC-registered companies – as a measure of a firm’s investment in internal accounting resources. After validating the measure, we show that firms with more GVs (less accounting resources) are more likely to announce restatements due to unintentional errors and internal control weaknesses in the future. Further, firms with more GVs issue fewer and less accurate management forecasts, suggesting that internal accounting resources not only influence external reporting but also (voluntary) disclosure. Collectively, our results demonstrate the importance of accounting resources on the quality of firms’ mandatory reporting and voluntary disclosure choices.

Keywords: accounting resources, financial reporting quality, disclosure, grammar

JEL Classification: M40, M41

Goodwill and Stock Price Crash Risk: An International Study

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3496064
52 Pages Posted: 17 Dec 2019

Wen He

University of Queensland - Business School

Jeong-Bon Kim

City University of Hong Kong

Chao Kevin Li

University of New South Wales (UNSW)

Yi Si

Xiamen University

Date Written: November 30, 2019

Abstract

Using data from 43 markets around the world, we document that firms with larger goodwill balances have a higher stock price crash risk in future years. The positive association between goodwill balances and future crash risk is stronger for firms with weaker incentives to provide transparent disclosure, in markets with poorer investor protection or weaker accounting and auditing enforcement, and after periodic goodwill amortization was replaced by fair-value- based goodwill impairment. Further evidence suggests that goodwill balances are positively related to a measure of bad news withholding. Overall, the results are consistent with the view that managers have greater tendency to withhold negative information about goodwill and delay the release of information about the economic impairments of goodwill, thereby leading to increasing the likelihood of stock price crash occurrences in the future.

Keywords: Goodwill, intangible assets, accounting standards, stock price crash risk

JEL Classification: G14, G41

From A to F: Grading the Fiscal Transparency of Canada’s Cities, 2019

C.D. Howe Institute Commentary 560

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3503551
28 Pages Posted: 17 Dec 2019

William B. P. Robson

C.D. Howe Institute

Farah Omran

C.D. Howe Institute

Date Written: December 10, 2019

Abstract

Financial presentations are key tools for Canadians who want to understand what their governments are doing with their money, and hold them to account. Unfortunately, Canada’s cities do not typically present information that lets Canadians do this. The problem is not so much their end-of-year financial statements as their budgets: nearly every major Canadian city presents budgets that separate current spending and capital spending on big-ticket items, and use accounting and aggregation methods that are inconsistent with their financial statements. Worse, many make the key numbers hard to find and recognize, and councillors often vote these non-transparent budgets after the fiscal year has already started and money has gone out the door. Bad budgeting practices impede councillors, taxpayers and voters seeking accountability from city staff and elected representatives. Simple information, such as how much the municipality plans to spend this year, or how its spending plan this year compares with the previous year’s plan, is hard or impossible for a non-expert to find. Moreover, the differences between how the numbers appear in budgets and in year-end financial statements have real-world consequences. Budgets that exclude key services such as water and the user fees that fund them, for example, understate their claim on community resources. Budgeting the cost of capital items on an up-front, cash basis, rather than recording the relevant expenses over the useful life of the asset through accrual accounting, exaggerates the cost of infrastructure investments, hides the cost of pension obligations, and undermines intergenerational fairness by mismatching costs and benefits over time. This report card grades the financial presentations of 31 major Canadian municipalities, based on their most recent budgets and financial statements. Of those we assessed, Durham Region, Windsor, London, Quebec City, Laval and Longueuil fail, providing little information in reader-friendly form. More happily, Vancouver garners an A+ for the clarity and completeness of its financial presentations, followed by Surrey and Richmond, each with an A-. Our overarching recommendation is that municipal governments should present budgets using the same public sector accounting standards (PSAS) and format that they use in their year-end financial statements. Most do not, and those that present supplementary PSAS-consistent information in their budgets typically do not do it in userfriendly ways. One key implication of this change would be that municipal budgets would use accrual accounting with respect to capital, recording revenues and expenses as assets deliver their services. Provincial governments that impede the preparation of PSAS-consistent municipal budgets – by mandating that cities present separate operating and capital budgets, for example – should stop doing so. Better would be to require cities to present PSAS-consistent budgets. Municipalities in provinces that continue to impede PSAS-consistent budgets can, and should, release the relevant information on their own. A second implication of this change is that municipal budgets, like municipal financial statements, would show city-wide consolidated, gross revenue and spending figures that represent the city’s full claim on its citizens’ resources and the full scope of its activities. Our second key recommandation is that cities should present and concillors should vote, budgets before the beginning of the fiscal year. These changes would help raise the fiscal accountability of Canada’s municipalities to a level more commensurate with their importance in Canadians’ lives.

Keywords: Public Governance and Accountability; Transparency of Public Finances

JEL Classification: H72; R50

The SEC Filing Review Process: Insights from Accounting Research

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3494830
55 Pages Posted: 16 Dec 2019

Date Written: November 2019

Keywords: Securities and Exchange Commission, SEC, comment letters, filing review process

JEL Classification: G18, M41, M48, L51

Introduction to the Essays of Warren Buffett: Lessons for Corporate America

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3502553
26 Pages Posted: 13 Dec 2019 Last revised: 17 Dec 2019

There are 2 versions of this paper

Date Written: December 11, 2019

Keywords: value investing, Warren Buffett, margin of safety, circle of competence, modern finance theory, executive compensation, corporate governance

JEL Classification: M10, G34, G24, G31, M41, M43, M44, M45, H25

Challenging Global Group Audits: The Perspective of U.S. Group Audit Leads

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3493748
64 Pages Posted: 13 Dec 2019

Date Written: November 26, 2019

Keywords: Group Audits; Group and Component Auditors; Multinational Company Reporting; Qualitative

Double Counting Accounting: How Much Profit of Multinational Enterprises Is Really in Tax Havens?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3491451
66 Pages Posted: 8 Dec 2019

Jennifer Blouin

University of Pennsylvania - Accounting Department

Leslie A. Robinson

Dartmouth College - Tuck School of Business; Dartmouth College - Accounting

Date Written: November 21, 2019

Abstract

Putting an end to the base erosion and profit shifting (BEPS) activity of multinational enterprises (MNEs) is on the national agenda of nearly every country in the world. While many influential papers suggest that the scope and magnitude of the BEPS problem is quite large, we show that these magnitudes are likely overstated due to the accounting treatment of indirectly-owned foreign affiliates in the BEA’s U.S. international economic accounts data. We explain how this accounting treatment leads to double counting of foreign income and to misallocations to the incorrect jurisdiction. We demonstrate an appropriate correction, and show that the correction significantly reduces the magnitude of the BEPS estimates. For instance, our correction reduces an estimate of the U.S. fiscal effects of BEPS from 30-45% to 4-15% of corporate tax revenues lost to BEPS activity of MNEs (Clausing 2016). Our work has far-reaching implications, as the U.S.’ national statistics have a unique accounting convention that can make comparisons of the U.S. national statistics to those of other countries difficult to interpret.

Keywords: base erosion and profit shifting, measurement, accounting, foreign direct investment

JEL Classification: H32, M41, O50

Corruption Culture and Accounting Quality

Journal of Accounting and Public Policy, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3490343
53 Pages Posted: 6 Dec 2019

Yunsen Chen

Central University of Finance and Economics (CUFE)

Limei Che

BI Norwegian Business School

Dengjin Zheng

Central University of Finance and Economics

Hong You

Southwest University - College of Economics and Management

Date Written: September 2019

Abstract

This paper examines the impact of corruption culture on accounting quality (AQ) of listed firms at the municipal level in China. We consider municipalities with (without) corrupt top government officials as having high (low) corruption culture. To isolate the effect of corruption culture, we use the arrest of corrupt officials (the events) to capture the change in local corruption culture, and apply the difference-in-difference method to compare AQ of firms operating in the jurisdictions of corrupt officials pre and post the events, compared to control firms. We find that AQ of firms affiliated with corrupt officials is higher after the events, which is robust to the placebo test, time-trend analysis, and various robustness tests. We complement the literature by showing that the increase in AQ is greater for firms associated with more powerful officials and having stronger connections with corrupt officials. Moreover, the positive effect on accounting quality is stronger in the post-2012 period. Further, we document that firms improving AQ after the events issue more SEOs and have lower cost of capital. Finally, analyses on channels firms used to improve AQ show that firms switch to higher quality auditors, have better internal control, and issue more management forecasts. This study has implications for policymakers in countries that suffer from corruption.

Keywords: Corruption Culture; Accounting Quality; Local Government Officials

Is the Sky Falling? New Evidence on Accruals Quality Over Time and Around the World

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3490758
53 Pages Posted: 6 Dec 2019

Date Written: November 18, 2019

Keywords: accruals quality, earnings quality, cash flow volatility

JEL Classification: D84, G14, M41

Do Client Bankruptcies Preceded by Clean Audit Opinions Damage Auditor Reputation?

Contemporary Accounting Research, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3493262
Posted: 5 Dec 2019

Nathan R. Berglund

Mississippi State University

There are 2 versions of this paper

Date Written: October 22, 2019

Abstract

There is a maintained assumption within the accounting literature that client bankruptcies preceded by clean audit opinions (Type II GCO errors) damage an auditor’s reputation. Consistent with this view, the PCAOB proposes that stakeholders may use Type II GCO errors as indicators of low audit quality. This study examines audit committee and investor responses to Type II GCO errors. I find no evidence that audit offices with Type II GCOs are more likely to be dismissed, have lower subsequent audit fees, or have a lower likelihood of being selected for new audit engagements. These findings are consistent with audit committees not using Type II GCO errors as indicators of low auditor quality. Using event study analysis, I find evidence of modest incremental negative investor responses for clients of audit offices with Type II GCO errors. However, these negative investor responses are found only during the financial crisis period of 2008–2010 and are observed only within windows of 30 days or less. Given this limited evidence that stakeholders do respond to Type II GCO errors, I examine whether stakeholders should respond to Type II GCO errors. I find that audit office Type II GCO errors are positively associated with subsequent restatements, an established measure of low audit quality. Taking the results as a whole, I do not find that audit offices incur substantial reputational costs for Type II GCO errors. However, the negative investor response and the positive association with restatements provide some evidence that Type II GCO errors may serve as indicators of low audit quality.

Keywords: Going Concern Opinion, Auditor Reputation, Audit Quality Indicators

Economics of Accounting Earnings (a monograph)

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3435218
217 Pages Posted: 3 Dec 2019 Last revised: 19 Dec 2019

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: December 18, 2019

Abstract

This monograph is not a review of the empirical accounting literature. This monograph tells a story and relates it to salient empirical phenomena. Why does accounting exist? Our answer is that financial accounting helps firms function efficiently. That efficiency is manifested in many ways, and it is contextual (e.g., investment decisions and capital allocation, corporate governance, managers’ performance assessment, and contracts among various stakeholders). We often use shareholder value as the measure of efficiency, though we discuss regulation, social and contract efficiency.

Keywords: imperfect and incomplete markets, information asymmetry, incentive conflicts, shareholder wealth, earning-return relation, market efficiency

JEL Classification: D82, D86, G10, G12, G14, G30, K22, L21, M41, M42

EY:  FASB issues final guidance to simplify the accounting for income taxes ---
https://www.ey.com/Publication/vwLUAssetsPI/TechnicalLine_08058-191US_SimplificationProject_20December2019/$FILE/TechnicalLine_08058-191US_SimplificationProject_20December2019.pdf

EY:  Master limited partnership accounting and reporting guide ---
https://www.ey.com/Publication/vwLUAssetsPI/MLPGuide_00563-171US_16December2019/$FILE/MLPGuide_00563-171US_16December2019.pdf

EY:  Financial Reporting Briefs December 2019 ---
https://www.ey.com/Publication/vwLUAssetsPI/FinancialReportingBriefs_08014-191US_19December2019/$FILE/FinancialReportingBriefs_08014-191US_19December2019.pdf

EY:  Highlights of the 2019 AICPA Conference on Current SEC and PCAOB Developments ---
https://mail.google.com/mail/u/0/#inbox/FMfcgxwGCQTbpNVxLlfDxtQSfQXSxMQd

EY:  2019 Updated SEC Financial Reporting Series now available  

EY:  Comment letter on the SEC’s proposal to update statistical disclosure requirements for bank and savings and loan registrants ---
https://www.ey.com/Publication/vwLUAssetsPI/CommentLetter_07865-191US_SECGuide3_27November2019/$FILE/CommentLetter_07865-191US_SECGuide3_27November2019.pdf

EY:  FASB issues narrow-scope amendments to credit losses standard ---
https://www.ey.com/Publication/vwLUAssetsPI/TothePoint_07909-191US_NarrowScopeAmendments_5December2019/$FILE/TothePoint_07909-191US_NarrowScopeAmendments_5December2019.pdf

Cadillac Tax --- https://en.wikipedia.org/wiki/Cadillac_insurance_plan

From the CFO Journal's Morning Ledger on December 24, 2019, 2019

Good morning. Finance chiefs, who have spent the past decade brainstorming how to avoid the brunt of the so-called Cadillac tax, can close their spreadsheets and exhale, CFO Journal reports.

The tax was repealed as part of a nearly $1.4 trillion spending package to fund the government through the end of the fiscal year. President Trump signed the deal late last week.

The 40% levy on high-cost employer health insurance, which was delayed twice, was scheduled to go into effect in 2022. The tax, part of the 2010 Affordable Care Act, represented a decadelong burden for CFOs, who were simultaneously devising strategies to deal with rising health-care costs.

To prepare for the tax, finance chiefs tried adjusting health-care benefits for employees in an effort to remain below the cost thresholds that trigger the tax. Some companies sought to reduce benefits or increase participants’ out-of-pocket contributions in an effort to cut coverage costs. CFOs also had said there was a limit to how much they could prepare because they didn’t have enough information from the U.S. Treasury Department and Internal Revenue Service to know whether their efforts to reduce plan costs would have been enough to dodge the tax.

Adaptive Biotechnologies Corp., for instance, sought to reduce its overall spending on health care by shifting early this year from offering fully insured to self-insured health plans. Self-insured plans wouldn’t be safe from the Cadillac tax, further raising cost concerns, CFO Chad Cohen said.

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

U.K. Regulator Widens Investigation Into Thomas Cook Audits

A U.K. regulator has widened its investigation into the audits of financial statements of Thomas Cook Group by Ernst & Young, a move that comes about three months after the collapse of the British travel conglomerate.

