New Bookmarks
Year 2020 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

574 Shields Against Validity Challenges in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

 

 

Choose a Date Below for Additions to the Bookmarks File

2019 

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December 31, 2020

Bob Jensen's Additions to New Bookmarks

December 2020

Bob Jensen at Trinity University 

My Latest Web Document
Over 600 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

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

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

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

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

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

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

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

 

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

 

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

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

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

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

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

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

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

CPA exam will increase focus on higher-order skills
"What Higher Order Skills Will be Tested on the Next CPA Examination," by Ken Tysiac, Journal of Accountancy, April 4, 2016 ---
http://www.journalofaccountancy.com/news/2016/apr/new-cpa-exam-201614166.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=04Apr2016

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

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

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

Don was one of my best friends in life!
In Memoriam:  James Donald Edwards, Sr. (November 12, 1926 - November 21, 2020) ---
AAA > Outreach > Newsroom > In Memoriam (aaahq.org)

Useful accounting news sites, associations, and organizations in 2020 ---
https://bestaccountingsoftware.com/accounting-news-sites-organizations/

Internal investigation finds $1 million in alleged fraud by 4 employees of Chico State’s Department of Accounting ---
UPDATED FOR CLARITY: Internal investigation finds $1 million in alleged fraud by 4 employees of Chico State’s Department of Accounting – The Orion
Thank you Glen Gray for the heads up

How to Mislead With Statistics
Paradoxes of Probability & Statistical Strangeness
 https://scitechdaily.com/paradoxes-of-probability-statistical-strangeness/?fbclid=IwAR3JlsjucUeAQg8LeYTFvSoGJcFWpovSvr3gnB4CM99Ekihr-_FTuXlTQOo  
Thank you Jagdish Gangolly for the heads up

Simpson's Paradox
Base Rate Fallacy
Will Rogers Paradox
Berkson's Paradox
Multiple Comparisons Fallacy

Harvard Business Review:  U.S. Financial Reporting Is Stuck in the 20th Century ---
https://hbr.org/2020/12/u-s-financial-reporting-is-stuck-in-the-20th-century?utm_medium=email&utm_source=newsletter_monthly&utm_campaign=finance_not_activesubs&deliveryName=DM111568

. . .

Value investors rely on multiple, often complicated, methods to make trading decisions. One way relies on income statement (profits) and balance sheets (assets) to identify cheap or expensive stocks. For example, a stock with low stock prices but large assets and profits could be a good stock to buy. This has been the fundamental tenet of value investing. However, as our previous HBR article and Professor Baruch Lev’s 2016 book The End of Accounting describe, balance sheet and income statement are becoming largely useless for this kind of decision making.

Continued in article

Jensen Comment
One thing about the Harvard Business Review is that often it's prestigious name contains articles with enticing titles and little substance in the articles. The above article is a great example of having a misleading title and little substance in the article.

From the title one would think that the article is going to tell you something substantive about moving financial reporting to the 21st Century. I find nothing in the article about how we should move financial reporting to the 21st Century. For example, the article suggests creating "recreated values," but does not explain how to create these values operationally or how "recreated values" could be part of the FASB standards for auditors and their clients.

The authors state that Lev's writings describe how useless the balance sheet and the income statement are becoming. I disagree! There is empirical evidence over the past two decades that shows that this is not the case, and that traditional accounting numbers have information value for investment decisions. Furthermore, Lev's proposals for recreated values are totally useless, because they are highly subjective vaporware numbers that, to my knowledge, have never produced recreated values that decision makers found useful. If there are such illustrations of the operational value of Lev's proposals why didn't the authors of this HBR article cite them as useful illustrations.

My criticisms of Lev's The End of Accounting book are at
http://faculty.trinity.edu/rjensen/theory01.htm#LimitsOfBigData

As an illustration of the usefulness of FASB standards for financial decision making, consider the FASB requirement that hedge accounting only be allowed to the extent hedges are effective. Many similar findings for the usefulness of FASB and IFRS standards can be found in the academic literature.
Does Mandatory Retrospective Hedge Effectiveness Assessment under ASC 815 Provide Risk-Relevant Information? ---
Accounting Horizons (2020) 34 (3): 61–85
https://meridian.allenpress.com/accounting-horizons/article-abstract/34/3/61/432377/Does-Mandatory-Retrospective-Hedge-Effectiveness

Current accounting standards permit special accounting treatment of derivatives used for hedging purposes. However, the requirement to perform periodic, retrospective assessments of hedge effectiveness and to disclose a quantitative accounting measure of hedge ineffectiveness (AMHI) for such derivatives has been controversial. In response to concerns over the compliance costs of this requirement, the FASB removed this requirement in the recently effective ASU 2017-12. However, this change was made with little empirical evidence on the benefits of retrospective effectiveness assessment and quantitative disclosure of AMHI. We document one potential benefit of this requirement to investors by providing initial evidence that (1) AMHI is positively associated with an array of concurrent market- and accounting-based risk measures and (2) investors react negatively to large AMHIs and related disclosures upon 10-K filings. Our findings suggest that this requirement can provide investors with risk-relevant information and shed light on its potential usefulness.

Bob Jensen's free tutorials on accounting for derivative financial instruments and hedging activities ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

Jensen Comment
Of course there's continuing need to improve financial reporting standards for the 21st Century. Sadly, the above HBR article entitled "U.S. Financial Reporting Is Stuck in the 20th Century" does virtually nothing to improve financial reporting standards other than to promote vaporware accountancy.

Quiz: Are you prepared to audit fraud risk during a pandemic?
https://www.journalofaccountancy.com/news/2020/dec/quiz-audit-fraud-risk-during-coronavirus-pandemic.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=17Dec2020

CPA Exam gets refresh after practice analysis ---
https://www.journalofaccountancy.com/news/2020/nov/cpa-exam-refresh-after-practice-analysis.html?utm_source=mnl:extracredit&utm_medium=email&utm_campaign=08Dec2020&SubscriberID=119191126&SendID=329404  

A Century of Not-for-Profit Accounting:  An Historical Perspective ---
https://www.cpajournal.com/2020/12/09/a-century-of-not-for-profit-accounting/  

Truth in Accounting Video:  Reform GASB accounting standards ---
https://www.youtube.com/watch?v=WidbX7L8Tik&feature=youtu.be
GASB has not made a fundamental change in governmental accounting standards while states and cities roar toward bankruptcy.
The video is a very short but somewhat effective promo for change for building in more accrual accounting into GASB standards.

The Governmental Accounting Standards Board: Fraud hidden in plain sight ---
https://www.truthinaccounting.org/news/detail/the-governmental-accounting-standards-board-fraud-hidden-in-plain-sight

GASB rules do not apply to the Federal government. But the FASAB plays a role in Federal accounting standards.
FASAB reaches 30-year milestone amid pandemic ---
Q&A: FASAB reaches milestone amid pandemic - Journal of Accountancy

Auditing Fraud Risk During a Pandemic
https://www.journalofaccountancy.com/news/2020/dec/auditing-fraud-risk-during-coronavirus-pandemic.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=03Dec2020

Under the Biden-Harris plan, community college will be free — and public colleges and universities will be tuition-free for families earning less than $125,000 a year ---
https://www.foxbusiness.com/politics/biden-pledges-tuition-free-community-college-for-all-public-colleges-for-working-class

Jensen Comment
A lot of details need to be worked out such as funding of room, board, books, and transportation. Then there's the issue of capacity, especially in flagship colleges that will be the most popular for high school graduates.

But most importantly, the issue is how to fund this massive program. We should commence to grease the money printing presses since it's literally impossible to fund this free college program with government borrowing or taxation after funding other initiatives such as universal health care, bailout of states and cities, road maintenance/improvements, universal basic income, etc.

What Biden and Harris don't tell you is that new taxes on business are passed on to customers. Business firms don't pay taxes. Their customers bear increased business taxes with increased prices among the businesses that can survive the higher taxation.

In some nations (think Germany, Norway, and Denmark) college tuition is free. However, only the top third of high school graduates are allowed to go to college or trade schools funded by taxpayers. The majority of students rely on the capitalist private sector to train them on-the-job for job skills ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#Tertiary
List of countries by tertiary education attainment ---
https://en.wikipedia.org/wiki/List_of_countries_by_tertiary_education_attainment
 

I doubt that Biden and Harris are considering limiting free college and trade schools to only the top high school graduates. They envision a trillion dollar program not limited to top high school graduates.

Chronicle of Higher Education:  Free Public Higher Education is a Horrible Idea ---
https://www.chronicle.com/article/Free-Public-College-Is-a/247134?utm_source=cr&utm_medium=en&cid=cr&source=ams&sourceId=296279

Now that the race for the Democratic nomination for president is becoming more serious, it is time to take an equally serious look at the proposal for tuition-free public college that has been explicitly endorsed by candidates including Bernie Sanders, Elizabeth Warren, and Julián Castro and that is likely to feature prominently in the upcoming debates.

Let’s pretend, for the sake of argument, that the proposal is not both unaffordable and unenforceable without an unprecedented level of state cooperation and expenditure. Let’s pretend as well that it is more than bumper-sticker material and actually the product of careful thought. Let’s pretend that it actually could become the law of the land.

 

It would be a terrible law.

 

There are many problems with higher education in the United States, but the greatest and most destructive is the significant inequality of access to education on the basis of race and economic status, which are often though not always intertwined. The goal of any good public policy should be to use finite public funds to reduce this inequality.

 

While eliminating tuition at all public colleges and universities, from the smallest community college to flagships like the University of Virginia and the University of Michigan, would indeed benefit many lower-income students, it would also, and probably to a greater extent, be a boon to students from the upper-middle and upper classes.

 

Moreover, the policy would not alleviate and would probably worsen the most striking inefficiency in our system of public education: the abysmally low rates of graduation.

 

In short, tuition-free college would be a hugely inefficient use of public resources and might actually make inequality of access worse.

 

The median family income at Virginia is $155,500, and 67 percent of students come from the upper economic quintile. At Michigan the numbers are $154,000 and 66 percent, and at the University of Minnesota — economically diverse by comparison — $110,000 and 50 percent. By contrast, the median family income at Minnesota’s private colleges is $83,000, or slightly below the state median.

 

Unsurprisingly, a recent study shows that affluent students disproportionately benefit from scholarships and grants offered at these flagship public institutions. Over time these universities have become more selective, more dependent on tuition revenue as state funding has been reduced, and thus less accessible to many of the lower-income students they were ostensibly intended to serve. They behave very much like elite private colleges and universities.

 

Here is almost certainly what would happen if these public universities were to become tuition-free: The absence of tuition would sharply increase the number of applications they received and would make them even more selective than they are now. Already Virginia and Michigan accept fewer than 30 percent of their applicants.

 

Unless those elite universities completely changed their admissions practices, an increase in selectivity would benefit primarily the high-achieving students who attend private and well-funded suburban high schools. Nothing in the "free tuition" plans addresses the capacity of these universities to enroll more students, so the applicants most likely to be squeezed out would be those from precisely the economic backgrounds that the plans are intended to help.

 

Nor does anything in these plans address the quality and efficiency of education provided at public institutions, so the graduation rates at the less selective, woefully underfunded institutions would remain low or get lower. The current six-year graduation rate at four-year Minnesota state universities is 49 percent. Among students of color it is 44 percent. More than half of the students who would attend such a college free would not receive a degree from that college.

 

Absent the ability to charge tuition, and given the likelihood that federal and state subsidies would be unable to keep pace with rising costs, the most likely outcome is that these already low graduation rates would decline over time. Absent any plan to address racial inequality, the achievement gap between white students and students of color would persist. There is no simple way to deal with the problem of inequality of access to education in the United States, given the deep and complex roots of that problem in everything from racism to fiscal policies that have come increasingly to favor the wealthy. But any policy change should focus on ensuring that the greatest benefit accrues to those who are most in need, that is, those from the lower income levels.

Continued in article

Bob Jensen's threads on how free college in parts of Europe is only available to the elite Top 1/3 of Tier 2 (high school) graduates. No nation in the world offers free college to everybody ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#Tertiary

Cuthbert Tunstall, in 1522, wrote (in Latin) the first arithmetic book printed in England, which he based on Pacioli's Summa de arithmetica.

More information about:
 Cuthbert Tunstall

Luca Pacioli

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

Luca Pacioli:  Author of the First Printed Work (Summa) in Algebra That Also Featured Algebraic Applications in Accountancy

Luca Pacioli was an Italian mathematician, Franciscan friar, collaborator with Leonardo da Vinci, and an early contributor to the field now known as accounting ---
https://en.wikipedia.org/wiki/Luca_Pacioli

Pacioli published several works on mathematics, including:

·         Tractatus mathematicus ad discipulos perusinos (Ms. Vatican Library, Lat. 3129), a nearly 600-page textbook dedicated to his students at the University of Perugia where Pacioli taught from 1477 to 1480. The manuscript was written between December 1477 and 29 April 1478. It contains 16 sections on merchant arithmetic, such as barter, exchange, profit, mixing metals, and algebra, though 25 pages from the chapter on algebra are missing. A modern transcription was published by Calzoni and Cavazzoni (1996) along with a partial translation of the chapter on partitioning problems.

·         Summa de arithmetica, geometria. Proportioni et proportionalita (Venice 1494), a textbook for use in the schools of Northern Italy. It was a synthesis of the mathematical knowledge of his time and contained the first printed work on algebra written in the vernacular (i.e., the spoken language of the day). It is also notable for including one of the first published descriptions of the bookkeeping method that Venetian merchants used during the Italian Renaissance, known as the double-entry accounting system. The system he published included most of the accounting cycle as we know it today. He described the use of journals and ledgers and warned that a person should not go to sleep at night until the debits equalled the credits. His ledger had accounts for assets (including receivables and inventories), liabilities, capital, income, and expenses — the account categories that are reported on an organization's balance sheet and income statement, respectively. He demonstrated year-end closing entries and proposed that a trial balance be used to prove a balanced ledger. Additionally, his treatise touches on a wide range of related topics from accounting ethics to cost accounting. He introduced the Rule of 72, using an approximation of 100*ln 2 more than 100 years before Napier and Briggs.

·         De viribus quantitatis (Ms. Università degli Studi di Bologna, 1496–1508), a treatise on mathematics and magic. Written between 1496 and 1508, it contains the first reference to card tricks as well as guidance on how to juggle, eat fire, and make coins dance. It is the first work to note that Leonardo was left-handed. De viribus quantitatis is divided into three sections: Mathematical problems, puzzles, and tricks, along with a collection of proverbs and verses. The book has been described as the "Foundation of modern magic and numerical puzzles," but it was never published and sat in the archives of the University of Bologna, where it was seen by only a small number of scholars during the Middle Ages. The book was rediscovered after David Singmaster, a mathematician, came across a reference to it in a 19th-century manuscript. An English translation was published for the first time in 2007.

·         Geometry (1509), a Latin translation of Euclid's Elements.

·         Divina proportione (written in Milan in 1496–98, published in Venice in 1509). Two versions of the original manuscript are extant, one in the Biblioteca Ambrosiana in Milan, the other in the Bibliothèque Publique et Universitaire in Geneva. The subject was mathematical and artistic proportion, especially the mathematics of the golden ratio and its application in architecture. Leonardo da Vinci drew the illustrations of the regular solids in Divina proportione while he lived with and took mathematics lessons from Pacioli. Leonardo's drawings are probably the first illustrations of skeletal solids, which allowed an easy distinction between front and back. The work also discusses the use of perspective by painters such as Piero della Francesca, Melozzo da Forlì, and Marco Palmezzano.[

Jensen Comment
Although Pacioli printed applications of double-entry accounting the first applications of double-entry accounting arose at an unknown time (probably in ancient Rome) ---
https://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

 

Real Options Valuation --- https://en.wikipedia.org/wiki/Real_options_valuation

Earnings and Firm Value in the Presence of Real Options ---
The Accounting Review (2020) 95 (6): 263–289
Earnings and Firm Value in the Presence of Real Options | The Accounting Review | Allen Press

To explain the empirically documented nonlinear, non-monotonic relationship between earnings and firm value, it suffices to assume that firms continually take profit-maximizing decisions in response to newly arriving investment opportunities. The real options embedded in these opportunities create hysteresis effects that lead to the well-known, but so far poorly understood, negative earnings-to-value relation among loss-making firms. Optionality also predicts the future growth component of firm value to be a decreasing function of earnings among highly profitable firms. More generally, the dynamic options model implies an earnings-to-value mapping that can be non-monotonic even over narrow earnings intervals. The commonly used linear earnings-response estimation may, therefore, be a poor approximation even locally. These phenomena arise because optionality makes past and future earnings the product of an unobservable flow of opportunities and decisions whose time dynamics cannot be described by direct linear past-to-future extrapolation.

Bob Jensen's threads on real options ---
http://faculty.trinity.edu/rjensen/realopt.htm

Amtrak Managerial Accounting Challenge for Students:  How to hypothetically explain this to taxpayers?
https://danfromsquirrelhill.wordpress.com/2020/12/26/amtrack/

Amtrack, the government run passenger rail system, purchases soda for $3.40 per serving, and then resells it to customers for $2.00. Meanwhile, McDonald’s purchases soda for 9 cents per serving, and then resells it to customers for $1.29.

CPA Journal's News Briefs:  FASB, PCAOB, IASB ---
https://www.cpajournal.com/2020/12/17/cpaj-news-briefs-fasb-pcaob-5/

CPA Journal's News Briefs:  FASB, PCAOB, IASB ---
https://www.cpajournal.com/2020/11/26/cpaj-news-briefs-fasb-pcaob-iasb/

Recent New York Sales Tax Litigation Leaves Auto Dealership at Side of Road ---
https://www.cpajournal.com/2020/12/01/recent-new-york-sales-tax-litigation-leaves-auto-dealership-at-side-of-road/
Consideration in contracts need not be cash. Every accountant knows that.

Vermont gets 3rd worst financial transparency score in the country (mostly due to unaudited pension reporting) ---
https://www.ethanallen.org/vermont_gets_3rd_worst_financial_transparency_rank_in_country  

WSJ:  Stock Buybacks: What Every Investor Needs to Know ---
https://www.wsj.com/articles/stock-buybacks-what-every-investor-needs-to-know-11607185864?mod=djm_dailydiscvrtst  

Billionaire tech mogul Elon Musk intends to move to Texas after becoming exhausted of high taxes and regulations in California ---
https://www.cnbc.com/2020/12/02/tesla-ceo-elon-musk-plans-to-move-to-texas-friends-and-associates-say.html

Elon Musk Takes Tesla’s War on Labor Unions to Germany ---
https://www.bloomberg.com/news/articles/2020-12-02/elon-musk-labor-unions-prepare-to-war-as-tesla-tsla-enters-germany?cmpid=BBD120220_BIZ&utm_medium=email&utm_source=newsletter&utm_term=201202&utm_campaign=bloombergdaily  

The CEO’s charm offensive has won over much of the country—except for some of its auto workers.

As Tesla Inc. builds its first European car factory, in a patch of forest outside Berlin, Elon Musk has been on a relentless charm offensive. He’s pledged to create thousands of jobs; he tweets in surprisingly good German; and, during the site’s topping-out ceremony in September, he donned a heavy-duty cord vest and wide-brimmed black felt hat like those traditionally worn by local craftspeople.

The message has been warmly received, with politicians fast-tracking approvals for the factory and locals clamoring for jobs in a region that struggles to attract investment. On Nov. 30, the Tesla chief executive officer swooped into the German capital for the third time in as many months to accept an award for his entrepreneurial achievements from the publisher of the influential Bild tabloid.

But there’s one corner of the German economy where the lovefest feels more like a standoff: the powerful 2.3 million-member IG Metall labor union. The group is on a collision course with the billionaire that threatens to either undermine Musk’s ambitions or diminish the power of an organization that’s long had an outsize role in the country’s auto industry with its demands for better wages and shifts in strategy, backed up by the very real threat of strikes.

Continued in article

The U.S. Treasury market came close to a meltdown in March, revealing a rickety system that threatens “national economic security,” a Stanford professor says ---
Click Here

Say What? 23.6% of All US Dollars Were Created in the Last Year ---
https://www.thestreet.com/mishtalk/economics/23-6-of-all-us-dollars-were-created-in-the-last-year  
Jensen Comment
Don't believe the economists that say simply printing money for government spending above what is taxed and borrowed is not inflationary!

Illinois Is Ground Zero for the Pension Crisis (taxpayers in 49 states asked to should pension fraud and mismanagement in Illinois) ---
https://www.thestreet.com/mishtalk/economics/illinois-is-ground-zero-for-the-pension-crisis

Illinois' and Chicago's budget gimmicks ---
https://www.data-z.org/news/detail/illinois-and-chicagos-budget-gimmicks

A short history of corruption in Illinois ---
https://www.data-z.org/news/detail/a-short-history-of-corruption-in-illinois

Online MBA Rankings Scandal Costs Temple University $17 Million; After Ranking #1 In 2015-2018 With False Data, Business School Now Ranks #88 ---
https://taxprof.typepad.com/taxprof_blog/2020/12/online-mba-ranking-scandal-costs-temple-17-million-after-ranking-1-in-2015-2018-with-false-data-busi.html

OZY Examines 28 Startups to Watch ---
https://www.ozy.com/?utm_term=OZY&utm_campaign=sundaymagazine&utm_content=Sunday_12.06.20&utm_source=Sailthru&utm_medium=email

Why are investment prices rising amidst an explosion in corona virus cases in the USA?

From a Quartz newsletter on December 13, 2020

. . .

You can thank the pandemic for this year’s splashy stock debuts. Much of 2020’s IPO value comes from tech companies, which have seen their valuations shoot up as coronavirus created massive demand for video conferencing, food delivery, online shopping, and other digital tools that make hunkering down more bearable.

The pandemic also brought a wave of new investors into the stock market. Stuck at home, bored, and without live sports to bet on, millions of Americans made accounts on stock-trading app Robinhood. Investment firm Fidelity saw trading volume rise 97% in the third quarter year over year, while the Nasdaq saw equity options trades go up by half. These novice traders have eagerly piled into IPOs alongside institutional investors.

The situation is raising alarm bells, especially since the last time the US saw a dizzying, tech-led IPO spike in 2000, it was quickly followed by a massive bust. Two decades later, widespread speculation and low federal interest rates have combined to pump valuations up to new heights, despite the fact that 80% of the companies that have gone public this year don’t turn a profit. Hand-wringing analysts called this week’s IPO prices “absurd,” “ridiculous,” and “embarrassing.”

Time will tell whether they—or the millions of new investors who just bought into Airbnb, Doordash, and C3.ai at towering valuations—are right.

Jensen Comment
High-priced homes in our White Mountains of New Hampshire, like housing prices in many other rural properties in various parts of the USA, are in a hot market at the moment due to various factors such as urban flight, lower state taxation, low interest rates, lower crime in rural areas, and new remote working alternatives. 

And people are spending more on housing and other equity investments in anticipation of spiked inflation that will follow trillions of increased federal government spending.

 I'm friends with a relatively young couple from Cape Cod who are now building a new scenic home not far from our home. She is a research proposal editor for MIT who, until covid hit, had nearly a two-hour commute each way by train to and from MIT. Now she does her job remotely and can continue to do so when she and her husband move into their new home in Sugar Hill, NH. 

Five accounting considerations for divestitures and carve-out ---
5 accounting considerations for divestitures and carveouts - Journal of Accountancy

Excel:  Tax Retirement Savings Decisions Using an Excel Spreadsheet Approach ---
Issues in Accounting Education (2020) 35 (3): 39–55
https://meridian.allenpress.com/iae/article-abstract/35/3/39/436380/Tax-Retirement-Savings-Decisions-Using-an-Excel

Excel: article shows how to create a simple model that calculates changes in inventory and associated costs of goods sold so financial statements reconcile ---
Taking stock of inventory calculations in Excel - FM (fm-magazine.com)

EY:  FASB proposes guidance for revenue contracts acquired in a business combination ---
https://www.ey.com/en_us/assurance/accountinglink/to-the-point---fasb-proposes-guidance-for-revenue-contracts-acqu  

EY:  December 2020 Financial reporting briefs issued ---
https://www.ey.com/en_us/assurance/accountinglink/financial-reporting-briefs---fourth-quarter-2020

EY: Comment Letter - FASB’s proposed changes to the new leases standard ---
https://www.ey.com/en_us/assurance/accountinglink/comment-letter---fasb-s-proposed-changes-to-the-new-leases-stand  

EY:  Comment Letter - ASB’s proposal to amend AU-C 315

In our comment letter, we support the proposed Statement on Auditing Standards, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and the efforts of the AICPA Auditing Standards Board (ASB) to converge its standards with those of the IAASB. We support the proposed enhanced requirements and guidance that would clarify the auditor’s process for identifying and assessing the risks of material misstatement. We also support the introduction of guidance on the use of automated tools and techniques in the audit, including data analytics. However, we believe some proposed amendments, including the requirement on identifying controls over journal entries, need to be clarified. 

 

From the CFO Journal's Morning Ledger on December 21, 2020

Good morning. Internal auditors are testing their companies’ controls over key processes and procedures earlier than normal and reevaluating risks as they deal with a wider range of issues that could imperil the business during the coronavirus pandemic.

Since the onset of the pandemic, internal auditors have taken on additional tasks to ensure that their companies comply with health guidelines on social distancing and returning to the workplace, often while working remotely themselves. They are spending more time screening risks related to companies’ supply chains and business-continuity plans, said Richard Chambers, chief executive of the Institute of Internal Auditors, an industry organization.

To stay on top of risks, internal auditors have moved up tests and examinations. Atlas Air Worldwide Holdings Inc., an air-cargo company, started reviewing the procedures around its financial reporting process in April instead of in July, giving it even more time for review before its financial year ends on Dec. 31.

Working largely from home, Atlas Air’s internal auditors now rely more heavily on electronic documents and signatures as well as emails when they verify audit evidence, said Charles Windeknecht, vice president of the company’s internal audit unit. “This pandemic has been a significant challenge, just because of the speed with which it brought change to the risk profile,” Mr. Windeknecht said. “You have to be responsive and able to pivot to these challenges.”

From the CFO Journal's Morning Ledger on December 18, 2020

Good morning. When the economy struggles, businesses typically hunker down and preserve cash by cutting spending and dividends. During the Covid-19 slowdown, companies controlled by private-equity firms have often gone the other way, borrowing heavily to pay big dividends to their owners.

The payouts boost returns for private-equity firms but can load their companies’ balance sheets with heavy debt at a precarious moment. The maneuvers can leave companies in weaker financial shape, while helping private-equity firms lock in gains, often a few years after their initial investment.

The amount of issued debt tied to such payouts, including both loans and bonds, grew to more than $29 billion this year, up more than 25% from 2019, according to S&P Global Market Intelligence’s LCD. Of that, loan volumes have grown well over 40% while bonds have fallen.

The payouts, known as dividend recapitalizations, are striking considering the pandemic’s economic disruption. By comparison, during the last recession, in 2008-09, such activity nearly dried up, the data shows. One reason dividends fell so much in the last downturn is lenders grew cautious and wouldn’t lend to companies already considered to be risky. This time, near-zero interest rates and robust government buying of corporate bonds have pushed investors to take more risk to get a decent return.

From the CFO Journal's Morning Ledger on December 10, 2020

General Electric agreed to pay a $200 million penalty to settle federal claims that it misled investors by failing to disclose problems in its gas-turbine power and insurance businesses.

The Securities and Exchange Commission, after a multiyear probe into how GE recognized some costs and profits, said the company misrepresented how its power business was making money and didn’t inform investors of the rising risk in its legacy insurance portfolio that would eventually require more than $15 billion to boost its reserves.

From the CFO Journal's Morning Ledger on December 9, 2020

Accounting Standard-Setters to Seek Feedback on Long-Term Plans

U.S. and international accounting standard-setters are preparing to ask the public for recommendations on what their long-term priorities should be.

The Financial Accounting Standards Board, which sets U.S. accounting rules, plans to start discussing priority areas with its advisory and other stakeholder groups, FASB Chair Richard Jones said Tuesday at a conference hosted by the American Institute of Certified Public Accountants. The FASB expects to release a paper for the public to comment on next summer, Mr. Jones said.

The FASB last undertook such an agenda consultation in 2016. As a result, the standard-setter added certain issues, for example, how to distinguish liabilities from equity, to its plans. “I believe it’s time to do it again,” Mr. Jones said. Among the standard-setter’s priorities for 2021 are potential changes to certain disclosure requirements and accounting for goodwill, Mr. Jones said.

Meanwhile, the International Accounting Standards Board, which sets standards for about 120 jurisdictions outside the U.S., intends to seek public input on its proposed agenda for the 2022 to 2026 time period in the coming quarter, Sue Lloyd, the IASB’s vice chair, said at the conference. Already on the agenda for 2021 is a proposal for rules governing companies’ reporting on sustainability and climate change, she said.

The IASB has to conduct a consultation on its plans at least every five years, unlike the FASB, for which it is optional.

From the CFO Journal's Morning Ledger on December 9, 2020

Good morning. Finance executives will be watching closely as Brexit negotiations enter a last decisive phase ahead of the end of the current transition period later this month. British Prime Minister Boris Johnson is preparing to travel to Brussels Wednesday in a bid to secure a deal over the European Union’s relations with the U.K.

Failure to reach a deal would mean tariffs would be applied for the first time in almost a half-century on some trade between the U.K. and the trade bloc to which it sends 43% of its exports, likely resulting in higher costs for companies.

Negotiators are trying to close gaps on issues that have bedeviled the talks from the start—how to secure fair competition, EU access to British fishing waters and how a deal would be enforced. Corporate decision makers for years have been trying to prepare their businesses for Brexit, but continue to struggle amid the lack of clarity about the future relationship between the U.K. and the EU.

Even with a deal, obstacles to trade will increase, adding costs and delays for importers and exporters on both sides of the border. Bank of England Gov. Andrew Bailey has warned that failure to secure a deal would leave more lasting scars on the British economy than the coronavirus, though Mr. Johnson has said he is confident the British economy would flourish whether or not it secured a trade accord with the EU.

From the CFO Journal's Morning Ledger on December 8, 2020

A Dish Network Corp. subsidiary will pay $210 million in penalties related to alleged telemarketing violations, in a settlement with the Justice Department and four states.

The U.S. government, along with California, Illinois, North Carolina and Ohio, said Dish made millions of unlawful telemarketing calls to consumers and was behind millions more by retailers that marketed Dish products and services. 

From the CFO Journal's Morning Ledger on December 8, 2020

The Public Company Accounting Oversight Board is planning to change the way it picks audits for inspection and conducts its evaluation, part of an effort to assess the impact of remote-work constraints on the quality of audits

From the CFO Journal's Morning Ledger on December 8, 2020

Good morning. A Trump administration regulation that cut the tax bills of companies such as Philip Morris International and Sealed Air Corp. could be poised for reversal in 2021 as the Biden administration tries to deliver on its campaign promise to raise taxes on corporations.

The rule, which gives some corporations a path out of a U.S. minimum tax on foreign earnings, has drawn criticism from progressives, including Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee. If Democrats don’t take control of the Senate after Georgia’s runoff elections in January, regulatory changes present the clearest paths to one of President-elect Joe Biden’s campaign promises: higher taxes on U.S. companies’ foreign operations.

The Biden transition team declined to comment. It would likely take months for the new administration to hire Treasury Department officials, make a decision and follow the procedures needed to revise or repeal the regulation.

Companies and their advisers, seeing the prospects for change, are offering a counterargument to the progressive narrative. In their view, the regulation is narrow, limited in ways that make it unattractive or unavailable to many companies. “The notion that there’s some big giveaway here is not consistent with the way these regulations were drafted,” said Pat Brown, co-leader of the national tax office at accounting firm PwC LLP. “That’s just not the lived reality of companies.”

From the CFO Journal's Morning Ledger on December 7, 2020

Chick-fil-A, the leading U.S. chicken chain, sued major poultry producers, accusing them of price-fixing that the company says led to inflated prices for billions of dollars worth of its chicken purchases.

From the CFO Journal's Morning Ledger on December 3, 2020

Good morning. New leadership at the Securities and Exchange Commission is expected to spur increased oversight of public-company audits, according to former regulators and auditors.

The SEC, the U.S. securities regulator, supervises the Public Company Accounting Oversight Board, an independent watchdog that sets audit standards, inspects audits and disciplines audit firms for violations. Regulatory experts said new leadership at the SEC could influence the PCAOB’s agenda, which is expected to eventually reflect the goals of a new administration. Those could include elements such as mandatory audit-firm rotation or stricter rules for auditors.

Other initiatives dealing with the role of auditors in assessing companies’ disclosures about climate risk and other nonfinancial information could come up for discussion, former regulators say. The board also might consider tighter standards around audit miscues or a more aggressive inspection program, said Harvey Pitt, chief executive of consulting firm Kalorama Partners LLC. Mr. Pitt is a former SEC chairman who advises the agency on governance issues at the PCAOB.

Meanwhile, the PCAOB is at the center of a fight over China’s resistance to allowing overseas inspections of its companies’ audits. The House unanimously approved legislation on Wednesday that threatens a trading ban of shares of Chinese companies such as Alibaba Group Holding. over concerns that their audits aren’t sufficiently regulated.

From the CFO Journal's Morning Ledger on December 1, 2020

General Motors will no longer take an equity stake in electric-truck maker Nikola under a stripped-down agreement revealed Monday, a significant retrenchment from an earlier pact that fueled investor enthusiasm for both companies.

Teaching Case:  Channel-Stuffing Reinvented: Earnings Management in Toshiba's Personal Computers Division ---
Issues in Accounting Education (2020) 35 (3): 25–38
Channel-Stuffing Reinvented: Earnings Management in Toshiba's Personal Computers Division | Issues in Accounting Education | Allen Press

This case describes how Toshiba, a well-known Japanese conglomerate, creatively used the technique of channel-stuffing to inflate its earnings by $478 million during 2008–2014. Students evaluate the uniqueness of Toshiba's practice of channel-stuffing, determine whether Toshiba's financial statements faithfully depicted the economic reality of underlying transactions, and understand the spiraling effects of channel-stuffing on reported profits. Students also learn that the responsibility for integrity in financial reporting lies not just with the top management, but also with the junior employees. The case requires an understanding of only basic accounting concepts and can be used in a variety of courses, especially in the M.B.A. introductory accounting course, and in the intermediate accounting courses at the undergraduate or graduate level.

Teaching Case on Channel Stuffing
From The Wall Street Journal Accounting Weekly Review on July 31, 2015

SEC Investigating Smirnoff Maker Diageo
 by: Tripp Mickle and Saabira Chaudhuri
Jul 24, 2015
Click here to view the full article on WSJ.com
 

TOPICS: Revenue Recognition

SUMMARY: The Securities and Exchange Commission is investigating whether Diageo PLC has been shipping excess inventory to distributors in an effort to boost the liquor company's results. By sending more cases to distributors than wanted, the British-based owner of Smirnoff and Johnnie Walker would be able to report increased sales and shipments. That allows Diageo to report shipments as sales, leaving distributors with a bitter taste as sales of the company's brands have waned. The company has already changed the way it accounts for those shipments, and that will almost certainly lead to lower inventory levels even as Diageo responds to securities investigators. In the U.S., liquor producers follow a three-tier system to market. Producers like Diageo ship to wholesalers, who then ship to retailers. Liquor companies can record shipments as sales when they ship them to the wholesaler.

CLASSROOM APPLICATION: This is a great article for a discussion regarding when to recognize sales. The Securities and Exchange Commission probe raises important questions over not only who owns inventory as it moves through distribution channels but who makes decisions about supply.

QUESTIONS: 
1. (Introductory) What is the SEC? What is its area of authority?

2. (Advanced) Why is the SEC investigating Diageo PLC? How does this investigation relate to the SEC's responsibilities?

3. (Advanced) What are the accounting rules regarding revenue recognition? What are possible times sales can be recognized in the business transaction described in the article? When should the sales be recognized?

4. (Advanced) What is cash basis accounting? What is accrual basis accounting? How does revenue recognition differ when a company is cash basis vs. accrual basis?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"SEC Investigating Smirnoff Maker Diageo." by Tripp Mickle and Saabira Chaudhuri, The Wall Street Journal, July 24, 2015 ---
http://www.wsj.com/articles/sec-investigating-smirnoff-maker-diageo-1437678975?mod=djem_jiewr_AC_domainid

Agency probing whether Diageo has shipped excess inventories to distributors.

The Securities and Exchange Commission is investigating whether Diageo PLC has been shipping excess inventory to distributors in an effort to boost the liquor company’s results, according to people familiar with the inquiry.

By sending more cases to distributors than wanted, the British-based owner of Smirnoff and Johnnie Walker would be able to report increased sales and shipments, according to these people.

Diageo confirmed Thursday to The Wall Street Journal that it received an inquiry from the SEC regarding its distribution in the U.S.

“Diageo is working to respond fully to the SEC’s requests for information in this matter,” a company spokeswoman said.

Diageo’s American depositary receipts fell 5% Thursday afternoon, following the Journal’s report on the inquiry, and ended the day down $4.99, or 4.2%, to $114.67.

The inquiry coincides with a period of tumult in Diageo’s executive ranks. The company announced in June that North American President Larry Schwartz would be retiring by the end of the year. Since then, the company has also announced the departures of its chief marketing officer for North America and a president of national accounts in the U.S.

Continued in article

Bob Jensen's threads on channel stuffing scandals ---
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm#ChannelStuffing

 

Teaching Case (Potentially a CPV case)
Here's how many millions of users of settElon Musk's Starlink may need to break even if it loses $2000 for every satellite dish it sells, according to experts ---
https://www.businessinsider.com/spacex-starlink-terminal-cost-subscriber-numbers-years-return-investment-profit-2020-11?nr_email_referer=1&utm_source=Sailthru&utm_medium=email&utm_content=Business_Insider_select&pt=385758&ct=Sailthru_BI_Newsletters&mt=8&utm_campaign=Insider%20Select%202020-12-09&utm_term=INSIDER%20SELECT%20-%20ENGAGED%2C%20ACTIVE%2C%20PASSIVE%2C%20DISENGAGED%2C%20NEW  

Every few weeks, SpaceX deploys dozens of Starlink satellites into orbit, moving ever closer to realizing its planned fleet of thousands, and perhaps tens of thousands, of the spacecraft.

SpaceX's goal isn't simply to add another arm to its sprawling business. The company wants to build a service that rakes in tens of billions of dollars per year — creating an economic flywheel to power founder Elon Musk's interplanetary ambitions.

"We think this is a key stepping stone on the way towards establishing a self-sustaining city on Mars and a base on the moon," Musk told reporters during a May 2019 telephone call. "Launch revenue probably taps out around $3 billion a year," he added, referring to SpaceX's rocket business, "but the internet service revenue is probably more like $30 billion a year."

SpaceX has launched nearly 900 spacecraft into low-Earth orbit over the past 12 months, a trajectory that has skyrocketed Morgan Stanley Research's approximate "base" valuation of the aerospace company to $101 billion from $52 billion last year, and up to $200 billion in a best-case scenario.

Success, however, is far from guaranteed. 

"This is probably one of the most challenging, if not the most challenging project, we've undertaken. No one has been successful deploying a huge constellation for ... satellite internet," Gwynne Shotwell, president and COO of SpaceX, told TED in May 2018. She estimated it'd require "$10 billion or more" to deploy the network's first phase of roughly 4,400 satellites. Musk said in March of this year that a key focus of Starlink is "making it not go bankrupt."

Even as public beta test users report Starlink can offer broadband-like performance in rural America, telecommunications industry analysts tell Business Insider it may take the audacious project several years to break even, let alone profit.

As part of that uphill battle, they say, SpaceX needs to simultaneously reduce costs, pull subscribers from the small US satellite-internet market, dramatically expand that market, and convince investors to continue pouring billions into the company's coffers.

SpaceX, like most private companies, is tight-lipped about its cash flow. But as Starlink testing expands stateside and the project makes licensing progress in Canada and other countries, industry experts are gaining a better sense of what it may take SpaceX to see a return on its investment.

A recent clue is how much SpaceX charges test subscribers: $99 per month for broadband-like service, plus a one-time fee of $499 for a starter kit. The kit includes a Wi-Fi router, a user terminal (a kind of high-tech satellite dish), and a tripod mount.

Roger Rusch, an engineer and satellite communications industry consultant at TelAstra, and others have said that's nowhere close to covering a Starlink terminal's likely cost. Instead, as previously reported by Business Insider, SpaceX set its prices to reflect what people might pay.

SpaceX's average cost per terminal is likely $2,400, according to details shared with Business Insider about the company's agreement with STMicroelectronics to purchase 1 million of the devices. This translates to a subsidy of about $1,900 per subscriber.

Subsidies aren't new in telecoms: Mobile providers frequently used to recoup the cost of "free" smartphones through long-term contracts with bigger monthly service charges, and steep fees to exit such deals. Dave Stehlin, the CEO of the Telecommunications Industry Association, told Business Insider it's typical for satellite companies to claw back equipment subsidies over a few years, and that SpaceX may be trying something similar.

"They're not going to make a ton of money in that first three-year period. But they'll pay back their cost for these terminals," he said.

However, Starlink's beta users have neither long-term contracts nor mandates to return their expensive equipment. That may change when Starlink formally opens for business in 2021, but if not, it could take SpaceX longer to recover each terminal's subsidy.

Continued in article

Jensen Comment
The above article is not written up as a cost-profit-volume case, but it could easily be written up as a case using facts available to the public and "assumed" inputs that are not available. Student teams could be assigned to write cases on this.

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 4, 2020

Student Loan Losses Seen Exceeding $400 Billion
By Josh Mitchell | November 21, 2020

Topics: Bad Debts

Summary: Under Secretary Betsy DeVos, the Education Department hired two private consultants to evaluate collectability of “$1.37 trillion in student loans held by the government at the start of the year.” They estimated that collections will total $935 billion in principal and interest, leaving $435 billion in estimated bad debts. In contrast, the Congressional Budget Office (CBO) “typically measure[s] how much the portfolio will cost the government in the next decade.” The expected economic burden from these bad debts is compared to the economic impact of the 2008 financial crisis. Finally, the details of the analysis procedures by FI Consulting and Deloitte are discussed.

Classroom Application: The article may be used in a governmental accounting class or when covering receivables and bad debts in a financial reporting class. Questions also include a request for students to consider the application of typical business evaluation methods to creditworthiness of student borrowers.

Questions:

  • Summarize how businesses typically estimate uncollectible accounts receivable.
  • When these procedures were applied to the student loans receivable held by the U.S. government, what were the findings?
  • How do these findings contrast with the estimated costs of the student loan program under typical procedures applied by the U.S. government?
  • As a student, how do you react to the discussion in the article of market factors such as creditworthiness that could be considered in deciding whether to grant loans to students?

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Student Loan Losses Seen Exceeding $400 Billion," by Josh Mitchell |, The Wall Street Journal, November 21, 2020 ---
https://www.wsj.com/articles/student-loan-losses-seen-costing-u-s-more-than-400-billion-11605963600

Projected toxic debt approaches subprime-mortgage losses incurred by lenders during financial crisis

The U.S. government stands to lose more than $400 billion from the federal student loan program, an internal analysis shows, approaching the size of losses incurred by banks during the subprime-mortgage crisis.

The Education Department, with the help of two private consultants, looked at $1.37 trillion in student loans held by the government at the start of the year. Their conclusion: Borrowers will pay back $935 billion in principal and interest. That would leave taxpayers on the hook for $435 billion, according to documents reviewed by The Wall Street Journal.

The analysis was based on government accounting standards and didn’t include roughly $150 billion in loans originated by private lenders and backed by the government.

The losses are far steeper than prior government projections, which typically measure how much the portfolio will cost the government in the next decade, not the entire life of the loans. Last year the Congressional Budget Office estimated that the student-loan program would cost taxpayers $31.5 billion, including administrative costs.

 

After decades of no-questions-asked lending, the government is realizing that it has a pile of toxic debt on its books. By comparison, private lenders lost $535 billion on subprime-mortgages during the 2008 financial crisis, according to Mark Zandi, chief economist at Moody’s Analytics.

The effect this time is different. The government, unlike private lenders, can borrow trillions of dollars at low rates to absorb the losses, without causing a panic. But taxpayers will end up paying a price because Congress will have to raise taxes, cut services or increase the deficit to cover the losses.

The absence of a cataclysmic event like the financial crisis is removing the impetus for the federal government to change its lending practices, which analysts said have enabled colleges to raise tuition far above the rate of inflation.

“There’s no market discipline here,” said Constantine Yannelis, a former Treasury Department official in the Obama administration who now teaches at the University of Chicago. “In 2007-2008, we saw a lot of lenders who were making risky bets going under. There’s no force like that in the student-loan market.”

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 4, 2020

Companies Restart Dividends, Shedding Covid Cash Concerns

 

By Thomas Gryta | November 22, 2020

Topics: Dividends

Summary: Despite the recent surge in Covid-19 cases in the U.S., some companies that halted their dividend payments to conserve cash due to uncertainty at the start of the pandemic are now reinstating them or committing to plans to do so. Factors influencing companies’ decisions to declare dividends are discussed.

Classroom Application: The article may be used when discussing dividends in a financial reporting course.

Questions:

  • What factors to companies consider in deciding whether to pay a dividend or to stop doing so?
  • Refer to the graphic associated with the article entitled “Number of S&P 500 firms to decrease or suspend their dividend. How do the dividend changes in 2020 compare to the 2008 and 2009 dividend changes during the financial crisis?
  • Define the terms dividend declaration date, payment date, and date of record.
  • Oil producer Marathon Oil Corp.’s dividend reinstatement is discussed in the article. In what month was the date of declaration? In what month is the payment date? Approximately when do you think the date of record occurs?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Companies Restart Dividends, Shedding Covid Cash Concerns," by Thomas Gryta, The Wall Street Journal, November 22, 2020 ---
https://www.wsj.com/articles/coronavirus-spurred-companies-to-hoard-cash-now-they-are-starting-to-dole-it-out-11606041000

Covid-19 cases are surging but Kohl’s, Marathon Oil and Darden are resuming dividend payments, a sign they believe the pandemic’s worst is behind them

After scrambling to hoard cash in the spring, some large U.S. companies that halted their dividend payments are reversing their decision, a sign that their leaders believe the worst of the crisis is behind them.

Earlier this year, when much of the country’s economy shut down in the first waves of the coronavirus pandemic, companies withdrew cash from credit lines, stopped repurchasing stock and halted dividend payments amid the uncertainty. The public health plight continues, but many businesses—from factories to law firms—have learned how to operate during the pandemic. Retailers, fast-food restaurants and car makers are doing better, and there is hope among executives that any new restrictions to battle the latest U.S. surge in cases won’t be as severe.

“Multinationals are beginning to exhale,” said Mark Zandi, chief economist at Moody’s Analytics. “The resumption of corporate dividend payments is an encouraging sign that executives believe that the pandemic will soon be behind us.”

Kohl’s Corp. KSS 5.88% was one of the 42 companies in the S&P 500 index that suspended its dividend to preserve cash after the Covid-19 virus arrived. In September, finance chief Jill Timm said the retailer would protect its cash reserves because of continued uncertainty. “As we see stabilization, we’ll move back into paying a dividend,” she said at an investor conference.

Her tone changed last week when the department store chain reported third-quarter results that showed its business recovering after reopening locations. Revenue fell 14%, compared with a 23% drop in the previous quarter. Kohl’s said it would resume its dividend in the first half of 2021.

“We have shown progressive improvement and stability in the business,” Ms. Timm said on a conference call.

A company’s decision to pay a dividend typically depends on management’s comfort with having enough cash flow for other uses—post-payment—along with its ability to access other cash. It is a commitment to make regular payouts to shareholders and suspending it is frequently a last resort in a crisis.

Of the 42 companies in the S&P 500 index that suspended their dividend earlier this year, six have resumed paying their dividend and several more have given a timeline to do the same, according to S&P Dow Jones Indices.

Despite the economic shocks this year, many large companies have successfully navigated the pandemic, and some are benefiting by taking market share from smaller competition. “It may not be a barometer of the strength of the broader economy,” Mr. Zandi said, referring to renewed dividend payments.

Oil producer Marathon Oil Corp. halted its dividend payments in May after oil prices dropped because of a decline in consumption of gasoline and jet fuel as millions of people worked from home and avoided driving and flying. Last month, the company declared a dividend for payment in December.

“We believe we have successfully repositioned our company for success in a lower, more volatile commodity price environment,” Chief Executive Officer Lee Tillman said at the time.

Other companies resuming their dividends include Darden Restaurants Inc., DRI 1.80% operator of Olive Garden, LongHorn Steakhouse and other chains; cosmetics company Estée Lauder EL -0.55% Cos.; and timber giant Weyerhaeuser Co. WY 4.17%

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 4, 2020

Salesforce Confirms Deal to Buy Slack

By Aaron Tilley | December 1, 2020

Topics: Business combinations

Summary: Salesforce.com, Inc. agreed to buy messaging company Slack Technologies Inc. for a total valuation of $27.7 billion for consideration of both cash and stock. “Slack shareholders will receive $26.79 in cash and .0776 Salesforce share for each share of Slack stock. That equates to $45.52 based on Salesforce’s closing share price on Tuesday…” December 1, 2020.

Classroom Application: The article may be used when discussing valuation of business combinations in a financial accounting course or any course addressing valuation.

Questions:

  • Access the stock prices of Slack Technologies,Inc. and Salesforce.com, Inc. in the Wall Street Journal by clicking on Markets, then Market Data Home or going directly to https://www.wsj.com/market-data?mod=nav_top_subsection In the Quotes& Companies box, type in each company name. Select ticker CRM for Salesforce and WORK for Slack technologies. Describe what happened to the stock price of each company between November 30 and December 1.
  • What was the closing price for Saleforce.com Inc. stock on Tuesday, December 1, 2020 in trading on the New York Stock Exchange?
  • Show how that closing price results in a value of $45.52 per share of Slack Technologies Inc. stock.
  • The article states that “the $27.7 billion price tag is so-called enterprise value, which typically includes net debt, and is based on Salesforce’s closing price Monday [November 30, 2020]. What is the accounting use of the $27.7bn total value of this acquisition?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Salesforce Confirms Deal to Buy Slack," by Aaron Tilley, The Wall Street Journal, December 1, 2020 ---
https://www.wsj.com/articles/salesforce-confirms-deal-to-buy-slack-for-27-7-billion-11606857925

Transaction is Salesforce’s largest ever acquisition and forms one of the biggest players in the business-software market

Salesforce.com Inc. CRM 2.21% agreed to buy messaging company Slack Technologies Inc. WORK 0.68% in a $27.7 billion deal that shows how the biggest players in cloud computing are racing to add muscle amid the pandemic’s remote-work boom.

The cash-and-stock deal, announced Tuesday, is the biggest move yet by Salesforce Chief Executive Marc Benioff, a pioneer in selling subscriptions for software run on remote servers, to turn the company he co-founded 21 years ago into a broad-reaching powerhouse in tech tools for businesses. The deal is almost twice as large as Salesforce’s largest acquisition so far and would turn the combined company into a more formidable competitor to Microsoft Corp. MSFT 0.06% and Google parent Alphabet Inc. GOOG 0.07% The Wall Street Journal previously reported Salesforce and Slack were in advanced deal talks.

 

The combination also brings together two of the tech industry’s highest profile CEOs—people who have made a career of taking on Silicon Valley icons. Mr. Benioff has positioned himself as a prominent voice in U.S. business, using venues such as the World Economic Forum in Davos, Switzerland, to champion causes and burnish his profile. He set up Salesforce with a pledge of corporate giving and bought himself an even larger platform with his acquisition of Time Magazine two years ago.

Slack CEO Stewart Butterfield has been one of the loudest voices arguing that companies need to revamp how they use technology. He co-founded Slack, which grew out of a gaming company called Tiny Speck, and pitched its product as an alternative to office email. It quickly took off among developers in technology companies when it became publicly available in 2014. He is expected to join Salesforce and continue to run Slack as a unit of Salesforce after the deal’s close, the companies said.

Salesforce’s planned Slack acquisition is another sign that companies are betting some of the changes in the workplace in recent months will outlast the pandemic. “We really see the world as fundamentally having shifted,” Salesforce operating chief Bret Taylor told analysts. “Slack is really the system of engagement for every employee, every partner and for every customer interaction.”

The purchase, which still has to clear Slack shareholder and regulatory approval, would underpin Mr. Benioff’s effort to move Salesforce beyond its core product, which helps companies manage their customer relationships, to providing the software tools that businesses need for a swath of their day-to-day operations.

The deal also opens a new front in Salesforce’s battle with much larger rival Microsoft, which has been pushing to be the go-to software vendor for businesses, offering a range of applications from data storage to video communications. The Redmond, Wash., company introduced its Teams software suite in 2016 with Slack-like chat collaboration features.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 11, 2020

U.S. Watchdog Will Be Selecting Audits for Inspection More Randomly

By Mark Maurer | December 7, 2020

Topics: PCAOB , Audit Inspections

Summary: The article discusses planned changes in the inspection process conducted by the Public Company Accounting Oversight Board (PCAOB). The PCAOB is “increasing ‘significantly’ the percentage of public-company audits it selects randomly for inspection in 2021” and will increase focus on areas of audits that don’t necessarily tend to pose significant challenges for auditors. Changes are designed to reduce the predictability of the audits that are selected and to “assess the impact of remote-work constraints on the quality of audits.”

Classroom Application: The article may be used in an auditing class.

Questions:

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"U.S. Watchdog Will Be Selecting Audits for Inspection More Randomly," by Mark Maurer, The Wall Street Journal,  December 7, 2020 ---
https://www.wsj.com/articles/u-s-watchdog-will-be-selecting-audits-for-inspection-more-randomly-11607387903  

Next year, the Public Company Accounting Oversight Board wants to make its target areas in audit inspections less predictable, in part to continue examining the impact of remote work on audits

The Public Company Accounting Oversight Board is planning to change the way it picks audits for inspection and conducts its evaluation, part of an effort to assess the impact of remote-work constraints on the quality of audits.

The U.S. audit watchdog is increasing “significantly” the percentage of public-company audits it selects randomly for inspection in 2021, PCAOB board member Megan Zietsman said Monday at a virtual conference hosted by the American Institute of Certified Public Accountants.

In selecting audits for inspections, the PCAOB usually seeks out those that may pose a difficult or complex issue. Despite the higher proportion of random audits next year, the total number of audit inspections conducted will remain about the same, she said.

Last year, the PCAOB inspected portions of about 710 public-company audits, most with fiscal years ending in 2018, up 1.4% from the previous year, according to annual reports. The percentage of randomly-selected audits wasn’t immediately available.

The PCAOB expects the increased element of surprise to help raise audit quality.

“We think that will cause audit firms to focus consistently on performing quality audits across the practice, rather than on those perceived to have a greater chance of being selected for PCAOB inspection,” said Ms. Zietsman, who was sworn in as the group’s newest board member Nov. 20.

Inspectors also intend to focus more on nontraditional areas of audits, such as those that don’t necessarily appear to present significant challenges to the auditor. For some audit firms, the PCAOB’s areas of focus have become predictable, allowing them to tailor their audit efforts accordingly, Ms. Zietsman said. The PCAOB also will continue to target areas that could pose a higher risk of a misstatement or are the subject of recurring audit deficiencies.

The 2021 inspections, like the evaluations under way this year, will focus heavily on how auditors are completing procedures despite remote-work constraints such as availability of information and access to the client’s managers.

This summer, the PCAOB extended its window for 2020 inspections to better assess the pandemic’s impact. For the first time, the watchdog reviewed some audits of quarterly financial statements, to release findings earlier in the process. External auditors increased their communication with their clients’ audit committees as they assessed financial performance, the PCAOB said in a Dec. 2 report.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 11, 2020

Trump-Era Tax Rule Benefiting Some Multinationals May Get Revised

By Richard Rubin | December 7, 2020

Topics: Tax Regulations

Summary: The article discusses potential change to a Trump Administration regulation related to the global intangible low-taxed income (GILTI) tax. “Many companies and lawmakers had thought GILTI wouldn’t apply if they paid foreign tax rates above 13.125%, but that isn’t actually how the law works in practice as it interacts with pre-existing tax rules. What happened instead is that some companies facing relatively high foreign taxes owe GILTI.” The regulation implemented by the Trump Administration now generally allows “companies with foreign taxes exceeding 18.9% [to] now choose to stay out of the GILTI tax regime.” President-elect Joe Biden may view the GILTI regulation “as a prime target” to implement campaign promises.

Classroom Application: The article may be used in an entity tax course or an international tax course. The related video linked in the article, “Joe Biden Had Big Ambitions for Taxes; Now Reality Sets In,” is an excellent summary of President-elect Biden’s proposals and the political reality necessary to achieve them. The article also references specific companies whose SEC filings disclose significant benefits from this regulation, so may be used in a financial reporting course covering income tax accounting and disclosures.

Questions:

  • What is the global intangible low-taxed income (GILTI) tax?
  • Why did the Trump administration implement regulations related to the GILTI tax?
  • What may now happen to these regulations under President-elect Joe Biden?
  • Mr. Douglas Poms “help write the regulations [implemented by the Trump administration] and has since rejoined accounting firm KPMG LLP.” What is his characterization of these regulations?
  • Why is this regulation change a likely path for President-elect Joe Biden and his incoming administration? Include in your answer the impact of the political process on this corporate taxation decision making.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Trump-Era Tax Rule Benefiting Some Multinationals May Get Revised," by Richard Rubin, The Wall Street Journal, December 7, 2020 ---
https://www.wsj.com/articles/trump-era-tax-rule-benefiting-some-multinationals-may-get-revised-under-biden-11607337001

New administration may seek to revise or repeal rule that limits reach of the U.S. minimum tax on foreign profits.

WASHINGTON—A Trump administration regulation that cut the tax bills of companies such as Philip Morris International Inc. and Sealed Air Corp. could be poised for reversal in 2021 as the Biden administration tries to deliver on its campaign promise to raise taxes on corporations.

The rule, which gives some corporations a path out of a U.S. minimum tax on foreign earnings, has drawn criticism from progressives, including Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee.

“These regulations let megacorporations choose how they want to be taxed,” he said. “They could take the massive tax cut Republicans gave them, or they could take an even bigger tax cut the Treasury Department pulled out of thin air.”

If Democrats don’t take control of the Senate after Georgia’s runoff elections in January, regulatory changes present the clearest paths to one of President-elect Joe Biden’s campaign promises: higher taxes on U.S. companies’ foreign operations.

The Biden transition team declined to comment. It would likely take months for the new administration to hire Treasury Department officials, make a decision and follow the procedures needed to revise or repeal the regulation.

Companies and their advisers, seeing the prospects for change, are offering a counterargument to the progressive narrative. In their view, the regulation is narrow, limited in ways that make it unattractive or unavailable to many companies.

“The notion that there’s some big giveaway here is not consistent with the way these regulations were drafted,” said Pat Brown, co-leader of the national tax office at accounting firm PwC LLP. “That’s just not the lived reality of companies.”

The regulation implements the 2017 tax law, which passed Congress without a single Democratic vote. The law lowered the corporate tax rate to 21% from 35% and changed taxes on U.S. companies’ foreign income. Corporations now owe the U.S. a special minimum tax called GILTI, for global intangible low-taxed income, if they don’t pay enough in foreign taxes.

Many companies and lawmakers had thought GILTI wouldn’t apply if they paid foreign tax rates above 13.125%, but that isn’t actually how the law works in practice as it interacts with pre-existing tax rules.

What happened instead is that some companies facing relatively high foreign taxes owe GILTI. The classic case is Kansas City Southern, the railroad that operates only in the U.S. and high-tax Mexico.

To soften the blow and prevent companies from engaging in other tax-planning strategies, the Treasury Department has offered several regulations since 2017. These include the one Mr. Wyden criticized that creates what’s known as a “high-tax exception” to the GILTI rules.

Continued in article

Environmental Social  Governmental --- three key factors when measuring the sustainability and ethical impact of an investment in a business or company

Teaching Case From The Wall Street Journal Weekly Accounting Review on December 11, 2020

Companies Could Face Pressure to Disclose More ESG Data

By Kristin Broughton Mark Maurer | December 6, 2020

Topics: Disclosure Requirements , ESG

Summary: “President-elect Joseph Biden campaigned on requiring companies to provide more detail on environmental risks and greenhouse-gas emissions within their operations and supply chains, as part of a broader agenda to combat climate change… Under [current] Securities and Exchange Commission regulations, public companies must only disclose ESG information if they deem it material to investors’ perception of the business.” The article also discusses investors' demand for changing this disclosure status.

Classroom Application: The article may be used in a financial reporting class when covering ESG reporting and disclosure requirements overall.

Questions:

  • What is ESG reporting? Cite your source for this information.
  • Are companies that are publicly traded in the U.S. required to provide ESG reporting? Explain your answer.
  • Earlier in 2020, Jay Clayton, current chair of the Securities and Exchange Commission, expressed his view on ESG reporting in one combined form. What is his view?
  • Some argue that moving towards required ESG reporting will reduced costs for publicly-traded companies. What is this argument?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Companies Could Face Pressure to Disclose More ESG Data," by Kristin Broughton Mark Maurer, The Wall Street Journal, December 6, 2020 ---
https://www.wsj.com/articles/companies-could-face-pressure-to-disclose-more-esg-data-11607263201

The Biden administration may push for rules that require companies to clearly spell out climate-change related risks, as well as other sustainability metric

Companies may be required to disclose more information on carbon emissions, diversity and other types of sustainability metrics in the coming years if the incoming Biden administration carries through on its election promise.

President-elect Joseph Biden campaigned on requiring companies to provide more detail on environmental risks and greenhouse-gas emissions within their operations and supply chains, as part of a broader agenda to combat climate change.

American corporations for years have been able to choose what they want to disclose in their annual sustainability reports, which are often glossy summaries of a company’s socially conscious actions. Under Securities and Exchange Commission regulations, public companies must only disclose ESG information if they deem it material to investors’ perception of the business.

Investors for years have pushed companies for more nonfinancial data, but some businesses haven’t been forthcoming.

“There’s a growing pressure for mandatory disclosures of public companies about climate change risk,” said Amy Borrus, executive director of the Council of Institutional Investors.

Mr. Biden’s transition team didn’t immediately respond to requests for comment.

The number of companies that report on their sustainability efforts has increased over the past decade amid the rise of socially conscious investing. Last year, 90% of companies in the S&P 500 index issued sustainability reports, up from about 20% in 2011, according to the Governance & Accountability Institute Inc., an ESG consulting firm.

At issue, however, is what these companies disclose. In the absence of enforceable standards or regulation, companies can cherry pick what metrics to make public and which to keep confidential. That puts them at odds with some investors who want a clear summary of the nonfinancial risks a company faces and the ability to benchmark a company’s ESG performance across an entire sector.

“Until we have some authoritative body, and maybe regulation mandating what to do, it’s just going to be the Wild, Wild West when it comes to standards and reporting for the time being,” said Louis Coppola, executive vice president at the Governance & Accountability Institute.

The SEC under Chairman Jay Clayton didn’t draft new rules on ESG disclosures, despite pressure from some of the commissioners to have companies do so. Mr. Clayton, who plans to step down this month, said earlier this year that combining analyses of environmental, social and governance in disclosures won’t be useful to investors. The regulator in September raised the bar for investors to submit proposals—most of which pertain to ESG issues—for a vote at companies’ annual meetings.

Exactly how the SEC could address the issue is unclear. Securities regulators could require companies to adopt an existing reporting framework, such as those from the nonprofit Sustainability Accounting Standards Board, investors and advisers said. Investors say they prefer the SASB benchmark because it is straightforward, and the board actively consulted investor groups in the development of the rules.

It took a long, long time for financial accounting standards to reach their current level of maturity,” said Marshall Chase, director of sustainability at Micron Technology Inc., a Boise, Idaho-based memory-chip maker. “Sustainability standards aren’t there yet, and it would be great if they could get there over time, hopefully sooner rather than later.”

Drafting a proposal and soliciting industry feedback would take time, meaning that a rule is unlikely to be completed until at least 2022, according to Amy Lynch, a former SEC accountant who is now president at consulting firm FrontLine Compliance LLC.

“It will be an additional burden [on companies] and they will not go forth willingly, most likely, but it will happen,” Ms. Lynch said.

Expectations for an SEC rule making come amid a push for global reporting standards.

The foundation that oversees international accounting rule makers this fall proposed creating a new board to oversee sustainability reporting. That effort, led by the International Financial Reporting Standards Foundation, has received support from BlackRock Inc., the world’s largest asset manager.

Continued in article

 

Harvard:  The Future of ESG Is … Accounting?
https://hbr.org/2020/12/the-future-of-esg-is-accounting?utm_medium=email&utm_source=newsletter_daily&utm_campaign=dailyalert_notactsubs&deliveryName=DM108266   

While sustainability has become a central concern of many managers, investors, and consumers, a major sticking point remains for the ESG movement: There are still no universally adopted standards for how companies can measure and report on their sustainability performance. Instead, we have a large number of NGOs working independently to develop standards for sustainability reporting, which is creating complexity and confusion for companies and investors. But this might be about to change, thanks to a quiet revolution in the accounting community.

That revolution is being led by the IFRS Foundation, the body that oversees the work of the International Accounting Standards Board (IASB) in setting financial reporting requirements for most companies in the world, across more than 140 jurisdictions. (In the U.S., these requirements are set by the Financial Accounting Standards Board, or FASB). This past September, the IFRS Foundation proposed the creation of a parallel Sustainability Standards Board (SSB).

The IFRs Foundation is well-placed to make this proposal. That’s because of its expertise in the standard-setting process, its legitimacy in the corporate and investor community, and its support from regulators all over the world. If its proposal is adopted, investors and other stakeholders will suddenly have a much clearer view of any company’s sustainability performance—just as they do its financial performance. Most companies already issue sustainability reports, of course, but these are divorced from their financial reports, making it difficult to see the relationship between financial performance and sustainability performance. The SSB would make it possible for the ideal of integrated reporting to be realized. And the FASB would be able to build on this work in the United States.

The proposal has the support of some major heavyweights in the investment and corporate communities, among them Anne Simpson, who currently serves as Investment Director for Board Governance & Sustainability at CalPERS, and who is a former member of the IFRS Advisory Council and the SEC’s Investor Advisory Group. “At CalPERS,” Simpson told us, explaining how the SSB would enable better investment decisions, “we know as a long-term investor that sustainable value creation relies upon the effective management of three forms of capital: financial, physical and human.  Investors are making the case for sustainability reporting for IFRS and also at the SEC. In global capital markets, both are needed.” Another prominent proponent is Paul Polman, the former CEO of Unilever, who believes that the SSB will change the dialogue between companies and their investors. “Investors are increasingly asking companies to report on their sustainability performance,” Polman told us. “Having a set of standards will greatly improve this dialogue and enable both to better understand the relationship between sustainability and financial performance.” Additionally, Oxford University’s Saïd Business School has submitted a letter to the IFRS Foundation in support of creating the SSB.