The Financial Reporting Council on Thursday said its probe now would include Ernst & Young’s audit of financial statements for the year ended Sept. 30, 2017, in addition to the audit of financial statements for the year ended Sept. 30, 2018.

The investigations are being conducted under the FRC’s audit enforcement procedure, which focuses on potential breaches of auditor requirements.

The FRC launched its first probe Oct. 1, following Thomas Cook’s failure to organize additional funding for a rescue package at the end of September.

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

EY Chief Accountant to Become Next FASB Chairman

Ernst & Young’s chief accountant, Richard Jones, will become the next chairman of the Financial Accounting Standards Board, CFO Journal's Mark Maurer reports.

Mr. Jones will succeed Russell Golden on July 1, according to the Financial Accounting Foundation, which oversees the U.S. standard-setter. Mr. Golden, whose term ends June 30, has served in the position since 2013.

The incoming chairman will serve a seven-year term with no option for renewal, according to FAF spokesman Matthew Broder. Mr. Golden initially served a three-year term, followed by a four-year renewal.

Bernie Ebbers --- https://en.wikipedia.org/wiki/Bernard_Ebbers

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

A federal judge has authorized the release of former WorldCom Chief Executive Bernard “Bernie” Ebbers from prison after more than 13 years because of his deteriorating health. Mr. Ebbers, 78 years old, is serving a 25-year prison term for participating in one of the largest accounting frauds in history

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

SEC Approves Audit Watchdog’s 2020 Budget

The U.S. Securities and Exchange Commission voted Wednesday to approve the Public Company Accounting Oversight Board’s budget for the 2020 fiscal year. The $284.7 million budget, which the PCAOB unveiled last month, is 4% larger than the fiscal 2019 budget. About three-quarters of the budget comprises personnel costs such as salaries and employee benefits. The budget’s salary allotment was $169.5 million, up 3.3% from fiscal 2019. The board, which polices audits of public companies and is overseen by the SEC, plans to have 850 employees, up from the 838 budgeted for the previous year. The PCAOB is undergoing a strategic shift as it seeks to overhaul its quality-control rules and inspection processes. The SEC in December 2017 replaced the PCAOB’s entire board after officials learned about the leak of confidential inspections data to auditors. “For some, the changes have been quite difficult,” Chairman William Duhnke said during the SEC meeting. “For many, the changes have been welcome and long overdue.”

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

European Airlines Fight Against  EU Jet Fuel Taxes

Airlines including Deutsche Lufthansa and Ryanair Holdings are rallying against the threat of jet fuel taxes that could help fund the European Union’s environmental ambitions. Last week, newly elected European Commission President Ursula von der Leyen unveiled her much-anticipated Green Deal, a road map for the bloc to reach zero net emissions by 2050. It pledges to “look closely at the current tax exemptions including aviation.” An EU-wide jet fuel tax—excluding the U.K.—could cost airlines around €13 billion ($14.5 billion) a year, more than doubling their current yearly taxes in the bloc, according to a July report from the European Commission. The study is based on a tax of €330 per kiloliter of kerosene at the point of departure.

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

Good morning. General Electric will likely take a significant hit to its cash flow from Boeing’s decision to halt production of the 737 MAX jetliner, which has already dented the conglomerate’s finances.

GE makes all of the MAX’s engines through a joint venture with France’s Safran SA. When Boeing in April cut monthly production of the plane to 42 from 52, it reduced GE’s quarterly cash flow by $400 million. The suspension of production Boeing announced Monday, if prolonged, could reduce cash flow by much more, as analysts warn that GE won’t receive payments made as the planes are being built.

GE’s management has flagged the problems around the MAX in regulatory filings and public comments, but it also has said the impact is temporary and cash flow would rebound as production ramps up. Nevertheless, improving cash flow could become a priority for GE’s incoming finance chief Carolina Dybeck Happe, analysts said.

Meanwhile, prices of Boeing’s bonds have been dropping, as investors bet halting production of the 737 MAX could trigger a downgrade of its single-A credit rating. The decline reflects concerns that earnings weakness caused by problems with the MAX could drag on well into 2020, forcing the company to borrow more to fund operations.

From the CFO Journal's Morning Ledger on December 17, 2019, 2019

What unwanted happening sets PwC apart from the other Big Four firms?
From the CFO Journal's Morning Ledger on December 17, 2019, 2019

Public companies are less likely these days to have to restate their earnings or other financial figures. Clients of PricewaterhouseCoopers are bucking this trend recently, new data show.

The Big Four audit firm has had a streak of accounting problems surface recently at U.S. companies it audits, including an uptick in high-profile restatements. Its clients account for three of the five biggest restatements so far this year, measured by cumulative impact on net income, according to a Wall Street Journal analysis of data from research firm Audit Analytics.

Companies audited by PwC have been more prone over the last couple of years than clients of the other Big Four firms to do the most serious type of restatement, the analysis found. These involve a company alerting clients to a problem and reissuing its financial statements.

From the CFO Journal's Morning Ledger on December 17, 2019, 2019

IASB Proposes Rule Requiring More Details on Profit, Income

The International Accounting Standards Board is proposing a new rule on how companies report profit and how they explain certain performance measures that go beyond generally accepted accounting principles, Mark Maurer reports

The proposal is part of an effort by the accounting standards setter to compel companies to provide more detailed information to investors, Hans Hoogervorst, chairman of the IASB, said in an interview.

From the CFO Journal's Morning Ledger on December 17, 2019, 2019

Good morning. The U.S. Securities and Exchange Commission’s planned changes to auditor independence rules would loosen regulation of audit firms, giving them more discretion in assessing conflicts of interest in their relationships with companies they audit, people familiar with the matter told CFO Journal.

SEC Chairman Jay Clayton said on Dec. 9 that changes to auditor independence rules were a priority of the regulator in the next year. His remarks, at a conference in Washington hosted by the American Institute of Certified Public Accountants, didn’t provide specifics about possible changes. But the plans will seek to relax regulatory control over external auditors, the people said.

The planned rules, which would follow the approval in June of softer rules governing auditors’ and funds’ financial ties to the same lender, are part of the SEC’s broader shift from strict guidance toward a principles-based approach governing corporate disclosures.

The SEC’s office of the chief accountant is making progress on providing recommendations on additional changes to the auditor-independence rule to the commission, the SEC’s chief accountant, Sagar Teotia, said at the AICPA conference.

The loan amendment, issued in June, contained a list of other potential changes to independence. One example given was an alteration to the requirement that U.S. companies planning to go public ensure their auditor’s independence during the two-to-three-year “look-back” period prior to IPO.

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

U.K. Audit Regulator Plans to Conduct Additional Reviews in 2020

The Financial Reporting Council, the U.K.’s regulator for audit and accounting, said Friday it plans to conduct thematic reviews of corporate reporting in 2020, adding to its routine inspections of companies’ filings. The FRC intends to take a closer look at cash flows and liquidity disclosures, accounting standards covering revenue recognition and leases as well as the implications of Britain’s exit from the European Union on corporate disclosures, it said in a statement. The FRC also will pay particular attention to audit issues such as long-term contracts, impairment of non-financial assets and fraud risk, the regulator said.

From the CFO Journal's Morning Ledger on December 13, 2019, 2019

KPMG’s Global Revenue Growth Slows

KPMG reported global revenues of $29.75 million for fiscal 2019, up 2.7% from the previous fiscal year—the slowest growth for the firm in four years. Revenue during the year ended Sept. 30 rose 6.2% in local-currency terms, which is how major accounting firms prefer to measure their growth. As international networks of private partnerships, the Big Four firms disclose revenue but not profit. All four firms saw global revenue increase in the most recent fiscal year, but each experienced slower growth from the previous fiscal year. Deloitte Touche Tohmatsu reported $46.2 million in revenue. PricewaterhouseCoopers reported $42.45 million in revenue. Ernst & Young reported $36.39 million. The three firms reported their revenue in September. KPMG breaks down its revenue into three divisions: audit, tax and advisory. The divisions saw modest increases of 0.3%, 4.4% and 4.2% respectively, their slowest growth since 2015. PwC likewise saw slower growth in its audit, tax and advisory divisions in fiscal 2019. KPMG’s results come as it plans for large-scale investments. The firm said last week it will pump $5 billion into the digital transformation of its professional services over the next five years.

 

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

Boards Could Do More to Hold Executives Accountable, Auditors Say

Corporate boards could significantly improve how they hold executives accountable for the strategies and policies they set, according to a new study from the Institute of Internal Auditors and the University of Tennessee. Public company audit executives were asked to evaluate their companies on criteria including board performance, external disclosures, companywide communication, corporate culture and long-term strategies. Overall, U.S. companies got a C+ for their efforts. But about 10% of respondents gave their companies failing grades, according to the survey of about 130 audit chiefs. More than one-third of respondents said board members at their companies aren’t willing to challenge the judgment of their chief executives, the survey said. Corporate-governance dysfunction could lead to unethical behavior or an imbalance in the relationship between internal auditors, executives and directors, according to the study. The most troubling aspect of the results was that, in the opinion of the auditors, board members often don’t hold management accountable for long-term sustainability of businesses, said Richard Chambers, the IIA’s chief executive. “The question I would ask is, ‘Is Corporate America really applying itself?’” he said.

From the CFO Journal's Morning Ledger on December 11, 2019, 2019

The University of Phoenix has agreed to pay a $191 million to settle Federal Trade Commission charges it used deceptive marketing to recruit students by touting relationships with high-profile companies.

From the CFO Journal's Morning Ledger on December 11, 2019, 2019

Chevron is writing down the value of its assets by more than $10 billion, a concession that in an age of oil-and-gas overabundance, some won't be profitable anytime soon.

In the largest write-down by an energy producer in years, Chevron said Tuesday it was cutting the value of a number of properties, notably its U.S. shale holdings in Appalachia, by a combined $10 billion to $11 billion. Chevron also is restructuring its operations to focus on fewer prospects in the face of persistently low natural gas prices, and will explore sales of some assets.

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

Good morning. U.S. Securities and Exchange Commission Chairman Jay Clayton said Monday that he expects to further change rules governing auditor independence in the next year, the latest move to re-evaluate the close relationship between companies and external auditors, CFO Journal reports.

The office of the regulator’s chief accountant is weighing whether to propose rule changes in an effort to make companies’ capital accumulation easier and to protect investors, the SEC has said. The agency included a proposal to amend certain provisions of the auditor independence rules as part of a biannual short-term agenda of planned rule making by federal agencies published in November.

The SEC hasn’t explicitly said if it will loosen or tighten auditor independence rules with the latest change. A spokeswoman for the SEC declined to comment on the plans for further changes to auditor independence rules beyond the short-term agenda.

Lynn Turner, senior adviser at financial consulting firm Hemming Morse LLP and a former chief accountant of the SEC, worried that looser rules governing auditors could hurt investors. “When you have a relationship between the auditor and the management that pays them,” Mr. Turner said, “the auditor will likely favor management over investors.”

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

Welch Foods Juiced Up On Zero-Based Budgeting

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

Good morning. Finance chiefs, in a constant battle to manage costs, increasingly are leaning on zero-based budgeting to add more discipline to spending. Welch Foods Inc. is among the latest to adopt this strategy.

The Concord, Mass., maker of grape jams, jellies and juices has reduced costs since implementing the decades-old cost-management technique last year, according to Chris Caswell, the company’s interim finance chief.

Zero-based budgeting requires managers to start from a budget of zero, justify every expense, assess the benefits of spending patterns and rethink how to deploy resources to more swiftly achieve organizational priorities.

At Welch’s, as the company is commonly known, the process has facilitated a wider discussion about spending among team members. It also has improved collaboration, Mr. Caswell said. “[Zero-based budgeting] is allowing the organization to understand where all of its spending is,” he said. “Every piece of spending is being supported by a business reason to make sure we don’t have any stale spend.”

 

Both the number of financial statement revisions and the sizes of those revisions have declined since 2006

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

Companies are increasingly likely to correct accounting problems by quietly updating past numbers, rather than alerting investors and reissuing financial statements.

The rules on when to alert investors about accounting errors grew out of the financial blowups of the early 2000s at companies including Enron and WorldCom. Big problems require “Big R” restatements, in which a company has to alert investors and reissue its financial statements. The number of Big R restatements, according to the research firm Audit Analytics, has fallen from a peak of 973 in 2005, just after the requirement to alert investors began, to 119 last year.

At the same time, companies have been playing down the importance of their accounting issues. For minor problems, the SEC requires “Little r” revisions, in which the company updates its past financial statements without having to alert investors. Back in 2005, less than a third of all restatements were revisions; last year it was about three-quarters, the Audit Analytics data show.

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

In a world of negative interest rates, stockpiling cash has left German households poorer than their international peers in terms of wealth, hindered German companies from investing in their future and restrained economic growth across Europe. Germany’s median household wealth is €61,000 ($67,000), lower than Greece’s, according to European Central Bank data. 

Jensen Comment
Germans seem to be willing to sacrifice wealth for leisure in terms of reduced hours of work each week and generous vacation time often running to more than six weeks per year. My wife  grew up mostly in Munich, and we used to go back to Germany quite often to visit her relatives. My very subjective opinion is that life's dreams differ somewhat between the USA and Germany. Whereas the Americans place a high priority on investing in their houses and condos, the Germans place less priority on housing (most rent rather modest apartments) and more priority on world travel, cruises, health spas, and vacation resorts.

Although both nations love their automobiles, it seems to me that the Germans put more of their incomes into expensive automobiles. Energy prices, including fuel prices, are very high in Germany. This makes Germans more conscious of energy savings. For example, in the USA most of us have hot water tanks that wastefully heat water 24/7 every week. In Germany, water is heated at the point of use and when it's needed.

Lifelong improvements in trade skills are a high priority among German workers. German companies seem more willing to pay for advanced training year after year.

Germans work the least hours in Europe ---
https://www.reddit.com/r/europe/comments/4dgyim/til_germans_work_the_least_hours_in_europe_while/
There are some misleading aspects compensation comparisons between nations.

Labor unions have more bargaining power in Germany relative to the USA --- which is one of the reasons German workers get more benefits.

In the USA workers often get paid vacations in terms of continued salaries during those vacations. But Germans get longer paid vacations and often get added benefits like free weeks in health spas and other resorts.