As in any effort to promote a new idea, this one presents challenges for the IFRS Foundation. An important issue of scope requires recognizing that not all sustainability issues would fall into the remit of the SSB. FASB and IASB exist to serve the information needs of investors. SSB would do the same. But not all sustainability issues are relevant to investors. The Sustainability Accounting Standards Board (SASB) has identified which ones they are, and they vary by industry. In contrast, the Global Reporting Initiative (GRI) is focused on the entire range of sustainability issues that matter to society as a whole.

That said, an issue that is not currently relevant to investors can become so for many reasons, including system-level effects on all companies regardless of industry (e.g., climate change and inequality), changing social expectations of customers and employees (particularly the Millennials), and laws and regulations (e.g., carbon taxes and minimum wage rates).

The solution to this is for the SSB to work within its remit of providing information to capital markets while coordinating with groups like GRI, which have a concern for sustainable development that extends beyond investors’ focus on enterprise value creation over the short-, medium-, or long-term. Creating visibility for these issues can enable civil society to spur regulations and laws that may make these issues material for investors, thereby supporting both public and private sector initiatives to address to challenges of sustainable development.

These issues also connect with financial accounting itself. The Impact-Weighted Accounts Initiative (IWAI), incubated as a project at Harvard Business School, is developing methodologies for financial accounts that also reflect a company’s social and environmental impact. There are already about 100 large companies that have measured or are developing their impact-weighted financial accounts including a dozen companies in the Value Balancing Alliance (VBA). This work should be monitored by both the IASB and the SSB.

The impact of sustainability reporting standards will be enormous. Executives will be better able to factor sustainability issues into strategy and capital-allocation decisions. This will help to ensure the sustainability of corporate financial performance, particularly over the long term. Boards of directors will see sustainability not as a side issue to be managed in a committee but as a major issue that the entire board needs to focus on. The companies that are most effective at managing sustainability will be more attractive to investors. Since sustainability performance can be a leading indicator of financial performance, investors will want the same consistency and clarity in a company’s sustainability reporting as they now expect for its financial reporting. Investors will want this information from the CEO and CFO, and will want to discuss with them the company’s financial and sustainability performance, and how they are related to each other.

These changes will be further enabled if compensation is tied to sustainability metrics. Today, executives and board members are rewarded almost entirely in terms of a company’s financial performance. Rigorous standards for measuring and reporting on sustainability will make it possible for them to be used in determining the compensation of executives, board members, and investors.

Although the IASB has great expertise and credibility in setting financial accounting standards, it does not currently have the capabilities to set sustainability accounting standards. Fortunately, the IFRS Foundation does not have to start from scratch. SASB, GRI, CDP, the Climate Disclosure Standards Board, and the International Integrated Reporting Council recently published a paper which provides a solid  conceptual foundation, and their work continues through the facilitation of the Impact Management Project, Deloitte, and the International Business Council of the World Economic Forum.

Continued in article

Humor for 2020

Not-So-Funny Yard Signs (Click on the Slideshow) ---
https://www.science-a2z.com/the-most-hilarious-and-original-yard-signs-youve-ever-seen-part2/?utm_medium=yahoo&utm_source=347&utm_campaign=402654456&utm_term=NEWS_US-c&site_id=news.yahoo.com&vmcid=p%24g%2co%244650d852-484a-11eb-b141-008cfa5b6918-7f2ca7d4a700%2ct%241609076940847

Forwarded by Auntie Bev

The local news station was interviewing an 80-year-old-lady because she had just gotten married for the fourth time. The interviewer asked her questions about her life, about what it felt like to be marrying again at 80, and then about her new husband’s occupation. “He is a funeral director” she answered. “Interesting,” the newsman thought.

He then asked her if she wouldn’t mind telling him a little about her first three husbands and what they did for a living. She paused for a few moments, needing time to reflect on all those years. After a short time, a smile came to her face and she answered proudly, explaining that she had first married a banker when she was in her 20’s, then a circus ringmaster when in her 40’s and a preacher when in her 60’s and now in her 80s a funeral director.

The interviewer looked at her, quite astonished, and asked why she had married four men with such diverse careers.

(Wait for it)
She smiled and explained, “ I married one for the money, two for the show, three to get ready, and four to go."

Forwarded by Auntie Bev

"You claim to be a chocolate lab," said the cat to the dog. "Lemme check."

Attack this day with the enthusiasm and confidence of of a four-year old wearing a Batman t-shirt.

I thought I would never be the kind of person to wake up early just to exercise. I was right all along.

Two ways to really improve your day:  Don't check the news, and stay off the scales.

The Circle of Life:  An old man on a walker meets a toddler trying to push a stroller.

Elsie Frey's One Liners Forwarded by Tina

For me drinking responsibly means don't spill it.

The older I get, the earlier it gets late.

I remember when I could get up without sound effects.

When I ask for directions, please don't use words like "east."

When I run I run like the winded.

I finally got eight hours of sleep; It only took three days, but whatever.

 

 

Humor December 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1220.htm 

Humor November 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1120.htm   

Humor October 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1020.htm  

Humor September 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0920.htm 

Humor August 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0820.htm 

Humor July 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0720.htm 

Humor June 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0620.htm

Humor May 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0520.htm

Humor April 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0420.htm 

 Humor March 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0320.htm  

Humor February 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0220.htm 

Humor January 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0120.htm

Humor December 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1219.ht

Humor November 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1119.htm

Humor October 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1019.htm  

Humor September 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0919.htm 

Humor August 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0719.htm 

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

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

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

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

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

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

 

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

And that's the way it was on December 31, 2020 with a little help from my friends.

 

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

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

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

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

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

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

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

 

 

 

November 2020
 

Bob Jensen's Additions to New Bookmarks

November 2020

Bob Jensen at Trinity University 

My Latest Web Document
Over 600 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

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

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

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

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

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

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

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

 

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

 

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

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

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

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

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

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

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

CPA exam will increase focus on higher-order skills
"What Higher Order Skills Will be Tested on the Next CPA Examination," by Ken Tysiac, Journal of Accountancy, April 4, 2016 ---
http://www.journalofaccountancy.com/news/2016/apr/new-cpa-exam-201614166.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=04Apr2016

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

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

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

Don was one of my best friends in life!
In Memoriam:  James Donald Edwards, Sr. (November 12, 1926 - November 21, 2020) ---
AAA > Outreach > Newsroom > In Memoriam (aaahq.org)

PCAOB 3.0: The Evolving Role of Investor Protection at the PCAOB ---
J. Robert Brown, Jr., Board Member
November 6, 2020
Click Here

First, my thanks to Rutgers Business School for the opportunity to speak at the 50th World Continuous Auditing & Reporting Symposium. It is a great privilege to be here today (virtually).

Before I begin, I need to remind you that the views I am expressing today are my own and do not necessarily reflect the views of my fellow Board members or the staff of the PCAOB.

The concept of continuous auditing is critical to the future of the audit profession. The issue goes to the heart of the relevancy of the audit. I have, in the past, talked about audit relevancy and the risks that, without changes, the profession may confront extinction.[2]

My view was, and still is, that the role of the auditor in providing assurance for information outside of the financial statements should be modernized. This type of disclosure is increasingly used by investors and other participants in the capital markets. Investors rely on non-GAAP measures, key performance indicators, and environmental, social, and governance (ESG) metrics to make investment and voting decisions.

I believe that the PCAOB is in a good position to lead the discussions on the role, if any, of auditors, in providing assurance on these metrics.

Today though I want to talk not about extinction but evolution. The PCAOB is an almost two decades experiment in the oversight of the audit profession by an independent regulatory organization. Before 2003, the audit profession was subject to self-regulation, a time when standards were written by practicing auditors without adequate public input[3] and inspections were conducted by peer audit firms, a practice subject to extensive criticism.[4]

The creation of the PCAOB ended the era of self-regulation. Perhaps the most far reaching change made by Congress in setting up the PCAOB was to include in the statute an explicit mission to act in the interests of investors and the public.[5] In setting standards, conducting inspections, and imposing disciplinary sanctions, the explicit objective was and is to act in the public interest.

The change had the potential to profoundly affect the approach to auditor oversight. While all stakeholders presumably wanted to improve audit quality, investors and the public often had very different ideas about how to accomplish this goal.[6]

Seventeen years after the creation of the PCAOB, implementation of this mission warrants reexamination. While the PCAOB has taken some useful steps, much more needs to be done. The policies designed to promote investor input should be clearly specified and added to the PCAOB's bylaws and rules, making them a requirement not a choice.[7] In doing so, these avenues should be structured in a manner consistent with congressional initiatives.

So today I want to talk about the evolution of the investor protection mission of the PCAOB and ways to ensure that this evolution strengthens the role played by investors and the public in the oversight of the audit profession.

. . .

So let me return to where I started. This is about the evolution of the PCAOB.

Congress inserted into the DNA of the PCAOB a mission to act in the interests of investors and the public. The mission, however, came with few specifics. Execution was left for the PCAOB to determine.

In 2003, the PCAOB, in executing the mission, was writing on whole cloth. Figuring out how to incorporate investor views into the process would necessarily be a learning exercise that would evolve over time.

We've now had 17 years of experience and insight. Investors and the public want, and are entitled to, a level of transparency comparable to what is provided by government agencies. They also want more useful information that can be factored into investment and voting decisions. Avenues for investor input, which means input for all investors, including underrepresented communities, should be guaranteed through structural changes to our bylaws or rules.

We should implement these evolutionary steps because we know from experience that they are necessary. As Congress knew, the capital markets benefit from the public interest mission. Investor and public input increases trust in the actions of the PCAOB, the audit and, ultimately, the financial disclosure process

CPA Journal:  History of the Auditing World, Part 1 ---
https://www.cpajournal.com/2020/11/25/history-of-the-auditing-world-part-1/
 

The Life and Career of Colonel Arthur H. Carter:   A Leading Accountancy Professional of the 1930s ---
https://www.cpajournal.com/2020/11/23/the-life-and-career-of-colonel-arthur-h-carter/  
 

CPA Journal News Briefs: FASB, PCAOB, IASB ---
CPAJ News Briefs: FASB, PCAOB, IASB - The CPA Journal
 

The Flat Tax Increases Growth ---
https://marginalrevolution.com/marginalrevolution/2020/11/the-flat-tax-increases-growth.html

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

Compare product features and ratings of Accounting Software---
https://www.capterra.com/sem-compare/accounting-software?utm_source=bing&utm_medium=cpc  

Jensen Comment

I have some doubts about the objectivity of the ranking and the reviews. However, this summary of "accounting software" has some alternatives that I did not previously know existed. Some are not even listed in Wikipedia.

Low ratings are relatively rare from customer feedback of all the alternatives in this study.

Financial Reporting and the Financial Reporting Regulators ---
Click Here
Thank you Lynn Turner for the heads up

FDIC win against PwC could finally force auditors to look for fraud ---
https://mullinhoard.com/fdic-win-against-pwc-could-finally-force-auditors-to-look-for-fraud/
Thank you Lynn Turner for the heads up

Jensen Comment
The big unknown is what this will do to added audit costs and incremental profits that are passed on to clients due to having to look for fraud beyond what auditors are traditionally responsible for until now. A big step toward fraud reduction came when auditors became responsible to review internal controls under the Sarbanes-Oxley Act (SOX). This increased auditing costs and fees.

However, internal control reviews fall short of what regulators and the courts may impose regarding fraud detection during financial statement audits. Fraud prevention and detection auditing can also create unwanted clients analogous to drivers that automobile insurance companies do not want to insure at affordable fees.

Why 55% of remote US workers could face an unexpected tax liability, and how it can be avoided  ---
https://www.toptenreviews.com/why-55-of-remote-us-workers-could-face-an-unexpected-tax-liability-and-how-it-can-be-avoided

A former Microsoft employee is going to prison after stealing $10 million in store credit and buying a Tesla and lakefront home ---
https://www.businessinsider.com/microsoft-employee-stole-millions-gift-cards-bitcoin-purchased-tesla-home-2020-11

A former Microsoft software engineer was sentenced to nine years in prison for stealing over $10 million in store credit and selling it for Bitcoin, the IRS announced on Monday.

The case is a landmark for the IRS, since it's "the nation's first Bitcoin case that has a tax component to it," said IRS-CI Special Agent in Charge Ryan L. Korner.

Volodymyr Kvashuk worked testing Microsoft's online retail platform between 2016 and 2018, according to the IRS. At first, the IRS says he stole smaller amounts in gift cards and other store credit, totaling about $12,000, using his own account access. However, as he took more and more, he began using coworker's emails to take the money, according to officials.

"Stealing from your employer is bad enough, but stealing and making it appear that your colleagues are to blame widens the damage beyond dollars and cents," US Attorney Brian T. Moran said in a statement. 

Continued in article

Where were the internal controls?
Kodak admits an internal error allowed former executives to make more than $5 million selling stock options they never owned ---
https://markets.businessinsider.com/news/stocks/former-kodak-executives-sold-stock-options-never-owned-internal-error-2020-11-1029793461

How to Mislead With Statistics

Here are the average retirement savings by age: Is it enough? ---
https://www.marketwatch.com/story/here-are-the-average-retirement-savings-by-age-is-it-enough-2020-11-16?mod=home-page

Jensen Comment
The first thing to do is have your students explain the wide disparity of means and medians in this data.

Next have students how outliers can distort statistical inference.

Black Swans --- https://en.wikipedia.org/wiki/The_Black_Swan:_The_Impact_of_the_Highly_Improbable

 

Distributed Ledger --- https://en.wikipedia.org/wiki/Distributed_ledger

Amazon:  Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems ---
https://www.amazon.com/gp/product/026253987X/ref=pe_3676590_548667430_em_1p_0_lm

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

Blockchain crop-trading platform is now ready for prime time ---
https://www.bloomberg.com/news/articles/2020-11-10/blockchain-based-crop-trading-platform-starts-for-commercial-use?cmpid=BBD111020_BIZ&utm_medium=email&utm_source=newsletter&utm_term=201110&utm_campaign=bloombergdaily

The future of accounting marketing is strategy ---
https://www.accountingtoday.com/opinion/the-future-of-accounting-marketing-is-strategy

CPA Journal:  The Enrollment Cliff, Mega-Universities, COVID-19, and the Changing Landscape of U.S. Colleges ---
https://www.cpajournal.com/2020/11/13/icymi-the-enrollment-cliff-mega-universities-covid-19-and-the-changing-landscape-of-u-s-colleges/

. . .

The Enrollment Cliff

Enrollments at U.S. colleges and universities have fallen for eight consecutive years and are now below 18 million for the first time this decade (https://bit.ly/2DLB5hD). Recently, accounting programs have experienced a drop in accounting majors that outpaces this overall decline (A. Gabbin, “Warning Signs about the Future Supply of Accounting Graduates,” CPA Journal, September 2019). Demographic indicators point to things getting even worse for the nation’s colleges and universities. Between 2025 and 2029, the college-age population in the United States is expected to decrease by 15%.

Labeled the “enrollment cliff,” this decline is not caused by the rising costs of a college education or the declining value proposition of a college degree; rather, the problem is beyond the control of higher education institutions, specifically the nation’s fertility rate. The birthrate in a given year largely determines the college freshman population 18 years later. The number of children born in the United States fell precipitously between 2008 and 2011. Because the drop in fertility coincided with the 2008 financial crisis, the decline is frequently attributed to that event; it is worth noting, however, that the birthrate failed to rebound with the economic recovery and the college-age population is expected to continue to decline by 1–2% per year after 2029. Immigration has also fallen during recent decades; the number of permanent resident “green cards” issued reached a peak in 1991 at 1.8 million, but has varied between 840,000 and 1.2 million since 2000 (Department of Homeland Security Office of Immigration Statistics, https://bit.ly/3fT3Rdi.)

The most comprehensive examination of population trends and college enrollment is provided in Demographics and the Demand for Higher Education by Nathan Grawe, an economist at Carleton College in Minnesota (Johns Hopkins University Press, 2018). Using census information on the number of births and demographic characteristics correlated with college attendance, Grawe predicts college enrollments in the coming years. To get a better understanding of the effect of changing birthrates on different regions of the country, Grawe’s estimates of changes in college populations by U.S. census division are presented in Exhibit 1. His model predicts a decrease of 11% nationwide, but significant variation exists among regions. In absolute terms, the Middle Atlantic (NJ, NY, and PA) and East North Central (IL, IN, OH, MI, and WI) account for 56% of the overall drop in predicted college enrollments, but only 27% of the U.S. population.

Continued in article

Guidance on deferred employee payroll tax issued ---
https://www.journalofaccountancy.com/news/2020/oct/employee-payroll-tax-deferral-irs-guidance.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=02Nov2020

THE QUALIFIED SMALL BUSINESS STOCK EXCLUSION: HOW STARTUP SHAREHOLDERS GET $10 MILLION (OR MORE) TAX-FREE ---
https://columbialawreview.org/wp-content/uploads/2020/01/Viswanathan-The_Qualified_Small_Business_Stock_Exclusion.pdf

Tax abuse and offshore havens are costing governments $427 billion a year, according to a new study ---
Click Here

Offshore tax havens are costing governments more than $427 billion a year, including more than $89 billion in the US, according to a study published Friday. 

"Globally, the equivalent of over 34 million nurses' annual salaries is lost to tax havens each year," the study, from UK-based advocacy group Tax Justice Network, said.

About $245 billion of the total was attributed to companies relocating profits to more tax-favorable countries. Wealthy individuals avoided the balance, $182 billion, by "hiding undeclared assets and incomes offshore, beyond the reach of the law," the study said. 

Corporations and the wealthiest are "cheating us all," US Congresswoman Pramila Jayapal said in a tweet.

The study's publication was timed to coincide with world leaders' arrival in Saudi Arabia for the G20 summit. The authors urged those leaders, whose countries account for a combined $290 billion in avoidance each year, to take action to stop tax cheats.

The leaders should require country-by-country asset and profit reporting, "so that corporate tax abusers and the jurisdictions that facilitate them can be identified and held to account," read a blog post by Mark Bou Mansour, Tax Justice Network's communications coordinator. 

The Cayman Islands were tagged as the biggest contributor to tax avoidance, responsible for about $70 billion per year. But they are just part of a "spider's web" of UK territories and dependencies responsible for a total of 37.4% of global tax cheats, the study found

Illinois’ proposed ‘fair tax’ gets its just deserts ---
https://www.data-z.org/news/detail/illinois-proposed-fair-tax-gets-its-just-deserts

Study identifies reasons for soaring nuclear plant cost overruns in the US ---
https://techxplore.com/news/2020-11-soaring-nuclear-overruns.html

Jensen Comment
A complication for cost accounting students is that some of these factors are highly interactive, thereby complicating regression analysis.

NMC Health administrators to sue EY for $4bn over audit work ---
https://www.yahoo.com/news/nmc-health-ey-audit-work-negligence-big-four-accounting-firm-161152743.html
Thank you Lynn Turner for the heads up

Bob Jensen's threads on the fraud and negligence of large auditing firms ---
http://faculty.trinity.edu/rjensen/fraud001.htm

NY Times: Democratic Presidential 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, free medical services, free medications, free nursing homes, free college, free preschool, free housing, free food, guaranteed annual income, reparations, open borders, legalized prostitution, etc. to the tune of over $10+ trillion per year.

How to Mislead With Statistics

To combat the COVID-19 economic downturn, New Jersey Governor Phil Murphy passed a millionaire's tax. Here's why he says that's good for everyone ---
https://www.businessinsider.com/nj-gov-phil-murphy-millionaires-tax-will-help-middle-class-2020-11

This year, New Jersey Governor Phil Murphy and the state legislature agreed on a deal to raise the income tax by 2% on incomes over $1 million per year to address the budget crisis brought on by the pandemic. Not only will this tax help administer coronavirus relief to the communities and small businesses that need it most, but it will also help rebalance a regressive state tax code which puts a bigger tax burden on poorer households.

In this week's episode of Pitchfork Economics, David Goldstein and Nick Hanauer interview Governor Murphy about his decision to tax the rich.

Murphy, a millionaire former Goldman Sachs executive, wants to be very clear that he's not fomenting class warfare.

"We don't begrudge people's success," Murphy began. "Whether you're a wealthy individual or a large corporation — we want more of each in New Jersey."

But Murphy says he raised the tax because "I got elected to stand for a stronger, fairer New Jersey that works for not just some, but for everybody." That meant asking the wealthiest New Jerseyans to "help us rebuild our middle class."

From the beginning, Murphy laid out the conditions for the tax very clearly: "Anyone earning a million dollars and up, we're asking you to pay a few pennies more, and we'll put every dime of that into the middle class."  

Continued in article

Taxes are about to rise for New Jersey millionaires. There aren’t many ways to duck the levies ---
https://www.cnbc.com/2020/09/24/taxes-are-about-to-rise-for-new-jersey-millionaires.html

. . .

“New Jersey is one of the more painful states to really tax plan for,” said Albert J. Campo, CPA and managing partner at AJC Accounting Services in Manalapan, New Jersey.

“Anyone who’s $1 million and up is getting substantial benefits (tax breaks) at the federal level, but they’re somewhat limited at the state level.”

The Garden State is known as a “gross income” state, and that means certain exclusions and deductions are off the table on state tax returns.

For instance, contributions you make to a workplace retirement plan reduce your taxable income on your federal return.

In New Jersey, only contributions to 401(k) plans are excludible from wages. Amounts you divert to a deferred compensation plan or any other retirement plan – including 403(b) or 457 plans -- are not excludible from your pay.

Another quirk: People who itemize on their federal income tax return can claim a write-off for charitable giving. New Jerseyans, however, can’t do this on their state return.

Earlier this year, Garden State legislators put forth a proposal to allow a gross income tax deduction for contributions made to certain New Jersey-based charitable organizations during the pandemic. That measure is pending.

See here for a list of items that can’t be excluded from wages in New Jersey.

There are a few moves high-income households can take to lower their income if they’re close to the margins and a couple of thousand dollars away from the steeper tax rate, according to Alan Sobel, CPA at Sobel & Co. in Livingston, New Jersey, and president of the New Jersey Society of CPAs:

Continued in article

Jensen Comment
But in both the federal and state jurisdictions, millionaires often defer more income tax than they report due to capital gains and losses, often value changes that are highly volatile and highly subjective in measurement. For example, owners of Tesla shares can see the values of their unsold shares bounce up and down like a basketball.

Ten different real estate appraisers may give you ten highly different value estimates of a 100 acre parcel of land on the outskirts of Newark, the value of which may be highly dependent upon where locations of future roads, road exits, train tracks, and bridges are built. Ups and downs in values of such investments are unknown in amount until sales transactions actually take place.

For the same reason, it's virtually impossible to compare total wealth of most millionaires and billionaires. The estimated wealth of such persons vary widely in the eyes of different appraisers. In estate value disputes it's often the courts that have to set values, and the courts do not have magical measurement wands any better than the wands all disputing appraisers. The courts merely have the power to set values when disputing value appraisers cannot agree.

My best example of where the court resolved highly varying value estimates of finance models is:
Questrom vs. Federated Department Stores, Inc.:  A Question of Equity Value," by University of Alabama faculty members by Gary Taylor, William Sampson, and Benton Gup, May 2001 edition of Issues in Accounting Education ---
http://faculty.trinity.edu/rjensen/roi.htm

One thing is certain is that the federal government under Biden and Harris will soon impose heavy new taxes on the same "millionaires" in New Jersey and millionaires in all the other 49 states. This will soon become a taxing time for high earners and wealthy people in the USA.

I think the Governor of New Jersey overstates the case that his proposed "millionaires" tax will not lead to exodus of a significant number of high earning citizens to move elsewhere or be a barrier to such citizens that might move into New Jersey. New Jersey already has nearly the highest state taxes for citizens at all levels of income. The problem with the causal factors that inspire movements of households is that there are many such factors that are highly interactive.

Consider me as an example, although my income is way too low to qualify for the new millionaire tax in New Jersey. When I retired in San Antonio, Texas my wife and I wanted to move out of the heat, humidity, and congestion of a big city. We also wanted to be closer to family. We have two children living in northern California, one living in Wisconsin, and two in northern Maine. Almost like New Jersey, those three states are among the highest taxing states in the USA. Having family within driving distance was the primary consideration for where to move, but environmental beauty and state taxation were interactive causal factors in choosing where to retire. We thus narrowed our search down to northern Nevada next to California or northern New Hampshire next to Maine. We found a mountain cottage in northern New Hampshire that is within five hours of driving to where two of our children live in Maine ---
http://faculty.trinity.edu/rjensen/Pictures.htm

State taxation was not the primary causal factor for choosing to retire in New Hampshire, but the fact that New Hampshire has no income tax and no sales tax was an interactive causal factor that led us to choose New Hampshire over California, Wisconsin, and Maine. If we had children in New Jersey we probably would've retired in a nearby state with lower taxes. Never New Jersey!

My point here is some people will avoid living in a state with very high taxes being the main reason. Others, like my wife and I, left Texas primarily for reasons not affected by taxation. But when choosing where to retire taxation became an interactive causal factor --- along with other factors like not wanting to live in a city, having nice surroundings like mountains, and having nearby family in an adjoining state.

New Jersey's enormous state taxes have primarily or interactively been a factor in keeping many people from wanting to live there. Adding more taxes to already high taxes may be hurting more than helping revenue taxes in New Jersey, the second highest taxing state in the USA. People who can now work remotely are leaving New York, New Jersey, and Silicon Valley in droves.

NYSE and Nasdaq threaten to leave New Jersey if transaction tax goes ahead ---
https://www.datacenterdynamics.com/en/news/nyse-and-nasdaq-threaten-leave-new-jersey-if-transaction-tax-goes-ahead/

The New York Stock Exchange (NYSE) has threatened New Jersey lawmakers it will move its data operations out of state if taxes are imposed on electronic trades.

Nasdaq has also come out against the tax, saying it is in talks with Texas as a future home.

New Jersey is proposing a hundredth-a-cent tax on every financial transaction processed in the state. The transaction tax won favor amongst politicians and also of Governor Phil Murphy and Senate President Steve Sweeney back when it was introduced in July. At the time it was set to charge a quarter-of-a-cent ($0.0025), but has been scaled back due to the stock markets' resistance.

If implemented, New Jersey’s financial transaction tax would be a flat-rate levy imposed per instrument, not per trade. Lawmakers believe it could harvest about $500m each year or $1bn over the tax’s two year lifetime.

The securities industry in New Jersey employs about 38,000 people and pays nearly $1.4bn in state and local taxes.

The Assembly of Financial Institutions and Insurance Committee held a virtual public hearing on Monday, as reported by NJ.com. The tax would be paid by companies operating data centers specializing in financial trades. Many such facilities are based out of New Jersey's suburban districts like Mahwah, Secaucus, and Carteret.

In the past, proximity to Wall Street made it sensible for data centers to be nearby for low latency trading, however, the market has now been testing whether it can operate out-of-state.

Back in September and earlier this month, the NYSE simulated a trading day using its backup data center in Chicago. This was a practice for any possible relocation of the market to data centers out of New Jersey. The co-head of government affairs for the NYSE, Hope Jarkowski, said: “From Sept 28 to Oct 2, we moved our production servers for our NYSE Chicago exchange out of New Jersey to our secondary data center… Proximity to New York City is no longer relevant in today’s trading environment."

She added: “We understand why a financial transaction tax, or FTT as it’s commonly known, may be perceived as a silver bullet that can remedy or offset financial hardship with little effect on the financial markets themselves, impacting perhaps only big corporations or wealthy individuals. In reality, this tax would be imposed on a processor of transactions but would be passed along to a purchaser or seller.

"That said, these harms will never come to pass," she added, "because those with obligations to their investor clients will simply move their business out of New Jersey to avoid harm, leaving no transactions in New Jersey to tax and undermining the revenue-generating aim of an FTT.”

Nasdaq also threatened to leave if any transaction tax was put in place and said it is currently in talks with Texas Governor Greg Abbott about relocating trading systems to the Dallas-Fort Worth area. Several other unnamed states are also said to be talking to Nasdaq.

New Jersey Governor Phil Murphy revealed he has been in talks with market representatives to get them on side. At a Covid-19 briefing on Monday, he said: “We’ve had - I thought - constructive discussions with Nasdaq and the New York Stock Exchange. They’ve expressed their concerns. I can’t read their minds. But the fact that we are in an hour of need, this is not a 'forever and always' consideration. I think our side of the argument is also reasonable... we shall see. This is something we still are studying and we still like what we see, but it’s complicated, there’s no question about it.”

Continued in article

MicroStrategy could have gotten rid of its excess cash by paying a big dividend or buying back a ton of stock. Instead, the company made a big digital currency bet ---
https://www.wsj.com/articles/cash-is-trash-so-lets-bet-425-million-on-bitcoin-11604070071?mod=djm_dailydiscvrtst

. . .

MicroStrategy’s revenues have barely grown over the past decade, from $455 million in 2010 to $486 million last year. Yet the company finished 2019 with $566 million in cash and short-term investments, up from $174 million a decade earlier. Even after shelling out $425 million for bitcoin and $61 million for stock buybacks since August, MicroStrategy still has $53 million in cash.

And the shares had been stagnant for years.

MicroStrategy had been one of the hottest stocks in the technology boom of the late 1990s, returning 567% in 1999. The company lost more than 90% the next year amid a Securities and Exchange Commission investigation into its accounting. MicroStrategy restated its financial results and settled administrative reporting charges, without admitting or denying them.

Three managers, including Chief Executive Michael Saylor, also settled civil accounting-fraud charges with the SEC. The executives didn’t admit or deny the charges; Mr. Saylor disgorged more than $8 million and paid a $350,000 penalty. When we spoke this week, Mr. Saylor, who is still CEO, declined to discuss the case.

MicroStrategy never recovered its lost glory. From its initial public offering in June 1998 through the end of 2019, the stock returned an average of 1.4% annually. Over the same period, the S&P 500 gained 7.2% annualized, including dividends.

But 2020 has been a whole new story. In August, when MicroStrategy announced it had invested $250 million in bitcoin, the stock jumped 9% in a day. A month later, the company declared that it would continue to put most of its excess cash into bitcoin. The stock rose 23% in two days.

At their peak on Oct. 23, the company’s shares had doubled in price since their low in early March.

MicroStrategy’s Mr. Saylor says the primary objective of buying bitcoin isn’t to make the stock go up, but to keep the company’s purchasing power from going down.

Thanks to the Federal Reserve’s immense intervention in the economy, the U.S. monetary supply is soaring—by one measure, up more than 20% this year. Mr. Saylor expects that pace to continue at 10% or 15% annually, not just in the U.S. but globally.

“We realized that cash is trash,” he says, “and we needed either to shrink the capital structure or move our cash into something that is going to float on the flood of liquidity and not sink under the flood of liquidity.”

Of course, even as the monetary supply has doubled since late 2008 the Fed has struggled to lift inflation, as officially measured, anywhere close to 2%. While financial assets have soared and some items in the real economy have become more costly, many others have stayed flat or gotten cheaper.

Because the quantity of bitcoin is limited to 21 million, the digital currency can never be “debased,” Mr. Saylor argues, and is therefore bound to hold its value over the long run.

At this week’s price of about $13,500, MicroStrategy’s 38,250 bitcoins were worth more than $515 million, a third of the stock’s total market value. Bitcoin doesn’t only go up, though. In 2018 it bottomed below $3,200, down roughly 80% from a year earlier. (To be fair, five years ago it was about $300.)

I asked if Mr. Saylor was nervous about putting so much of his company’s capital into such an asset.

“What would I be nervous about?” he shot back. “If I had $500 million in cash, that would make me nervous because I think it would go to zero [in purchasing power] over five years. So what’s my choice? I think bitcoin is better than gold as a store of value.”

He added, “It’s not perfect, there’s risk. But I can’t find anything better, and the option of doing nothing is more risky.”

Continued in article


Goldman Sachs --- https://en.wikipedia.org/wiki/Goldman_Sachs

 In April 2016, Goldman Sachs launched a direct bank, GS Bank.[93] In October 2016, Goldman Sachs Bank USA started offering no-fee personal loans under the brand Marcus by Goldman Sachs.[94] In March 2016, Goldman Sachs agreed to acquire financial technology startup Honest Dollar, a digital retirement savings tool founded by American entrepreneur whurley, focused on helping small-business employees and self-employed workers obtain affordable retirement plans. Terms of the deal were not disclosed.[95] In May 2017, Goldman Sachs purchased $2.8 billion of PDVSA 2022 bonds from the Central Bank of Venezuela during the 2017 Venezuelan protests.
 

In April 2018, Goldman Sachs bought Clarity Money, a personal finance startup, to be added to its Marcus by Goldman Sachs roster. This acquisition is expected to add over 1 million customers to the Marcus business.

 

Goldman Sachs made Marcus Insights available to anyone, including consumers who aren't existing customers ---
https://www.businessinsider.com/goldman-sachs-opens-marcus-insights-to-all-consumers-2020-10?IR=T&utm_medium=email&utm_term=BII_Daily&utm_source=Triggermail&utm_campaign=BII Weekender 2020.10.30 - Marketing

The free suite of personal finance management (PFM) tools dubbed Marcus Insights is now available to any iOS, Android, or web user, regardless of whether they are a customer of Goldman Sachs' digital-only offshoot, per an email sent to Insider Intelligence.


 

This marks an expansion from the initial September rollout to only Marcus customers on iOS. Users need only link their external bank accounts—including checking, saving, brokerage, or retirement accounts, among others—to create a dashboard of their finances and get insights into their spending per month; across categories like shopping, dining and drinks, and home; and, for iOS users only, with their most frequented merchants.


 

This enhanced PFM functionality could greatly increase the utility of the Marcus app for existing savings account or loan users. Marcus' flagship products are a high-yield savings account and personal loans of $3,500–$40,000, and its app was previously meant for little besides managing those accounts—like viewing account balances or making transfers.

But now with the wider launch of Marcus Insights, existing savings or loan customers can choose to aggregate their external account information and use Marcus to stay on top of their entire financial lives. This could drive engagement with Marcus and boost the app's importance to its users' lives, provided that customers like Marcus Insights better than the PFM options offered by their other primary bank or by fintechs that focus only on PFM tools, like Mint.


 

Offering Marcus Insights to noncustomers for free is also a bold customer acquisition strategy that could draw new clients into the Marcus fold. The features could attract consumers who currently don't have access to PFM tools that meet their needs or who are looking for a way to manage and view their financial accounts from a centralized hub.

And once those customers are using the Marcus platform to stay on top of their financial lives, the digital bank will have ample opportunities to cross-sell them on products like its high-yield savings account, or its upcoming checking or brokerage accounts, potentially driving revenues as well as engagement.


 

Continued in article

New lease accounting guidance proposed for federal entities ---
https://www.journalofaccountancy.com/news/2020/nov/lease-accounting-guidance-for-federal-entities.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=06Nov2020

Bloomberg:  Rich Americans Are Increasingly Looking for Second Passports ---
https://www.bloomberg.com/news/articles/2020-11-24/wealthy-u-s-citizens-are-increasingly-eyeing-a-second-passport

Eric Schmidt acquired all the typical trappings of a mega-rich U.S. citizen: a superyacht, a Gulfstream jet, a Manhattan penthouse.

One of his newest assets is far less conventional: a second passport.

Alphabet Inc.’s former chief executive officer applied to become a citizen of Cyprus, according to an announcement last month in a Cypriot newspaper that was first reported by the website Recode. Schmidt, 65, joins a growing club of individuals participating in government programs enabling foreigners to acquire passports.

In previous years, U.S. citizens rarely sought to buy so-called golden passports. The business mainly thrived targeting people from countries with fewer travel freedoms than the U.S., such as China, Nigeria or Pakistan.

But that’s changing. People close to the industry say they’ve been inundated with inquiries from citizens of the world’s richest country.

The benefits of owning a second passport, which range from potentially lower taxes, to more investing freedoms and less hassle traveling, can be had for as little as $100,000. The so-called citizenship-by-investment programs haven’t historically been as popular with Americans since one of their main draws -- the favorable tax regimes of adopted countries -- has been of little benefit to citizens of the U.S., one of the few nations to tax its people regardless of where they live.

The current heightened interest among U.S. citizens predates the coronavirus pandemic, but the crisis has helped turbo-charge demand as they plan for how to maintain some freedom of movement with lockdown measures increasing amid a swelling second wave of Covid-19 cases.

“Americans are thinking: ‘I want to have that ability to move as quickly as possible and not be stuck,’” said Nestor Alfred, chief executive officer of St. Lucia’s citizenship-by-investment unit.

U.S. Elections

The U.S. elections have also stoked interest. While Joe Biden has rejected the wealth tax pushed by some of his Democratic primary rivals, his proposals could disrupt the ways that many Americans minimize -- or altogether avoid -- taxes on their investment gains. Some have also looked to get an additional passport due to fears of social unrest, according to citizenship advisory firm Apex Capital Partners, which said inquiries from clients -- typically about five a year -- have increased 650% since this month’s vote.

“We’re seeing this interest from Americans who are all saying the same things that Chinese, or Middle Eastern or Russian clients are saying,” Apex founder Nuri Katz said in an interview. “They’re saying, ‘We’re not leaving the U.S. right now, but we’re concerned and we want to have something else, just in case.’”

St. Kitts and Nevis was the first country to introduce a citizenship-by-investment program in the early 1980s, and more than half-a-dozen nations have since done the same. In many cases, they’ve proved lucrative. Malta raised almost $1 billion through June 2019 after launching its program last decade, while the Caribbean territory of Dominica has raised more than $350 million in the past five years.

The industry has generated plenty of consternation for effectively turning citizenship -- usually obtained from birthplace or heritage -- into something that can be purchased

Continued in article

How to Mislead With Statistics

Statistical Anomalies in Biden Votes, Analyses Indicate ---
https://www.theepochtimes.com/statistical-anomalies-in-biden-votes-analyses-indicate_3570518.html?utm_source=newsnoe&utm_medium=email&utm_campaign=breaking-2020-11-08-5

Jensen Comment
Be aware that the above article is published by a conservative and highly biased media outlet. In spite of this the article raises some interesting questions such as Benford's Law commonly used by accountants (think IRS)  in search of fraud in financial data. Benford's Law is also a common component of forensic accounting education ---
https://www.mentalfloss.com/article/63099/irss-favorite-mathematical-law

I want to claim that I do no support the long delay in the the GOP concession that Trump lost to Biden. But it is interesting how data analysts are identifying and analyzing statistical anomalies. Readers can be confused by false claims of statistical anomalies and true anomalies that are not due to fraud or error ---
https://www.kdnuggets.com/2020/09/diy-election-fraud-analysis-benfords-law.htm

Having said this I don't think there's probably sufficient evidence to overthrow the 2020 election results. Investigations of fraud should proceed to improve the integrity of future elections. But the Biden team should not be delayed in their efforts to take over the leadership of the USA.

Election fraud analysis becomes increasingly important as the margins of difference vote counts shrink like they did in the November 2020 election.  Some fraud controls in live voting are lost when votes are accepted by mail. For example, it's much harder for the dead to show up at the voting centers.

Camtasia and Other Self-Made Videos ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#NewTools

Privacy, Consent, and the Virtual One-Shot ---
https://acrlog.org/2020/11/13/privacy-consent-and-the-virtual-one-shot/

. . .

I (article author) did teach two virtual guest lectures in May and thought nothing of the fact that the instructors recorded them—something we’d discussed in advance and which seemed important given the emergency outside of all of our apartments and the very real technology barriers that students at CUNY face.

Then in the summer when both courses ran again and the instructors emailed to ask if I could reprise my guest lectures, they both indicated they could also just use the recordings from spring if I was busy or away. I responded immediately that either was fine as though we all implicitly understood that in virtual education contexts, ourselves and our pre-recorded simulacra are basically the same. Aren’t they?

But then, upon further reflection, I felt a little odd and I began to wonder how many MP4s of me had been recorded or shared since the pandemic had started. I thought of a virtual conference panel I participated in, which I learned was being live-streamed to YouTube only after the session had commenced: “thousands of people are watching right now,” one of the organizers said, proudly. Then in June, I was asked by a faculty member who I’d worked with before to do virtual library instruction for a research-intensive course and was startled to join a Zoom session and see the red recording button blinking before I opened my mouth.

I wondered then, gloomily, if part of the natural progression of higher education in this moment is not only the loss of corporeality but the end of the ephemeral educational encounter altogether. Or perhaps we are all experiencing some kind of temporal implosion in which college exists both nowhere and everywhere, and classes are attended by black boxes on a screen, which may or may not represent the attention and presence of actual students, and the teacher might be ported in from another time and place.

. . .

I don’t know exactly what I’m worried will happen with the videos, which are not exciting and I can’t imagine many people rewatching. I certainly would never rewatch them, in part because they are, with some small deviations, almost identical. In the background are small personal details-—a framed May Day poster a friend designed, a dying succulent, my swimsuit drying on a door-knob, my husband walking by. Parts of the videos are potentially dangerous out of context in that they are mildly political; almost all students in first year composition courses are researching social and political issues. It’s unlikely but not impossible that pieces of the videos could be recontextualized and weaponized by alt-right cyber-trolls who spend their days harassing and doxxing liberal academics and students of color (the majority of students at the CUNY campus where I work are Black and Hispanic).

Continued in article

Jensen Comment
In my courses (not online) I made videos of the most technical aspects of my courses (e.g., how to account for very technical derivative instrument contracts as speculations versus as hedges under FAS 133 rules). The students watched and rewatched these videos over and over before class as many times as needed, because they knew they would have to demonstrate what they learned in front of the class in subsequent class meetings).

My point is that there are many types of videos that can be used for onsite or online teaching. My preference is to make learning videos on very technical topics that students learn at different rates. Videos were a great way to level the playing field on learning rates ---
http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

Message from Zac Rolnik on November 23, 2020

Dear Professor Jensen,

I would like to draw your attention to this issue of Foundations and Trends in Accounting (http://www.nowpublishers.com/ACC).  Each issue of FnT Accounting is an in-depth review of a single topic identifying the most important papers that have been published on that topic.  Professor Johnstone suggested that I reach out to you to post this on your web site and/or blog. 

David Johnstone (2018), "Accounting Theory as a Bayesian Discipline", Foundations and Trends® in Accounting: Vol. 13: No. 1-2, pp 1-266. http://dx.doi.org/10.1561/1400000056

. . .

Stay well,

Zac

 

This was my review of David Johnstone's book in February 2019
http://faculty.trinity.edu/rjensen/book19q1.htm
I do not know what revisions, if any, transpired between February 2019 and

Bayesian Inference --- https://en.wikipedia.org/wiki/Bayesian_inference

Book:  Accounting Theory as a Bayesian Discipline by David Johnstone

Suggested Citation: David Johnstone (2018), “Accounting Theory as a Bayesian Discipline”, Foundations and Trends R in Accounting: Vol. 13, No. 1-2, pp 1–266.
DOI: 10.1561/1400000056.
https://www.nowpublishers.com/article/Details/ACC-056

Table of contents:
1. Introduction
2. Bayesianism Early in Accounting Theory
3. Survey of Bayesian Fundamentals
4. Case Study: Using All the Evidence
5. Is Accounting Bayesian or Frequentist?
6. Decision Support Role of Accounting Information
7. Demski's (1973) Impossibility Result
8. Does Information Reduce Uncertainty
9. How Information Combines
10. Ex Ante Effect of Greater Risk/Uncertainty
11. Ex Post Decision Outcomes 12. Information Uncertainty
13. Conditioning Beliefs and the Cost of Capital
14. Reliance on the Normal-Normal Model
15. Bayesian Subjective Beta
16. Other Bayesian Points of Interest
17. Conclusion
Acknowledgements
References

Abstract

The Bayesian logic of probability, evidence and decision is the presumed rule of reasoning in analytical models of accounting disclosure. Any rational explication of the decades-old accounting notions of "information content", "value relevance", "decision useful", and possibly conservatism, is inevitably Bayesian. By raising some of the probability principles, paradoxes and surprises in Bayesian theory, intuition in accounting theory about information, and its value, can be tested and enhanced. Of all the branches of the social sciences, accounting information theory begs Bayesian insights. This monograph lays out the main logical constructs and principles of Bayesianism, and relates them to important contributions in the theoretical accounting literature. The approach taken is essentially "old-fashioned" normative statistics, building on the expositions of Demski, Ijiri, Feltham and other early accounting theorists who brought Bayesian theory to accounting theory. Some history of this nexus, and the role of business schools in the development of Bayesian statistics in the 1950–1970s, is described. Later developments in accounting, especially noisy rational expectations models under which the information reported by firms is endogenous, rather than unaffected or "drawn from nature", make the task of Bayesian inference more difficult yet no different in principle. The information user must still revise beliefs based on what is reported. The extra complexity is that users must allow for the firm's perceived disclosure motives and other relevant background knowledge in their Bayesian models. A known strength of Bayesian modelling is that subjective considerations are admitted and formally incorporated. Allowances for perceived self-interest or biased reporting, along with any other apparent signal defects or "information uncertainty", are part and parcel of Bayesian information theory. DOI:10.1561/1400000056

 

Selected Quotation from Chapter 1

Chapter 1

This monograph introduces Bayesian theory and its role in statistical accounting information theory. Its intended audience includes accounting PhD students and researchers. The Bayesian statistical logic of probability, evidence and decision lies at the historical and modern epicenter of accounting thought and research. It is not only the presumed rule of reasoning in analytical models of accounting disclosure but also the default position for empiricists when hypothesizing about how the users of financial statements think:

Based on Bayesian decision theory research (e.g. DeGroot, 1970) that shows that loss-minimizing investors place less weight on noisier (i.e. more uncertain) information, we expect to observe more muted initial market reactions to unexpected earnings signals that have higher information uncertainty. (Francis et al., 2007, p. 408)

Bayesian logic comes to light throughout accounting research. It is the soul of most strategic disclosure models, for the reason that any other model of investor behavior implies an incoherence or inconsistency in beliefs and actions by which the investor will overall surely lose to a more coherent market or opponent:

In theory-based, economic analyses, reliance on Bayes rule is so routinized an assumption as rarely to warrant any justification. The compelling feature of Bayes rule is that it implies the most efficient use of information. Consequently, in market settings, investors who use information more efficiently (i.e. Bayesians) should be able to exploit and dominate their less efficient counterparts. (Verrecchia, 2001, p. 123)

Bayesianism is similarly a large part of the stated and unstated motivation of empirical studies of how market prices and their implied costs of capital react to better financial disclosure. Investors are taken to impose discount rates or costs of capital consistent with their best possible (i.e. most rational) probability assessments. Summarizing their philosophical position, Chen and Schipper (2016) argued for theory to play a greater part in accounting PhD programs and in empirical research designs. Their view of accounting is overtly Bayesian. They highlight the role of accounting measurements as information for fundamental analysis, which is understood as the formation of beliefs about the firm’s cash flows and risks, culminating in financial investment decisions:

Analyses of different accounting measurement attributes (for example, fair value and historical cost) illustrate the potential benefit of using theory to discipline empirical analysis. A general question that accounting researchers are interested in is whether accounting measurements matter, in the sense of whether different accounting measurement attributes for the same item lead to differences in investors’ assessment of firms’ fundamentals and therefore affect investors’ decision-making. (Chen and Schipper, 2016)

Similarly, Barth (2006b) notes an array of market effects that are indicative of accounting information having met its objective, namely to alter investors’ beliefs and thus actions:

Some [empirical research] designs use capital market metrics, other than equity market value, such as trading volume, cost of capital estimates, and bond ratings. These studies help to provide insights into the role of accounting in capital markets. Beaver (1968) is the seminal paper in this literature and shows that accounting information changes investors’ beliefs by showing that trading volume increases at earnings announcement dates. (Barth, 2006b, p. 95)

It could be argued that using information for decision-making — and hence logical (i.e. Bayesian) reasoning — all goes without saying. The retrospective provided by Chen and Schipper suggests otherwise. They explain that even theoretically formal and rigorous valuation models, like the Ohlson residual income model, are essentially non-Bayesian, because they feed accounting information into a finance-based valuation model rather than feeding Bayes theorem. Any implicit belief revision upon the Ohlson framework is not brought to light:

This valuation approach does not model how investors use accounting information to update their beliefs about firms’ future dividends. Therefore, the value relevance literature circumvents what some might view as a basic question to be asked about differences in accounting measurement attributes, namely, do the different measurements indeed result in differences in information used by investors. Fur- thermore, because the valuation model is silent on what “information content” and “value relevance” mean and how they are affected by different measurements, it has limited ability to guide research designs and to help researchers draw meaningful inferences. Consequently, much of the existing literature has relied on ad hoc specifications, and focused on assessments of explanatory power and assessments of regression coefficients linking accounting outcomes such as earnings to market outcomes such as price or return. Absent a theory or at least an analytical structure explicitly considering investors’ use of information (e.g., investors’ prior, Bayes updating), the interpretations of these results must of necessity be ad hoc. . . .We are not implying that the residual income frameworks revived by Ohlson (1995) and others have no value. In fact, we believe this research provides useful insights on the role of accounting measurement. Our point is that this research is not suitable to answer questions related to how investors use accounting data to update their assessments of estimates of future cash flows. (Chen and Schipper, 2016)

Any attempt to explicate the decades-old accounting notions of “information content”, “value relevance”, “decision useful” and the like, is inevitably a Bayesian task. It is fair to say that in the human logic of reasoning under uncertainty, probability theory (and thus Bayes’ theorem) is the only candidate (we would not draw balls from an urn, and make inferences about its contents, on any formal understanding other than the laws of probability).

Frequentist or “classical” statistics, which we have probably all studied, refuses to play that game. It is not permitted under frequentist statistical theory to put a probability of any description on a proposition or “hypothesis”. We can write f(data|hypothesis), provided that we interpret f as frequency, but we cannot write f(hypothesis|data) on any interpretation of f. So, for example, we cannot use accounting data to come to an assessed probability of a firm going bankrupt, which of course means that we cannot revise that probability when new accounting data arrives.

Subjectivist Bayesian inference supports inferences drawn from accounting “measurements” or “numbers” and does not need input observations/signals to have any substantive meaning other than as merely a “signal”. Just as we can use a barometer to give an “indicator” of what weather to expect, while not necessarily giving that reading of barometric pressure any deeper scientific interpretation, Bayesian theory shows that extensibly “meaning-free” or merely “hard to interpret” accounting disclosures (and non-disclosures) can be decision-useful indicators of economic fundamentals. That understanding of Bayesian belief revision and decision-making was brought to accounting theory by Feltham, Demski and others in the 1960s and 1970s, and mirrored the rise of neo-Bayesianism in other fields in the 1950s–1960s, which in turn followed a burst of statistical work in decision theory, operations research and code breaking during WWII. The approach taken in this monograph is a Demski-like treatment of “accounting numbers” as “signals” rather than as “measurements”.

It should be of course that “good” measurements like “quality earnings” reports make generally better signals. However, to be useful for decision- making under uncertainty, accounting measurements need to have more

than established accounting measurement virtues, of the types that early theorists like Paton, Bell and Sterling might have advocated, and which recently resurfaced in the 1960s/1970s-like normative discussion in Hodder et al. (2014) and Dechow et al. (2010). Chen and Schipper’s view is that accounting measurements need to possess enough technical Bayesian information attributes to materially influence users’ beliefs and consequent investments. This monograph is really about explaining what those Bayesian information attributes are, where they come from in Bayesian theory, and how they apply in statistical accounting information theory.

Continued in Chapter 1

Selected Quotation from Chapter 4

Chapter 4

This case study re-examines Burgstahler’s (1987) method for drawing Bayesian inferences from frequentist empirical test results. The findings apply not only to the original application of interpreting the results in empirical research studies, but also far more generally to interpreting any ill-defined or incomplete signal or statement of evidence.

The following analysis reveals how Bayesian interpretations of data, or of the translation of data that is actually reported to the user, are not merely subjective, but are also often highly sensitive to the Bayesian user’s probability model, background knowledge or basic assumptions. In general, the more subjective the analysis, the wider its range of possible inferences, yet the more realistic its approach. The antidote to subjectivity is usually “get more data”, but often there is a decision to make that cannot wait, or there is no possibility of more data, or other researchers want a conclusion.

That limitation is deeply understood in the information economics models used in accounting theory. Accounting, of all applications, will often leave the information user with a less than complete report, and yet needing to act or form beliefs on what is reported, despite its perceived weaknesses. In the “worst” cases, the user is left to act in the face of no express report at all, and to interpret that non-report for what it implies. See for example Dye (2017), Dye and Hughes (2018) and the corresponding analysis set out later in this monograph.

4.1 Interpreting “p-level ≤ α”

The Bayesian theory of experimental design applies to the ex ante planning of experiments or “signal design”. It is recognized however that often the user or decision maker does not design the signal, nor know all about how it was produced, yet must still interpret it as best possible. Even a signal which is known to be imprecise or biased can still change rational Bayesian beliefs, sometimes substantially, and can still be highly informative. The following case study based on Burgstahler (1987) illustrates how a given statistical signal can have quite contrary interpretations under different levels of Bayesian conditioning, or essentially under different levels of subjectivity.

The inference problem raised by Burgstahler (1987) is to use the pub- lished report “significant at α” to revise belief in the null hypothesis H0 against alternative H1. Without introducing an alternative hypothesis it is not possible to calculate the probability of H0, because there exists only one half of the likelihood ratio.1 The idea of Burgstahler’s analysis is to help empirical researchers interpret classical (i.e. frequentist) statistical evidence in a Bayesian way, so as ultimately to assess the probability of the null hypothesis, which is theoretically disallowed in Neyman–Pearson classical statistics. Burgstahler correctly notes that the usual non-Bayesian way of calculating and interpreting significance levels does not admit any statement about the probability of H0. 2

There are at least three possible meanings to “significant at α”. If all three are plausible, the Bayesian posterior belief is a mixture or probability-weighted average of the three corresponding posterior ...

Continued in Chapter 4

Selected Quotations from Chapter 17

Issues of how information affects beliefs, certainty, decisions and rational risk premia have been the subject of Bayesian theory since the 1950s when the founding Bayesians wrote the first textbooks on Bayesian business decision-making under uncertainty. That connection between Bayesian theory and financial decision-making was cemented in the early literature on Bayesian portfolio optimization, where fundamental Bayesian insights such as the use of predictive distributions were applied to decision problems characterized by innate parameter uncertainty.

Although avowedly Bayesian in principle, accounting theory after Demski, Feltham and others largely detached itself from the source Bayesian literature, and even from the Bayesian finance literature. This monograph is intended to assist PhD students and researchers to re-make that connection.

A traditional understanding of accounting information under efficient markets theory says that better information alters investors beliefs and trades and tends to have a stronger influence, up or down, on the stockmarket. Even confirmatory evidence fits that description, because it tightens investors’ belief distributions around the same mean.

By the traditional view, accounting information serves investors in the same way as the sports pages serve gamblers on football games. Investors qua gamblers use the information available to revise their probability assessments. Their new assessments may not prove to be more successful in all cases, but on average they assist towards more profitable betting or investment outcomes.

An appealing viewpoint, underlying much contemporary empirical accounting research, suggests that better information, such as higher quality earnings, reduces uncertainty and hence also reduces the risk premium or market cost of capital. On that understanding, financial reporting standards are evaluated by whether firms disclosing “more” or “more precise” information seem to be “charged” a lower cost of capital. The older and less idealistic Bayesian view is that information which raises new doubts about an asset’s future viability and payoff, and causes its ex ante discount rate to increase, is desirable in the sense that “it is always better to know”.

Bayes fits

Critics of Bayesian inference traditionally balked at the subjectivity of the prior belief, usually overlooking the innate subjectivity of any model. The Bayesian response is that all beliefs have a starting point and are subjective, so why not express that subjectivity openly and use it advantageously to incorporate factors in the inference and decision that would otherwise be relegated to afterthoughts, and possibly go financially unhedged. As a conceptual framework for understanding uncertain inference in markets and the value and limitations of information, textbook subjectivist Bayesian theory is as good an ideal as exists.

Starting with Demski and Feltham, Bayesian logic has been shown to fit elegantly with the idea of accounting as information for decision- making under uncertainty. The rules of Bayesian logic are nothing but the probability calculus, part of which is Bayes theorem. A Bayesian in the mathematical sense is merely someone who applies the laws of probability, to revise and reconcile beliefs.

Continued in Chapter 17

Jensen Comment
I just received a copy of this book from David this morning and have not had a chance to digest it let alone review it.

First and foremost I want to congratulate David on the tremendous effort put into what appears to be a valuable contribution to accountics science, and I do have a huge respect for the monumental contributions of accountics science in general. Keep in mind that the book is addressed to Ph.D. students and not to the International Accounting Standards Board that faces issues that do not neatly into any type of quantitative analysis.

Readers of this book may want to explore the entire subject of "Naive Bayes" which is intended for real world (especially machine learning) applicatiosn of Bayesian reasoning ---
https://www.amazon.com/seribu-bintang-Naive-Bayes-Tutorial/dp/B075H7FM5Q/ref=sr_1_15?ie=UTF8&qid=1549543905&sr=8-15&keywords=naive+bayes    (Free Download)
Also enter the phrase "Naive Bayes" in Amazon books

If I were to do a critique of the work I would commence with the critique of Baysian statistics of prominent statisticians.

Here's a sampling:

"An Intuitive Explanation of Bayes':  Theorem:  Bayes' Theorem for the curious and bewildered; an excruciatingly gentle introduction," by Eliezer S., Yudkowsky, August 2009 --- http://yudkowsky.net/rational/bayes

I think a case can be made that the IASB is becoming more Bayesian as tests of credit risk of cash flow impairments become weighted by subjective probability distributions. Hence we have to dredge up more of the old Bayesian theory for students if the IASB heads full bore into using subjective probability distributions for credit impairment, fair value, etc. Reverend Bayes may be smiling down on the FASB. I am not so enthusiastic about how it will help investors to add this subjectivity to financial reporting ---
http://www.iasplus.com/dttletr/1007amortcost.pdf 

"Beyond Bayes: causality vs correlation," by Steve Hsu Professor of physics at the University of Oregon, Information Processing, July 10, 2010 ---
http://infoproc.blogspot.com/2010/07/beyond-bayes-causality-vs-correlation.html

A draft paper by Harvard graduate student James Lee (student of Steve Pinker; I'd love to post the paper here but don't know yet if that's OK) got me interested in the work of statistical learning pioneer Judea Pearl. I found the essay Bayesianism and Causality, or, why I am only a half-Bayesian (excerpted below) a concise, and provocative, introduction to his ideas.

Pearl is correct to say that humans think in terms of causal models, rather than in terms of correlation. Our brains favor simple, linear narratives. The effectiveness of physics is a consequence of the fact that descriptions of natural phenomena are compressible into simple causal models. (Or, perhaps it just looks that way to us ;-)
 

Judea Pearl: I turned Bayesian in 1971, as soon as I began reading Savage’s monograph The Foundations of Statistical Inference [Savage, 1962]. The arguments were unassailable: (i) It is plain silly to ignore what we know, (ii) It is natural and useful to cast what we know in the language of probabilities, and (iii) If our subjective probabilities are erroneous, their impact will get washed out in due time, as the number of observations increases.

Thirty years later, I am still a devout Bayesian in the sense of (i), but I now doubt the wisdom of (ii) and I know that, in general, (iii) is false. Like most Bayesians, I believe that the knowledge we carry in our skulls, be its origin experience, schooling or hearsay, is an invaluable resource in all human activity, and that combining this knowledge with empirical data is the key to scientific enquiry and intelligent behavior. Thus, in this broad sense, I am a still Bayesian. However, in order to be combined with data, our knowledge must first be cast in some formal language, and what I have come to realize in the past ten years is that the language of probability is not suitable for the task; the bulk of human knowledge is organized around causal, not probabilistic relationships, and the grammar of probability calculus is insufficient for capturing those relationships. Specifically, the building blocks of our scientific and everyday knowledge are elementary facts such as “mud does not cause rain” and “symptoms do not cause disease” and those facts, strangely enough, cannot be expressed in the vocabulary of probability calculus. It is for this reason that I consider myself only a half-Bayesian. ...

"You Might Already Know This ... ," by Benedict Carey, The New York Times, January 10, 2011 ---
http://www.nytimes.com/2011/01/11/science/11esp.html?_r=1&src=me&ref=general

. . .

The critics have been crying foul for half that time. In the 1960s, a team of statisticians led by Leonard Savage at the University of Michigan showed that the classical approach could overstate the significance of the finding by a factor of 10 or more. By that time, a growing number of statisticians were developing methods based on the ideas of the 18th-century English mathematician Thomas Bayes.

Bayes devised a way to update the probability for a hypothesis as new evidence comes in.

So in evaluating the strength of a given finding, Bayesian (pronounced BAYZ-ee-un) analysis incorporates known probabilities, if available, from outside the study.

It might be called the “Yeah, right” effect. If a study finds that kumquats reduce the risk of heart disease by 90 percent, that a treatment cures alcohol addiction in a week, that sensitive parents are twice as likely to give birth to a girl as to a boy, the Bayesian response matches that of the native skeptic: Yeah, right. The study findings are weighed against what is observable out in the world.

In at least one area of medicine — diagnostic screening tests — researchers already use known probabilities to evaluate new findings. For instance, a new lie-detection test may be 90 percent accurate, correctly flagging 9 out of 10 liars. But if it is given to a population of 100 people already known to include 10 liars, the test is a lot less impressive.

It correctly identifies 9 of the 10 liars and misses one; but it incorrectly identifies 9 of the other 90 as lying. Dividing the so-called true positives (9) by the total number of people the test flagged (18) gives an accuracy rate of 50 percent. The “false positives” and “false negatives” depend on the known rates in the population.

Continued in article

Bayes Factors Versus P-Values ---
https://replicationnetwork.com/2017/03/22/bayes-factors-versus-p-values/

In a recent article in PLOS One, Don van Ravenzwaaij and John Ioannidis argue that Bayes factors should be preferred to significance testing (p-values) when assessing the effectiveness of new drugs.  At his blogsite The 20% Statistician, Daniel Lakens argues that Bayes factors suffer from the same problems as p-values. Namely, the combination of small effect sizes and sample sizes leads to inconclusive conclusions no matter whether one uses p-values or Bayes factors.  The real challenge facing decision-making from statistical studies comes from publication bias and underpowered studies.  Both significance testing and Bayes factors are relatively powerless (pun intended) to overcome these more fundamental problems. To read more, click here.

If the American Statistical Association Warns About p-Values, and Nobody Hears It, Does It Make a Sound? ---
 https://replicationnetwork.com/category/news-events/

Statisticians Are Ringing the Death Knell for P-Values:  It will be much harder to call new findings ‘significant’ if this team gets its way ---
 http://www.sciencemag.org/news/2017/07/it-will-be-much-harder-call-new-findings-significant-if-team-gets-its-way?utm_source=MIT+Technology+Review&utm_campaign=33147f2854-The_Download&utm_medium=email&utm_term=0_997ed6f472-33147f2854-153727301

Academic psychology and medical testing are both dogged by unreliability. The reason is clear: we got probability wrong ---
https://aeon.co/essays/it-s-time-for-science-to-abandon-the-term-statistically-significant?utm_source=Aeon+Newsletter&utm_campaign=b8fc3425d2-Weekly_Newsletter_14_October_201610_14_2016&utm_medium=email&utm_term=0_411a82e59d-b8fc3425d2-68951505

Jensen Comment
Especially note the many replies to this article

. . .

David Colquhoun
https://aeon.co/conversations/what-should-be-done-to-improve-statistical-literacy#
I think that it’s quite hard to find a really good practical guide to Bayesian analysis. By really good, I mean on that is critical about priors and explains exactly what assumptions are being made. I fear that one reason for this is that Bayesians often seem to have an evangelical tendency that leads to them brushing the assumptions under the carpet. I agree that Alexander Etz is a good place to start. but I do wonder how much it will help when your faced with a particular set of observations to analyze.

Henning Strandin ---
https://aeon.co/users/henning-strandin
Thank you for a good and useful article on the pitfalls of ignoring the baseline. I have a couple of comments.
Bayes didn’t resolve the problem of induction, even in principle. The problem of induction is the problem of knowing that the observations you have made are relevant to some set of (perhaps as-yet) unobserved events. In his Essay on Probabilities, Laplace illustrated the problem in the same paragraph in which he suggests  . . .

Karl Young
Nice article; as a Bayesian who was forced to quote p values in a couple of medical physics papers for which the journal would have nothing else, I appreciate the points made here. But even as a Bayesian one has to acknowledge that there are a number of open problems besides just how to estimate priors. E.g. what one really wants to know is given some observations, how one’s hypothesis fares against as complete a list of alternative hypothesis as can be mustered. Even assuming that one could come up with such a list, calculating the probability that one’s hypothesis best fits the observations in that case requires calculation of a quantity called the evidence that is generally extremely difficult (the reason that the diagnostic examples mentioned in the piece lead to reasonable calculations is that calculating the evidence for the set of proposed hypotheses, that either someone in the population has a disease or doesn’t, is straightforward). So while I think Bayes is the philosophically most coherent approach to analyzing data (doesn’t solve the problem of induction but tries to at least manage it) there are still a number of issues preventing it

Comments Continued at
https://aeon.co/conversations/what-should-be-done-to-improve-statistical-literacy

"Not Even Scientists Can Easily Explain P-values," by Christie Aschwanden, Nate Silver's 5:38 Blog, November 30, 2015 ---
http://fivethirtyeight.com/features/not-even-scientists-can-easily-explain-p-values/

P-values have taken quite a beating lately. These widely used and commonly misapplied statistics have been blamed for giving a veneer of legitimacy to dodgy study results, encouraging bad research practices and promoting false-positive study results.

But after writing about p-values again and again, and recently issuing a correction on a nearly year-old story over some erroneous information regarding a study’s p-value (which I’d taken from the scientists themselves and their report), I’ve come to think that the most fundamental problem with p-values is that no one can really say what they are.

Last week, I attended the inaugural METRICS conference at Stanford, which brought together some of the world’s leading experts on meta-science, or the study of studies. I figured that if anyone could explain p-values in plain English, these folks could. I was wrong.