Basic health care is free in Germany, but it's very basic. Most Germans also pay for added medical insurance from private sector insurance companies. Many long-term nursing patients are exported out of German where services are cheaper (think Poland) ---
https://www.bloomberg.com/news/articles/2013-09-16/germans-export-grandma-to-poland-as-costs-care-converge

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

American shoppers increased their spending by 16% over the five-day shopping period between Thanksgiving Day and Cyber Monday, according to new data, signaling U.S. consumer confidence hasn’t wavered in the face of global political and economic uncertainty.

 Nearly 190 million shoppers made purchases during the period, a 14% increase over the previous year, and more of them shopped online than in stores, data from the National Retail Federation and Prosper Insights & Analytics show.

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

Good morning. Tax chiefs at international companies are voicing concerns about a proposal that would introduce a global minimum tax and could result in higher tax payments for some companies. The proposal is part of an effort by the Organization for Economic Cooperation and Development to revamp the international tax system by expanding and reallocating the global tax pie.

Amazon said the new tax should be applicable to all types of business and not result in different tax rates for foreign and domestic taxpayers. “It is important that consensus is achieved with sufficient detail to foster consistent application and avoid multi-layer taxation,” the e-commerce giant's vice president for global tax, Kurt Lamp, said in written comments made public by the OECD on Tuesday.

The suggested minimum tax resembles the U.S.’s Global Intangible Low-Taxed Income provision that was introduced in late 2017 and sets a minimum rate for the taxation of overseas income generated by U.S. companies.

The OECD’s proposed global minimum tax would apply to companies with income from cross-border activities that currently pay taxes below a certain threshold. The new tax would only be relevant in cases in which companies don’t pay sufficient tax on their overseas income. Otherwise, national tax laws and rates would continue to apply.

The OECD proposal, dubbed Global Anti-Base Erosion Proposal, or Pillar II, lacks clarity on various elements, said Manal Corwin, principal-in-charge of KPMG’s national tax practice in Washington. “Most corporates are concerned about the level of complexity and the threat of double taxation.”

Previously: Corporate Executives Try to Assess Potential Impact of Tax Change Proposals

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

Good morning. The total value of goodwill impairments by U.S. public companies—on the rise for the past three years—could decline in 2019 as a result of companies’ rising stock market values, CFO Journal reports.

Major goodwill impairments for U.S. public companies reported in 2019, which doesn’t account for the fourth quarter or smaller impairments, exceeded $33 billion, according to Duff & Phelps LLC, a New York-based valuation firm. Major impairments so far this year are down 19% from the $40.74 billion reported through the third quarter in 2018.

The magnitude of impairments shows that many U.S. companies are struggling with changes in regulations, their industries or the economy, said Greg Franceschi, global leader of the financial reporting practice and the office of professional practice at Duff & Phelps, which tracked 8,800 publicly traded companies in the U.S. for its study. “Companies’ expectations for transactions have not been reflected in the actual results,” he said, “so there’s been a write-down in these prices.”

Surprise impairments can cause investors to question management, said PJ Patel, co-chief executive of valuation firm Valuation Research Corp. “This is about giving you insight into how management thinks and how they go to market and in many ways it reflects on the quality of management,” Mr. Patel said, noting the exception is during market downturns.

From the CFO Journal's Morning Ledger on December 2, 2019, 2019

General Electric aims to excite investors about its health-care unit, a business that was tagged to be cast off but is now central to the company’s turnaround efforts.

From the CFO Journal's Morning Ledger on December 2, 2019, 2019

 Good morning. Finance chiefs at brick-and-mortar-retailers are facing mounting investor concerns about the viability of their business. Short sellers have revived their bets against these companies in recent weeks, taking their most aggressive positions in months. 

Despite expectations for a solid holiday shopping season, several investors said their bearish bets are based on retailers’ struggles in a highly competitive landscape and consumers’ growing preference for digital shopping. And investors say they will closely watch the results from Dollar General, Big Lots and Lululemon, which are due to report results this week.

Early data show that online shopping will once again account for a larger percentage of total holiday sales compared with previous years. Foot traffic to U.S. stores fell about 6.2% on Black Friday, as more people ordered online or went to stores on Thanksgiving Day, when visits increased 2.3%, according to ShopperTrak, which uses cameras to count traffic in a range of U.S. stores.

Some chains, including Target, Walmart and Best Buy, have posted strong sales in recent years by adapting to the shift to online shopping. They use their stores to handle deliveries or convince shoppers to pick up orders rather than wait for an Amazon.com Inc. package.

Faster deliveries is one area where online marketplace Etsy wouldn't mind being like its biggest e-commerce rivals, CFO Journal's Mark Maurer reports. The Brooklyn, N.Y.-based company is banking on a new free-shipping strategy to help boost sales as it faces pressure from investors who worry about its growth potential.

 

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

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

   . . .

One can argue that bookkeeping is always post facto, and can't influence someone’s intend to hack the system, however it's also true that auditors are in a fiduciary role and are considered to be the watchdogs. Therefore right accounting followed by honest auditing can truly be the needed deterrent that can thwart any intend to fraud a system if done honestly. It's not the accounting best-practices or the rules of book-keeping which are in question here, that have matured over the last 600+ years since the double entry accounting principles were pioneered by Luca Pacioli, but the adoption of such rules, which have fallen below standards and lost the respect of consumers worldwide.

Hypothesizing a solution to this problem - A solution to this problem was envisaged by Yuji Ijeri during early 1980s in the form of adding a third dimension to an already existing double entry accounting system.  In theory, the third dimension would not change any of the existing or evolving accounting norms of book keeping, but help in adding a third check to the prevailing framework, and thereby ensure a self-regulated and shared environment amongst all participating entities, so that the larger purpose of book keeping and auditing doesn't suffer because of errors or omissions either caused intentionally or unintentionally.  His paper introduced to the world the subject of " Triple Entry Accounting ". However, before we dig deep on this subject, let's travel the journey that accounting took from being "single entry" to "double entry book keeping", understand the rationale, as what brought about this change, and then logically relate it to "Triple Entry Accounting " and what change it may bring, if adopted at scale. 

• Single Entry - Since medieval times the practice of maintaining financial data has been adopted at mass, however during those times what got recorded was only one side of transactions, much like someone maintaining a diary of his personal expenses or income. As a result, looking at those historical data, it would be tough by any measure to find out as why a transaction would have happened. In other words, a transaction recorded in single entry form would not ever establish a "cause and effect" relationship of a business event between two entities. For example - "an amount spent on purchase of an asset" under the norms of single-entry, would be recorded in cash book as a single line - "Amount spent on Purchase of Asset" and thereby the entity’s cash balance depleting by an equal amount. The issue with this type of recording transactions, (as was realized later), is that it doesn't give enough insights on the other leg of the event which in this case is an equal amount of increase in Asset. 
• Transition to double-entry accounting - During the renaissance period, when businesses became more organized, societies started embracing change and for every event people started questioning the causal relationship, it also led to gradual changes in the way how books of accounts were maintained. This led to the start of recording two side of every transaction that had business significance. Till early 15th century, when Luca Pacioli (an Italian monk and mathematician) formally laid down the basic tenets of double entry accounting surrounding "real", "nominal" and "personal" heads of accounts, which have not changed in the last 600 odd years. Business have become more complex, the types of income and expenses which are made or incurred have kept changing, new asset classes and thereby the nature of cash flows continue to keep evolving, however the basic rules following which real, nominal and personal accounts get debited or credited do not change irrespective of geographical, linguistic or currency differences. Wonder if Luca Pacioli would have received an equivalent of Nobel Prize during his time for having envisioned the rules of accounting that wouldn't change for centuries.
• This brings us to the question as – Why now, the need to add a third dimension to accounting? - The answer to this question is in the issues we discussed earlier in this article. The problems which have plagued our systems is not in the double entry rules but because of adoption of such rules within the governance framework of today's accounting world, which have fallen so much below standards that they have lost the respect of consumers worldwide. And a possible solution to this secular problem (as mentioned earlier) was envisaged by Yuji Ijeri in the early 1980s in form of adding a third dimension to the already existing double entry accounting system, that would not change any of the existing or evolving accounting norms of book keeping, but add a third lever, and thereby establish a self-regulated and shared environment amongst all participating entities to ensure that the larger purpose of book keeping and auditing doesn't suffer because of errors or omissions either cased intentionally or unintentionally.  The need for “Triple Entry Accounting” was further advocated by Ian Grigg in 2005-06. This one statement by him that mentions - "It's tough to lie when everyone is watching" summarizes the principle and the need of Triple Entry Accounting to its core.

Explaining Triple Entry Accounting with the help of an Example - The best way to substantiate this theory would be by a simple example:

Suppose Philippe extends a loan of EUR 1000 to Jenny.

• In Philippe’s book this transaction following double entry norms would reflect as “Jenny being debited with EUR 1000” and “Bank being Credited with EUR 1000”.
• Similarly, in Jenny’s Book the same transaction will be accounted as “Bank being Debited with EUR 1000” and “Philippe being Credited with EUR 1000”.

However, since Philippe and Jenny are two separate entities there is no guarantee that both would have accounted exactly like the above. What if Jenny has an ill intend and accounts for only EUR 100, that passes through the audit too? What if Jenny keeps understating her liabilities book till hell breaks loose, and it’s too late to recover, leading to major shareholder losses. Well there is no answer to this question because the system, as it is today, expects auditors to be the watchdogs and ensure that such inconsistencies do not happen.

What Triple Entry Accounting does is that it takes the dependency out from the Auditors (as the only means) to ensure consistency and introduces as well a pubic ledger to be a mandatory place to host all accounting entries from all participating entities and thereby establish a self-regulated and shared environment amongst all to ensure that the larger purpose of book keeping and auditing doesn't suffer because of errors or omissions either cased intentionally or unintentionally.  Extending the above example to a “Triple Entry Accounting Framework”, following will be the output.

• In Philippe’s book this transaction following double entry norms would reflect as “Jenny being debited with EUR 1000” and “Bank being Credited with EUR 1000”.
• Similarly, in Jenny’s Book the same transaction will be accounted as “Bank being Debited with EUR 1000” and “Philippe being Credited with EUR 1000”.
• Plus, in the public accounting book, both of the above entries will be recorded so that at any time if there is a reconciliation by either parties, auditors or regulators, any discrepancy can be spotted immediately.

How do we implement such a public book technically, and where does Blockchain fit in?

Wouldn't the world be different if there was a possibility of a public database that could be encrypted, would be trust-less, decentralized and immutable? These questions remained unanswered for a long time till in 2008 the whitepaper on blockchain became public and the world had answers to how trust can be decentralized. With the advent of blockchain and it's growing adoption across industries it is no longer necessary that to build trust between multiple trading entities there must essentially be a middleman. If the same principle can be extended to a (now) probable use case for distributed ledger implementation on Triple Entry Accounting, this is what it will translate to:

1. Introducing a Public Ledger - As step 1, to solve this problem lets enhance the traditional double entry system by introducing a central public ledger which will host all accounting entries involving all entities which are cryptographically sealed by a respective third entry into the public ledger. And every journal entry that has a double entry reference to another node (entity) in the chain will be linked through a hash to ensure that every subsequent entry in the lifecycle of its cash flow, follows the previous entries hash as reference to ensure traceability across the lifecycle.                       
2. Decentralizing The Public Ledger - However the issue with a centrally hosted public ledger is that, any entity centrally made responsible to host such a public ledger shall again lead to “trust” getting centralized which ideally means that we just move from a system of double entry where trust was on each entity’s ledger to now a system where we have a public ledger, in which records can be ensured to be consistent across entities (because of central reconciliation), however at the same time this system doesn’t solve problems related to hosting of data centrally. And therefore, as step 2, the need is to distribute the risk from central hosting, to a distributed model where each entity within the system can have an exact copy of the public ledger that is secured, distributed, reliable and Immutable. An eureka moment for blockchain, because these are also the exact characteristics of a blockchain framework.

In conclusion – It wouldn’t be far from truth, to say that “self-sustaining audit with the help of Triple Entry Accounting is most likely one of the most profound use case on blockchain after STOs”. While this may remain a scholarly concept till it finds interest in regulators, however it’s no doubt food for thought for the accounting community, which, if implemented at scale can lead to significant benefits to corporate finance. While on one side it doesn’t change the basic tenets of accounting, however on the other side, by an extension of the accounting chain, it mitigates most the risks related to accounting and auditing mis-governance.

 

Hermann Weyl born in Hamburg, Germany. He wrote, "One may say that mathematics talks about the things which are of no concern to men. Mathematics has the inhuman quality of starlight---brilliant, sharp, but cold ... thus we are clearest where knowledge matters least: in mathematics, especially number theory." ---
http://www-groups.dcs.st-and.ac.uk/~history/Biographies/Weyl.html
Also see Mathematical Analytics in Plato's Cave
http://faculty.trinity.edu/rjensen/TheoryTAR.htm#Analytics

Robert Shiller --- https://en.wikipedia.org/wiki/Robert_J._Shiller

Yale:  Robert Shiller on the power of narratives ---
https://news.yale.edu/2019/11/04/robert-shiller-power-narratives

Jensen Comment
Among the most prestigious academic accounting journals narratives have been virtually abandoned in favor of equations.

What Went Wrong With Academic Accounting Research?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

The Bottom Line
As with so many disciplines academic research ceased being relevant to the outside world --- like 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!

NY Times: Democratic Presidential (Candidate)Tax Plans Would Hit Blue States The Hardest ---
https://taxprof.typepad.com/taxprof_blog/2019/11/ny-times-democratic-presidential-tax-plans-would-hit-blue-states-the-hardest.html

New York Times, How Democrats Would Tax High-Income Professionals (Not Just the Mega-Rich):

Moody’s data shows that higher taxes would be paid disproportionately in Democratic-leaning states.

Much of the Democratic primary race has focused on taxes aimed at the billionaire class — policies devised to reduce inequality and fund progressive goals on health care and education.

But there’s also a less discussed tax increase in leading Democratic policy proposals that would affect not just a tiny sliver of the ultra-wealthy, but also millions of high-income workers. For these people, many of them affluent professionals in Democratic strongholds, it would be the biggest tax increase in recent memory.

This year, American workers and their employers owe a combined 12.4 percent on Social Security payroll taxes for income up to $132,900 (rising to $137,700 in 2020). They owe nothing on earnings above that level.

Some Democrats in the thick of the presidential race and on Capitol Hill now seek to change or eliminate that cap — potentially placing a new double-digit tax on high earners, with several plans focusing on earnings above $250,000. ...