Continued in article

Jensen Comment
Why all the fuss? Accountics scientists have a perfectly logical explanation. P-values are numbers that are pumped out of statistical analysis software (mostly multiple regression software) that accounting research journal editors think indicate the degree of causality or at least suggest the degree of causality to readers. But the joke is on the editors, because there aren't any readers.

November 30, 2015 reply from David Johnstone

Dear Bob, thankyou for this interesting stuff.

 

A big part of the acceptance of P-values is that they easily give the look of something having been found. So it’s an agency problem, where the researchers do what makes their research outcomes easier and better looking.

 

There is a lot more to it of course. I note with young staff that they face enough hurdles in the need to get papers written and published without thinking that the very techniques that they are trying to emulate might be flawed. Rightfully, they say, “it’s not my job to question everything that I have been shown and to get nowhere as a result”, nor can most believe that something so established and revered can be wrong, that is just too unthinkable and depressing. So the bandwagon goes on, and, as Bob says, no one cares outside as no one much reads it.

 

I do however get annoyed every time I hear decision makers carry on about “evidence based” policy, as if no one can have a clue or form a vision or strategy without first having the backing of some junk science by a sociologist or educationist or accounting researcher who was just twisting the world whichever way to get significant p-values and a good “story”. This kind of cargo-culting, which is everywhere, does great harm to good or sincere science, as it makes it hard for an outsider to tell the difference.

 

One thing that does not get much of a hearing is that the statisticians themselves must take a lot of blame. They had the chance to vote off P values decades ago when they had to choose between frequentist and Bayesian logic. They split into two camps with the frequentists in the great majority but holding the weakest ground intellectually. The numbers are moving now, as people that were not born when de Finetti, Savage, Lindley, Kadane and others first said that p-values were ill-conceived logically. Accounting, of course, being largely ignorant of there being any issue, and ultimately just political, will not be leading the battle of ideas.

January 28, 2016 reply from Paul Williams

Bob,

Thank you for this. In accounting the problem is even worse because at least in other fields it is plausible that one can have "scientific" concepts and categories. Archival research in accounting can only deal with interpretive concepts and the "scientific" categories are often constructed for the one study in question. We make a lot of s... up so that the results are consistent with the narrative (always a neoclassical economic one) that informs the study. Measurement? Doesn't exist. How can one seriously believe they are engaged in scientific research when their "measurements" are the result of GAAP? Abe Briloff described our most prestigious research (which Greg Waymire claimed in his AAA presidential white paper "...threatens the discipline with extinction."). as simply "low level financial statement analysis." Any research activity that is reduced to a template (in JAE the table numbers are nearly the same from paper to paper) you know you are in trouble. What is the scientific value of 50 control variables, two focus independent variables (correlated with the controls), and one dependent variable that is always different from study to study? This one variable at a time approach can go on into infinity with the only result being a huge pile of anecdotes that no one can organize into any coherent explanation of what is going on. As you have so eloquently and relentlessly pointed out accountants never replicate anything. In archival research it is not even possible to replicate since the researcher is unable to provide (like any good scientist in physics, chemistry, biology, etc.) a log book providing the detailed recipe it would take to actually replicate what the researcher has done. Without the ability to independently replicate the exact study, the status of that study is merely an anecdote. Given the Hunton affair, perhaps we should not be so sanguine about trusting our colleagues. This is particularly so since the leading U.S. journals have a clear ideological bias -- if your results aren't consistent with the received wisdom they won't be published.

Paul

And the beat goes on!

Excel:  How to Use the Built-In Geography Feature in Microsoft Excel ---
https://www.howtogeek.com/699219/how-to-use-the-built-in-geography-feature-in-microsoft-excel/

Excel:  Excel 365 has X-cellent upgrade over VLOOKUP ---
https://www.journalofaccountancy.com/issues/2020/nov/microsoft-excel-365-xlookup-vlookup.html

CPA Journal News Briefs: FASB, PCAOB, IASB ---
CPAJ News Briefs: FASB, PCAOB, IASB - The CPA Journal

EY:  SEC eliminates certain MD&A requirements and revises others to make disclosures more useful ---
To the Point - SEC eliminates certain MD&A requirements and revises others to make disclosures more useful | EY - US

EY:  Financial Reporting Developments - Revenue from contracts with customers (ASC 606) ---
Click Here

EY:  Financial Reporting Developments - Income taxes ---
Click Here

EY:  Technical Line - A closer look at how insurers will have to change their accounting and disclosures for long-duration contracts ---
https://www.ey.com/en_us/assurance/accountinglink/technical-line---a-closer-look-at-how-insurers-will-have-to-chan

EY:  SEC updates from an EY Newsletter on November 6m 2020

SEC staff provides transition guidance for amended Regulation S-K Items 101, 103 and 105

 

The SEC staff in the Division of Corporation Finance issued a frequently asked questions (FAQ) document to provide transition guidance for amended Regulation S-K Items 101, 103 and 105. The amendments are effective for periodic reports and registration statements filed on or after 9 November 2020.

 

Among other things, the FAQs clarify that if a registrant files a prospectus supplement to an effective registration statement on Form S-3 on or after 9 November 2020, the prospectus supplement does not need to comply with the amended Items 101 and 103. Although Form S-3 requires Item 105 disclosure, the SEC staff will not object if the prospectus supplement complies with the legacy Item 105 until the next update to the registration statement on Form S-3 for Section 10(a)(3) purposes.

 

While the SEC staff did not address this in the FAQ, we believe a registrant could also file a new Form S-3 after the effective date but before its Form 10-K and incorporate the previously filed Form 10-K without any revisions to Items 101 and 103. However, the Form S-3 would need to comply with amended Item 105. Registrants should consult with legal counsel to confirm this approach.

 

SEC adopts rule changes to harmonize the exempt offering framework

 

The SEC adopted amendments to its rules for securities offerings that are exempt from registration. The amendments are aimed at promoting capital formation and expanding investment opportunities, while preserving or enhancing investor protections.

 

The changes harmonize many of the rules governing the 10 different exemptions from SEC registration requirements. The amendments:

 

·        Establish a general principle of integration to help an issuer determine whether multiple securities transactions should be considered part of the same offering and establish four safe harbors under which multiple transactions would not be integrated

 

·        Increase the offering limits for Regulation A, Regulation Crowdfunding and Rule 504 offerings, and revise certain individual investment limits

 

·        Expand the availability of certain “test-the-waters” communications for exempt securities offerings and permit certain “demo day” communications by issuers

 

·        Harmonize certain disclosure and eligibility requirements and disqualification provisions to reduce the differences among the various exemptions

 

The rules also provide an 18-month extension to the temporary relief from Regulation Crowdfunding financial statement review requirements that the SEC provided earlier this year to certain issuers impacted by the COVID-19 pandemic.

 

The amendments are effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register and lasts until 1 March 2023.

 

 

EY:  SEC Updates from an EY Newsletter on October 31, 2020

SEC adopts final rule to modernize funds’ use of derivatives and other transactions

The SEC adopted a final rule and related rule and form amendments that allow certain funds to enter into derivatives and certain other transactions that create future payment obligations, notwithstanding the restrictions under the Investment Company Act of 1940, if they comply with certain conditions. The new rule and amendments apply to mutual funds (other than money market funds), exchange-traded funds (ETFs), registered closed-end funds and business development companies (collectively, funds).

 

The new rule and related amendments set the following requirements for entering into certain transactions:

 

Funds entering into derivatives will be required to implement a written derivatives risk management program, administered by a board-approved derivatives risk manager, and comply with a limit on leverage risk based on value‑at‑risk (VaR).

 

Funds that limit their exposure to derivatives, excluding certain currency and interest rate hedging transactions, to 10% of net assets do not have to meet the requirements described above if they adopt and implement written policies and procedures reasonably designed to manage their derivatives risks.

 

Leveraged or inverse ETFs will be able to operate without obtaining exemptive orders, but the amount of their leverage will be limited based on VaR.

 

Leveraged or inverse funds in operation as of 28 October 2020 that seek an investment return above 200% of the return (or inverse of the return) of the fund’s underlying index and satisfy certain conditions will not need to comply with the new leverage risk limit.

 

Funds will be required to satisfy certain conditions to enter into reverse repurchase agreements or similar financing transactions and unfunded commitments.

 

Funds will not need to consider in their asset coverage computations any derivatives transactions and unfunded commitments they enter into in compliance with the new rule.

 

Funds and money market funds will be required to satisfy certain time and physical settlement conditions to invest in securities on a when-issued or forward-settling basis, or with a non-standard settlement cycle.

 

Funds will be required to confidentially report to the SEC on Form N-RN (formerly known as Form N-LIQUID) if they are out of compliance with the leverage risk limitations for more than five consecutive business days.

 

Funds that are currently required to file reports on Forms N-PORT and N-CEN will be required to disclose information about their derivatives use.

 

The rule will be effective 60 days after publication in the Federal Register, and the compliance date will be 18 months after the effective date with earlier compliance permitted.

 

New Regulation S-K disclosure requirements are effective 9 November 2020

 

The SEC’s recent amendments to Regulation S-K are effective for periodic reports and registration statements filed on or after 9 November 2020. The amendments streamline the disclosures registrants are required to make about business, legal proceedings and risk factors, and add new requirements for disclosures about human capital resources.

 

Most companies filing quarterly reports on Form 10-Q on or after 9 November only need to decide whether to streamline their disclosures about legal proceedings. However, companies that include a full discussion of risk factors in their Form 10-Q may need to make changes to comply with the amendments, including adding a summary if the disclosures exceed 15 pages.

 

Annual reports on Form 10-K filed on or after the effective date must include disclosures that satisfy all of the new rules, including the new requirement to include a description of human capital measures or objectives that management uses to run the business.

 

For details about the rule changes, see our August 2020 To the Point. Our recent publication, How to approach the SEC’s new human capital disclosures, provides guidance for companies to consider as they begin preparing their disclosures.

 

Division of Corporation Finance Director Bill Hinman to leave SEC

 

Bill Hinman, Director of the SEC’s Division of Corporation Finance, plans to leave the SEC later this year. Under his leadership, the division modernized, streamlined and improved a number of public company disclosure requirements, the proxy process and the securities-offering framework. Mr. Hinman also guided the division in its efforts to address emerging issues, such as how to evaluate whether digital assets, including new types of digital assets, meet the definition of a security under federal securities laws.

The US-China Audit Oversight Dispute: Causes, Solutions, and Implications for Hong Kong

International Lawyer (Forthcoming)
SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3708068

Posted: 26 Nov 2020

(Robin) Hui Huang

Chinese University of Hong Kong - Faculty of Law; 华东政法大学(East China University of Political Sicence and Law); University of New South Wales - Faculty of Law

Date Written: October 8, 2020

Abstract

The U.S. audit regulator, PCAOB, has extraterritorial oversight power over all accounting firms that audit U.S.-listed companies, including that of foreign accounting firms. This put it in conflict with foreign audit regulators due to sovereignty and conflict of law issues. Today China remains to prevent its accounting firms to be inspected by the PCAOB, although most other jurisdictions have resolved their differences with the U.S. regulator. This dispute between the U.S. and China had led to lawsuits, warnings, and potential bill to de-list all Chinese companies. This article examines the U.S. audit oversight regime and its inspection practices, the law of China that prevent foreign access to audit documents, as well as the court cases that arose out of the dispute. The reasons for the reluctance of the Chinese side to cooperate are found to be multi-folded, from legal restriction, administrative hurdle, regulatory standard differences, enforcement resources constraints, to a political preference for sovereign rights and national control. As another major listing destination for Chinese companies, Hong Kong has also encountered difficulties with access to Chinese audit documents but has taken a different approach to solving them. This article proposes various policy options to cope with the dispute over cross-border audit oversight, including sidestepping the legal issue over approval of state secrets by first asking the audit firm to prove the factual existence of state secrets, categorizing the Chinese companies into different groups with different treatments, exploring other forms of cooperative arrangements based on the Hong Kong experience or even using Hong Kong as a proxy for oversight.

Keywords: Cross-border audit oversight, audit working paper, cross-listing, Chinese Concept Stocks, securities regulatory cooperation, PCAOB

JEL Classification: G15, K22

Suggested Citation:

Huang, (Robin) Hui, The US-China Audit Oversight Dispute: Causes, Solutions, and Implications for Hong Kong (October 8, 2020). International Lawyer (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3708068

Accounting for Intangible Assets: Suggested Solutions

SSRN
 Accounting for Intangible Assets: Suggested Solutions by Richard Barker, Stephen H. Penman, Alan Teixeira :: SSRN
37 Pages Posted: 25 Nov 2020

Richard Barker

University of Oxford - Said Business School

Stephen H. Penman

Columbia Business School - Department of Accounting

Alan Teixeira

Deloitte LLP; The University of Auckland Business School

Date Written: September 2020

Abstract

Current accounting practice expenses many investments in intangible assets to the income statement, confusing earnings from current revenues with investments to gain future revenues. This has led to increasing calls to book those investments to the balance sheet. Drawing on the relevant research, this paper proposes solutions for the accounting for intangible assets that contrast with balance sheet recognition, and compares them to current practice and the IFRS standards that dictate practice. Key is the recognition that an accounting solution comes from a double-entry system which produces an income statement as well as a balance sheet, and that has features that both enable and limit the information that can be conveyed about the value in intangible assets. In this system, asset recognition in the balance sheet must consider the effect on measurement in the income statement, for the income statement conveys value added to investment on the balance sheet. A determining feature is uncertainty about investment outcome and how that affects the income statement, so our solutions centre on accounting under uncertainty. Two other accounting features are added: There has to be an investment expenditure for balance sheet recognition and that expenditure must be separately identifiable from transactions. These features rather than the tangible-intangible asset dichotomy lead to the prescribed solutions.

Suggested Citation:

Barker, Richard and Penman, Stephen H. and Teixeira, Alan, Accounting for Intangible Assets: Suggested Solutions (September 2020). Available at SSRN: https://ssrn.com/abstract=3706435 or http://dx.doi.org/10.2139/ssrn.3706435

How Accounting Professionals Cope with Client-Initiated Workplace Aggression

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3706352
45 Pages Posted: 25 Nov 2020

Tim Bauer

University of Waterloo - School of Accounting and Finance

Sean M. Hillison

Virginia Tech

Ala Mokhtar

University of Waterloo

Date Written: September 13, 2020

Abstract

We survey 163 accounting professionals to examine the mechanisms they use to cope with workplace aggression initiated against them by their clients. Using data from our questionnaires, we briefly touch on the negative acts that accountants experience at the hands of their clients but focus on their coping responses and their perceptions of how the negative acts affect their work. Our results show that accounting professionals often try to take action to address the situation, but they also commonly passively cope by ignoring or resigning themselves to the situation. Further, how they cope depends on their rank in their firm and is related to how much they believe their work is adversely affected by client-initiated workplace aggression. That is, partners generally cope differently than staff, seniors, or managers and certain coping mechanisms appear better-suited to avoid adverse effects of client-initiated aggression (e.g., talking to the perpetrator) than others (e.g., just accepting the situation).

Keywords: Client-Initiated Workplace Aggression; Coping Mechanisms; Accounting Professionals; Work Quality

JEL Classification: M4

Suggested Citation:

Bauer, Tim and Hillison, Sean and Mokhtar, Ala, How Accounting Professionals Cope with Client-Initiated Workplace Aggression (September 13, 2020). Available at SSRN: https://ssrn.com/abstract=3706352 or http://dx.doi.org/10.2139/ssrn.3706352

Efficiency Gains from Accounting Regulatory Compliance

SSRN
 Efficiency Gains from Accounting Regulatory Compliance by Chandrani Chatterjee :: SSRN
44 Pages Posted: 23 Nov 2020

Chandrani Chatterjee

University of Iowa

Multiple version iconThere are 2 versions of this paper

Date Written: October 7, 2020

Abstract

Using the recent lease accounting standard change (ASC-842), I examine whether the process of complying with new accounting standards has positive spillover effects on operating efficiency through managerial learning. To separate managerial learning from the potential benefits of enhanced disclosures, I exploit the relatively long transition period (2017-2018), wherein managers have access to new lease-related information that has not been disclosed to the market. I find that firms with a high proportion of operating leases experience an increase in profitability and a reduction in operating leases during the transition-period relative to other firms. I document that the results are not driven by substitution to capital leases or the purchase of PPE. Additional analyses reveal that the results are concentrated in firms with poor internal information environments and high business complexity. My results support the claim that the information generated through the compliance process can lead to efficiency gains.

Keywords: Operating Leases, Efficiency, Regulation

JEL Classification: M41, M48

Suggested Citation:

Chatterjee, Chandrani, Efficiency Gains from Accounting Regulatory Compliance (October 7, 2020). Available at SSRN: https://ssrn.com/abstract=3736028 or http://dx.doi.org/10.2139/ssrn.3736028

Immediately Expense or Capitalize and Amortize? A New Perspective on Accounting for R&D Expenditures

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3722902
51 Pages Posted: 19 Nov 2020

Zach King

University of Wisconsin-Madison

Date Written: November 9, 2020

Abstract

Prior research suggests an accounting policy to capitalize and amortize R&D expenditures provides decision-useful information to equity investors. However, the economic theory underlying that research was developed for tangible capital and assumes R&D expenditures generate revenues immediately. Based on an alternative economic theory that assumes R&D expenditures generate revenues with a delay, this study predicts and finds an accounting policy to immediately expense R&D expenditures provides more decision-useful information about the expected value of the firm than an accounting policy to capitalize and amortize R&D expenditures. Accounting standards in the United States require firms to immediately expense R&D expenditures, but the Financial Accounting Standards Board is actively considering whether to undertake a project that would change those standards to require capitalization and amortization. This study suggests that changing current accounting standards to require capitalization and amortization is inconsistent with how equity investors value the R&D activities of the firm.

Keywords: Accounting policy, accounting standards, dynamic R&D investment, R&D capital, standard setting

JEL Classification: D24, M41, O30

Suggested Citation:

King, Zachary, Immediately Expense or Capitalize and Amortize? A New Perspective on Accounting for R&D Expenditures (November 9, 2020). Available at SSRN: https://ssrn.com/abstract=3722902 or http://dx.doi.org/10.2139/ssrn.3722902

Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks

Institute for New Economic Thinking Working Paper Series No. 136
 https://doi.org/10.36687/inetwp136

SSRN

31 Pages Posted: 18 Nov 2020

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 27, 2020

Abstract

This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.

Keywords: E58, G21, G32

JEL Classification: capital requirements, too big to fail, loss recognition, income-distribution effects

Suggested Citation:

Kane, Edward J., Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks (August 27, 2020). Institute for New Economic Thinking Working Paper Series No. 136
https://doi.org/10.36687/inetwp136 , Available at SSRN: https://ssrn.com/abstract=3731834

Audit Committee Financial Expertise, Litigation Risk, and Auditor-Provided Tax Services

Forthcoming, Accounting Perspectives

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3702425
54 Pages Posted: 17 Nov 2020

Jean Bédard

Université Laval - École de comptabilité

Suzanne M. Paquette

Université Laval, École de comptabilité

Date Written: July 28, 2020

Abstract

The Sarbanes-Oxley Act greatly expanded audit committees’ oversight responsibilities by requiring that they preapprove all non-prohibited non-audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT-FEs) serve on the audit committee, suggesting that ACT-FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex-ante litigation risk, ACT-FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by sub-period (2003 to 2006 versus 2007 to 2011) shows that this result is significant only in the second period. ACT-FEs’ differential evaluation of the trade-off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post SOX years.

Keywords: Auditor-provided tax services, non-audit services, auditor independence, audit committee, financial expertise, litigation risk

JEL Classification: G38, H25, K22, M40, M41

Suggested Citation:

Bédard, Jean and Paquette, Suzanne M., Audit Committee Financial Expertise, Litigation Risk, and Auditor-Provided Tax Services (July 28, 2020). Forthcoming, Accounting Perspectives, Available at SSRN: https://ssrn.com/abstract=3702425 or http://dx.doi.org/10.2139/ssrn.3702425

A Ripple in the Muddy Waters: The Luckin Coffee Scandal and Short Selling Attacks

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3672971
32 Pages Posted: 13 Nov 2020

Zhe Peng

Wilfrid Laurier University - School of Business & Economics

Date Written: August 1, 2020

Abstract

Luckin Coffee was extolled as the Chinese challenger of Starbucks. However, nine months after its IPO on NASDAQ, Luckin was accused of accounting fraud but did not confessed to the allegations until two months later. This scandal caused wide concerns, not only on Luckin but also two related firms. We found evidence that the two related firms suffered from panic-selling not upon the release of the allegations, but after Luckin's own confession. We found evidence of short squeeze in the short selling attacks before Luckin's confession, pointing to non-negligible shorting selling risks. Our results also indicate the difficulty for non-stakeholders to impound negative corporate information into the stock price.

Keywords: Financial Fraud, Luckin Coffee, Short Selling Risk

JEL Classification: G14, G18

Suggested Citation:

Peng, Zhe, A Ripple in the Muddy Waters: The Luckin Coffee Scandal and Short Selling Attacks (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3672971 or http://dx.doi.org/10.2139/ssrn.3672971

Real Options Approach for a Staged Field Development With Optional Wells

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3698334
37 Pages Posted: 12 Nov 2020

Semyon Fedorov

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Thomas Lerdahl

OKEA ASA

Date Written: September 23, 2020

Abstract

The decreasing average size of new discoveries in mature production areas makes the base of oil field investment decisions more uncertain than ever before. Fewer appraisal wells, which allow to decrease the amount of subsurface uncertainty, are typically drilled before the development of a small field compared to large fields. Therefore, new solutions are required to make small discoveries commercial given both technical and market uncertainties. Therefore, accounting for managerial flexibilities that enable to change the course of the project due to new information, becomes even more important for investment valuation.

Combining the real options approach and decision analysis we present a novel model that allows to identify additional value created by a sequential drilling strategy for field development under oil price and resource uncertainty. We capture the sequence of key investment and operating decisions of a marginal field development in cooperation with an oil industry partner building a synthetic (yet realistic) project case. Addressing the flexibility to divide production wells drilling into two stages, we evaluate the option to wait to expand the production by drilling additional wells after the revelation of reservoir information based on a least-squares Monte Carlo algorithm.

We identify the conditions under which the staged (phased) development is preferred compared to standard development. Furthermore, we propose a decision rule determining the optimal expansion timing based on new information on the reservoir and the oil price uncertainty. Our results suggest that staged development carries large upside potential for marginal field development under extensive reservoir uncertainty. We also illustrate that partial hedging against the downside risks within a staged development can improve project's economy significant enough to justify investment.

Keywords: Real Options, Decision Analysis, Marginal Fields, Staged Field Development

JEL Classification: Q30

Suggested Citation:

Fedorov, Semyon and Hagspiel, Verena and Lerdahl, Thomas, Real Options Approach for a Staged Field Development With Optional Wells (September 23, 2020). Available at SSRN: https://ssrn.com/abstract=3698334 or http://dx.doi.org/10.2139/ssrn.3698334

Heterogeneous Variable Selection in Nonlinear Panel Data Models: A Semi-Parametric Bayesian Approach

Tinbergen Institute Discussion Paper 2020-061/III

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3697480
45 Pages Posted: 12 Nov 2020

Anoek Castelein

Erasmus University Rotterdam (EUR)

D. Fok

Econometric Institute - Erasmus University Rotterdam; Erasmus Research Institute of Management (ERIM); Tinbergen Institute Rotterdam

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Date Written: September 22, 2020

Abstract

In this paper, we develop a general method for heterogeneous variable selection in Bayesian nonlinear panel data models. Heterogeneous variable selection refers to the possibility that subsets of units are unaffected by certain variables. It may be present in applications as diverse as health treatments, consumer choice-making, macroeconomics, and operations research. Our method additionally allows for other forms of cross-sectional heterogeneity. We consider a two-group approach for the model's unit-specific parameters: each unit-specific parameter is either equal to zero (heterogeneous variable selection) or comes from a Dirichlet process (DP) mixture of multivariate normals (other cross-sectional heterogeneity). We develop our approach for general nonlinear panel data models, encompassing multinomial logit and probit models, poisson and negative binomial count models, exponential models, among many others. For inference, we develop an efficient Bayesian MCMC sampler. In a Monte Carlo study, we find that our approach is able to capture heterogeneous variable selection whereas a "standard'' DP mixture is not. In an empirical application, we find that accounting for heterogeneous variable selection and non-normality of the continuous heterogeneity leads to an improved in-sample and out-of-sample performance and interesting insights. These findings illustrate the usefulness of our approach.

Keywords: Individualized Variable Selection, Dirichlet Process, Stochastic Search, Heterogeneity, Attribute Non-Attendance, Feature Selection, Bayesian

JEL Classification: C23, C11

Suggested Citation:

Castelein, Anoek and Fok, Dennis and Paap, Richard, Heterogeneous Variable Selection in Nonlinear Panel Data Models: A Semi-Parametric Bayesian Approach (September 22, 2020). Tinbergen Institute Discussion Paper 2020-061/III, Available at SSRN: https://ssrn.com/abstract=3697480 or http://dx.doi.org/10.2139/ssrn.3697480

Accounting Information in Innovative Small Cap Firms: Evidence from London's Alternative Investment Market

Accounting and Business Research, 2020

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3695299
57 Pages Posted: 7 Nov 2020 Last revised: 27 Nov 2020

Andrei Filip

ESSEC Business School

Alessandro Ghio

Monash University

Luc Paugam

HEC Paris, Accounting and Management Control Department

Date Written: September 18, 2020

Abstract

We posit that investors and social media users place more weight on cash flows than on earnings for innovative small cap firms and that, in turn, innovative small cap firms (i) manage cash flows more than earnings, and (ii) disclose more cash flow than earnings information on social media. Using a matched sample of innovative and non-innovative small cap firms listed on the London’s Alternative Investment Market (AIM), we document that the value relevance of cash flows (earnings) is higher (lower) for innovative compared to non-innovative small cap firms. Using Twitter to examine the demand of accounting performance measures, we find that Twitter users more frequently retweet and include as ‘Favorite’ information about cash flows, than information about earnings for innovative small cap firms. We then show that innovative small cap firms engage less intensively in earnings management and exhibit higher abnormal cash flows compared to non-innovative small cap firms. Innovative small cap firms emphasize more information in their tweets about cash flows and less about earnings compared to non-innovative small cap firms. Cross-sectional tests demonstrate that seasoned equity offerings provide additional incentives to engage in increasing abnormal cash flow management activities.

Keywords: Financial Reporting; Innovation; Small Cap Firms; Social Media; Cash Flows; Earnings; AIM London

Suggested Citation:

Filip, Andrei and Ghio, Alessandro and Paugam, Luc, Accounting Information in Innovative Small Cap Firms: Evidence from London's Alternative Investment Market (September 18, 2020). Accounting and Business Research, 2020, Available at SSRN: https://ssrn.com/abstract=3695299

Organizational Climates in Non-Big 4 vis-à-vis Big 4 Accounting Firms

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3694012
52 Pages Posted: 7 Nov 2020

Candice Hux

Northern Illinois University

Ally Zimmerman

Florida State University - Department of Accounting

Date Written: September 15, 2020

Abstract

Non-Big 4 firms represent important participants in the audit market and are often compared to Big 4 firms, yet details on how and why they are different from and yet similar to the more widely studied Big 4 firms remain largely unexplored. We use a multi-method approach and a theoretical framework drawn from institutional theory to investigate the organizational climates of Non-Big 4 firms vis-à-vis Big 4 firms. First, we administer an experiential questionnaire to Non-Big 4 partners with and without former Big 4 experience about their perceptions of various organizational aspects of how these firms operate. Second, we probe deeper on the organizational climates of these firms by conducting semi-structured interviews of Non-Big 4 firm partners with former Big 4 experience given their unique insights into the operations of both types of firms. Finally, we triangulate our data by gathering the perspectives of Big 4 firm partners. Our findings shed light on how and why internal and external institutional forces have shaped Non-Big 4 firms, thereby contributing to a deeper overall understanding of Non-Big 4 firms vis-à-vis Big 4 firms. Based on our findings, we provide suggestions for future research.

Keywords: Accounting Firms, Organizational Climate, Big 4 Firms, Non-Big 4 Firms

JEL Classification: M41, M42

Suggested Citation:

Hux, Candice and Zimmerman, Aleksandra, Organizational Climates in Non-Big 4 vis-à-vis Big 4 Accounting Firms (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3694012 or http://dx.doi.org/10.2139/ssrn.3694012

What Questions Would You Ask If You Were Wirecard’s Auditor?

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3652197  
41 Pages Posted: 6 Nov 2020

Kathleen Bakarich

Hofstra University - Department of Accounting, Taxation and Legal Studies in Business

Date Written: July 15, 2020

Abstract

In June 2020, the auditor of Wirecard, one of Germany’s largest publicly traded companies, announced it was unable to issue its 2019 audit report because it could not confirm the existence of €1.9 billion in cash. This follows years of speculation regarding suspicious accounting at the company in the financial press. Utilizing a series of internal spreadsheets published by the Financial Times, detailing quarterly sales and profit transactions for some of Wirecard’s largest subsidiaries, this paper delves into the scandal, assuming the role of auditor and using data visualization techniques to highlight intriguing trends and relationships in the data. The purpose of this paper is to provide an insightful look into a current accounting scandal, provide accounting educators with real world information to utilize in their coursework to engage with students, and contribute to the ongoing discussion of the importance of emerging technologies and techniques in audit procedures.

Keywords: Audit Data Analytics, Data Visualization, Fraud, Wirecard

Suggested Citation:

Bakarich, Kathleen, What Questions Would You Ask If You Were Wirecard’s Auditor? (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3652197 or http://dx.doi.org/10.2139/ssrn.3652197

You Can’t Get There from Here: The Influence of an Audit Partner’s Prior Non-Public Accounting Industry Experience on Audit Outcomes

 

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3694022
Posted: 6 Nov 2020

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Timothy A. Seidel

Brigham Young University

Ally Zimmerman

Florida State University - Department of Accounting

Date Written: September 15, 2020

Abstract

We examine whether audit partners with prior non-public accounting industry experience conduct higher quality and more efficient audits. We further analyze whether the sequencing and nature of this experience matters by splitting audit partners with prior industry experience into those who started in industry and subsequently became an auditor (“industry starters”) and those who started in public accounting, left to take an industry position, and later returned to public accounting (“boomerangs”). Additionally, we separate these two groups according to whether the partner has experience in a key financial reporting oversight role. We find that boomerang auditors with experience in key financial reporting oversight roles are associated with higher quality and more efficient audits. These results suggest that the formative impact of auditing experience early in one’s career coupled with actual first-hand experience in major oversight roles shapes the efficacy of audit partners’ prior industry experience on audit quality and efficiency.

 

 

Keywords: audit partner industry experience, boomerangs, audit quality, audit partners, audit efficiency, imprinting theory, perspective-taking theory

JEL Classification: M41, M42

Lisic, Ling Lei and Pittman, Jeffrey A. and Seidel, Timothy A. and Zimmerman, Aleksandra, You Can’t Get There from Here: The Influence of an Audit Partner’s Prior Non-Public Accounting Industry Experience on Audit Outcomes (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3694022

Do Audit Firms Care about Media Coverage? An Investigation of Audit Firm Response to News Coverage

SSRN
Do Audit Firms Care about Media Coverage? An Investigation of Audit Firm Response to News Coverage by Elizabeth N. Cowle, Caleb Rawson, Stephen P. Rowe :: SSRN
48 Pages Posted: 5 Nov 2020 Last revised: 17 Nov 2020

Elizabeth N. Cowle

University of Arkansas

Caleb Rawson

University of Arkansas - Department of Accounting

Stephen P. Rowe

University of Arkansas

Date Written: October 28, 2020

Abstract

We examine how auditors respond to news coverage of their firm and evaluate the extent to which national news outlets function as a watchdog over audit firms. We find that when media coverage includes issues specific to the audit opinion (i.e., restatements, adverse internal control opinions, fraud), audit firms respond by increasing audit attention (increased fees, reporting delay, and late filings). We find that this is amplified among clients with issues similar to those discussed in the media coverage. In contrast, we find that when news coverage does not relate to audit reporting decisions, firms decrease fees and issue audit opinions sooner. Additional analyses reveal that audit firms respond to high levels of news coverage at peer firms, suggesting that firms try to preemptively manage their reputation even when they are not under direct media scrutiny, and negative news has significant costs for firms’ client growth and retention. Collectively, our evidence suggests that the news media functions as an effective informal oversight mechanism of auditing firms by driving increased auditor attention and improved audit quality.

Keywords: Accounting News, Auditor Reputation, Big 4, Media Coverage

JEL Classification: M41, M42

Suggested Citation:

Cowle, Elizabeth N. and Rawson, Caleb and Rowe, Stephen P., Do Audit Firms Care about Media Coverage? An Investigation of Audit Firm Response to News Coverage (October 28, 2020). Available at SSRN: https://ssrn.com/abstract=3720973 or http://dx.doi.org/10.2139/ssrn.3720973

Efficiency Gains from Accounting Regulatory Compliance

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3692813
Posted: 4 Nov 2020

Chandrani Chatterjee

University of Iowa

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2020

Abstract

My study examines whether the process of complying with new accounting standards has positive spillover effects on operating efficiency and firm performance. Using the recent lease accounting standard change (ASC-842), I examine whether the requirement to capitalize operating leases increases efficiency through managerial learning. To separate managerial learning from the potential benefits of enhanced disclosures, I exploit the relatively long transition period (2017-2018), wherein managers have access to new lease-related information that has not been disclosed to the market. I find that firms with a high proportion of operating leases experience an increase in profitability during the transition period relative to other firms. Further analysis shows that the increase in profitability is associated with a reduction in rent expenses and cost of goods sold. I document that these firms experience a decline in the level of operating leases during the transition period relative to other firms. I also provide evidence that this decrease in operating leases is not driven by substitution to capital leases or purchase of property, plant, and equipment. In cross-sectional analyses, I find that the results are concentrated in firms that have a poor internal information environment and high business complexity. These results are robust to entropy balancing and to controlling for a host of firm characteristics. Overall, my results support the claim that even though managers view new accounting standards as a burden, the information generated through the compliance process can lead to efficiency gains.