Moody’s data also shows that the higher taxes would be paid disproportionately in Democratic-leaning states. The 12 states with the highest share of earners who would owe higher taxes all voted for Hillary Clinton in the 2016 election, led by New Jersey, Connecticut and Massachusetts.

Jensen Comment
The most liberal candidates spending plans for green initiatives, medicare-for-all, free college, guaranteed income, reparations, and open borders will also destroy stock markets, real estate markets, and pension savings.

We're really going to miss econometrics blogger David Giles ---
https://davegiles.blogspot.com/2019/10/its-time-to-go.html
Thank you David for sharing your exceptional expertise over the years

Canada:  The Big Four is High on Weed ---
http://www.canadian-accountant.com/content/business/exclusive-report-big-four-audit-client-gains-losses-in-canada

KPMG pulled in $9.3 million from Canadian cannabis ---
https://www.businessinsider.com/kpmg-pulled-in-9-million-from-canadian-cannabis-companies-2019-11

But KPMG Exhaled One Cannibus Client ---
https://ca.reuters.com/article/idCAKCN1UZ18Q-OCABS

How to Mislead With Headlines and Four-Letter Filth

Report: "Big 4 Firms Are Cesspools For Sexual Harassment, Bullying, and Discrimination" ---
https://goingconcern.com/report-big-4-firms-are-cesspools-for-sexual-harassment-bullying-and-discrimination/

Jensen Comment
Although I sometimes find this Website useful, I'm generally repulsed by the foul language and tabloid-nature of the site. For example, there are over one million full-time employees of the Big Four firms worldwide. The above article takes a few isolated, anecdotal, and hearsay examples, ,mostly from other countries, of "sexual harassment, bullying, and discrimination" and makes a headline leading us to believe all one million employees of the Big Four multinational accounting firms are swimming in excrement. This is not responsible journalism. It's tabloid sensationalism.

You can expect each and every one of over a million employees in all parts of the world to always behave behave like heavenly angels during each and every moment of their careers. These are human beings in different cultures with different lifestyles (think Japan where there are separate train cars for women who do not want to be pawed over by men in Japan's beehive culture). Some bad things are going to happen among the million employees of Big Four firms going to work every day around the world. This does not mean the Big Four firms in general are "cesspools."

Three of the Big Four multinational accounting firms are among the very top companies of the the world for working moms at Ranks 4/100, 5/100, 8/100
And all four are in the 15-year Hall of Fame for working moms ---
https://www.workingmother.com/working-mother-100-best-companies-winners-2019

The Big Four firms are among the very best companies to work for in general at Ranks 26/100, 34/100, 36/100, and 44/100 ---
https://fortune.com/best-companies/

These are not "Cesspools for Sexual Harassment, Bullying, and Discrimination."

A Must Read on Replication ---
https://replicationnetwork.com/2019/11/16/a-must-read-on-the-statistical-analysis-of-replications/

Bob Jensen's threads on research validity and replication ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

Deirdre McCloskey:  Reflections on My Decision to Change Gender
https://quillette.com/2019/11/10/reflections-on-my-decision-to-change-gender/

Deirdre is the most famous transgender economics professor in the world and stands out among transgendered academics of all disciplines. She's best known as an economic historian, but her writings and speaking engagements cover a wide range of specialties.

I met her live when she was a plenary speaker at an American Accounting Association annual meeting. I had the honor of being one of the discussants of her speech. I was also delighted to have breakfast with her prior to the session. She was introduced at the session as a:
"literary, quantitative, postmodern, free-market, progressive Episcopalian, Midwestern woman from Boston who was once a man. Not 'conservative'! I'm a Christian libertarian."
Some of her books are listed at
https://www.amazon.com/s?k=Deirdre+McCloskey&i=stripbooks&ref=nb_sb_noss_2

Her speech that day was in the area of Cliometrics ---
https://en.wikipedia.org/wiki/Cliometrics

 2012 AAA Meeting Plenary Speakers and Response Panel Videos  (Washington DC, August 6, 2012)  ---
 http://commons.aaahq.org/hives/20a292d7e9/summary
 I think you have to be a an AAA member and log into the AAA Commons to view these videos.
 Bob Jensen follows another discussant, Cornell's Rob Bloomfield, in the Follow-up Panel Video ---
http://commons.aaahq.org/posts/a0be33f7fc

Deirdre is a prolific scholar who is also a woman of remarkable courage. For example, if I had her stammer I would probably never agree to speak in public, especially in front of very large audiences. This affliction does not inhibit Deirdre in the least, and after she commences to speak this stammer becomes less and less distracting even if it is a bit time consuming.

She's a role model for both transgendered scholars and scholars in general. Her prolific writings are amazing amidst all her other professional obligations.

You can read more about Deirdre at https://en.wikipedia.org/wiki/Deirdre_McCloskey

Supreme Court Will Consider Stripping SEC of Disgorgement Powers ---
https://www.bloomberg.com/news/articles/2019-11-01/supreme-court-will-consider-stripping-sec-of-disgorgement-powers?cmpid=BBD110119_BIZ&utm_medium=email&utm_source=newsletter&utm_term=191101&utm_campaign=bloombergdaily

Deconstructing a tax law change: The case of the kiddie tax ---
https://www.thetaxadviser.com/issues/2019/nov/deconstructing-tax-law-change-kiddie-tax.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=22Nov2019

Tax Tips for Retirees --- Deconstructing a tax law change: The case of the kiddie tax
https://money.usnews.com/money/retirement/aging/articles/tax-tips-for-retirees

Jensen Comment
To this I might add that for savings that can be moved you might consider a tax exempt mutual fund such as that offered by Fidelity or Vanguard. I love my Vanguard long-term insured tax exempt fund, although this kind of investing is not for everybody, especially younger people who have a greater need for inflation protection. Every savings alternative has advantages and drawbacks. It's especially important to learn more about this at all stages of life, especially the tradeoffs between return and risks in a taxing context. I advise learning about it rather than just relying on some financial manager who probably charges too much and may not be entirely ethical even when the firm worked for has a supposedly good reputation.

Bob Jensen's personal finance helpers ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

Empowering Accountants:  Shrinking the Tax Gap: Approaches and Revenue Potential
by Natasha Sarin and Lawrence H. Summers
https://www.taxnotes.com/special-reports/compliance/shrinking-tax-gap-approaches-and-revenue-potential/2019/11/15/2b47g

In this report, Sarin and Summers argue that more resources for conducting IRS examinations (particularly of high-income earners), increasing cross-party reporting requirements, and overhauling outdated IRS technology would enable the agency to shrink the tax gap by around 15 percent in the next decade.

Jensen Comment
The downfall of gangster Al Capone is one of the many examples where accounting power wins when other forms of law enforcement are failing.

Weak tax law enforcement and government corruption go hand in hand in promoting private sector corruption.

Florida:  99% of companies pay no corporate income tax — with lawmakers’ blessing ---
https://www.orlandosentinel.com/news/os-ne-florida-corporate-tax-avoidance-20191113-sx37z4l3d5b6viugtl4thlqxem-story.html#nws=true

South Dakota:  The Great American Tax Haven ---
https://www.theguardian.com/world/2019/nov/14/the-great-american-tax-haven-why-the-super-rich-love-south-dakota-trust-laws

Excel:  How to build an Excel model for revising forecasts ---
https://www.fm-magazine.com/news/2019/nov/excel-model-for-revising-forecasts-201921875.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=18Nov2019

FASB proposes clarifying hedge accounting standard ---
https://www.journalofaccountancy.com/news/2019/nov/fasb-proposes-clarifying-hedge-accounting-standard-201922435.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=13Nov2019

Jensen Comment
I treasure the very first hard copy version of FAS 133 which used to be available for free from the FASB and some of the public accounting firms ---
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas133/sfas133.htm
Of course there have been changes to the standard since it was originally issued.
Also see
http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/sfas138/FAS138.htm

When I was teaching this material I assigned the original FAS 133 and FAS 138 standards. Both were tremendous sources of illustrations. What I think helped students a lot was my explanatory Excel version of each and every illustration in FAS 133 and FAS 138 along with my Camtasia videos that walked students through these illustrations.

Sadly, the FASB left nearly all the original FAS 133 and 138 illustrations out of the Codification database. I suspect this is because readers complained that they were too complicated. But they were not too complicated if you took the trouble to teach the finance of of the derivative contracts before delving into the accounting.

My tutorials (and glossary) on this topic linked at are at
https://www.journalofaccountancy.com/news/2019/nov/fasb-proposes-clarifying-hedge-accounting-standard-201922435.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=13Nov2019

FAS 133 and the related standards that followed are arguably the most complicated standards ever issued by the FASB.

FASB debt classification reproposal sparks concerns ---
https://www.journalofaccountancy.com/news/2019/oct/fasb-debt-classification-reproposal-sparks-concerns-201922354.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=30Oct2019

CPA Exam topics undergoing change for digital age ---
https://www.journalofaccountancy.com/issues/2019/nov/cpa-exam-topics-changing.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=15Nov2019

Auditors Look to Modernize Rules to Include Environmental, Social and Cybersecurity Issues ---
https://www.wsj.com/articles/auditors-look-to-modernize-rules-to-include-environmental-social-and-cybersecurity-issues-11572909295

Under rules proposed by standards board, auditors of private companies would be able to review nonfinancial issues without company first doing so

The auditing standards board of the American Institute of Certified Public Accountants is working to modernize standards governing nonfinancial information to include cybersecurity and environmental, social and corporate governance issues.

The board, which sets the standards for audits of private companies in the U.S., is tackling projects to better define the role of new technology in gathering information for auditors of private companies. One of the projects, which spans three standards proposed in 2018, represents a broader effort to revise “attestation standards,” which establish requirements for procedures related to reporting on nonfinancial subjects.

Under the current rules, external auditors of private companies can only test nonfinancial information if management of the company being audited had measured and provided it first, with the intent of providing performance indicators to interested parties such as investors, regulators and creditors.

Companies have requested an auditor’s perspective on nonfinancial issues because they represent an unbiased voice, Robert Dohrer, chief auditor for the organization, said in an interview. “The subject matters evolve so quickly that the clients are looking to their [accountants] to report on that, rather than the client having to do that themselves,” Mr. Dohrer said.

To address that demand, the standards board has proposed rules that would allow auditors to measure nonfinancial information without management having done so first. The company would still need to request that the auditor perform that work.

Auditors also would be able to provide their opinion directly to investors and regulators on companies’ nonfinancial information. Investors and regulators frequently request auditors’ opinions on timely issues of environmental regulation, cybersecurity and social discrimination, Mr. Dohrer said.

Depending on the subject, the auditor’s work could involve measuring a company’s emissions from smokestacks or evaluating a company’s cybersecurity controls, Mr. Dohrer said.

Continued in article

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

Hard Problems in Cryptocurrency: Five Years Later ---
https://vitalik.ca/general/2019/11/22/progress.html

Russia's Cold-Weather Bitcoin Mining Operation Where Electric Power is Cheap ---
https://www.bloomberg.com/news/features/2019-11-24/seo-inside-russia-s-largest-bitcoin-mine?cmpid=BBD112519_BIZ&utm_medium=email&utm_source=newsletter&utm_term=191125&utm_campaign=bloombergdaily

The Crypto Crooks Show Up in Iceland
https://www.vanityfair.com/news/2019/11/the-big-bitcoin-heist?utm_source=nl&utm_brand=vf&utm_mailing=VF_Hive_110419&utm_medium=email&bxid=5c7498e024c17c67f89ebcae&cndid=31837029&hasha=b16c6f948f297f77432f990d4411617f&hashb=0bee1d4fec27f0868c63f296f7257dfdbde4739b&hashc=4033ee13b64ffd126cee3428261c2cffa106f45d696c13fab049bff8873d8694&esrc=newsletteroverlay&utm_campaign=VF_Hive_110419&utm_term=VYF_Hive

CPA practitioners interested in providing assurance and advisory services in the cryptocurrency space are drawn to a seemingly simple model ---
https://www.accountingweb.com/technology/trends/what-cpas-should-know-about-cryptocurrency-and-money-laundering?source=110119&utm_medium=email&utm_campaign=AWUS ei_110119&utm_content=AWUS ei_110119+Version+A+CID_e801982459b172a53e5303ce127b50df&utm_source=internal_cm&utm_term=Read more

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

BLOCKCHAIN IN BANKING: An inside look at four banks' early blockchain successes and failures ---
https://www.businessinsider.com/the-blockchain-in-banking-report-2019-6

Stock Redemption --- http://www.toledocpa.com/docs/Stock Redemptions.pdf
Also see --- https://pro.bloombergtax.com/portfolio/redemptions-portfolio-767/

Stock redemption: Capital gain or ordinary income?
https://www.thetaxadviser.com/issues/2019/nov/stock-redemption-capital-gain-ordinary-income.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=20Nov2019

Stanford University:  Public Employee Pensions and Municipal Insolvency ---
https://web.stanford.edu/~smyers2/Myers_JMP.pdf

This paper studies how governments manage public employee pensions and how this affects insolvency risk. I propose a quantitative model of governments that choose their savings and risk exposure by borrowing/saving in defaultable bonds, borrowing in non-defaultable pension benefits, and saving in a pension fund that earns a risk premium. In insolvency, the government can receive transfers from households who may differ from the government in their preferences for public services and private consumption. I match the model to a panel of CA cities and a hand-collected record of fiscal emergencies. The model predicts that governments are highly vulnerable to another stock market bust. A hypothetical shock to pension funds in 2015 produces twice as many fiscal emergencies as the original 2008-10 shock. In the quantified model, the government undersaves and take excess risk relative to what a benevolent government would choose. Savings requirements that limit spending to essential services plus 0.3% of cash-on-hand produce large welfare gains for households. Requiring the pension fund to invest more in safe assets decreases household welfare because the lower average return discourages the government from saving.