Keywords: Operating Leases, ASC-842, Accounting Regulatory Compliance

JEL Classification: M41, M48

Suggested Citation:

Chatterjee, Chandrani, Efficiency Gains from Accounting Regulatory Compliance (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3692813

From the CFO Journal's Morning Ledger on November 30, 2020

Companies and governments have issued a record $9.7 trillion of bonds and other debt this year, as extraordinary support from the Federal Reserve and other central banks has fueled a borrowing bonanza.

From the CFO Journal's Morning Ledger on November 30, 2020

Roughly half as many people visited stores on Black Friday as they did last year, according to research firms that measure foot traffic, as the coronavirus pandemic accelerated the yearslong shift to online shopping.

Web shoppers on Amazon or Best Buy could get many of the same deals that stores once dangled only to those who lined up overnight. Those who did venture out made fewer stops and increasingly turned to big-box chains like Walmart and Target that sell everything from lettuce to Legos, according to the foot-traffic data, shoppers and retail analysts.

From the CFO Journal's Morning Ledger on November 18, 2020

Good morning. Coca-Cola placed too much of its profit in its foreign operations instead of its higher-taxed domestic parent company, a U.S. Tax Court judge ruled Wednesday. The court adopted most of the U.S. government’s main arguments, and the ruling marks a setback for the beverage giant’s international tax strategy.

The Internal Revenue Service had been seeking more than $3.3 billion for the tax years 2007 through 2009. The cost to Coca-Cola could be more if the government applies the same successful rationale to subsequent tax years. The dispute stemmed from Coca-Cola’s subsidiaries in countries including Brazil, Ireland and Egypt.

Especially before the 2017 U.S. tax law cut the corporate tax rate, U.S. companies had an incentive to pack profits into low-tax countries and defer U.S. taxes on those profits rather than attribute earnings to the U.S. parent, which faced an immediate 35% rate.

Companies within a single corporate structure are supposed to allocate profits between parent and a foreign subsidiary based on what unrelated companies would do in an equivalent, arm’s length transaction. But there are plenty of gray areas, especially when companies profit from mobile, intangible assets like trademarks and patents. The IRS regularly engages in protracted legal fights with corporations over how those rules should apply in each situation.

From the CFO Journal's Morning Ledger on November 18, 2020

Financial Accounting Foundation Names New Board Member for FASB

The Financial Accounting Foundation on Tuesday named Frederick Cannon as a board member on the Financial Accounting Standards Board, the U.S. standard-setter. Mr. Cannon, who currently serves as director of research at investment bank Keefe, Bruyette & Woods Inc., will succeed Hal Schroeder, whose second and final term ends June 30, 2021, the FAF said. The foundation oversees FASB.

Mr. Cannon’s term will run from July 1, 2021 until June 30, 2026, according to the FAF. Board members can serve no longer than 10 years total. There are seven board members, including the chair. Current board member Christine Ann Botosan will serve another term, ending June 30, 2026, the FAF said.

From the CFO Journal's Morning Ledger on November 17, 2020

Walmart threw in the towel on Japan after 18 years, selling most of its stake in a local supermarket chain and continuing its retreat from slow-growing global markets in favor of e-commerce bets.

From the CFO Journal's Morning Ledger on November 17, 2020

Good morning. Securities and Exchange Commission Chairman Jay Clayton will step down at the end of the year, opening the door for Democrats to push for a more aggressive approach to regulation of Wall Street. His departure, announced on Monday, is the latest in a wave of expected turnover at federal regulators as power changes hands in Washington.

Mr. Clayton’s successor will likely prod public companies to include more disclosures of risks related to climate change, Democratic regulators and consultants say. The commission is also likely to set clearer rules for mutual funds that emphasize companies’ environmental, social and governance-related goals

More than 350 companies have listed on U.S. public markets this year, on track for the most since 2000, according to Dealogic. The total includes many deals involving special-purpose acquisition companies, publicly traded shell companies that raise cash to pursue merger deals. “I do believe that our efforts to eliminate unnecessary frictions have made the public markets relatively more attractive than they were before we started,” Mr. Clayton said in an interview on Monday.

But progressives say he failed to strike the right balance between two of the SEC’s core mandates: protecting investors and promoting capital formation. By making it easier for companies to raise money directly from buyout firms and venture capitalists, they say, Mr. Clayton risked undermining public markets, which require companies to disclose key information before accepting investors’ money.

From the CFO Journal's Morning Ledger on November 16, 2020

Good morning. Specific health-care policy changes in Washington related to billing and telehealth, among others, could affect companies’ insurance costs.

President-elect Joe Biden during the campaign proposed a public insurance program that people with employer-provided coverage could opt into. He also suggested expanding eligibility for Medicare, the public insurance program for people 65 years and older. Those proposals could face an uphill climb in Congress if the GOP wins two runoff races in Georgia scheduled for Jan. 5. Democrats held on to their majority in the House in the Nov. 3 election.

Employer health costs have increased steadily in recent years. The average family premium this year rose 4% to $21,342 compared with last year, according to the nonprofit Kaiser Family Foundation. While workers on average contribute 27% of family premiums, employers are the primary source of U.S. health insurance, the Kaiser foundation said. Employer-sponsored plans cover roughly 157 million people.

Here are five health policy issues—the pandemic response, future of the Affordable Care Act, telehealth, surprise billing and antitrust enforcement—for executives to watch under a new administration. Read more. 

From the CFO Journal's Morning Ledger on November 12, 2020

Good morning. Finance chiefs are gearing up to raise prices, reduce workers’ hours and ramp up technology investments as they face the possibility of higher labor costs under a Biden administration.

President-elect Joe Biden has proposed increasing the federal minimum wage to $15 by 2026, up from the current $7.25. Raising the pay floor would help low-wage workers, Mr. Biden said before the Nov. 3 elections. He hasn’t commented on the issue since the Associated Press on Saturday declared him the winner of this year’s presidential election. President Trump has mounted several legal challenges to the electoral results in several states.

Companies including Chipotle Mexican Grill, Potbelly and Texas Roadhouse are already doing the math to assess what a higher federal minimum wage could mean for their operations and cost base. Some executives fear that increases to the federal pay floor would drive up wages across income classes, hurting profits and forcing businesses to find savings to offset higher spending on labor.

Potbelly, a Chicago-based sandwich chain, would first respond to a higher federal minimum wage by improving its modeling of labor costs and raising efficiency during work shifts, Chief Financial Officer Steven Cirulis said in a phone interview. Over the long term, the company would also consider raising menu prices, a spokesman said. “A move in the minimum wage would certainly impact us,” Mr. Cirulis said.

Jensen Comment
What happens if and when wage increases cannot simply be passed on to customers. In managerial and cost accounting courses we teach about the demand curve and use CPV analysis to show how higer expenses can result in lower profits and even losses. This is especially problematic in the hardest hit industries affected by Covid19. Airlines, restaurants, hotels, colleges, etc. often experience lower profits with price increases because of the loss in revenue at higher prices.

Studies of minimum wage increases are sometimes misleading, because they are limited to outliers in the market and do not extrapolate well to non-sampled firms. For example, studies of minimum-wage increases in high-income cities like Seattle, San Francisco, and Manhattan do not extrapolate well to towns like Luckenbach where many businesses are operating at or very close do bankruptcy at lower minimum wages. There are many, many more struggling small town businesses than elite city businesses in the USA. A $15 per-hour wage increase is analogous to hitting a garment pin with the full swing of a sledge hammer ---
https://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States#Low-paying_occupations:_2006_and_2009

It's almost impossible to separate current joint effects of negative effects Covid-19 and the higher minimum wage leading to business closings. These two causal factors will be joined at the hip when a nationwide doubling of the minimum wage goes into effect while Covid-19 and other emerging pandemics go into effect.

Often, a higher minimum wage will lead to labor losses due to robotics and labor substitutions. For example, more and more restaurants will be substituting washable dinnerware with non-washable dinnerware.

Not long ago I observed the automation of an enormous tomato ranch in California. Automated combines were picking tomatoes and loading them directly into 18-wheel trucks that hauled them to tomato juicing plants that themselves are heavily automated. It won't be long before the 18-wheel trucks will have robotic drivers while tomato harvesting workers watch all of their jobs disappear from field to grocery store in part because tomato businesses can no longer afford minimum wages and generous benefit expenses like parental leave and universal child care on top of medical insurance expenses.

Have you figured out why, in the 2020 election, a majority of California voters rejected the law of adding minimum wages and generous benefits to gig workers? Could it be that they feared for losing their family livelihood? Could it be that customers (think vegans) feared the higher prices at their grocery stores?

From the CFO Journal's Morning Ledger on November 11, 2020

Good morning. More companies are looking to dump excess office space by renting it out to new tenants, flooding the market with additional supply that could depress U.S. office rents.

With many employees planning to keep working from home for the foreseeable future, big corporate tenants in city centers say they have a surplus of office space. Most of those companies are locked into long leases of as long as 20 years and have little opportunity to get out of these agreements.

That is leading companies from Airbnb and Twitter in San Francisco to Expedia Group in Austin, Texas, to try to unload their overflow by subletting unwanted office space.

Corporate tenants put a record 42 million square feet of space on the office market in the second and third quarters, according to data firm CoStar Group Inc. That increased the total sublease space in the U.S. to roughly 157 million square feet, or 1.7% of the total office inventory. It is the highest rate since CoStar began measuring it in 2005.

From the CFO Journal's Morning Ledger on November 11, 2020

Good morning. Company executives are trying to model and assess what a new administration could mean for their businesses and plans for 2021 and beyond.

An executive branch led by President-elect Joseph Biden is likely to bring more certainty about the direction of the economy and how the federal government will handle the coronavirus pandemic, finance chiefs said.

Finance chiefs would welcome a Republican controlled Senate and a Democrat-controlled House because it would likely force Mr. Biden to temper some of his plans. Some of his proposals, for example, the 28% corporate tax rate—up from 21% now—or increases in the tax rates on income earned by foreign subsidiaries of U.S. businesses, could be hard to implement without a majority in the Senate.

“That will be a welcome situation for many companies because you won’t see extremes from one party or the other,” said Roscoe Jones Jr., counsel at law firm Gibson, Dunn & Crutcher LLP. “From a company standpoint, you will see more stability.”

Jensen Comment
Democrats need to control the Senate in order to launch trillions of Joe Biden's spending promises

Various green initiative programs ($2 trillion)
Bailouts of bankrupt states and cities
National healthcare and medicines for everybody, including a tidal wave of undocumented immigrants
Free or highly subsidized vaccines (including billions already being spend for the Corona-19 vacine)
Free preschool
Forgiveness of most of the $1.5 trillion student loans outstanding
Free college and free training schools
Reparations for descendants of wronged minorities
Guaranteed annual income for everybody
Free public transportation
 Housing for all

Additional campaign promises

$1.3 trillion for infrastructure
$100 billion for investments in public school buildings that are already included in the infrastructure plan)
$750 billion for higher education (other than free college and training)
$700 billion for Biden’s “Buy American” plan
$125 billion for Biden’s opioid plan
$30 billion for criminal justice reform
$30 billion for small business opportunity funding
Between $270 billion and $380 billion for paid family leave

The point in this tidbit is that it's literally impossible to raise enough tax revenue to fund all the new spending programs promised by Biden and Harris. Borrowing will have accelerate beyond the growth rate assumed at
https://www.cpajournal.com/2020/10/29/icymi-the-trillion-dollar-annual-interest-payment/

And when borrowing and tax increases cannot pay the bills the Federal government will increase the $1 trillion the Fed already printed ---
https://en.wikipedia.org/wiki/Quantitative_easing

It won't be long before interest on Federal government debt is the 800-lb gorilla in the annual budget. America's world-wide credit rating is at stake. Disaster will hit if and when the biggest investors in this debt (think China and Japan) decide not to roll over their investments in our debt. Remember the Jane Fonda/Kris Kristofferson movie "Rollover" ---
https://en.wikipedia.org/wiki/Rollover_(film) 

Never fear. It won't be long before the Federal Reserve owns most of the Federal government debt. Try to explain to student how borrowing from yourself works!

From the CFO Journal's Morning Ledger on November 9, 2020

The federal government is swamped with reports of potential fraud in the Paycheck Protection Program, according to government officials and public data, casting a shadow on one of Washington’s signature responses to the pandemic.

Congress and the Trump administration designed the PPP to give small businesses fast and easy access to taxpayer funds, and it worked: About $525 billion in loans were distributed to 5.2 million companies between April 3 and Aug. 8. Many business owners say it was a lifeline in turbulent times.

U.K. Company Audits Need to Improve, Regulator Says ---
https://www.wsj.com/articles/u-k-company-audits-need-to-improve-regulator-says-11605263401?mod=djemCFO

Audits of financial statements of Britain’s largest companies need to improve, the U.K. Financial Reporting Council said. The audit watchdog in recent months inspected 130 company audits. Forty-nine, or nearly 38%, required improvements, up from 25% in last year’s report, the FRC said.

From the CFO Journal's Morning Ledger on November 9, 2020

FRC Imposes Sanctions on Deloitte Over Audit of Client’s Pension Plan

The U.K. Financial Reporting Council on Friday imposed sanctions on Deloitte LLP and a former audit partner over audit failures related to a former client’s pension plan.

The professional-services firm didn’t obtain sufficient audit evidence to verify the cash holdings of the unidentified pension plan in its 2015 financial statements, the U.K. audit and accounting regulator said. Deloitte also didn’t adequately document its work, the FRC said.

Deloitte was ordered to pay a fine of £500,000, equivalent to $657,745, and prepare a report on its current efforts to maintain audit quality. The former audit engagement partner, who wasn’t identified, has to pay an undisclosed sum to cover the costs of the investigation, the FRC said.

“The proportionate sanctions reflect the failures by the Respondents to obtain sufficient appropriate audit evidence and to properly document work in significant areas of audit risk,” Claudia Mortimore, the FRC’s deputy executive counsel, said.

Deloitte, the sponsor of CFO Journal, regrets that aspects of its audit work for the client didn’t comply with the relevant standards, a Deloitte spokesperson said. “Audit quality remains our priority and we continue to enhance our audit quality processes and to seek improvement across all of our work,” the spokesperson said.

Sometimes Crime Pays
From the CFO Journal's Morning Ledger on November 5, 2020

Two men accused of trading on information hacked from a Securities and Exchange Commission database will pay $425,000 to settle regulatory claims, a fraction of the illegal profits they were alleged to have earned.

From the CFO Journal's Morning Ledger on November 5, 2020

Inside the Chaotic Unraveling of Jack Ma’s $35 Billion IPO ---
https://www.bloomberg.com/news/articles/2020-11-05/inside-the-chaotic-unraveling-of-jack-ma-s-35-billion-ant-ipo?cmpid=BBD110520_BIZ&utm_medium=email&utm_source=newsletter&utm_term=201105&utm_campaign=bloombergdaily

From the CFO Journal's Morning Ledger on November 5, 2020

The U.S. is suing for the forfeiture of thousands of Bitcoins tied to the Silk Road marketplace, totaling more than $1 billion, the largest cryptocurrency seizure ever made by the U.S.

From the CFO Journal's Morning Ledger on November 5, 2020

Federal regulators fined  T-Mobile US $200 million after investigators determined its recently acquired Sprint subsidiary had overcharged a national wireless subsidy program for years.

Federal investigators last year found that Sprint had improperly counted hundreds of thousands of Assurance subscribers as active when records showed the phone lines weren’t used.

From the CFO Journal's Morning Ledger on November 3, 2020

As federal aid to the U.S. Farm Belt surges, a fraction of farmers are reaping a big portion of the government largess.

The Trump administration is expected to pay farmers more than $37 billion this year, a historic sum largely intended to help those hit by trade wars and the coronavirus pandemic. Of the first nearly $5 billion paid out under a pandemic-relief program, just over 1% of recipients received at least one-quarter of the funds, or $1.2 billion, according to a Wall Street Journal analysis of federal data.

From the CFO Journal's Morning Ledger on November 3, 2020

Walmart has ended its effort to use roving robots in store aisles to keep track of its inventory,  reversing a yearslong push to automate the task.

Teaching Case From The Wall Street Journal Weekly Accounting Review on October 30, 2020

CFOs Using Bond Proceeds to Pay Down Credit Lines, Debt

By Nina Trentmann | October 28, 2020

Topics: Bonds

Summary: This article reports on academic research by finance and economics faculty at Columbia Business School investigating bond issuances between March and June 2020. The researchers “…find that a lot of issuers [do so] earlier in their cash cycle than usual, are in sectors that are not the most affected by Covid [and] use the proceeds to hoard cash or repay debt, not invest in their operations….” The implication is that the federal government actions designed to bolster the economy, including maintaining low interest rates and purchasing bonds in the open market, may not have the full expected impact on a recovery.

Classroom Application: The article may be used when discussing bond issuances and disclosure of the use of the proceeds.

Questions:

  • What is the source for the information in this article about use of funds from bond proceeds?
  • How are companies using proceeds from debt issuances?
  • How does that corporate use of bond proceeds impact the economic recovery from the Coronavirus pandemic?
  • What steps has the Federal Reserve Bank taken to help the U.S. economy through the pandemic?
  • How have these steps contributed to incentives for corporates to issue record amounts of debt in 2020, particularly speculative-grade debt, rather than rely on bank loans?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"CFOs Using Bond Proceeds to Pay Down Credit Lines, Debt," by Nina Trentmann, The Wall Street Journal, October 28, 2020
 https://www.wsj.com/articles/cfos-using-bond-proceeds-to-pay-down-credit-lines-debt-11603877403

Study finds companies hoarding cash but not investing in their businesses

Many companies in recent months raised billions of dollars in new debt in the bond market, taking advantage of low funding costs and high investor demand.

Finance chiefs used the additional capital to bolster their companies’ balance sheet, pay down credit lines or replace older debt following interventions by the Federal Reserve to stabilize financial markets. Most didn’t, however, use the funds to invest in their businesses, according to a recent study of about 9,500 bond sales by Columbia Business School.

“We find that a lot of issuers issue earlier in their cash cycle than usual, are in sectors that are not the most affected by Covid [and] use the proceeds to hoard cash or repay debt, not invest in their operations,” said Olivier Darmouni, an associate professor for finance and economics at Columbia Business School and one of the authors of the study.

As a result, the bond market recovery between March and the end of June—the period the researchers analyzed—is unlikely to result in a “V-shaped” recovery in the broader economy, the study said. U.S. economic growth has contracted sharply since the coronavirus pandemic took off in the spring, and the pace of recovery has slowed in recent months. American companies have raised about $1 trillion in U.S. debt markets since March, according to the Federal Reserve Bank of New York.

The Fed has been buying corporate bonds for several months in an effort to keep bond markets open and stop a potential wave of bankruptcies. It started by purchasing investment grade-rated debt and later added some junk or high-yield bonds, among other measures it employed, such as lowering interest rates to near zero.

 

Among the companies selling bonds was Chevron Corp. The oil producer’s net debt went up by $5.5 billion in the first quarter and $1.7 billion in the second quarter, even though it has a $9.75 billion revolving credit facility. The company has cut its plans for capital expenditures for 2020 by $4 billion, following the example set by many other businesses, which slashed investment budgets. Chevron booked a more than $8 billion loss in the second quarter.

Coca-Cola Co. , the Atlanta-based beverage maker, sold a total of $11.5 billion in debt in March and April. During that time, Coca-Cola had about $8.8 billion in untapped credit lines, according to a spokesman. The company declined to comment further.

Over 40% of companies that issued bonds between March and the end of June didn’t draw down existing credit lines, while close to 60% used bond proceeds to pay back credit lines, the study said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on October 30, 2020

Covid-19 Vaccine Makers to Face Challenges When Recognizing Revenue

By Mark Maurer | October 22, 2020

Topics: Revenue Recognition

Summary: “Uncertainty around rules could complicate how companies account for vaccine sales that may come through large and complex government contracts.” Both the timing and the amount of revenue to recognize are in question. Among other issues, the article describes concerns about transfer of control of vaccines including a special Securities and Exchange Commission rule for sales to government stockpiles. NOTE: Instructors will want to remove the following before distribution to students. The Accounting Standards codification paragraphs describing recognition of revenue when control has transferred include 606-10-25-23 (Satisfaction of Performance Obligations), 606-10-25-27 (over time), and 606-10-25-30 (at a point in time). A second issue identified in the article is that complex government contracts contribute to challenges in revenue recognition. Paragraph 606-10-25-9 addresses combination of contracts with the same customer.

Classroom Application: The article may be used when discussing revenue recognition under Topic 606.

Questions:

  • What recently-issued standard is creating accounting challenges for pharmaceutical companies?
  • How does revenue recognition depend on transfer of control of a products? Cite your source for this answer if outside of the article.
  • Describe the issues raised in the article relating to transfer of control of Covid-19 vaccines.
  • Why do you think the U.S. Securities and Exchange Commission has issued specific guidance in relation to vaccines sold into U.S. government stockpiles?
  • Identify one other issue in the article creating challenges with accounting for revenues from vaccine sales besides transfer of control. Explain your understanding of the issue and the revenue recognition accounting requirement. Cite the FASB accounting standards codification paragraph identifying this accounting issue.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Covid-19 Vaccine Makers to Face Challenges When Recognizing Revenue," by Mark Maurer, The Wall Street Journal, October 22, 2020
https://www.wsj.com/articles/covid-19-vaccine-makers-to-face-challenges-when-recognizing-revenue-11603359000

Uncertainty around rules could complicate how companies account for vaccine sales that may come through large and complex government contracts

Drugmakers developing Covid-19 vaccines can add one more challenge to their list: how to account for the sales.

The companies will face challenges recognizing revenue due to a lack of specific guidance from U.S. regulators and standard-setters on Covid-19 vaccines and the sheer scale of the production effort.

Vaccine manufacturers, among them Moderna Inc., Johnson & Johnson, Pfizer Inc., Merck & Co., and AstraZeneca PLC, not only could have trouble determining when to book this revenue, but how much to book also could be in question, accounting experts say. Stockpiling, complex federal contracts and uncertainty around future demand for the vaccine add to the accounting complication.

About 170 different Covid-19 vaccines are being developed world-wide, according to the World Health Organization. In the U.S., several companies working on vaccines are in the middle of late-stage trials, though Johnson & Johnson and AstraZeneca have paused trials due to potential safety issues. Some drugmakers have said their vaccines could be greenlighted for use as soon as this year, while others plan for next year.

Estimates for production capacity vary among companies. AstraZeneca, for example, wants to provide two billion doses globally, significantly more than what the company has produced for other vaccines. It said one billion Covid-19 vaccines could be ready later this year.

U.S. regulators in recent years have provided general guidance on accounting for revenue from vaccines, but none specific to the Covid-19 immunization.

There are different rules for recognizing revenue from vaccines. For those that go into the U.S. government’s Strategic National Stockpile, special guidance from the Securities and Exchange Commission applies. All other vaccines sold in the U.S. are covered by the Financial Accounting Standards Board’s revenue recognition rules.

The SEC last released guidance on accounting for vaccines going into national stockpiles in 2017. It said manufacturers should recognize revenue when dosages are received by the U.S. government, meaning they don’t have to wait for the vaccines to be taken out of the stockpiles and used.

The U.S. stockpiles vaccines for childhood diseases and influenza as well as bioterror countermeasures. The SEC declined to comment on whether Covid-19 vaccines would qualify for the same accounting treatment.

There are no plans to store any potential Covid-19 vaccines in the Strategic National Stockpile, according to a spokeswoman for the U.S. Department of Health and Human Services. Various companies have agreed to supply at least 100 million doses of Covid-19 vaccines to the U.S. government.

HHS, in partnership with the Department of Defense, has put agreements in place for manufacturing of vaccine doses as part of development for six vaccines, an HHS spokeswoman said. Those doses, which are being manufactured with federal funding, won’t be stockpiled and the companies will distribute them to locations designated by the federal government, the spokeswoman said.

The SEC in March sought to ease audit requirements for certain vaccine makers, including those making the Covid-19 vaccine. It ruled that small public companies no longer need to have an auditor examine their accounting systems and safeguards known as internal controls. That should allow vaccine makers to devote more resources to research and development, Hester Peirce, an SEC commissioner, said at the time.

For immunizations that don’t fall under the SEC’s stockpiling guidance, companies have to wait to book revenue until control of the product is transferred, a technical term that means the customer is in charge of its use and can reap all available benefits from it, said Shripad Joshi, an accounting specialist at S&P Global Ratings, a ratings company.

For example, companies can’t recognize revenue from a foreign government until the government has passed the vaccines on to doctors or hospitals for use. If that revenue is deferred to later, potentially next year, there will be a mismatch between costs and revenue, Mr. Joshi said. “It’s all very unclear right now, with so many vaccine manufacturers and the timing to market,” he said.

Revenue from one contract can be booked in various amounts over multiple accounting periods, which needs to be done carefully. If a company recognizes revenue outside of the correct accounting period, it could force a company to restate its earnings.

The uncertainty about vaccines in development and the size of contracts, with some potentially covering billions of doses, make the risk of deviation from sales estimates especially high. This likely will cause complications in recognizing revenue, said Tom Selling, a retired accounting professor at Southern Methodist University.

Deciding how much revenue to book for vaccine supplies in a particular period can be a tricky judgment call, accountants say.

Some drugmakers, such as Moderna and AstraZeneca, have begun alerting investors and analysts about the accounting challenges surrounding the vaccine. “There is heightened interest in several areas of accounting that will increasingly impact our reported results as we move forward,” David Meline, Moderna’s chief financial officer, said on an Aug. 5 earnings call. The company declined to comment further.

AstraZeneca said its accounting would vary from deal to deal, depending on when it receives invoices and reimbursement from expenses. The Cambridge, U.K.-based company has agreed to produce vaccines for several customers, including the U.S. and China. “We’ll have different types of accounting for some of those deals,” Chief Executive Pascal Soriot said on a July 30 earnings call. AstraZeneca, among others, has vowed not to earn a profit from making the vaccine.

FASB hasn’t yet received any questions or concerns related to accounting for vaccines, a spokeswoman said. The standard-setter hasn’t issued guidance on revenue from Covid-19 vaccines.

Regulators or investors could challenge companies’ estimates, said Jeffrey Johanns, senior lecturer of accounting at the University of Texas at Austin. “If I was a pharma CFO, it would scare me, because I know I’m not going to be exactly right and I’m going to have to adjust the numbers later on,” Mr. Johanns said.

Continued in article

 

Teaching Case From The Wall Street Journal Weekly Accounting Review on October 30, 2020

Barbie Sales Take Off as Parents Try to Cut Down on Screen Time

By Paul Ziobro | October 22, 2020

Topics: Revenue Forecast , Supply Chains , Analysts Forecasts

Summary: “After years of struggles and rising competition from other dolls, Mattel sought to invigorate the Barbie brand by introducing new body sizes, skin tones, hair colors, and career paths.” The pandemic has been favorable for this product as parents are spending more on toys for children that do not increase screen time. Barbie product retail sales have surged 50% in the quarter ending September 30, 2020, leading to overall revenue growth for Mattel of 10% and beating analysts forecasts for both revenue and profits.

Classroom Application: The article may be used when discussing revenues, quarterly reporting, or supply chains.

Questions:

  • Summarize how sales of Barbie Dolls have impacted Mattel Corporation’s total sales.
  • What other Mattel product lines have performed well during the most recent quarter?
  • Summarize the impact on profitability of these increased sales.
  • What is a supply chain?
  • What supply chain issues have developed from the pandemic and Barbie sales growth described in this article?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Barbie Sales Take Off as Parents Try to Cut Down on Screen Time," by Paul Ziobro,  The Wall Street Journal, October 22, 2020
https://www.wsj.com/articles/barbie-sales-take-off-as-parents-try-to-cut-down-on-screen-time-11603399290

Mattel reports largest increase in demand for flagship doll in at least two decades; Hot Wheels, Baby Yoda also fuel growth

Add Barbie to the list of the pandemic’s biggest winners.

Mattel Inc.’s MAT -1.64% flagship doll posted a 29% sales increase in the third quarter, leading the toy company to 10% revenue growth in the period. It was the largest quarterly increase posted by Barbie going back at least two decades, the company said.

“The brand is more relevant than ever at 62 years old,” Mattel Chief Executive Ynon Kreiz said in an interview Thursday.

After years of struggles and rising competition from other dolls, Mattel sought to reinvigorate the Barbie brand by introducing new body sizes, skin tones, hair colors and career paths. Recently, Barbie has also been boosted by hits like a “Color Reveal” product where you dip a doll into water to disclose what kind it is.

The pandemic has helped, too. Parents say they are looking for ways to entertain their children that don’t involve a screen and many are gravitating to familiar toys.

“Parents prioritize spending on their kids and look for quality, trusted products,” Mr. Kreiz said.

Alyson Johnson said that the pandemic has been hard on her 8-year-old daughter, who isn’t able to socialize with her friends like she used to. But her daughter has been doing a lot more imaginative play during the past six months, which Ms. Johnson tried to encourage with purchases like a four-pack of election-themed Barbies, including a candidate and campaign manager.

“This is a really stressful time, especially for my daughter,” said Ms. Johnson, who runs a sports marketing and communications firm and lives in Califon, N.J. “I’m trying to find more things to do that allow her to play on that instead of being on screens.”

The pandemic didn’t start off well for Mattel. Lockdowns forced tens of thousands of stores that sell Mattel toys globally to close, depriving the company of sales. And parents early on stocked up on what industry executives call “boredom busters” like board games and puzzles to fill the hours indoors as opposed to Barbie dolls and Hot Wheels cars.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 6, 2020

Five Things That Could Change for CFOs After the Nov. 3 Elections

By CFO Journal Staff | November 2, 2020

Topics: Budgeting , Forecasting

Summary: This article discusses the details behind five areas of concern that could be impacted by the presidential election: tax rates, the overall economy and an economic stimulus package, trade policies, regulation, and health-care costs. The discussion is neutral, simply describing the expected impact in case of either side winning the election.

Classroom Application: The article may be used in a managerial accounting course to consider macro-economic factors that must be monitored and considered by executives responsible for financial reporting, financing transactions, and forecasting. It is useful to integrate current events--the election--with accounting studies.

Questions:

  • Refer to the graphic entitled “Executive Take.” Summarize the information presented in the graphic in a way that also summarizes the points made in the entire article.
  • Which of the areas of concerns expressed by U.S. corporate executives in response to a recent survey is of equal, or nearly equal, concern regardless of who is elected president?
  • What is the potential impact on corporate tax rates of the election as described in the article?
  • How do corporations use potential changes in income tax rates? Describe at least one situation in which you think these rates are used.
  • Consider the impact of a potential change in regulation by the U.S. Securities and Exchange Commission encouraging reports on environmental, social and governance (ESG) issues. What change is anticipated if a new president is elected? Why do you think this possible disclosure change could result?
  • Refer to your answer to the question above. What type of reporting is done now by U.S. companies on environmental, social and governance (ESG) issues? You must consider sources outside the article; cite your source.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Five Things That Could Change for CFOs After the Nov. 3 Elections," by CFO Journal Staff , The Wall Street Journal, November 2, 2020
 https://www.wsj.com/articles/five-things-that-could-change-for-cfos-after-the-nov-3-elections-11604313002

Tax rates, trade policies and regulation could shift under a new administration, alongside other issues

Finance executives and their companies could face changes in core areas such as tax rates, trade policies and regulation, depending on who wins the presidency and which party controls the Senate.

Here’s what to look out for.

1. Tax Rates

Corporate taxes could rise under a Democratic administration, reversing some elements of the 2017 overhaul, which reduced the federal tax for companies to 21% from 35%.

Democratic presidential candidate Joe Biden proposes raising the corporate tax rate to 28%, alongside other measures such as an alternative minimum tax of 15% on businesses generating a profit of $100 million or more. He also seeks to raise tax rates on income earned by foreign subsidiaries of U.S. businesses.

Mr. Biden also has suggested a 10% tax penalty for companies that shift operations abroad and a 10% tax credit for businesses that create new jobs in the U.S.

President Trump hasn’t proposed additional changes to the country’s corporate tax framework but does advocate lowering the capital-gains tax and increasing incentives to bring manufacturing back to the U.S.

2. The Economy

Democrats and Republicans so far have failed to agree to a new stimulus package. It is increasingly unlikely they will strike a deal ahead of the Nov. 3 elections.

If Mr. Biden is elected, Democrats could wait until he is inaugurated in January to push for a larger stimulus bill. The dynamics are more uncertain if Mr. Trump wins re-election. Economists have warned the recovery might take longer if there isn’t additional government stimulus, which could cloud the outlook for companies in many sectors.

Labor costs could rise as part of a change in government. Mr. Biden has vowed to increase the federal minimum wage to $15 by 2026, up from the current $7.25. Mr. Trump, meanwhile, said he doesn’t plan to raise the federal minimum wage. Some companies argue that raising the federal minimum wage could hurt profits.

 

 

3. Trade Policies

Changes in trade policies could result in new restrictions on certain products and higher tariff costs. Those could come on top of existing import tariffs.

Mr. Trump is expected to continue using tariffs as an instrument in trade negotiations and to take a unilateral approach to dealing with China. The continuing trade war with China and tensions with other countries have resulted in higher costs for many businesses. The current administration has relied heavily on tariffs to encourage companies to manufacture or source products domestically.

Mr. Biden, too, plans to use tariffs, albeit more for environmental purposes such as quotas on imports from countries that fail to meet climate targets. The Democratic candidate has said he would take a multilateral approach to trade and work with allies to negotiate with China.

 

4. Regulation

Companies could face greater regulatory scrutiny under a new president. Mr. Biden, if elected, said he would increase oversight of Wall Street and boost the Dodd-Frank Act. Parts of the financial regulation act, which was introduced in 2010, have been scaled back under the Trump administration. Mr. Trump is expected to continue weakening regulations if he is re-elected.

The Securities and Exchange Commission, the U.S. securities regulator, might also look different under a new president. Mr. Biden, if elected, could replace SEC Chairman Jay Clayton, whose term ends June 2021. The SEC under a Democratic president likely would force companies to provide more, consistent disclosure on risks related to environmental, social and governance issues.

Mr. Clayton, who was nominated by Mr. Trump in 2017, has been easing certain rules for companies and other organizations. Mr. Trump during his term appointed several regulators in charge of agencies such as banking and consumer protection who have been working to ease regulatory requirements.

5. Health-Care Costs

The election is unlikely to affect employer health-care costs in the immediate term, given that many companies already have negotiated the cost of their insurance plans for the year ahead.

But, a Supreme Court case challenging the Affordable Care Act and the law’s penalty for individuals who don’t have coverage also could impact health-care costs. A U.S. Circuit Court last year found the ACA mandate to carry coverage unconstitutional after Congress reduced the penalty to zero. The Supreme Court is scheduled to hear the challenge on Nov. 10, and a ruling could take months. The outcome of the election could affect how Congress responds if the law is struck down.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 6, 2020

Why You Might Have Trouble Getting the Refrigerator or Car You Want

By Austen Hufford Nora Naughton | October 25, 2020

Topics: Inventory Management , Supply Chains , Coronavirus

Summary: “Factory production of consumer products has largely recovered after shutdowns this spring related to the virus crippled manufacturing across the country.” However, inventory shortages are resulting as buyers purchase items that have “…recently surged in popularity with people spending more time at home and nervous about travel….” For example, more people are relocating to the suburbs and avoiding public transportation, leading to increased auto and motorcycle demand. As well, demand for do-it-yourself home renovation supplies and products is at an all-time high, leading to both shifts in production, such as to increases in smaller container sizes of paint, and shortages of long-lived products such as appliances.

Classroom Application: The article may be used in a managerial accounting course when covering inventory planning or supply chains.

Questions:

  • What is a supply chain?
  • How does inventory management involve factors from both customer demand and production supply chains? Summarize the issues in the article that answer this question.
  • What specific customer demand factors have led to challenges in inventory management by U.S. manufacturers? Provide details supporting your summary answer to question 2.
  • What specific production supply chain factors have led to challenges in inventory management by U.S. manufacturers? Provide details supporting your summary answer to question 2.
  • Suppose you are a controller preparing 2021 budgets for a U.S. manufacturing company with a calendar year-end. What factors will you consider from this article as you undertake your task?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Why You Might Have Trouble Getting the Refrigerator or Car You Want," by Austen Hufford Nora Naughton, The Wall Street Journal,  October 25, 2020
 https://www.wsj.com/articles/factories-rush-to-keep-up-with-post-lockdown-shopping-11603627201

Factories rush to keep up as Americans spend on their houses and vehicles

From makers of cars to appliances to paint cans, U.S. manufacturers are falling behind on demand for goods that Americans are buying up as the Covid-19 pandemic drags on.

Factory production of consumer products has largely recovered after shutdowns this spring related to the virus crippled manufacturing across the country.

But as companies rush to restock, buyers are snapping up items at an even faster pace, leading to inventory shortages on goods that have recently surged in popularity with people spending more time at home and nervous about travel, executives, retailers and analysts say.

Five months after vehicle production restarted, car dealers are still seeing their stockpiles dwindle as public transit-averse buyers flock to the new-car lot and more people relocate to the suburbs and countryside.

A surge in home-improvement projects has left paint producers with not enough cans and appliance makers short on parts to produce refrigerators, kitchen mixers and washing machines. 

Supply-chain disruptions, worker absences and other challenges related to virus-proofing the workplace are further complicating manufacturers’ efforts to catch up. Some executives say it won’t be until early next year before stock levels return to normal.

“We do not have the inventory on the new side or the preowned side to meet the demand that’s out there,” said Mike Jackson, chief executive for AutoNation Inc., the U.S.’s largest publicly traded dealership chain. He said he expects availability to improve next year.

Some manufacturers with big consumer businesses, including 3M Co. MMM -0.11% , Harley-Davidson Inc. HOG -0.62% and Ford Motor Co. F -2.50% , are expected to report earnings for their latest quarters this coming week, likely offering more insight into the state of U.S. supply chains.

Production of long-lasting consumer goods, like appliances, trucks and furniture, was down nearly 50% in April from January levels, according to data provided by the Federal Reserve. But over the summer it rebounded, and in September, production was up 1% from January, the data shows.

For buyers, shortages can be a letdown. But for businesses, there is also upside. With inventory tight, auto makers and dealers say they are able to charge more for vehicles, driving stronger profits. And the pent-up demand should help keep sales robust into next year, some executives say.

“It’s good that we have an exceptionally strong order book, but we are, of course, trying to minimize any customer frustration,” Marc Bitzer, chief executive of appliance maker Whirlpool Corp. , said on a call last week with analysts.

After widespread plant closures this spring, manufacturers began bringing workers back in late May under new safety protocols, many scheduling overtime to make up for lost production.

But the restart efforts were slow-going at first, with suppliers also struggling to reopen and factories confronting high rates of worker absences.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 6, 2020

Comcast, Walmart in Talks to Develop, Distribute Smart TVs

By Lillian Rizzo Patience Haggin | November 3, 2020

Topics: Budgeting , Revenue Recognition

Summary: A smart TV deal between Comcast and Walmart would involve Walmart promoting “…TVs running Comcast software in exchange for a share of Comcast’s recurring revenue. Being able to market to consumers nationwide would mark a change in the U.S. cable industry, where players have stuck for decades to their regional footprints.” These discussions are at an early stage “and may not result in a pact, people familiar with the talks said.” The approach would mean that Comcast must compete with tech companies that already have the majority share of home streaming product sales—Amazon.com Inc., Roku Inc., and Apple Inc.

Classroom Application: The article may be used in a managerial accounting class to consider risks in budgeting for future operations at Comcast or in a financial reporting class to consider performance obligations associated with each TV sale under the five-step model for revenue recognition.

Questions:

  • Summarize the proposed deal between Comcast and Walmart.
  • What risks does the proposed deal with Walmart entail for Comcast?
  • Suppose you are on the Comcast controller’s team developing operating budgets and capital budgets. Define what is included in each of these budgets.
  • How do you think that the proposed deal might impact preparation of these budgets? Consider both the details of the product being planned and the risks you identify question 2.
  • Consider revenue earned from TV sales to WalMart by Comcast. Under the five-step model for determining revenue recognition, what is the minimum number of performance obligations that is associated with the sale of each smart TV? Support your answer.
  • What entity do you think is responsible for satisfying the performance obligation(s) you identify above?
  • When will Comcast recognize revenue for performance obligation(s) associated with TV sales? Describe in words the recognition you expect at a point in time, over time, or both.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Comcast, Walmart in Talks to Develop, Distribute Smart TVs, by Lillian Rizzo Patience Haggin, The Wall Street Journal,  November 3, 2020
 https://www.wsj.com/articles/comcast-walmart-in-talks-to-develop-and-distribute-smart-tvs-11604430314

Under the terms being discussed, the retail giant would promote TV sets running Comcast software and receive share of recurring revenue

Comcast Corp. CMCSA 0.41% is in talks with Walmart Inc. WMT 1.60% to develop and distribute smart TVs, according to people familiar with the matter, as the cable giant looks to become a dominant hub for streaming apps, not just TV channels.

 

Under the terms the companies are discussing, retail giant Walmart would promote TV sets running Comcast software, and would get a share of recurring revenue from Comcast in return, the people said. A third party would likely manufacture the sets, and one possibility is that they could carry Walmart branding, they said.

The Comcast software, drawing on expertise the company has developed and technology it has acquired, would aim to help consumers navigate through their streaming apps and watch programming. That would put Comcast up against tech companies that already are the major players in the streaming era’s living room— Apple TV maker Apple Inc., Fire TV maker Amazon.com Inc. and Roku Inc.

The strategy would enable Comcast to market to consumers nationwide, a change in a U.S. cable industry where players have stuck for decades to their regional footprints. Comcast would be able to promote its new streaming service, Peacock, front and center in the smart TVs, the people familiar with the matter said.

Walmart, a dominant seller of TV sets, already has a partnership with Roku to sell smart TVs under the Walmart brand Onn.

The Comcast talks with Walmart are at an early stage and may not result in a pact, people familiar with the talks said.

A Comcast spokeswoman declined to comment.

“We’re constantly having conversations with current and new suppliers about innovation and new products we can bring to our customers, and we don’t share details of those discussions,” said Ryan Peterson, vice president of electronics at Walmart U.S.

Comcast Chief Executive Brian Roberts said at a conference in September that Comcast has its sights set on developing smart TVs “on a global basis.” Mr. Roberts didn’t discuss any specific deals or timing.

Focusing on smart TVs and streaming technology could help Comcast move beyond its eroding traditional cable TV business, which continues to lose subscribers as households cut the cord. So far this year, the company has lost nearly 1.2 million cable TV subscribers. Its broadband access business, meanwhile, has surged, even during the coronavirus pandemic, adding more than 1.4 million customers.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 13, 2020

Biden’s Tax Agenda Faces Blockade if GOP Holds Senate

By Richard Rubin | November 10, 2020

Topics: Taxation

Summary: The article describes the political factors influencing the likelihood of passing the entire plan presented during President-elect Joe Biden’s campaign. Factors considered include both the gridlock of a divided Congress and the challenges of a wide range of political viewpoints even withing the Democratic party. An excellent related article by Richard Rubin delves into the details of each proposed component of the plan and is available at https://www.wsj.com/articles/how-joe-bidens-tax-plan-could-affect-you-11603307433

Classroom Application: The article may be used in any tax class to discuss political proposals and tax plans as well as the factors leading to their likely implementation.

Questions:

  • According to the article, what are the major tax implications of President-elect Joe Biden’s tax plan?
  • According to the article, what are the major spending implications of President-elect Joe Biden’s tax plan?
  • What is the argument that these tax and spend proposals are “on life support” even before President-elect Joe Biden takes office?
  • Specifically focus on comments in the article about achieving support from every member of the Democratic party to pass Biden-proposed tax legislation. Why is the likelihood of success with Democrats as daunting as achieving bi-partisan support (support from both Republicans and Democrats) for new taxation and spending legislation?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Biden’s Tax Agenda Faces Blockade if GOP Holds Senate," by Richard Rubin, The Wall Street Journal, November 10, 2020 ---
https://www.wsj.com/articles/bidens-tax-agenda-faces-blockade-if-gop-holds-senate-11605004200

President-elect’s tax plans likely hinge on whether Democrats can win two January runoffs in Georgia

President-elect Joe Biden’s tax plan is on life support even before he takes office, and his chances of raising taxes on businesses and high-income individuals likely rest on whether Democrats can win two January runoffs in Georgia to take control of the U.S. Senate.

If Republicans keep their grip on the Senate, Majority Leader Mitch McConnell (R., Ky.) could block the tax increases Mr. Biden seeks and extend the low-tax Trump era.

Even with control of the Senate, Democrats would be limited by what can get through the House, where their majority is shrinking. And in a 50-50 Senate with Vice President-elect Kamala Harris breaking ties, they would likely need every Democratic vote to raise any taxes, limiting increases to whatever can unify progressives such as Elizabeth Warren (D., Mass.) and moderates such as Joe Manchin (D., W.Va.)

During the campaign President Trump was vague on his second-term plans, so much of the tax-policy focus was on Mr. Biden’s calls for higher taxes on corporations, capital gains and households making over $400,000. The agenda—a net tax increase of more than $2 trillion over a decade—was an important part of his campaign and was designed to pay for expanded federal spending on health, education and environmental programs.

But without Democratic control of the Senate, the tax increases would be off the table and the fate of the spending programs uncertain.

“No matter which version of divided government you have, it is difficult to do anything that is not broadly bipartisan,” said Janice Mays, a former House Democratic aide now at PwC LLP.

Instead, lawmakers would focus on expiring tax breaks as well as cuts to help the economy recover from the coronavirus pandemic. And a Biden administration would look to what it could do through regulation and enforcement without congressional approval.

 

In the near term, taxes will be part of an attempt to bridge the divides between the parties over an economic relief bill. There is bipartisan support for tax credits for struggling businesses that retain employees and for tax credits for purchases of protective equipment.

Tax policy is one of the areas that separates the parties most sharply, so relatively few big moves can happen in a divided government. Unified control is why Republicans could pass the 2017 tax law, which lowered taxes on corporations, other businesses, individuals and estates.

That law also contained the seeds of what will become the tax policy agenda for this Congress if the government is divided—breaks that expire and tax increases that are scheduled to take effect over the next few years.

Starting in 2022, businesses will be required to spread deductions for research expenses over multiple years instead of taking them immediately. Companies and a bipartisan group of lawmakers are trying to prevent that from happening.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 13, 2020

Green-Energy Companies Hope for Renewal of Tax Credit, National Plan After Election

By Kristin Broughton | October 29, 2020

Topics: Investment Tax Credits , Renewable energy

Summary: This article was written before the outcome of the presidential election was known, but is based on chief financial officers of renewable energy companies “eyeing the possibility of an economic boost under a Democratic victory.” President-elect Joe Biden and President Donald J. Trump “hold starkly contrasting views” regarding this industry. “Biden has proposed spending $2 trillion to combat climate change and eliminating carbon emissions from the power grid by 2035.” CFOs also claim that “broader economic trends—including a rise in corporate sustainability pledges and socially conscious investing, and a decline in renewable-energy production costs—have all been good for business” in this sector.

Classroom Application: The article may be used in a corporate tax class discussing investment-tax credits or in a class discussing sustainability reporting. The article also discusses sale/financing lease strategies by renewable energy equipment manufacturer Plug Power, Inc.

Questions:

  • What are carbon emissions?
  • Based on the description in the article of the Plug Power, Inc., how does this company’s product help to reduce carbon emissions?
  • What are tax credits?
  • According to the article, how are investment tax credits calculated by renewable industries? How have they been reduced in recent periods?
  • In general how do tax credits improve expected returns from investments by companies in renewable energy projects?
  • Plug Power, like other energy companies, “…uses its tax credits to attract capital…by making deals with commercial banks to buy its equipment.” Why must they take this step to take advantage of the tax credits?
  • What do the banks who purchase from Plug Power do with the equipment purchased?
  • Based on your understanding of the equipment leasing discussed in this article, what type of leases are these—direct-financing, sales-type with a gross profit, or something else?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Green-Energy Companies Hope for Renewal of Tax Credit, National Plan After Election," by Kristin Broughton, The Wall Street Journal, October 29, 2020, ---
https://www.wsj.com/articles/green-energy-companies-hope-for-renewal-of-tax-credit-national-plan-after-election-11603963800

Finance chiefs say extending investment-tax credits for renewable energy is a priority

Finance chiefs in the clean-energy sector will face different realities depending on who wins the U.S. presidential election, but are eyeing the possibility of an economic boost under a Democratic victory.

Renewable energy is one of several policy areas where the two candidates hold starkly contrasting views. Former Vice President Joe Biden has proposed spending $2 trillion to combat climate change and eliminating carbon emissions from the power grid by 2035. President Trump, meanwhile, has challenged the science behind global warming and has eased or rescinded regulations on coal, oil and natural-gas production.

 

Chief financial officers manage their balance sheets through the red and blue political waves in the nation’s capital. Regardless of the election outcome next week, clean-energy CFOs say broader economic trends—including a rise in corporate sustainability pledges and socially conscious investing, and a decline in renewable-energy production costs—have all been good for business.

Still, a Democratic win could be a boon, these executives said. On the industry’s wish list: prompt renewal of alternative-energy investment tax credits, removal of tariffs on solar technologies and, more broadly, the establishment of a national clean-energy plan, among other proposals.

“I think there’s an expectation that investment levels will be higher with a national administration that’s more supportive of growth in our sector,” said Gregory Wetstone, chief executive of American Council on Renewable Energy, a nonprofit.

Share prices in renewable-energy companies have increased in recent months in anticipation of a Democratic victory. The WilderHill Clean Energy Index, which tracks renewable-energy stocks, has climbed steadily since the spring, rising over the past month amid a broader market selloff.

Paul Middleton, CFO of Plug Power Inc., a hydrogen fuel-cell company in Latham, N.Y., said extending the investment-tax credit for renewable energy and making it refundable would have the biggest impact on his business. Plug Power makes fuel cells that are primarily used to power forklifts inside of commercial warehouses and manufacturing centers. Its largest customers include Amazon.com Inc. and Walmart Inc.

Plug Power, like other energy companies, uses its tax credits to attract capital. One way the company does that is by making deals with commercial banks to buy its equipment. The banks in turn claim the tax credits and lease the equipment back to Plug Power or one of its customers.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 20, 2020

SEC Chairman Jay Clayton to Leave Agency at End of 2020

By Dave Michaels Paul Kiernan | November 16, 2020

Topics: Securities and Exchange Commission

Summary: On Monday, November 16, 2020, the Securities and Exchange Commission (SEC) announced that “Chairman Jay Clayton will step down at the end of the year.” Such a move is not unexpected given the upcoming change in White House administration: Mr. Clayton is a political independent and was nominated by President Trump in 2017. “Democratic regulators and analysts said the agency will likely take a different tack after President-elect Joe Biden…names a successor.” These individuals expect that a successor may focus on requiring companies to increase disclosures about risks related to climate change.

Classroom Application: The article may be used to discuss the regulatory process over financial reporting by publicly traded companies, the political influence on that process, and resulting possible change in disclosure requirements such as in the area of climate change risks.

Questions:

  • What is the Securities and Exchange Commission? You can find information at www.sec.gov
  • Return to www.sec.gov, click on “About”, then Commissioners. Who are they? Who appointed them to their positions? When will their terms end?
  • Summarize your impression from reading the article of the legacy that Chairman Jay Clayton has left during his time at the SEC.
  • Does it surprise you that “Mr. Clayton’s successor likely will prod public companies to include more disclosures of risks related to climate issues”? Explain your answer.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"SEC Chairman Jay Clayton to Leave Agency at End of 2020," by Dave Michaels and Paul Kiernan, The Wall Street Journal, November 16, 2020 ---
https://www.wsj.com/articles/sec-chairman-jay-clayton-to-leave-agency-at-end-of-2020-11605531600

Departure of the Trump nominee after 3 ½ years opens door for Democrats to seek a tougher approach to regulation of Wall Street

WASHINGTON—Securities and Exchange Commission Chairman Jay Clayton will step down at the end of the year, opening the door for Democrats to push for a more aggressive approach to regulation of Wall Street.

His departure, made public on Monday, is the latest in a wave of expected exits at federal regulators as power changes hands in Washington. Mr. Clayton, 54 years old, said he intends to remain active on the commission until the end of the year.

Mr. Clayton, a longtime corporate deals lawyer at Sullivan & Cromwell LLC and a political independent, was nominated by President Trump in 2017. He pursued an active enforcement agenda that included cases against Silicon Valley biotech startup Theranos Inc. and auto maker Tesla Inc. As a regulator, he focused on making it easier for companies to raise capital—even if that meant bypassing the public markets that the commission polices.

“The guy is a moderate by nature, and that’s the way I think he has conducted himself at the SEC,” said Hal Scott, a professor at Harvard Law School. “The overall system of securities regulation has to do with disclosures, and enforcement, and making sure we don’t have insider trading, and those issues. I don’t think he’s really relaxed much around that.”

Progressives largely supported Mr. Clayton’s approach to enforcement while criticizing some of his policy moves as overly friendly to Wall Street and corporations. Democratic regulators and analysts said the agency will likely take a different tack after President-elect Joe Biden, a Democrat, names a successor.

The head of Mr. Biden’s transition, Ted Kaufman, pushed to rein in big banks when he served briefly in the Senate following the 2007-09 financial crisis. Gary Gensler, an aggressive regulator who ran the Commodity Futures Trading Commission under President Obama, is managing Mr. Biden’s process for drafting an agenda for the Wall Street regulatory agencies.

Mr. Clayton’s successor likely will prod public companies to include more disclosures of risks related to climate issues, Democratic regulators and consultants said. The commission is also likely to set clearer rules for mutual funds that emphasize companies’ environmental, social and governance-related goals.

Names that have surfaced as possible successors include Mr. Gensler, former Democratic SEC commissioners Kara Stein or Robert Jackson Jr., and former U.S. Attorney Preet Bharara of the Southern District of New York, people familiar with the transition say.

Before Mr. Clayton’s departure, the commission is moving fast on a plan that would require Chinese companies with shares traded in the U.S. to use auditors overseen by U.S. regulators or face being kicked off exchanges, according to people familiar with the matter.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 20, 2020

Airbnb Turns Deep Cutbacks Into a Profit Ahead of IPO

By Maureen Farrell Preetika Rana | November 16, 2020

Topics: Initial Public Offering (IPO)

Summary: Airbnb, Inc. unveiled its draft S-1 registration statement on Monday, November 16, 2020. The company earned “a profit in the third quarter after the coronavirus pandemic forced it to overhaul its business and shed costs.” A $219 million quarterly profit was achieved and, despite the impact of the Covid-19 pandemic, revenues increased from previous quarters. The revenue amount fell 18% from the 2019 comparable quarter and cumulative 2020 results show $697 million lost in nine months after revenue dropped 32% from the result obtained in the first 9 months of 2019. Chief Executive Brian Chesky is credited with swift moves to reduce costs and change strategy in order to keep the business afloat and help it rebound. The strategy was possible in part because of the company’s low fixed costs/overhead.

Classroom Application: The article may be used in a financial reporting class to discuss profitability or the process for an initial public offering of stock. Questions also focus on costs: the company has low fixed costs because of its operating model. Also prominent in the S-1 registration statement is discussion of non-GAAP measures. The S-1 registration statement is available here https://www.sec.gov/Archives/edgar/data/1559720/000119312520294801/d81668ds1.htm#toc81668_10 The link is also provided in question 2.

Questions:

  • What is an initial public offering (IPO)?
  • Access the Airbnb, Inc. S-1 registration statement on the Securities and Exchange Commission EDGAR database at https://www.sec.gov/Archives/edgar/data/1559720/000119312520294801/d81668ds1.htm#toc81668_10 Click on Table of Contents and summarize the information that is included in the document.
  • Click on the link to Use of Proceeds. How will Airbnb, Inc. use the proceeds from this offering?
  • Why are there blanks in this description of the use of proceeds from the Airbnb, Inc. offering?
  • According to the article, how was Airbnb able to produce a quarterly profit in the quarter ended September 30, 2020? How did that compare to the preceding quarter?
  • Is Airbnb, Inc., profitable overall? Explain your answer.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Airbnb Turns Deep Cutbacks Into a Profit Ahead of IPO," by Maureen Farrell and Preetika Rana, The Wall Street Journal, November 16, 2020 ---
https://www.wsj.com/articles/airbnb-ipo-filing-shows-profitable-quarter-after-deep-cuts-11605564419

Home-sharing giant is expected to garner a valuation of about $30 billion

Airbnb Inc. unveiled paperwork for its initial public offering on Monday, showing the home-sharing giant turned a profit in the third quarter after the coronavirus pandemic forced it to overhaul its business and shed costs.

The company’s revenue for the three months ended Sept. 30 fell 18% to $1.34 billion from the same period a year earlier, as the pandemic continued to hurt bookings. But deep cost cuts, combined with an uptick in revenue from previous quarters, still led it to post a profit of $219 million. The Wall Street Journal reported last month that Airbnb would be profitable during the period.

Airbnb lost $697 million through the first nine months of the year, more than twice as much as it lost in the year-earlier period, underscoring the toll of the health crisis. Revenue dropped 32% over the nine-month period.

The home-sharing platform’s ability to resuscitate to profitability and proceed with an impending public offering show how unpredictable—and yet ultimately navigable—this year has proven for some companies. When the pandemic first gripped China and then the world, travel firms such as Airbnb faced a drastic drop in demand. But then customers, some newly able to work remotely, started turning to Airbnb over hotels as a way to escape from cities or take a manageable vacation.

Airbnb cautioned, however, that a recent surge in Covid-19 infections in Europe could damp its prospects for the fourth quarter.

Airbnb’s filing comes a few days after DoorDash Inc.’s IPO paperwork and amid a flood of startups that have made their debuts on the public markets in a year that has already broken records in terms of IPO dollars raised. Airbnb and DoorDash are both planning to debut in mid December, which in most years is a fairly quiet window for the IPO market.

Airbnb Chief Executive Brian Chesky toyed with the idea of going public for several years, but stopped short of pulling the trigger. The pandemic hit just as Airbnb was formalizing its listing plans, shuttering global travel and crushing its core home-rentals business.

Mr. Chesky quickly pivoted to raising capital to keep the business afloat, laid off a quarter of staff and shed noncore businesses.

He ordered a redesign of Airbnb’s app and website so the company could focus on local stays during the pandemic—a strategy that paid off as people ventured into neighboring communities so they didn’t have to fly—marking a turnaround for a company whose peers in the hotel industry are still reeling from the crisis.

Airbnb’s filing shows business has picked up from June lows. Revenue in the three months ended June 30 plunged 72% from a year earlier to $335 million amid world-wide shelter-in-place orders. The loss in the second quarter widened to $576 million from $297 million a year earlier

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on November 20, 2020

Coca-Cola Improperly Shifted Profits Abroad, Tax Court Rules

By Richard Rubin | November 19, 2020

Topics: International Taxation , Transfer Pricing

Summary: Judge Albert Lauber has issued a U.S. tax course ruling against Coca-Cola, finding that the company “…placed too much of its profit in its foreign operations instead of its higher-taxed domestic parent company… The Internal Revenue Service had been seeking more than $3.3 billion for the tax years 2007 through 2009. The cost to Coca-Cola could be more if the government applies the same successful rationale to subsequent tax years.”

Classroom Application: The article may be used in a corporate or international tax class. Factors discussed in the article include ownership of the intellectual property, transfer pricing by subsidiaries, and consolidation concepts. Consequently, the article also may be used in a financial reporting or managerial accounting course.

Questions:

  • Who/what made the determination that Coca-Cola inappropriately located too much of its profits outside of the United States?
  • Based on the discussion in the article, summarize your understanding of the Coca-Cola operating structure.
  • Do you think the Coca-Cola subsidiary locations are solely driven by the level of taxation in their location? Explain.
  • What factors formed the basis for the ruling that Coca-Cola improperly shifted profits away from the U.S. to foreign locations with lower tax rates?
  • How should intercompany transactions be priced?
  • Does intercompany pricing impact overall operating results as shown in Coca-Cola’s consolidated financial statements? Explain your answer, specifically addressing Coca-Cola’s warning to investors that the results of this case could have a material adverse impact.
  • Explain your understanding of how pricing of intercompany sales determines profitability reported in separate legal entities that form a consolidated group.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Coca-Cola Improperly Shifted Profits Abroad, Tax Court Rules," by Richard Rubin, The Wall Street Journal, November 19, 2020 ---
https://www.wsj.com/articles/coca-cola-improperly-shifted-profits-abroad-tax-court-rules-11605738514

Judge backs IRS’s main arguments in beverage giant’s multibillion-dollar lawsuit

WASHINGTON— Coca-Cola Co. KO -0.54% placed too much of its profit in its foreign operations instead of its higher-taxed domestic parent company, a U.S. Tax Court judge ruled Wednesday.

The court adopted most of the U.S. government’s main arguments, and the ruling marks a setback for the beverage giant’s international tax strategy.

The Internal Revenue Service had been seeking more than $3.3 billion for the tax years 2007 through 2009. The cost to Coca-Cola could be more if the government applies the same successful rationale to subsequent tax years.

Wednesday’s ruling doesn’t set a final amount that Coca-Cola will owe from 2007 to 2009. The company and the government must make further calculations to determine that.

“We are disappointed with the outcome of the U.S. Tax Court opinion, which we are reviewing in detail to consider its impact and potential grounds for its appeal,” the company said in a statement Thursday. “We intend to continue to vigorously defend our position.”

The IRS typically doesn’t speak publicly about litigation.

The dispute stemmed from Coca-Cola’s subsidiaries in countries including Brazil, Ireland and Egypt. Those operations produce syrups and other ingredients for use in the company’s beverages.

Especially before the 2017 U.S. tax law cut the corporate tax rate, U.S. companies had an incentive to pack profits into low-tax countries and defer U.S. taxes on those profits rather than attribute earnings to the U.S. parent, which faced an immediate 35% rate.

Companies within a single corporate structure are supposed to allocate profits between the parent and a foreign subsidiary based on what unrelated companies would do in an equivalent arm’s length transaction. But there are plenty of gray areas, especially when companies profit from mobile, intangible assets like trademarks and patents. The IRS regularly engages in protracted legal fights with corporations over how those rules should apply in each situation.

In his ruling, Judge Albert Lauber noted that Coca-Cola’s foreign subsidiaries had few trademarks or intellectual property and had little discretion over marketing, strategy and other decisions controlled by U.S. executives.

Yet, he noted, some of them had profits far higher than the company as a whole, thanks to their arrangements with the parent company. He rejected the arguments advanced by the company’s experts as unpersuasive.

“Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world?” he wrote. “And why does their profitability dwarf that of [Coca-Cola], which owns the intangibles upon which the Company’s profitability depends?”

Coca-Cola had previously warned investors that the case could have a material adverse impact and has vowed to fight the IRS.

The company had argued that the IRS had blessed its profit split during an earlier dispute. But Judge Lauber rejected that argument, calling it “a formula to which the parties agreed in settling the dispute before them at that moment.”

The judge sided with Coca-Cola on one point about how its tax deficiency should be calculated.

Continued in article

Humor for November 2020

EVERYTHING IS ALIVE --- www.everythingisalive.com

Great Gags and Happy Endings: Books to Cheer Everybody Up ---
https://www.theguardian.com/books/2020/nov/16/great-gags-hope-and-happy-endings-books-to-cheer-everyone-up

Forwarded by Auntie Bev

In the 1400's a law was set forth in England that a man was allowed To beat his wife with a stick no thicker than his thumb. Hence we have 'the rule Of thumb'

------------ --------- --------- --------- ----

Many years ago in Scotland , a new game was invented. It was ruled 'Gentlemen Only...Ladies Forbidden'.. .and thus, the word GOLF entered Into the English language.

------------ --------- --------- --------- ----

The first couple to Be shown in bed together on prime time TV was Fred and Wilma Flintstone.

------------ --------- --------- --------- ----

Every day more money Is printed for Monopoly than the U.S. Treasury.

------------ -- ------------ --------- --------

Men can read smaller Print than women can; women can hear better

------------ --------- --------- --------- ----

Coca-Cola was Originally green.

------------ --------- --------- --------- ----

It is impossible to lick Your elbow.

------------ --------- --------- --------- ----

The State with the Highest percentage of people who walk to work:

Alaska

------------ --------- --------- --------- ----

The percentage of Africa that is wilderness: 28% (now get This...)

The percentage of North America that is wilderness: 38%

------------ --------- --------- --------- --------- --------- --------- ------

The cost of raising A medium-size dog to the age of eleven:

$ 16,400

------------ --------- --------- --------- --------- --------- --------- ------

The average number Of people airborne over the U.S. In any given Hour:

61,000

------------ --------- --------- --------- --------- --------- --------- ------

Intelligent people Have more zinc and copper in their hair..

------------ --------- --------- --------- --------- --------- --------- ------

The first novel ever Written on a typewriter, Tom Sawyer.

------------ -- ------------ --------- --------- --------- --------- --------- -

The San Francisco Cable cars are the only mobile National Monuments.

------------ --------- --------- --------- --------- --------- --------- ------

Each king in a deck Of playing cards represents a great king from history:

Spades - King David

Hearts - Charlemagne

Clubs -Alexander, The Great

Diamonds - Julius Caesar

------------ --------- --------- --------- ----

Newspapers are half of the size they used to be because in those days they published both sides of an issue.

------------ --------- --------- --------- ----

You should have seen the class reaction when young Stephen King read his first short story in the second grade.

------------ --------- --------- --------- ----

The doctor said my blood test outcome had a lot in common with a potato chip --- high in cholesterol, high in sodium, high in toxins

Forwarded by Auntie Bev

You buy your kid a book, and she asks where to put the batteries.