IRS posts 2020 inflation adjustments and tax tables ---
https://www.journalofaccountancy.com/news/2019/nov/2020-irs-tax-tables-inflation-adjustments-201922409.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=07Nov2019

DoD's second financial audit uncovers 1,300 new deficiencies ---
https://www.statedatalab.org/news/detail/dods-second-financial-audit-uncovers-1300-new-deficiencies

Newspaper publisher McClatchy, which owns the Miami Herald, The Kansas City Star, The Sacramento Bee, and the Charlotte Observer, among other publications, is seeking a bailout of its pension fund. The company said in a filing with the Securities and Exchange Commission (SEC) that it is in discussions with the Pension Benefit Guaranty Corporation (PBGC) for help ---
https://www.statedatalab.org/news/detail/strapped-mcclatchy-seeks-pension-bailout

Rhode Island Supreme Court allows city to cut pension benefits to avoid bankruptcy ---
https://yankeeinstitute.org/2019/11/18/rhode-island-supreme-court-allows-city-to-cut-pension-benefits-to-avoid-bankruptcy/

This is One for Ripley's Believe it or Not
Harvard Law Prof Who Was Ousted From Deanship For Representing Harvey Weinstein Failed To File Tax Returns For Nearly A Decade ---
https://taxprof.typepad.com/taxprof_blog/2019/11/harvard-law-prof-who-was-ousted-from-deanship-for-representing-harvey-weinstein-failed-to-file-tax-r.html

Francine:  A wrap-up of writing about GE 2011-2018
http://retheauditors.com/2018/09/02/gee-no-ge/

FASB addresses share-based payments to customers ---
https://www.journalofaccountancy.com/news/2019/nov/fasb-share-based-payments-customers-201922430.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Nov2019

If a local professional sports team sells "membership fees" to build a new stadium, how should these fees be accounted for by the team for tax versus financial reporting purposes?
https://www.thetaxadviser.com/issues/2019/nov/sports-franchise-membership-fees.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Nov2019
Hint:  Much depends upon the contract clauses regarding refunds.

Dean Foods, America’s biggest milk producer, files for bankruptcy ---
https://www.cnbc.com/2019/11/12/dean-foods-americas-biggest-milk-producer-files-for-bankruptcy.html

Forwarded by Glen Gray on November 12, 2019

Dear XBRL US Members:

Thanks to all who were able to attend last week’s XBRL US Investor Forum: Driving Actionable Analytics.

Watch the video

The video recording of the forum is now available: https://xbrl.us/forum Click on the “hamburger” navigation in the upper right-hand of the video link to watch specific panels (or use the links below to access individual presentations):

• Introductions and FASB Chairman Russell Golden keynote.
• Standardizing Municipal Securities with S&P Global Ratings’ Rahul Jain, Muni Credit & Compliance Advisors’ Anne Ross, and Liz Sweeney of Nutshell Associates.
• Standards for Public Utilities – Robert Hudson from FERC and Campbell Pryde.  
• Modernizing Regulatory Disclosures – SEC’s Mike Willis, Calcbench’s Pranav Ghai, and Toppan Merrill’s Mike Schlanger.
• Quarterly Financial Reporting – Morgan Stanley’s Todd Castagno, CFA Institute’s Mohini Singh, Business Wire’s Michael Becker, and Michelle Savage.
• Blockchain and smart contracts – Sandra Ro, CEO of Global Blockchain Business Council.
• Artificial intelligence and RegTech – eBrevia’s Ned Gannon and Donnelley Financial Solutions’ (DFIN) John Truzzolino.
• Demonstrations of XBRL-powered applications – idaciti’s Christine Tan, Intrinio’s Rachel Carpenter, and Seatig’s Avery Starr.

 

Important Points from FASB Chairman’s Keynote Address

I also wanted to draw attention to the event’s keynote speaker, Russell G. Golden, Chairman, Financial Accounting Standards Board (FASB), who made key points in his talk:

• The FASB uses XBRL to make better standard-setting decisions, citing specific examples, and noting “Since 2012, the FASB has performed more than 175 research projects using XBRL data. We turn to XBRL data when we need information to develop proposals, provide insights for ongoing deliberations, and help companies implement standards.”  
• Standardized financial data helps investors make better decisions, stating “ … XBRL tagged data reduce costs, which improves investor returns… by enhancing productivity, which in turn allows investors more time to do what they’re paid to do: analysis. Less time spent gathering data increases the opportunity for higher returns – because investors can reallocate their time to perform deeper dives into the stocks they follow. And it gives investors more time and energy to expand coverage into less widely followed stocks. Over time, this has the added benefit of lowering the cost of capital for smaller companies.”

 

Read the full speech: https://fasb.org/cs/Satellite?c=FASBContent_C&cid=1176173690907&pagename=FASB%2FFASBContent_C%2FGeneralContentDisplay

Please help us get the word out about the individual sessions and the keynote talk at the event by using your own social media outlets. And thanks again to all who participated in, attended or, or contributed to the investor forum and the AGM.

Michelle Savage

Vice President, Communication

XBRL US

(917) 747-1714

 

More than 9,100 stores are closing in 2019 as the retail apocalypse drags on — here's the full list
https://www.businessinsider.com/stores-closing-in-2019-list-2019-3

Auditor Response to Negative Media Coverage of Client Environmental, Social, and Governance Practices
https://aaajournals.org/doi/full/10.2308/acch-52450

We use new data to examine auditor response to negative media coverage of client environmental, social, and governance (ESG) practices. This coverage can be indicative of an increased risk of material misstatement, which is an important assessment in client retention and pricing decisions. Specifically, media criticism can threaten a client's financial condition, as well as reveal management effectiveness and integrity issues that are further compounded by negative attention and related financial problems. We therefore predict that auditors will notice and incorporate media-provided ESG information in their risk response, which has not been examined by prior research. Supporting this prediction, we find that ESG-related negative media coverage of an audit client is associated with a higher likelihood of auditor resignation and increased audit fees. This response is incremental to the issues that underlie this media coverage. Overall, these findings identify an additional economic incentive for companies to avoid poor ESG practices.

Audit Data Analytics Research—An Application of Design Science Methodology
Accounting Horizons
Article Volume 33, Issue 3 (September 2019)
https://aaajournals.org/doi/full/10.2308/acch-52459

This introduction to Audit Data Analytics Research overviews the forum's five articles that showcase recent advances in audit data analytics technology and methodology. The articles are discussed through the prism of design science research that originates in engineering and computer science. In contrast with natural and social sciences that aim to develop and test theories about the world, the objective of design science is to create new artifacts that are useful for solving important practical problems. In audit research, design science methodology was originally used implicitly in early studies devoted to developing and evaluating audit analytical procedures and audit sampling techniques. The recent advances in information technology necessitate renewed attention to this research methodology especially given the profound changes in accounting, auditing, and business processes currently underway.

Process Mining of Event Logs: A Case Study Evaluating Internal Control Effectiveness
Accounting Horizons
Article Volume 33, Issue 3 (September 2019)
https://aaajournals.org/doi/full/10.2308/acch-52458

This paper aims at adopting process mining to evaluate the effectiveness of internal control using a real-life event log. Specifically, the evaluation is based on the full population of an event log and it contains four analyses: (1) variant analysis that identifies standard and non-standard variants, (2) segregation of duties analysis that examines whether employees violate segregation of duties controls, (3) personnel analysis that investigates whether employees are involved in multiple potential control violations, and (4) timestamp analysis that detects time-related issues including weekend activities and lengthy process duration. Results from the case study indicate that process mining could assist auditors in identifying audit-relevant issues such as non-standard variants, weekend activities, and personnel who are involved in multiple violations. Process mining enables auditors to detect potential risks, ineffective internal controls, and inefficient processes. Therefore, process mining generates a new type of audit evidence and could revolutionize the current audit procedure.

IIn Celebration of 30 Years of Behavioral Research in Accounting
Behavioral Research in Accounting
Article Volume 31, Issue 1 (Spring 2019)
https://aaajournals.org/doi/full/10.2308/bria-10681

The first article in this volume, Chua (2019), was invited by the senior editor to be a reflection on how the research climate has changed (or not) since Behavioral Research in Accounting (BRIA) first went to press in 1989. A significant influence in the founding of BRIA was Chua (1986), the first, and until recently, the only article published in The Accounting Review that posited a wider view of the field of accounting beyond financial economics and psychology-based research. In the late 1980s geography was still a major factor in research publications, and while Accounting, Organizations and Society was a highly successful journal based in the United Kingdom, behavioral accounting researchers felt it was important to have a similar journal based in North America. Thus, BRIA was born!

Indeed, in the late 1980s psychology-based accounting research was narrowly confined to the field of auditing, with the rare management accounting article being published. Hence, Chua's (1986) argument that financial economics-based research and psychology-based research in accounting were just two variants of the same type of research (i.e., positivist research) was a surprise to many North American-based accounting scholars.

Chua (1986) introduced the accounting world to not only different ways of thinking about research (interpretivist and critical), but also to a set of research methods that sent the accounting researcher into the field in an in-depth exploration of accounting in situ: a very different approach than the dominant paradigm of markets-based archival research or the rather stark psychology lab-like experiments being conducted in those days by accounting researchers.

So, to mark 30 years of BRIA, I invited Professor Chua to reflect on the course of accounting research over the past 30 years. I think that her insights and reflections about this period are a great means of marking the start of our 31st year of publishing BRIA, given the influence that her original article had in the foundation of the journal.

 

3

Radical Developments in Accounting Thought? Reflections on Positivism, the Impact of Rankings and Research Diversity Wai Fong Chua Abstract | Full Text | PDF (798 KB)

Main Articles

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The Governance Committee Process for U.S. Publicly Traded Firms Richard R. (Rich) Clune, Dana R. Hermanson, James G. Tompkins and Zhongxia (Shelly) Ye Abstract | Full Text | PDF (193 KB)

 

41

Individual Donor Support for Nonprofits: The Roles of Financial and Emotional Information Isaac Agyemang, Darlene D. Bay, Gail L. Cook and Parunchana Pacharn Abstract | Full Text | PDF (159 KB)

 

55

Workplace Mindfulness and its Effect on Staff Auditors' Audit Quality-Threatening Behavior David N. Herda, Nathan H. Cannon and Randall F. Young Abstract | Full Text | PDF (187 KB)

 

65

An Examination of Nonprofessional Investor Perceptions of Internal and External Auditor Assurance Travis P. Holt Abstract | Full Text | PDF (267 KB)

 

81

The Effect of Diversity and the Mediating Role of Elaboration on Multidisciplinary Greenhouse Gas Assurance Team Effectiveness Erboon Ekasingh, Roger Simnett and Wendy J. Green Abstract | Full Text | PDF (386 KB)

Methods, Methodology, and Replications

97

Values of Participants in Behavioral Accounting Research: A Comparison of the M-Turk Population to a Nationally Representative Sample William D. Brink, Lorraine S. Lee and Jonathan S. Pyzoha Abstract | Full Text | PDF (616 KB) | Supplemental Material

 

119

p-Hacking in Experimental Audit Research Mohammad Jahanzeb Khan and Per Christen Trønnes Abstract | Full Text | PDF (295 KB)

 

133

Investors' Processing of Financial Communications: A Persuasion Perspective Erin L. Hamilton and Jennifer Winchel Abstract | Full Text | PDF (679 KB) | Supplemental Material

Do Targeted Business Tax Subsidies Achieve Expected Benefits?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3482207
78 Pages Posted: 15 Nov 2019

Lisa De Simone

Stanford Graduate School of Business

Rebecca Lester

Stanford Graduate School of Business

Aneesh Raghunandan

London School of Economics

Date Written: November 6, 2019

Abstract

We examine the association between thousands of state and local firm-specific tax subsidies and business activity in the surrounding county, measured as the number of employees, aggregate wages, per capita employment, per capita wages, and number of business establishments. Using three different matched control groups, we find a positive association between subsidies and the employment measures. However, we show that local information – measured based on subsidy-specific disclosures, public awareness, and local press coverage – plays an important role in the effectiveness of subsidies. We also demonstrate that (i) receipt of multiple or subsequent subsidies in the same counties is critical for these employment outcomes and (ii) results are concentrated in the largest subsidy packages by dollar value. In addition, we observe mixed evidence for the relation between subsidies and business establishments and find little to no local effects for over 1,000 subsidies that cost approximately $99.8 million in aggregate. By providing a large-scale empirical analysis of the relation between firm-specific tax subsidies and aggregate economic activity at the county level, we extend a literature that generally focuses on the real effects of statutory tax policies that impact all firms in a jurisdiction. We also contribute to the accounting literature by examining the role of the local information environment in subsidy effectiveness.

Keywords: Business taxes, Subsidies, Employment, Local information

JEL Classification: G38, H25, M40, M48

Conclusions
We test whether and to what extent firm-specific local tax abatements and subsidies are associated with greater local employment and investment, measured with employment, aggregate wages, per capita employment and wages, and business establishments, in counties with tax subsidy recipients. We show that the local information environment plays an important role in this association, finding results consistent with subsidy funds being spent on outcomes other than employment and establishments. Further, we study whether subsidy effectiveness in achieving improvements in local economic conditions varies with the number of subsidies, subsidy size, and the information environment of the granting jurisdictions.

There are four key results from our empirical analysis. First, using three different control groups to benchmark the economic outcomes of counties with subsidy recipients, we generally find evidence of a positive association between tax subsidies and employment outcomes, but mixed evidence for business establishments. In several cases, the effects are delayed or even fully offset on a per capita basis.

Second, we observe that the more effective subsidies appear to be those in jurisdictions that have less information about subsidies. This could be due to jurisdictions granting more politically palatable subsidies in the first place, or to recipients diverting subsidy funds to local organizations or causes to remediate societal effects induced by subsidies. Future research and additional data will be needed to test these possible outcomes and also to determine whether more recent and improved local disclosure initiatives requiring information about firms' use of subsidy dollars facilitate improved monitoring of subsidy use.

Third, some of these positive effects appear attributable to jurisdictions giving multiple subsidies, implying that this policy could be costly if subsequent subsidies are necessary to achieve economic outcomes. When taking into account multiple subsidies, the cost of subsides approaches or even exceeds a half year of wages for each new job.

Finally, effects appear concentrated in the largest subsidy packages by dollar value: although we observe employment effects in the top tercile of subsidies, we observe little to no economic effect for over 1,000 of the smaller first-time subsidies observed that cost approximately $99.8 million in aggregate. Further, megadeals are associated with an increased number of jobs, but we again observe that population growth appears to negate employment effects in those jurisdictions.

These results are subject to several important caveats. First, we acknowledge that counties with subsidy recipients likely differ from other counties. While we address this selection issue by using three alternative control samples, we cannot observe distinct establishments (or their respective political connections) in a particular county or state, and thus are unable to model or control for these effects.

Second, we limit the sample to counties with sufficient GJF coverage and without observable tax subsidies prior 2006. However, results may be different with the inclusion of other states and/or could be attributable to subsidies granted prior to 2004 that we cannot observe.

Third, there are numerous possible outcomes we could examine, including local-area GDP, tax revenue collections, public services, and costs of these tax policies such as increased pollution, traffic, or housing prices. Given the stated policy benefits of these subsidies and data availability, we focus our analysis on the employment and investment outcomes of number of employees, aggregate wages, per capita rates of employment and wages, and establishments. However, a complete cost-benefit analysis would need to consider all relevant outcomes to assess the net cost or benefit to the local communities. Finally, we cannot consider general equilibrium effects of tax subsidies on employment levels and growth.

Nonetheless, we think this work is an important step in understanding the potential effects of these subsidies. We look forward to future research that adds to and complements our understanding of the economic effects of these subsidies, particularly given their large and growing prevalence as a tool to compete for private sector activity.

 

Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3483895
51 Pages Posted: 15 Nov 2019

Alain Naef

University of California, Berkeley - Department of Economics

Date Written: November 6, 2019

Abstract

Studies on the effectiveness of central bank intervention yield mixed results and poorly deal with endogeneity. By using a narrative approach,this paper is the first to deal with intraday changes in market conditions to show the real effect of central bank foreign exchange intervention on exchange rates. Some studies find that intervention works in up to 80% of cases. By accounting for intraday market moving news, I find that in adverse conditions, the Bank of England only managed to influence the exchange rate in 8% of cases. I use both machine learning and human assessment to confirm the validity of the narrative assessment.

Keywords: intervention, foreign exchange, natural language processing, central bank, Bank of England

JEL Classification: F31, E5, N14, N24

Accounting for Inventory Costs and Real Earnings Management Behavior

SSRN

40 Pages Posted: 13 Nov 2019

Fernando Caio Galdi

Fundacao Instituto Capixaba de Pesquisas em Contabilidade, Economia e Financas (FUCAPE)

E. Scott Johnson

Virginia Tech - Pamplin College of Business

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: November 4, 2019

Abstract

Prior research finds that managers engage in inventory overproduction to inflate current earnings, but overproduction is associated with significant economic costs. Additionally, Statement of Financial Accounting Standards No. 151 (SFAS 151) introduced new accounting penalties for underproduction. Because firms do not have to overproduce in order to avoid underproduction, and because underproduction generally follows overproduction, we posit that management’s propensity to use overproduction to meet earnings benchmarks should decrease after the adoption of SFAS No. 151, as managers attempt to avoid incurring the costs of overproduction and the underproduction that generally follows.

Consistent with expectations, our findings suggest that SFAS 151 eliminated the tendency of firms to use overproduction to meet benchmarks. Overall, our results suggest that in recent years, managers have generally avoided overproduction, presumably because of the economic costs associated with this practice. These results challenge the view that SFAS 151 inadvertently encouraged overproduction.

Keywords: Real Earnings Management, Inventory Overproduction, SFAS 151, Accounting Standards

JEL Classification: M41

No Contest: Can Financial Reporting Standards Achieve Comparability in the Face of Financial Engineering

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3479338
32 Pages Posted: 12 Nov 2019

Erik Olson

Yale University, School of Management

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: October 31, 2019

Abstract

By comparing the accounting of 10 transaction methods designed to achieve the same net economic effect for a firm borrowing a given amount of money, we show that these 10 methods, under the current financial reporting standards, have markedly different consequences for a firm’s financial reporting. It follows that agents (e.g., managers, auditors, shareholders, and regulators, etc.) with different interests in financial reports may employ different methods of achieving the same net economic result. Accounting regulators can only specify how preparers should account for a given transaction; regulators have little control over the transactions and instruments firms choose to use. The broad range of financial reporting consequences of a given economic transaction, with regard to financial engineering, points to the difficulty — and even virtual impossibility — of regulators achieving comparability and consistency among firms’ financial reports. Despite attempts at regulation and the voluminous GAAP regulations, we reveal that managers remain free to engineer their transactions to publish their firm’s desired (or engineered) financial reports since these accounting methods are largely reported inconsistently with no comparability.

Keywords: financial reporting standards, comparability, financial engineering, regulation

JEL Classification: G23, G28, M48

Perspectives on Mental Accounting: An Exploration of Budgeting and Investing

Financial Planning Review, Vol. 1, Issue 1-2, March-June 2018

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3485611
Posted: 12 Nov 2019

C. Yiwei Zhang

University of Chicago - Booth School of Business

Abigail B. Sussman

University of Chicago - Booth School of Business

Date Written: September 19, 2018

Abstract

This article provides an overview of recent advances in the literature on mental accounting within the context of consumer financial decision‐making. We first discuss the categorization process that underlies mental accounting and the methods people use to categorize funds. We then highlight some of the notable work that examines how mental accounting influences budgeting, spending, and investment decisions. The article concludes by proposing an agenda for future research, focusing on current gaps in our knowledge and promising areas to explore.

Full Text Available Here: https://doi.org/10.1002/cfp2.1011

Big Four Public Client Portfolios: Is the Risk Dispersed?

Journal of Accounting, Ethics & Public Policy 20(4): 501-532, 2019

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478923
32 Pages Posted: 11 Nov 2019

Renee Flasher

Penn State Harrisburg

James Schmutte

Ball State University

Date Written: November 1, 2019

Abstract

We examine the Big Four public client portfolios to determine if there appears to be homogeneity of business risk — an overall firm risk of loss arising from accepted clients — across the four accounting firms’ public company portfolios. If a varying risk profile exists among the firms, then the potential for another “Enron” event resulting in a failing firm may be more likely. Using the Audit Analytics’ proprietary Accounting Quality and Risk Matrix data for almost 4,200 clients, our results find statistical support for one of the Big Four being dissimilar than the others due to its existing long-term client base and its more recent client acquisitions. This result is consistent with one firm taking a unique risk profile relative to the other large firms. This provides a cautionary note to regulators and investors as any further reduction in the Big Four may have a significant negative impact on the capital markets assurance function.

Keywords: Big Four, Accounting

External Sharī‘ah Auditors in Islamic Banking and Finance Industry: Challenges of Qualification and Professional Competency

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478878
Posted: 11 Nov 2019

Muhammad Asghar Shahzad

Shari'ah Academy, International Islamic University

Raees Khan

SKANS School of Accountancy, Islamabad

Date Written: October 31, 2019

Abstract

This short study provides an overview of the present circumstances regarding the importance of External Sharī‘ah Audit in Islamic banking market and major challenges. The main challenge to this industry is lack of skilful and qualified man power. Realizing the current curricula of reputed Accountancy Institutions who produce certified Accountants and auditors lacks the topics related to Islamic banking products and services, besides as suggested by the State Bank of Pakistan the audit firms should hire Sharī‘ah scholars on the basis of “Shahadatul Almiya Fil Uloomal Arabia wal Islamia” or Takhasus fil Fiqh wal Ifta or Sharī‘ah background. (Ayub, Shahzad, and Rehman 2019) These persons will not have adequate knowledge and experience of accounting and auditing knowledge as per FAPC. (State Bank of Pakistan 2018) However the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has suggested a solution regarding the qualification of an external Sharī‘ah auditor.

Keywords: Shariah Audit, External Shariah Audit, Islamic Banking, SBP, SECP, Modaraba Companies

Accounting Programs Ranked by Accounting-Education Publications: Controlling for Journal Quality, Authors’ Doctoral Time and the Number of PHD/DBA on Faculty

Bernardi, Richard A. and Collins, Kimberly Z.: (2019). Accounting Programs Ranked by Accounting-Education Publications: Controlling for Journal Quality, Authors’ Doctoral Time and the Number of PHD/DBA on Faculty, The Accounting Educators’ Journal, 29, 1-26.

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478292  (not available for download)
Posted: 11 Nov 2019

Richard A. Bernardi

Roger Williams University - Gabelli School of Business; Roger Williams University

Kimberly Collins

affiliation not provided to SSRN

Date Written: October 30, 2019

Abstract

This research ranks accounting programs based on their faculty members’ publications in accounting-education journals. The goal of this research is to ‘level the playing field’ when ranking accounting-education programs by providing smaller programs a means to compete with larger programs. We accomplished this by using three methodologies: non-standardized article counts; article counts standardized by each journal’s quality rating; and, article counts standardized by each journal’s quality rating, the time since the each author received their PHD/DBA and the number of accounting-education authors on faculty (i.e., fully standardized rankings). This information would be useful for new PHD/DBAs seeking an initial position and interested in accounting-education research or associate/full professors considering relocating who are interested in accounting-education research. Programs seeking or maintaining their AACSB accreditation can also use the data in this study as an outcomes assessment indicator.

Keywords: Standardized Quality Ratings, Departmental Rankings

The CPA Examination as Outcome Assessment: The Case for Stronger Business Law in the College Curriculum.

Journal of Accounting, Ethics & Public Policy 20(3): 421-449 (2019)

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478332
29 Pages Posted: 11 Nov 2019

Dustin Grant

University of West Florida

Lawrence Menter

Clayton State University

Gregory Kordecki

Clayton State University

Date Written: October 30, 2019

Abstract

The CPA Examination serves as a model assessment for outcome measurement of accounting and business skills and knowledge. The National Association of State Boards of Accountancy (NASBA) maintains candidate scores. This paper highlights recent trends in teaching and learning business law concepts along with measures of CPA exam performance results evidenced on the Regulation section.

This study found general uniformity across geographic areas and school size with exceptions for accountancy accreditation and large university flagship status. The research also found practical variation in one southeastern state for performance results obtained from those institutions requiring the sophomore legal environment course rather than the junior business course.

Keywords: CPA exam, business law, accounting major, outcome assessment, ethics, accreditation, legal environment

JEL Classification: G18, H20, K2, K4, K10, M41, M48

Baumol versus Engel: Accounting for 100 Years (1885-1985) of Structural Transformation in Japan

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3483965
28 Pages Posted: 10 Nov 2019

Keywords: long-run structural transformation, the Engel effect, Baumol's cost disease effect, sectoral productivity growth

JEL Classification: O40, O10

Pathways to Materiality: How Sustainability Issues Become Financially Material to Corporations and Their Investors

Harvard Business School Accounting & Management Unit Working Paper No. 20-056

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3482546
29 Pages Posted: 8 Nov 2019 Last revised: 11 Nov 2019

Jean Rogers

Accounting Standards Board

George Serafeim

Harvard University - Harvard Business School

Date Written: November 4, 2019

Abstract

As sustainability issues, also labelled environmental, social and governance (ESG) issues, become financially material, companies, investors and regulators are designing strategies and policies to improve sustainability disclosure and performance. In this paper, we outline a framework of how sustainability issues become financially material arguing that materiality is not a “state of being” but a “process of becoming.” Our framework could assist companies and investors to make resource allocation decisions based on expectations about future materiality, social entrepreneurs and NGOs to develop their theories of social change, and policy makers to design disclosure regulations. Moreover, our framework generates predictions about the conditions under which sustainability issues become financially material that could be empirically tested in the future.

Keywords: Sustainability Disclosure, Esg, Materiality, Social Impact, Corporate Valuation, Pharmaceutical Companies, Ethics, Business Ethics, Sustainability, Environment, Finance, Accounting, Disclosure, Disclosure and Access, Regulation, Valuation, Corporate Governance, Corporate Accountability

JEL Classification: M4, G1, G3, M14

Technical Debt and Firm Performance

Management Science, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3476765
47 Pages Posted: 7 Nov 2019

Rajiv D. Banker

Temple University - Department of Accounting

Yi Liang

Temple University - Department of Accounting

Narayan Ramasubbu

University of Pittsburgh - Katz Graduate School of Business

Date Written: October 28, 2019

Abstract

Technical debt refers to the design, development, and implementation shortcuts taken by firms when deploying accounting information systems. Prior system-level studies have shown that such shortcuts decrease the reliability of systems and increase the long-term system maintenance obligations. On the one hand, technical debt may cause system disruptions that impair firm-level performance. On the other hand, incurring technical debt may aid firms to expedite their systems deployment and to implement idiosyncratic functionalities that may enhance performance. In this firm-level study, we examine the economic implications of technical debt accumulated by 26 firms in their customer relationship management (CRM) systems over an eleven-year period. We find that firms operating in industries with higher “clockspeed” and higher competitive threats tend to accumulate more technical debt. After controlling for industry-level and firm-level factors, our analysis reveals that technical debt embedded in the CRM systems negatively impacts firms’ performances, measured as gross profit scaled by beginning-of-year total assets (GROA). We estimate that a 10 percent increase in technical debt reduces GROA by 16 percent on average; the negative impact of technical debt on GROA increases over the lifecycle of the systems, which significantly reduces the long-term business value of those systems. Highly experienced information technology teams and the presence of CIO in a firm’s top management team, however, serve to mitigate, at least partially, the negative impacts of technical debt. We discuss the implications of these findings for research on the business value and governance of accounting information systems and performance evaluation.

Keywords: technical debt, business value of accounting information systems, firm performance, governance

JEL Classification: M15, M40, L86

The Relationship between the Income and Behavioural Biases

Journal of Economics, Finance & Administrative Science, 2018

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3399730
18 Pages Posted: 6 Nov 2019

Renu Isidore R.

Loyola College, Chennai - Loyola Institute of Business Administration (LIBA)

Christie P.

Loyola College, Chennai - Loyola Institute of Business Administration (LIBA)

Date Written: 2018

Abstract

Purpose – The purpose of this paper is to test the relationship between the annual income earned by the investors and eight behavioural biases exhibited by the investors such as mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness and overconfidence.

Design/methodology/approach – The relationship is derived based on a questionnaire survey conducted on 436 secondary equity investors residing in Chennai, India.

Findings – Analysis of variance test was performed on the normalised and non-normalised version of the biases divided in terms of the annual income earned by the investor. The test found that for the significant biases except the overconfidence bias, the investors with higher annual income were less prone to the biases when compared to investors with lower annual income. On the other hand, with respect to the overconfidence bias, the investors with higher annual income were prone to exhibit overconfidence bias when compared to the investors with lower annual income. Correlation analysis showed that the investors with high annual income were more likely to exhibit higher overconfidence bias but lower representativeness, loss aversion, availability and mental accounting biases.

Originality/value – A contribution in the financial and economic front which would benefit the financial advisors to now consider the income earned by the clients as an important factor while giving financial advice to the clients and while guiding themabout the biases they are prone to exhibit.

Keywords: Mental accounting, Anchoring, Gambler’s fallacy, Availability, Loss aversion, Regret aversion, Representativeness, Overconfidence

IRS Section 529 Savings Plans --- https://en.wikipedia.org/wiki/529_plan

Costs, Conflicts, and College Savings: Evaluating Section 529 Savings Plans

Virginia Law and Economics Research Paper No. 2019-04

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3343727
47 Pages Posted: 6 Nov 2019

Quinn Curtis

University of Virginia School of Law

Date Written: January 27, 2019

Abstract

Americans collectively save hundreds of billions of dollars for their children’s education in Section 529 college savings plans. These plans are sponsored by states and largely exempt from the legal regimes that typically apply to money managers. This is the first academic study to comprehensively evaluate the quality of menus offered by these plans. While some plans are cost-efficient, there is considerable variation, and many plans are egregiously expensive. While large 401(k) plans have average total costs of 0.3%, college savings plans average 0.31% in administrative fees alone, with investment expenses adding another 0.32%. Plans distributed through brokers are particularly costly. Controlling for size, broker-sold investments are twice as expensive as those sold direct to consumers, even before accounting for brokerage sales charges that may exceed five percent of invested assets. A careful examination of plans’ legal disclosures shows that some states generate significant revenue from plan fees and use that revenue to support activities that do not directly benefit plan investors, including subsidizing defined-benefit style plans. This cross-subsidization may undermine incentives for state administrators to negotiate lower costs and is in tension with state boards’ role as fiduciaries. These results raise questions about whose interests are served by 529 plans and whether investors are adequately protected by existing regulations.

Keywords: college savings, mutual funds, consumer investing, 

Accounting for Goodwill: Still Crazy After All These Years

Journal of Accounting, Ethics & Public Policy 20(3): 411-419 (2019)

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3475093
9 Pages Posted: 4 Nov 2019

Clemense Ehoff

Central Washington University

Marvin Bouillon

University of Southern Mississippi

Date Written: October 24, 2019

Abstract

For more than fifty years, goodwill has captured the fascination and frustration of accounting theorists. This analysis examines the changes in treatment of goodwill from the sixties to the present. Its purpose is to gain further insight into one of the most interesting puzzles in accounting theory.

Keywords: goodwill, accounting, intangible, impairment test, assets, FASB, SFAS

JEL Classification: L59, M41, M48

Inventory Costing: A Comprehensive Case Study

Review of Business & Finance Studies, v. 10 (1) p. 15-24, 2019

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462007
10 Pages Posted: 2 Nov 2019

Peter Harris

New York Institute of Technology

Umapathy Ananthanarayanan

New York Institute of Technology

Date Written: 2019

Abstract

Under Accounting Standards Update (ASU) 330, Inventory requires an entity to measure inventory at lower of cost or market. Market value can be determined in three methods: replacement cost, net realizable value or net realizable value less profit margin. The Federal Accounting Standards Board (FASB) received comments from users that the current guidance on the measurement of inventory is unnecessarily complex because there are three potential outcomes to determine market. In response to these concerns, FASB issued ASU 2015-11 to simplify the measurement of inventory as part of the FASB’s Simplification initiative. In this paper, we outline the new mechanism proposed by FASB for measuring inventory and how it would impact entity’s financial statements. We provide a series of comprehensive questions relating to Lower of Cost and Net Realizable Value, and Lower of Cost or Market at the end of the paper. This case study is best suited for the Intermediate Accounting 1 course.

Keywords: ASU 2015-11, ASC 330, Lower of Cost or Market, Lower of Cost or Net Realizable Value, Net Realizable Value, FIFO, LIFO, Replacement Cost, Inventory Floor

JEL Classification: M48, M49

Performance Evaluation in a Traditional Cost System: A Case Study

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462000
14 Pages Posted: 2 Nov 2019

Date Written: 2019

Keywords: Performance Evaluation, Cost Variances, Decision Making, Cost systems

Modeling Bidder Risk Preferences to Optimize Pricing

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3474470
36 Pages Posted: 2 Nov 2019

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

Lucas Stich

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: October 23, 2019

Abstract

Name-your-own-price selling is a tractable laboratory paradigm for studying bidding behavior because it involves only one bidder per transaction. Using data from an incentive-compatible laboratory experiment that implemented a name-your-own-price seller who charges entry fees, we estimate a flexible model of risk preferences at the individual level, and we find substantial population heterogeneity. The behavior of three quarters of our subjects is more consistent with prospect theory than with expected utility theory in that their estimated utility functions are convex in the loss domain. In several counterfactual simulations, we measure the impact of accounting for the heterogeneity in risk preferences on setting entry and reserve prices in three market institutions that involve bidding, including first-price auctions. We find that when the seller cannot discriminate based on risk preferences, prices set using the simpler homogeneous model (that assumes everyone has the same risk preferences) achieve over 99% of the optimal profit. By contrast, a discriminating seller can benefit from using the heterogeneous model in several situations that we characterize as depending on both the institution and the dispersion in the distribution of valuations.

Keywords: Pricing, Auctions, Risk Preferences, Econometric Modeling

The Effects of Accounting Complexity and the Choice of Accounting Methods on Financial Reporting Quality: Evidence From the Oil and Gas Industry

Barber. R. and D. Hollie. 2019. The effects of accounting complexity and the choice of accounting methods on financial reporting quality: Evidence from the oil and gas industry. Journal of forensic & Investigative Accounting, Forthcoming

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3473011
Posted: 31 Oct 2019 Last revised: 2 Nov 2019

Russell Barber

University of Colorado Denver

Dana Hollie

The University of Toledo; U.S. Securities and Exchange Commission

Date Written: September 1, 2019

Abstract

This study examines whether the financial reporting quality of oil and gas firms differs for firms that use successful efforts versus full cost accounting methods. Successful efforts is generally perceived as a more complex method, while full cost is perceived as a less complex method. The Financial Accounting Standards Board (FASB) considers reducing unnecessary complexity in financial reporting a benefit to all FASB stakeholders. This study provides additional insights into the discussion on accounting complexity and financial reporting quality. Using restatements as a proxy for financial reporting quality, we find that firms using successful efforts (the more complex method) have better financial reporting quality, as shown by a lower likelihood of restatements. This study has implications for regulators, investors, auditors, and academics interested in financial reporting quality and the relative association of complexity with financial reporting quality.

Keywords: financial reporting quality; successful efforts; full cost; accounting choice; restatements; accounting complexity

Abnormal Audit Fees and Audit Quality Post PCAOB

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3472611
Posted: 29 Oct 2019

Date Written: October 20, 2019

Keywords: Audit Quality, Discretionary Accruals, Fee Premium, Normal Audit Fees, Abnormal Audit Fees

EY:  Proposed Statement on Auditing Standards — Auditing Accounting Estimates and Related Disclosures ---
https://www.ey.com/Publication/vwLUAssetsPI/CommentLetter_07848-191US_AICPAEstimates_22November2019/$FILE/CommentLetter_07848-191US_AICPAEstimates_22November2019.pdf

EY:  Financial Reporting Developments on Income Taxes ---
https://www.ey.com/ul/en/accountinglink/frd-bb1150-income-taxes

EY:  FASB defers certain effective dates for major standards ---
https://www.ey.com/Publication/vwLUAssetsPI/TothePoint_07801-191US_EffectiveDates_18November2019/$FILE/TothePoint_07801-191US_EffectiveDates_18November2019.pdf

EY: FASB requires the ASC 718 measurement approach for all share-based payments to customers ---
https://www.ey.com/Publication/vwLUAssetsPI/TothePoint_07737-191US_SBPPayabletoaCustomer_14November2019/$FILE/TothePoint_07737-191US_SBPPayabletoaCustomer_14November2019.pdf

EY: FASB proposes amendments to clarify and improve its hedge accounting guidance ---
https://www.ey.com/Publication/vwLUAssetsPI/TothePoint_07790-191US_HedgeCodImprovements_14November2019/$FILE/TothePoint_07790-191US_HedgeCodImprovements_14November2019.pdf

EY:  November 2019 EITF Updates ---
https://www.ey.com/Publication/vwLUAssetsPI/EITFUpdate_07738-191US_11November2019/$FILE/EITFUpdate_07738-191US_11November2019.pdf

EY:  Proposed Statement on Auditing Standards — Amendments to AU-C sections 800, 805, and 810 to incorporate auditor reporting changes from SAS no. 134 ---
https://www.ey.com/Publication/vwLUAssetsPI/CommentLetter_07611-191US_800Series_28October2019/$FILE/CommentLetter_07611-191US_800Series_28October2019.pdf

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

 Good morning. General Electric’s decision this week to appoint an outsider as finance chief is rekindling speculation over whether the company will end its audit relationship with KPMG that goes back more than a century. 

The industrial conglomerate is in the middle of a transformation effort. The U.S. Securities and Exchange Commission is investigating GE’s accounting practices, alongside the U.S. Justice Department. A new auditor would add credibility to the company’s efforts to uphold agreements with regulators, William Blair & Co. analyst Nick Heymann tells CFO Journal.

“They’re finding outsiders to rejuvenate the process for not only changing the operations of the company but also the accountability and verifiability of results,” Mr. Heymann said.

GE, which on Monday said Carolina Dybeck Happe would take over as chief financial officer, previously disclosed plans to invite bids from independent auditors after its 2019 audit. The process could lead to the replacement or retention of KPMG.

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

Good morning. The uncertainty of a tax on pricey health coverage hangs over finance chiefs as they aim to cut costs and prepare for the levy despite its possible repeal, CFO Journal's Mark Maurer reports.

The federal government in 2022 is scheduled to begin collecting the 40% tax on U.S. employer benefit plans whose values exceed government-set thresholds. The so-called Cadillac tax, which is a part of the 2010 Affordable Care Act, has been delayed twice, feeding doubts that it will ever come to fruition.

The tax was developed to help fund the provisions of the Affordable Care Act and battle rising health-care costs. It is projected to record gross collections of $96 billion between 2022 and 2029, according to a May report from the Congressional Budget Office. 

But some aspects of the plan remain unresolved. Some executives say they don’t have enough information from the U.S. Treasury Department and Internal Revenue Service to know whether their efforts to reduce plan costs will be enough to dodge the tax. The Treasury requested feedback from companies in 2015 and 2016, but hasn’t released guidance since.

It is also unclear whether benefits such as retiree medical coverage, dental and vision plans and on-site medical clinics will be subject to the tax. If they are, it could bring the total cost of company health plans closer to “busting through the tax threshold,” according to J.D. Piro, a senior vice president at Aon, a professional-services firm.

From the CFO Journal's Morning Ledger on November 25, 2019

Exxon Mobil may not reside in Silicon Valley, create the latest tech devices or manage the world’s largest delivery service, but it is one of the most innovative U.S. companies, according to a new ranking of the country’s best-run corporations.

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

Hospitals are pushing back against the Trump administration’s new health-pricing disclosure rule, with the industry planning a legal challenge to block it.

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

General Motors filed a federal racketeering lawsuit against Fiat Chrysler Automobiles, accusing it of corrupting union negotiations, in an unusual legal dispute between crosstown rivals.

According to court documents filed in Michigan, GM’s suit is related to the ongoing federal investigation into corruption between leaders at the United Auto Workers and Fiat Chrysler’s labor-relations executives. GM accuses Fiat of corrupting the collective bargaining process in 2011 and 2015, as well as the implementation of a 2009 agreement, to solidify a labor cost advantage for the Italian-American auto maker in its contracts.

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

Good morning. A finance chief’s service on another company’s board could enhance the quality of financial reporting for his or her own company, new academic research suggests.

Companies in which the CFO also serves as an outside board director saw 21% fewer financial reporting misstatements over a 12-year period than at companies in which the CFO didn’t, according to the research, which is expected to be published in mid-December in the journal Accounting Horizons, CFO Journal reports.

The research, conducted by Sarfraz Khan, an associate professor of accounting at the University of Louisiana at Lafayette, indicated outside board work gives CFOs additional insight into how organizations apply accounting practices.

Companies historically have been reluctant to permit CFOs to sit on other companies’ boards, given the time-consuming nature of the role they would likely have as a member of an outside audit committee.

The study argues that companies should encourage their CFOs to join outside boards. Mr. Kahn concluded that CFOs who are recruited to outside directorships often come from well-managed companies and the insight they gain often further strengthens the management of their own businesses.

Jensen Comment
Congratulations to Professor Khan for conducting accounting research that's picked up by the financial press. It's relatively uncommon for academic accountants to publish research that ends up being read by accounting practitioners.

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

Investors have lost hundreds of millions of dollars wagering that struggling mall owners won’t be able to pay their debts. Those losses haven’t deterred activist Carl Icahn from making the same bet.

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

PCAOB Approves 2020 Budget

The Public Company Accounting Oversight Board on Tuesday unanimously approved its budget for the 2020 fiscal year at its first public meeting in nearly a year. The PCAOB, which polices audits of public companies, plans to spend $284.7 million, up 4% from fiscal 2019. About three-quarters of the budget comprises personnel costs such as salaries and employee benefits. Board members are traditionally well compensated, with an annual salary of more than $500,000. The budget’s salary allotment was $169.5 million, up 3.3% from fiscal 2019. Audit firms and broker-dealers pay fees that fund the PCAOB's budget. The funding covers all 850 employees that the PCAOB expects to have by the end of fiscal 2020, up from about 780 now. The U.S. Securities and Exchange Commission, which oversees the PCAOB, is expected to vote on final approval of the budget Dec. 18.

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

Most Investors Say Portfolio Companies Use Non-GAAP Metrics, Study Says

Most institutional investors believe that companies in their portfolios frequently rely on creative accounting metrics in their financial statements, according to a study from BlackLine Inc., a Los Angeles-based maker of financial controls and automation. The survey found that 91% of the roughly 760 global participants believe the tactics, which go beyond the guidelines under generally accepted accounting principles but are legal, are prevalent. Those investors also expect more large companies to resort to non-GAAP tactics over the next 12 to 18 months, according to the survey, which was conducted by survey company Censuswide and commissioned by BlackLine. The behavior could in turn make investors more likely to scrutinize financial information—or even deter prospective investors. One-quarter of investors surveyed said “creative accounting”—defined in the survey as financial loopholes companies use to present figures in a “legal though misleadingly favorable light”—is the factor that would make them least likely to invest in a particular company. Recent academic research showed that non-GAAP adjustments related to net income increased 33% from 1998 to 2017.

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

Companies’ Non-GAAP Adjustments to Net Income Have Soared

Companies’ reliance on disclosing adjusted earnings or other figures not consistent with generally accepted accounting principles has made it more difficult for investors to forecast performance, new academic research shows.

Companies say that such tailor-made metrics are a way for investors to better understand their business. As a result, the rise of earnings adjustments over the past 20 years has been dramatic, CFO Journal’s Mark Maurer reports.

Non-GAAP adjustments related to net income increased 33% from 1998 to 2017, according to the research, which was conducted by accounting professors from the Harvard Business School and the Massachusetts Institute of Technology’s Sloan School of Management.

SEC:  Petition for Rulemaking Regarding Disclosures on Use of Non-GAAP Financials in Proxy Statement CD&As ---
https://www.sec.gov/rules/petitions/2019/petn4-745.pdf

Journal of Accounting and Economics:  The effect of voluntary clawback adoption on non-GAAP reporting ---
https://www.sciencedirect.com/science/article/pii/S0165410118301071

Use of non-GAAP financial metrics increases in executive comp—will the SEC increase its scrutiny?
https://cooleypubco.com/2019/06/20/ngfms-in-executive-comp/

SEC:  Non-GAAP Financial Measures --- https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

CFO:  Has Non-GAAP Reporting Become an Accounting Chasm?
https://www.cfo.com/gaap-ifrs/2019/09/has-non-gaap-reporting-become-an-accounting-chasm/

The CPA Journal:  Recent Trends in Reporting Non-GAAP Income ---
https://www.cpajournal.com/2017/07/05/recent-trends-reporting-non-gaap-income/

Journal of Accounting and Economics:  The effect of voluntary clawback adoption on non-GAAP reporting ---
https://www.sciencedirect.com/science/article/pii/S016541011830107

Non-GAAP includes pro forma financial statements but is not limited to the concept of pro forma ---
https://en.wikipedia.org/wiki/Pro_forma#Accounting

Bob Jensen's threads on pro forma accounting are at
http://faculty.trinity.edu/rjensen/theory02.htm#ProForma

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

Good morning. Airlines lease gates and ticket counters at airports, retailers lease stores in malls and banks lease branches. Under new accounting rules, one of these groups doesn’t need to include the leases on company balance sheets.

Airlines are the winners, as they don’t have to count many leases at airports as liabilities. Though nothing has changed in their financial situation, the exclusion makes their balance sheets look better than they would otherwise. That has led bond-ratings agencies, which judge the risk of borrowers, to give airlines a break. The result: Carriers enjoy extra leeway to rack up debt before risking a downgrade.

The change has added hundreds of billions of dollars to corporate balance sheets since coming into effect late last year, and affected many metrics used by investors. For S&P 500 companies, operating leases amount to $525 billion in balance-sheet liabilities, according to second-quarter numbers from data provider Calcbench.

The operating leases that now must go on balance sheets are longer than a year, with payments that are fixed or increase by agreed amounts. So-called variable leases, where future payments can change depending on circumstances, generally aren’t included. Professional investors had long prepared for the broad impact of the accounting change, so its introduction had little, if any, market reaction. But there are aspects of the new rule that may catch some investors unaware, analysts said.

From the CFO Journal's Morning Ledger on November 15, 2019

Good morning. Former executives at Under Armour, the sportswear company whose accounting is under federal investigation, said they scrambled to meet aggressive sales targets, borrowing business from future quarters to mask slowing demand in 2016 for its athletic apparel.

According to former executives in sales, logistics, merchandising and finance, Under Armour frequently leaned on retailers to take products early and redirected goods intended for its factory stores to off-price chains to book sales in the final days of a quarter, the Journal's Khadeeja Safdar and Aruna Viswanatha report. 

They said the company repeatedly used these and other moves to help extend a 26-quarter streak of 20% sales growth, a feat that came to an abrupt end in late 2016. Some of the executives said such end-of-quarter moves are common in the retail industry.

“It was all in the name of hitting the number, and it would happen out in the open,” said a former Under Armour merchandising executive. “They [the company] didn’t think there was anything improper about it.”

Jensen Question
Isn't this channel stuffing?
https://en.wikipedia.org/wiki/Channel_stuffing

November 15, 2019 reply from Tom Selling

 In my mind, there are two versions of channel stuffing.  The first is where recognized revenue could be reversed through right-of-return provisions granted to customers in exchange for accepting inventory earlier than needed.  As a result, it is reasonably possible that revenue recognized in the current period is likely to be reversed in a future period.  That would be bad.

The second kind is where the customer has no special right-of-return.  Here, revenue recognized is not likely to be reversed; but it is likely that future product deliveries/sales will be affected.  IMO, this type of channel stuffing should be less of a concern to accountants.  Notwithstanding, the SEC’s MD&A rules in respect to forward looking information should be triggered here.  Specifically, when management is aware of facts and circumstances (e.g., the UnderArmour situation) indicating that it is “reasonably likely” that future revenues will be lower, that should trigger a required MD&A disclosure.

An important question is the degree to which auditors should be responsible for MD&A.  That was being discussed at the pre-Trump PCAOB.  Now, a fading memory.

Best,

Tom

From the CFO Journal's Morning Ledger on November 13, 2019

Marijuana is seen as a dangerous narcotic in China, and possession there is strictly punished. That hasn’t stopped the country from trying to become a powerhouse in the fast-growing industry for cannabis products.

From the CFO Journal's Morning Ledger on November 13, 2019

Good morning. Changes in technology and the structure of audit firms have prompted a U.S. regulator to consider tweaking rules governing the controls audit firms use to determine the quality of their audits, CFO Journal reports.

The Public Company Accounting Oversight Board is weighing whether to change longstanding rules on audit firms’ quality-control systems as part of a broader overhaul of its inspection processes, according to the board.

The PCAOB, which regulates firms that audit public companies listed in the U.S., is expected to discuss a preliminary proposal at a meeting next month aimed at ensuring that audit firms are more proactive in identifying emerging risks and deficiencies in their quality-control systems. The public’s feedback on the so-called concept release would help the board form a proposal.

The concept release, which hasn’t yet been shared with the public, could represent the first major changes to standards on quality-control systems since 2003, shortly after the board’s formation.

“A lot has been learned over 20ish years in terms of how good quality-control systems can be structured,” board member Duane DesParte said this week at a Financial Executives International conference in New York, “and I think that applies to how firms are managing their quality as well.”

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

FASB Chairman Zeroes In on Solving Goodwill and Liabilities Issues

Russell Golden, chairman of the Financial Accounting Standards Board—a U.S. accounting standards-setter—said he is focusing on differentiating liabilities from equity and improving goodwill accounting as he approaches the end of his term in June 2020. “We solved a number of issues that were identified a number of years ago,” Mr. Golden said Monday at a conference held by Financial Executives International in New York. “We still have a few left to solve, like liabilities and equity and the appropriate improvement for goodwill.” These are among the more significant proposals that the FASB expects to address before June. FASB in July proposed a new standard to help companies further differentiate between liabilities and equity. The narrow differences between liabilities and equity have created confusion among companies and investors. The board is reviewing comments and plans to discuss them at a meeting next month. Separately, the FASB board is discussing whether to change standards on assets tied to company acquisitions, and plans to hold a roundtable Friday with companies, investors and other parties affected.

From the CFO Journal's Morning Ledger on November 11, 2019

After his local farm bank wouldn’t lend him as much as he said he needed in 2017, Iowa farmer James Kron turned to Ag Resource Management LLC, a Texas-based financial-services firm. Now, when he takes his corn and soybeans to grain elevators near his farm, he signs the checks over to ARM until his loan is paid back in full. He is one of many farmers leaning on alternative lenders to make it through the steepest agricultural downturn in a generation. With crop prices stuck at low levels, traditional farm banks are placing stricter terms on farm loans and doling out less money, leaving cash-strapped farmers such as Mr. Kron to seek capital from more lightly regulated entities.

·         Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped.

From the CFO Journal's Morning Ledger on November 11, 2019

Good morning. Just weeks before WeWork expected its stock to begin trading publicly, the startup was still wrangling with the U.S. Securities and Exchange Commission over a controversial key financial metric and a litany of other concerns about its planned multibillion-dollar IPO.

On Sept. 11—after the initial public offering prospectus had been public for nearly a month, and after the SEC had already made dozens of demands about the document—the regulator sent the shared-workspace company a list of 13 still-unresolved concerns, according to previously unpublished correspondence reviewed by The Wall Street Journal.

The back-and-forth shows that WeWork was scrambling to clean up big problems as its IPO was crumbling. The timing was indicative of the chaotic management that gave investors pause and ultimately led the company to pull the offering and Chief Executive Adam Neumann to step down under pressure. “It’s highly unusual to have issues that are so important still being disputed while they are out there marketing the stock to investors,” said Minor Myers, a law professor at the University of Connecticut who reviewed the correspondence at the Journal’s request. As WeWork was battling the SEC over its metrics, its advisers were “figuring what they can sell using these numbers,” Mr. Myers added.

 

Jensen Comment
I sometimes repeat my favorite New Yorker cartoon where the CEO stands in from of a disastrous earnings chart and says to the Chief Accounting Officer:
"Digby, the only thing that can save this company is an accounting miracle."

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

Associated British Foods Took a Year to Build a New Lease Database

Associated British Foods PLC, the London-based maker of Twinings tea and Patak’s sauces, spent a year creating a new database covering all of its leases in response to an accounting standard that took effect in January, Finance Director John Bason tells CFO Journal. “I thought it would take us three to six months, but it took way longer,” Mr. Bason said, adding that the length of time underscores the complexity of the undertaking. The new rule—International Financial Reporting Standard 16—requires companies to list their leases on the balance sheet. Compliance with the new standard has increased the level of insight that he and other members of the executive team have into the company’s lease portfolio, Mr. Bason said. “It brought closer to management’s attention the lease portfolio that we have,” according to Mr. Bason. ABF has started paying more attention to break clauses and average lease lengths as a consequence, he said.

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

Good morning. Executives at Saudi Arabian Oil Co. face a challenging task as they are readying the company’s initial public offering scheduled for December: convincing international investors that the company is worth what it says it is.

For some investors, the risks with Saudi Aramco were made clear by a recently disclosed 18% decline in net profit to $68 billion for the nine months ending in September from the same period a year ago. The figures raise questions about the resilience of the world’s most profitable company, as oil price volatility remains high and in the aftermath of recent attacks that briefly slashed its output by about half.

The company’s dividend payout, set at $75 billion annually, makes it attractive to investors seeking steady cash flows akin to a bond, some of the potential investors have said. As such, Aramco’s offering is expected to be largely judged on the dividend yield it would generate for investors—the higher the yield the more appealing the investment but the lower the resulting valuation for Aramco.

Aramco is targeting a valuation of up to $2 trillion and has set a base valuation of around $1.7 trillion, The Wall Street Journal has reported. At those levels, the company would generate a dividend yield of between 3.75% and 4.4%, based on an annual payout of $75 billion.

A lower valuation of $1.5 trillion, which some investors have said is more realistic, would raise the yield to 5%. Aramco will face investor pressure to deliver the higher yield, which would bring it in line with dividend yields of already trading energy majors. Royal Dutch Shell, for example, carries a yield of more than 6%, according to FactSet.

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

Auditors Look to Modernize Rules Related to ESG and Cyber Issues

The auditing standards board of the American Institute of Certified Public Accountants is working to modernize standards governing nonfinancial information to include cybersecurity and environmental, social and corporate governance issues, CFO Journal reports. The board, which sets the standards for audits of private companies in the U.S., is tackling projects to better define the role of new technology in gathering information for auditors of private companies. One of the projects, which spans three standards proposed in 2018, represents a broader effort to revise “attestation standards,” which establish requirements for procedures related to reporting on nonfinancial subjects. Under the current rules, external auditors of private companies can only test nonfinancial information if the management of the company being audited had measured and provided it first, with the intent of providing performance indicators to interested parties such as investors, regulators and creditors. Companies have requested an auditor’s perspective on nonfinancial issues because they represent an unbiased voice, Robert Dohrer, chief auditor for the organization, said in an interview.

From the CFO Journal's Morning Ledger on November 4, 2019

Good morning. Federal law-enforcement officials are investigating Under Armour's accounting practices in a probe examining whether the sportswear maker shifted sales from quarter to quarter to appear healthier, according to people familiar with the matter.

As part of the probe, which hasn’t been made public, investigators questioned people in Baltimore, where the company is based, as recently as last week, one of the people said. U.S. Justice Department prosecutors are conducting a criminal inquiry into the matter, and coordinating with civil investigators at the Securities and Exchange Commission, another person said.

A representative for Under Armour, which reports third-quarter results Monday, had no immediate comment. Spokespeople for the Justice Department and SEC declined to comment. When examining what are known as revenue-recognition practices, authorities generally focus on whether companies record revenue before it is earned or defer the dating of expenses to make earnings appear stronger, among other possible infractions.

The company has been restructuring its operations and struggling with weak sales in the last two years. Until then, it had been among the fastest-growing apparel makers, riding 26 straight quarters of at least 20% year-over-year revenue growth. That streak ended abruptly when Under Armour missed its sales targets in the final quarter of 2016. On Jan. 31, 2017, the company’s shares plunged after it reported sales growth of only 12% in the holiday quarter and cut its growth forecasts for the next year.

 

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

Fiat Chrysler Automobiles and Peugeot maker PSA Group unveiled their $50 billion merger. Making it work in an industry littered with unsuccessful mergers will be the hard part.

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

Good morning. Stitch Fix Inc. is expanding its internal information-technology controls after identifying weaknesses in how the online personal-styling service reported financial performance, CFO Journal reports.

The issue, related to outsourced information-technology service providers, was flagged by the San Francisco company’s independent auditor in October—one of the starkest examples of how a new audit rule is training a spotlight on companies’ hairiest internal issues.

The Public Company Accounting Oversight Board, which regulates audit firms, this year began requiring independent auditors to disclose significant challenges in reviewing public companies’ financial statements. The issues—“critical audit matters,” or CAMs, in auditor parlance—are intended to give investors a better view into potential problems that may not have been previously apparent.

Stitch Fix’s expanded audit report featured two critical audit matters. One of them, according to auditor Deloitte Touche Tohmatsu, was a material weakness: Stitch Fix couldn’t adequately assess controls pertaining to outsourced IT service providers. Stitch Fix was the first to identify the problem, the report said.

Third-party IT service providers couldn't provide system and organization controls reports that aligned with the company’s fiscal year. That issue was considered material because it could affect account balances and disclosures in Stitch Fix’s financial statements, according to the auditor.