You can open the book without a password

Reading is how brains become updated with software

The best way to keep your car from being stolen is to buy one with a standard shift and clutch pedal

Explain to your child that he can send coded messages just by learning to write in cursive

Forward by Auntie Bev

 

How to Maintain a Healthy Level

  Of     Insanity in RETIREMENT...


  

 

1.

 

 

At lunch time, sit in your parked car with sunglasses on, point a hair dryer at passing cars and watch them slow down!

 

2.

 

 

On all your check stubs, write, "For Sexual Favors"
  

 

3.


  

 

Skip down the street rather than walk, and see how many looks you get.
  

 

4.


  

 

With a serious face, order a Diet Water whenever you go out to eat.
  

 

5.


  

 

Sing along at The Opera.
  


  

 

6.


  

 

When the money comes out of the ATM, scream 'I Won! I Won!'
  

 

7.


  

 

When leaving the Zoo, start running towards the car park, yelling, 'Run For Your Lives! They're Loose!'
  

 

8.


  

 

Tell your children over dinner, 'Due to the economy, we are going to have to let one of you go....'
  

 

9.


  

 

Pick up a box of condoms at the pharmacy, go to the counter and ask where the fitting room is.
  
 

 

 

Humor November 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1120.htm   

Humor October 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1020.htm  

Humor September 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0920.htm 

Humor August 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0820.htm 

Humor July 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0720.htm 

Humor June 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0620.htm

Humor May 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0520.htm

Humor April 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0420.htm 

 Humor March 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0320.htm  

Humor February 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0220.htm 

Humor January 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0120.htm

Humor December 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1219.ht

Humor November 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1119.htm

Humor October 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1019.htm  

Humor September 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0919.htm 

Humor August 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0719.htm 

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

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

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

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

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

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

 

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

And that's the way it was on November 30, 2020 with a little help from my friends.

 

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

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

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

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

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

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

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

 

 

Bob Jensen's Additions to New Bookmarks

October 2020

Bob Jensen at Trinity University 

 

My Latest Web Document
Over 600 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

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

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

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

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

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

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

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

 

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

 

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

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

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

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

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

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

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

CPA exam will increase focus on higher-order skills
"What Higher Order Skills Will be Tested on the Next CPA Examination," by Ken Tysiac, Journal of Accountancy, April 4, 2016 ---
http://www.journalofaccountancy.com/news/2016/apr/new-cpa-exam-201614166.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=04Apr2016

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

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

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

Yuji Ijiri --- https://aaahq.org/Accounting-Hall-of-Fame/members/1989/Yuji-Ijiri

American Accounting Association's Annual Yuji Ijiri Lecture Series ---
https://aaahq.org/Ijiri-Lecture

The Future of Accounting Education Amidst Declining Enrollments in Masters Degree Programs ---
https://www.cpajournal.com/2020/10/12/the-future-of-accounting-education/
 

SUCCESS INSIDER: Insiders at big consulting firms like PwC and KPMG reveal how they're adapting to the pandemic --- Click Here

Leading consultancies are uncertain about what the future of the industry will look like. Here's how business travel, remote work, and client relationships have changed at firms like KPMG, PwC, and Boston Consulting Group.

PCAOB Member Brown Calls PCAOB's Revised Agenda ‘a Tragic Mistake’ ---
https://tax.thomsonreuters.com/news/pcaob-member-brown-calls-revised-agenda-a-tragic-mistake/
Thank you Lynn Turner for the heads up
 

CPA Journal:  The implementation of ASU 2016-15, Statement of Cash Flow Classification of Certain Cash Receipts and Cash Payments (Topic 230), has led to an increased focus on accounts receivable financing arrangements, with a variety of consequences, both real and paper-based, intended and unintended ---
https://www.cpajournal.com/2020/08/24/factor-fiction-under-asu-2016-15/

CPA Journal:  Accounting Education at a Crossroads Does a Drop in Enrollment Foretell a Decline in the Marketplace?
 https://www.cpajournal.com/2020/09/30/accounting-education-at-a-crossroads/
 

Sustainability Accounting --- https://en.wikipedia.org/wiki/Sustainability_accounting

CPA Journal:  Even as corporate reporting of sustainability information continues to gain in popularity, the practice still is not standardized, either domestically or globally ---
https://www.cpajournal.com/2020/09/03/icymi-the-coso-internal-control-framework-and-sustainability-reporting/
 

SEC Enforcement Division: A History --- http://www.sechistorical.org/
Thank you Jim McKinney for the heads up

 

Small business accounting regulations and tax shelter implications ---
https://www.journalofaccountancy.com/news/2020/sep/small-business-accounting-tax-shelter-implications.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=29Sep2020
 

Where have the Big 4 gone?  BDO Now Has the Most (Barely) Audit Clients In the U.K. ---
https://www.goingconcern.com/lol-big-4-bdo-now-has-the-most-audit-clients-in-the-u-k/

Jensen Comment
As the article points out, however, BDO gains are mostly smaller clients.
Could some of those gains be due to pricing?

Ex-KPMG Partner Given Slap on the Wrist From Judge During Cheating Scandal Sentencing ---
https://www.goingconcern.com/ex-kpmg-partner-given-slap-on-the-wrist-from-judge-during-cheating-scandal-sentencing/
 

String of Firms That Imploded Have Something in Common: Ernst & Young Audited Them ---
https://www.wsj.com/articles/string-of-firms-that-imploded-have-something-in-common-ernst-young-audited-them-11602863319?mod=djm_dailydiscvrtst

 

Answering 7 Questions About Remote Work ---
https://www.journalofaccountancy.com/issues/2020/oct/optimize-remote-work.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=06Oct2020
 

Wisconsin

Good morning. Federal securities regulators have warned General Electric of a civil-enforcement action over its accounting for a legacy insurance business, adding a fresh hurdle to efforts to turn around the once-mighty manufacturer.

The industrial giant said in a securities filing Tuesday that it received the so-called Wells notice on Sept. 30 over the company’s accounting for reserves related to an insurance business it has been trying to wind down for years. A Wells notice is a letter saying the SEC staff is recommending that the commission bring an enforcement action against the recipient and offers an opportunity to argue why the action shouldn’t be taken.

The company also made some executive changes, including the retirement of the head of the GE Capital unit, which houses the insurance business. GE said the new head of GE Capital, Jennifer VanBelle, would report to the company’s finance chief, Carolina Dybeck Happe.

Ms. Dybeck Happe, who was appointed GE’s chief financial officer last November, has been instrumental in increasing corporate disclosures through the company’s financial statements, said Deane Dray, an analyst at RBC Capital Markets. Her outsider perspective has helped lend fresh eyes to the accounting, he said.

“One of the long-term complaints about GE has been some of their opaque accounting, and from our perspective, that's all being addressed,” Mr. Dray said.

 

Increase in state auditors helped boost corporate tax collections 20% ---
https://madison.com/wsj/news/local/govt-and-politics/report-increase-in-state-auditors-helped-boost-corporate-tax-collections-20/article_5736bd6e-aaeb-50d8-8d94-a1ce3972d9a1.html
 

Chodorow: How I’ll Teach Trump’s Tax Returns ---
https://slate.com/business/2020/10/trumps-tax-returns-law.html

The Alternative Minimum Tax: The New York Times Is Wrong — Trump Paid Millions in Taxes in 2017 ---
https://www.breitbart.com/economy/2020/10/01/carney-new-york-times-is-wrong-trump-paid-millions-taxes-2017/

Why can’t Sacramento’s financial reporting match private sector standards?
 https://www.data-z.org/news/detail/why-cant-sacramentos-financial-reporting-match-private-sector-standards

Bloomberg:  Banks brace for “big bang” switch on $80 trillion worth of swaps ---
https://www.bloomberg.com/news/articles/2020-10-15/banks-brace-for-big-bang-switch-on-80-trillion-worth-of-swaps?cmpid=BBD101520_BIZ&utm_medium=email&utm_source=newsletter&utm_term=201015&utm_campaign=bloombergdaily

Bob Jensen's free tutorials on how to account for swaps and other financial derivatives ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

International Tax Competitiveness Index 2020 ---
https://taxfoundation.org/2020-international-tax-competitiveness-index/

Funding Short-Term Expenses With Long-Term Debt:  Mayor Lightfoot’s 2021 budget rescued by risky borrowing ---
https://www.data-z.org/news/detail/mayor-lightfoots-2021-budget-rescued-by-risky-borrowing

5G (Fifth Generation) --- https://en.wikipedia.org/wiki/5G

Chinese 5G Not Living Up to Its Hype ---
https://www.voanews.com/east-asia-pacific/voa-news-china/chinese-5g-not-living-its-hype

 

BDO Puerto Rico Tax Partner Accused of Trying and Failing to Defraud the IRS ---
https://www.goingconcern.com/bdo-puerto-rico-tax-partner-accused-defrauding-irs/

Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems Paperback –--
https://www.amazon.com/Distributed-Ledgers-Regulation-Financial-Infrastructure/dp/026253987X/ref=sr_1_15?dchild=1&keywords=robert+townsend&qid=1603908401&sr=8-15/marginalrevol-20
 

 

Earnings Management to Avoid Debt Covenant Violations and Future Performance

Accounting Research Network, 2020

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687741
63 Pages Posted: 26 Oct 2020

Scott Dyreng

Duke University - Accounting

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Fernando Penalva

IESE Business School - University of Navarra

Date Written: September 6, 2020

Abstract

In this study, we examine the trade-offs between earnings management (both accruals and real) and covenant violations by examining how they are associated with future accounting and stock market performance. We analyze a matched-pair sample of covenant violation firms with non-violation firms that have a similar risk of a covenant violation. We have three main findings. First, our evidence indicates that covenant violations are costly events for shareholders as lenders appear to use their control rights in ways that increase the likelihood of loan repayment but impose costs for shareholders. Second, there is limited evidence indicating covenant-related accrual-earnings management activities impose significant costs on shareholders, but we find shareholders are worse off following unsuccessful real earnings management. Third, our evidence indicates that, on average, shareholders at high violation risk firms are better off when their firms successfully engage in accruals earnings management to avoid a violation compared to shareholders at firms that violate a covenant but do not manage earnings. Thus, covenant-related earnings management may be in the best interests of shareholders and is not necessarily evidence of shareholder-manager agency conflicts.

Keywords: earnings management; debt covenants violations; future firm performance

JEL Classification: M41, G10

Suggested Citation:

Dyreng, Scott and Hillegeist, Stephen A. and Penalva, Fernando, Earnings Management to Avoid Debt Covenant Violations and Future Performance (September 6, 2020). Accounting Research Network, 2020, Available at SSRN: https://ssrn.com/abstract=3687741 or http://dx.doi.org/10.2139/ssrn.3687741

Agency Theory, Accounting Based Performance Evaluation Systems and IFRS: A Brief Relational Overview

Journal of Economics and Business, Vol.3 No.3 (2020)

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687518
8 Pages Posted: 26 Oct 2020

Bruce H. Geddes

Keiser University

Date Written: September 7, 2020

Abstract

This paper covers multiple related topics. To begin, the use of a performance evaluation system is helpful to the success of an organization (Wu et al., 2018). Performance evaluation systems drive corporate governance by results. The metrics used in the evaluation determine the direction that the executives of a company will govern it; corporate governance influences firm performance (Brahmana et al. 2018). The research topic covered is Agency Theory, its relation to corporate governance on an international scale related to IFRS. The paper concludes the issues with a look at the possible future effect on corporate governance and areas of future research.

Keywords: Agency Theory, Accounting, Performance Evaluation Systems, IFRS

Suggested Citation:

Geddes, Bruce H., Agency Theory, Accounting Based Performance Evaluation Systems and IFRS: A Brief Relational Overview (September 7, 2020). Journal of Economics and Business, Vol.3 No.3 (2020), Available at SSRN: https://ssrn.com/abstract=3687518

Research on Corporate Sustainability: Review and Directions for Future Research

Foundations and Trends® in Accounting: Vol. 14: No. 2, pp 73-127, 2020

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687330
52 Pages Posted: 26 Oct 2020

Jody Grewal

University of Toronto

George Serafeim

Harvard University - Harvard Business School

Date Written: September 5, 2020

Abstract

We review the literature on corporate sustainability and provide directions for future research. Our review focuses on three actions: measuring, managing and communicating corporate sustainability performance. Measurement is the least developed of the three and represents promising opportunities for research. Compelling evidence now exists on the role of management control systems, investor pressure and mandated disclosure in improving corporate sustainability outcomes. Research has moved beyond weighing the importance of all sustainability issues equally, with recent studies drawing distinctions between the financial materiality of different sustainability issues. Collectively, this new line of inquiry suggests that improving performance on material sustainability metrics is related to improved financial performance, helping to resolve four decades of inconclusive evidence on the relation between sustainability and financial outcomes. Finally, we review research on how disclosure mediums, accounting standards, information monitors and intermediaries shape the communication of sustainability performance. We conclude with a call for research on how to measure performance in the 21st century when corporate purpose extends beyond shareholder value maximization.

Keywords: Sustainability, ESG, Measurement, Accounting, Disclosure, Management Control Systems

JEL Classification: M12, M14, M41, M42, M48, M51, M54, G34, Q51, Q52

Suggested Citation:

Grewal, Jyothika and Serafeim, George, Research on Corporate Sustainability: Review and Directions for Future Research (September 5, 2020). Foundations and Trends® in Accounting: Vol. 14: No. 2, pp 73-127, 2020, Available at SSRN: https://ssrn.com/abstract=3687330 or http://dx.doi.org/10.2139/ssrn.3687330

Finding the Narrative in the Numbers: Long-Term Investors’ Demand for Accounting Information

 

SSRN
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3687213
50 Pages Posted: 24 Oct 2020

Federico Siano

Boston University Questrom School of Business

Date Written: August 10, 2020

Abstract

I study the MD&A section of 10-K filings and use disclosed numbers within the text of corporate narratives to proxy for the qualities of information that are demanded by long-term investors. I hypothesize and show that the prevalence of quantitative information in firms’ written communication is strongly and positively linked to long-term institutional ownership. Numbers capture a dimension of business communication that is opposite in direction to a short-term disclosure horizon. Exploiting language that surrounds numbers, I study topical narratives that are directly related to firm value and confirm the importance of numeric information to long-term shareholders in the relevant contexts of investment and forward-looking sentences.

 

 

Keywords: Disclosure, Long-Term Investors, Quantitative Information, Textual Analysis

JEL Classification: G23, G32, G11, M41, G14

Siano, Federico, Finding the Narrative in the Numbers: Long-Term Investors’ Demand for Accounting Information (August 10, 2020). Available at SSRN: https://ssrn.com/abstract=3687213 or http://dx.doi.org/10.2139/ssrn.3687213
 

Income Statement Mismatching Has Not Reduced the Information Conveyed by Accounting Over Time

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663942
59 Pages Posted: 23 Oct 2020

Hyung Il Oh

University of Washington, Bothell

Stephen H. Penman

Columbia Business School - Department of Accounting

Date Written: September 1, 2020

Abstract

Research has concluded that there has been a decline in the informativeness of financial reports over recent years. The reported decline has been attributed to an increasing mismatch of expenses to revenues in the income statement. This paper challenges this attribution: Mismatching that results from expending investments actually adds information for pricing. It does so by distinguishing higher risk investment from that booked to the balance sheet, and the market prices it as such. Further, seemingly paradoxically, the mismatching preserves the information in matching. Once mismatched expenses and matched earnings are separated, there is little indication of a decline in the information content of accounting over time.

Suggested Citation:

Oh, Hyung Il and Penman, Stephen H., Income Statement Mismatching Has Not Reduced the Information Conveyed by Accounting Over Time (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3663942 or http://dx.doi.org/10.2139/ssrn.3663942

Knowledge is Power: The Importance of Public Accounting Experience to Mutual Fund Managers’ Monitoring

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3661649
Posted: 20 Oct 2020

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Jun Huang

Shanghai University of Finance and Economics

Ting Li

Shanghai University of International Business and Economics

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: July 27, 2020

Abstract

We document that firms held by mutual fund managers who worked in public accounting earlier in their careers exhibit higher quality financial reporting. In cross-sectional evidence consistent with expectations, we find that the role that fund manager public accounting experience plays is magnified when: the firm suffers more severe agency problems, firm information asymmetry is worse, the fund has a longer investment horizon, fund managers formerly worked at large accounting firms, and fund managers have social connections with corporate executives. Additional evidence implies that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting topics when there. Firms’ earnings management subsides after site visits by these fund managers, particularly when they raise accounting issues during their visits. Overall, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms’ financial reporting.

Keywords: Mutual fund manager; Public accounting experience; Earnings management

JEL Classification: G23, G34, M40

Suggested Citation:

Chen, Yangyang and Huang, Jun and Li, Ting and Pittman, Jeffrey A., Knowledge is Power: The Importance of Public Accounting Experience to Mutual Fund Managers’ Monitoring (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661649

Calculating Pay in Swedish Schools: Accounting, Performativity, and Misfires

Financial Accountability & Management, Vol. 36, Issue 4, pp. 420-438, 2020

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3712359
19 Pages Posted: 20 Oct 2020

Cemil Eren Fırtın

University of Gothenburg, School of Public Administration

Gustaf Kastberg

University of Gothenburg, School of Public Administration

Multiple version iconThere are 2 versions of this paper

Date Written: November 2020

Abstract

This is a study of individual differentiated pay (IDP) for teachers in Sweden. We regard IDP as part of the observed accountingization of professional work. Our aim is to contribute to the understanding of accounting as a performative calculative device through the study of how performance is made an element of individual pay. As we sought to answer “How are merits and performance of professionals turned into a set IDP?” we observed the ways in which IDP had diverse performative consequences, which made the connection between performance and merit less influential in the process of setting wages. We contribute to the theorizing of accounting as a performative practice by introducing two propositions that indicate the importance of considering the extent to which accounting is turned into a dominant narrative and the extent to which the operations can be visualized in a relevant, stable manner. The propositions are the result of the approach to include visualizations as a focal dimension of performativity. The concept stresses the importance of recognizing the prerequisites of relevance and correspondence.

Keywords: accountingization, performance measurement, performativity, school, visualizations

Suggested Citation:

Fırtın, Cemil Eren and Kastberg, Gustaf, Calculating Pay in Swedish Schools: Accounting, Performativity, and Misfires (November 2020). Financial Accountability & Management, Vol. 36, Issue 4, pp. 420-438, 2020, Available at SSRN: https://ssrn.com/abstract=3712359 or http://dx.doi.org/10.1111/faam.12236

Forensic Accounting

Annual Review of Law and Social Science, Vol. 16, pp. 147-164, 2020

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3711272
Posted: 19 Oct 2020

Colleen Honigsberg

Stanford Law School

Date Written: October 2020

Abstract

Forensic accounting serves as a regulatory and investment tool that allows interested professionals to predict whether firms are engaged in financial reporting misconduct. Financial reporting misconduct has severe economic and personal consequences. Not only does such misconduct distort the allocation of economic resources, but investors and employees of these firms incur substantial financial and psychological harms. In essence, forensic accounting aims to mitigate these harms by predicting the likelihood a firm has committed financial reporting misconduct—thus allowing for early detection of such misconduct. In this review, I provide an overview of the most popular forensic accounting techniques in the literature and the effectiveness of such techniques. Although traditional forensic models tended to focus on behavioral characteristics of the executives who commit financial misconduct or to take a purely numerical approach based on financial data, more recent models combine big data analysis with psychological intuitions.

Suggested Citation:

Honigsberg, Colleen, Forensic Accounting (October 2020). Annual Review of Law and Social Science, Vol. 16, pp. 147-164, 2020, Available at SSRN: https://ssrn.com/abstract=3711272 or http://dx.doi.org/10.1146/annurev-lawsocsci-020320-022159

Evaluating the Effectiveness of the Accounting Review Conflict of Interest Policy

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3682157
32 Pages Posted: 16 Oct 2020

Ben McMillan

Watson Company, LLC

Catherine Whelan

University of Notre Dame Australia

Jehan El-Jourbagy

Georgia College

Date Written: August 27, 2020

Abstract

The majority of research examining the peer review process in accounting as well as other disciplines have focused on its perceived fairness from the perspective of the author. Balancing the process from the editorial board perspective, academic journals employ conflict of interest policies to mitigate biases. Specific relationships included in conflict policies are acquaintances, colleagues, co-authors, dissertation committee chair or committee membership, and the editorial board. Using a sample of 568 manuscripts collected from The Accounting Review from 2010 to 2019, we examine the efficacy of the journal’s conflict of interest policy. Using days under review as a measure of bias with control variables, our findings suggest that the policy is effective in mitigating relationship from colleagues, co-authors, and members of the editorial board. Dissertation committees with editorial board membership report a potential bias based. In addition, 52% of all manuscripts were conflicted at the time of submission, review, or acceptance. A secondary analysis is performed examining the impacts of citation counts, senior editors, and conference attendance on days under review. Control variables appear to remain significant except for conference attendance.

Keywords: peer review, days under review, insider publishing, publishing bias

JEL Classification: M41; N01

Suggested Citation:

McMillan, Ben and Whelan, Catherine and El-Jourbagy, Jehan, Evaluating the Effectiveness of the Accounting Review Conflict of Interest Policy (August 27, 2020). Available at SSRN: https://ssrn.com/abstract=3682157 or http://dx.doi.org/10.2139/ssrn.3682157

How Design Features Affect the Balance Sheet Presentation of CoCo-bonds

SSRN
 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3683131
2 Pages Posted: 16 Oct 2020

Matthias Petras

University of Cologne - Department of Banking; University of Cologne; University of Cologne - Faculty of Management, Economics and Social Sciences

Kai Coufal

affiliation not provided to SSRN

Date Written: April 14, 2020

Abstract

CoCo-bonds are hybrid capital instruments. Therefore, they can be classified as debt or as equity on the balance sheet. International Financial Reporting Standards do not yield clear guidance on how to account for CoCo-bonds. We investigate empirically how CoCo-bonds are accounted for in bank practice. We identify relevant design features which decide whether the bond is classified as debt or equity. Thereby, we shed light on the factors which determine the balance sheet representation and provide useful information for the process of designing the bonds, considering its consequent accounting treatment.

Keywords: CoCo-bonds; IFRS; hybrid capital; financial instruments, financial reporting

JEL Classification: G1; G21; G23; M41

Suggested Citation:

Petras, Matthias and Coufal, Kai, How Design Features Affect the Balance Sheet Presentation of CoCo-bonds (April 14, 2020). Available at SSRN: https://ssrn.com/abstract=3683131 or http://dx.doi.org/10.2139/ssrn.3683131

EY:  Latest Technical Guidance on Financial Accounting and Reporting ---
https://www.ey.com/en_us/assurance/accountinglink

EY:  Audit Quality Report ---
https://assets.ey.com/content/dam/ey-sites/ey-com/en_us/topics/assurance/ey-2020-commitment-to-aqr-brochure.pdf

EY: Lessee accounting considerations for retailers in the current environment ---
https://www.ey.com/en_us/assurance/accountinglink/technical-line---lessee-accounting-considerations-for-retailers-

EY:  FASB proposes targeted changes to the new leases standard
https://www.ey.com/en_us/assurance/accountinglink/to-the-point---fasb-proposes-targeted-changes-to-the-new-leases-

EY:  Accounting considerations for lessees that plan to reduce physical workspace ---
https://www.ey.com/en_us/assurance/accountinglink/technical-line---accounting-considerations-for-lessees-that-plan

EY:  Accounting pronouncements effective for the third quarter of 2020 ---
https://www.ey.com/en_us/assurance/accountinglink/accounting-pronouncements-effective-for-the-third-quarter-of-202

EY:  A closer look at the new guidance on distinguishing liabilities from equity and EPS ---
https://www.ey.com/en_us/assurance/accountinglink/technical-line---a-closer-look-at-the-new-guidance-on-distinguis

EY:  Financial Reporting Developments - Gains and losses from the derecognition of nonfinancial assets (ASC 610-20) ---
https://www.ey.com/en_us/assurance/accountinglink/financial-reporting-developments---gains-and-losses-from-the-der

EY:  Comment Letter - FASB proposal to provide a nonpublic entity practical expedient for fair value of equity-classified share options ---
https://www.ey.com/en_us/assurance/accountinglink/comment-letter---fasb-proposal-to-provide-a-nonpublic-entity-pra

EY:  How to approach the SEC’s new human capital disclosures  ---
https://www.ey.com/en_us/assurance/accountinglink/how-to-approach-the-sec-s-new-human-capital-disclosures 

EY:  From an October 16 EY newsletter

FASB issues ASU to clarify certain guidance on callable debt securities in ASC 310-20

The FASB issued an ASU as part of its Codification improvements project to clarify that an entity should reevaluate for each reporting period whether a callable debt security is within the scope of certain guidance in ASC 310-20 that was issued in ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments are effective for public business entities for fiscal years beginning after 15 December 2020, and interim periods within those fiscal years. Early adoption is not permitted for public business entities. For all other entities, the amendments are effective for fiscal years beginning after 15 December 2021, and interim periods within fiscal years beginning after 15 December 2022. Early adoption is permitted for these entities for fiscal years, and interim periods within those fiscal years, beginning after 15 December 2020.

 

EY:  The CAQ SEC Regulations Committee issued highlights of its July 2020 meeting at which the SEC staff expressed the following views:

 

·        A company that isn’t an emerging growth company (EGC) that submits or files a registration statement for an initial public offering (IPO) in 2020 or later should apply the public business entity (PBE) adoption dates for all accounting standards that use the PBE definition, including ASC 842.

 

·        In a reverse-merger, if a non-reporting operating target meeting the criteria to be an EGC merges with an EGC that is either a shell company or a special purpose acquisition company that elected to use the non-PBE adoption dates of accounting standards, the merged entity will maintain EGC status, and the target would be able to apply non-PBE adoption dates in its financial statements included in the S-4 and/or merger proxy before the merger is consummated and in the Form 8-K filed upon consummation.

 

·        Given that the FASB has deferred the effective dates of certain accounting standards in light of COVID-19, the SEC staff will extend its prior relief related to the adoptions of ASC 842 and ASC 606 to entities that meet the definition of a PBE only because their financial statements or financial information is included in other entities’ filings with the SEC to satisfy the requirements of Rules 3-05, 3-09 or 4-08(g) of Regulation S-X.

 

·        A registrant that is not an EGC (or a smaller reporting company must reflect adoption of accounting standards on the SEC filer adoption dates (Bucket 1) in its first filing after the IPO registration statement becomes effective but is encouraged to do so in the financial statements included in the IPO registration statement.

 

Excel: Microsoft overhauls Excel with live custom data types ---
https://www.theverge.com/2020/10/29/21539844/microsoft-excel-custom-data-types-power-bi-wolfram-alpha-power-query-data

 

From the CFO Journal's Morning Ledger on October 30, 2020

Good morning. Companies manufacturing household and consumer goods were expecting a slowdown in sales ahead of the Nov. 3 vote, similar to previous election years. This year, though, Americans have continued buying appliances and other items during the final weeks before the elections, forcing finance chiefs to reassess their plans for inventory management and working capital.

The U.S. economy grew at a record pace in the third quarter—increasing 7.4% over the prior quarter and at a 33.1% annual rate—recovering about two-thirds of the ground it lost earlier in the coronavirus pandemic. Pent-up consumer demand and government support helped power spending after disruptions related to Covid-19 eased, though it is unclear whether this will continue.

“Historically, we have seen some anxiety ahead of an election,” said Jim Peters, chief financial officer of Whirlpool. The maker of washing machines and kitchen utensils recorded a slowdown in consumer demand a few weeks before the 2016 election, but hasn’t observed a similar trend this year. Whirlpool currently has a backlog for its products of about seven weeks, Mr. Peters said, similar to other manufacturers, for example, automakers or paint producers.

Even though factory production has largely recovered from the shutdowns in the spring, buyers are snapping up items at a fast pace. That is leading to inventory shortages of goods that have surged in popularity with people spending more time at home and nervous about travel, executives, retailers and analysts say. “No matter which administration is in place, people still buy appliances,” Mr. Peters said.

From the CFO Journal's Morning Ledger on October 27, 2020

China accelerated purchases of U.S. farm products last month, new data shows, but overall it remains far behind on a commitment to buy about $140 billion in specific U.S. agricultural, energy and manufactured goods this year under a trade accord signed in January.

As of Sept. 30, China had purchased $58.8 billion in goods covered by the agreement. Purchases should have reached $108 billion by that time to be on track toward the full-year target.

From the CFO Journal's Morning Ledger on October 22, 2020

Good morning. Airlines’ losses are mounting as revenue plunged during what is typically their most lucrative season.

The coronavirus pandemic has eviscerated travel demand, bringing a decadelong streak of strong profits to a screeching halt. The four largest U.S. carriers have lost more than $25 billion this year so far. But airlines say they’re getting over their initial whiplash and settling into their new reality as significantly smaller companies.

Southwest Airlines lost nearly $1.2 billion during the third quarter, its biggest quarterly loss ever. American Airlines Group lost $2.4 billion. Alaska Air Group on Thursday reported losing $431 million. Rivals United Airlines Holdings and Delta Air Lines also reported massive losses during the third quarter last week.

Airlines have been slashing costs and raising as much cash as they can to weather the prolonged downturn. American said Thursday that it would sell up to $1 billion in equity to raise more money, adding to the $13.6 billion stockpile of liquidity at the end of the quarter. The airline furloughed 19,000 workers this month, saying it would bring them back if Congress approves another round of aid for airlines.

 

From the CFO Journal's Morning Ledger on October 22, 2020

Good morning. Drugmakers developing Covid-19 vaccines can add one more challenge to their list: how to account for the sales. The companies will face challenges recognizing revenue due to a lack of specific guidance from U.S. regulators and standard-setters on Covid-19 vaccines and the sheer scale of the production effort.

Vaccine manufacturers, among them Moderna, Johnson & Johnson, Pfizer, Merck and AstraZeneca, not only could have trouble determining when to book this revenue, but how much to book, accounting experts say. Stockpiling, complex federal contracts and uncertainty around future demand for the vaccine add to the accounting complication.

The uncertainty about vaccines in development and the size of contracts, with some potentially covering billions of doses, make the risk of deviation from sales estimates especially high. This likely will cause complications in recognizing revenue, said Tom Selling, a retired accounting professor at Southern Methodist University.

Some drugmakers, such as Moderna and AstraZeneca, have begun alerting investors and analysts about the accounting challenges surrounding the vaccine. “There is heightened interest in several areas of accounting that will increasingly impact our reported results as we move forward,” David Meline, Moderna’s chief financial officer, said on an Aug. 5 earnings call

From the CFO Journal's Morning Ledger on October 21, 2020

Goldman Sachs will pay about $2.8 billion and admit wrongdoing to resolve an investigation into the bank’s work for a corrupt Malaysian government fund known as 1MDB, people familiar with the matter said.

From the CFO Journal's Morning Ledger on October 21, 2020

FASB Proposes More Tweaks to Leasing Rules

The Financial Accounting Standards Board has proposed more changes to the way companies account for leases under a sweeping rule that went into effect in early 2019 and that requires businesses to put operating leases on their balance sheets, instead of in footnote disclosures.

Tuesday’s proposal by FASB would force landlords to classify leases that might have fluctuating rent payments—for example, because they are tied to a tenant achieving a certain amount of sales—differently. These leases would be categorized as operating leases instead of sales leases, a change meant to help landlords reduce losses they normally incur at the start of certain leases.

FASB’s proposed amendment would allow corporate tenants to recalculate lease liabilities depending on changes in the consumer price index or another economic indicator that affects future lease payments. Companies can reassess their lease obligations on the day the index or indicator changes.

FASB, which sets standards for companies and nonprofits in the U.S., has already made several adjustments to the lease rule over the past two years. In May, private companies and nonprofits were granted the option to delay implementation by one year.

FASB is seeking public feedback on the proposal by Dec. 4 and plans to vote on it early next year.

From the CFO Journal's Morning Ledger on October 20, 2020

U.K. Companies Paid More in Audit Fees to Big Four in 2019

Audit fees that U.K. companies paid to the country’s biggest professional-services firms continued to increase in 2019, according to a new report from the Financial Reporting Council.

Ernst & Young, PricewaterhouseCoopers, Deloitte Touche Tohmatsu and KPMG together reported a 6.9% rise in audit-fee income accelerating from a 1.7% increase in 2018. Audit-fee income at firms outside the Big Four grew at a slower rate, 2.2%, in 2019, the U.K. audit and accounting regulator said.

Meanwhile, fee income the Big Four received for non-audit work such as consulting dropped by 20.8% in 2019. The decline was due in part to auditors applying a 70% fee for non-audit services they provided to organizations that cater to “public interest entities,” the regulator said. The rule was issued in 2016.

The fee cap and other standards have sought to reduce potential conflicts of interests between audit and non-audit work, said David Rule, the FRC’s executive director of supervision.

In July, the FRC ordered the Big Four to draw up plans for separating their audit businesses by Friday of this week, and for the work to be completed by mid-2024

 

From the CFO Journal's Morning Ledger on October 20, 2020

Good morning. The Federal Reserve is in no hurry to issue a digital currency, Chairman Jerome Powell said, citing unresolved concerns including the potential for theft and fraud.

Central banks around the world are stepping up research on the costs and benefits of central-bank digital currencies, which could supplement existing national currencies. China is ahead of other nations, after rolling out a homegrown digital currency in April across four cities in a pilot program.

Potential benefits include faster and less costly international transactions, Mr. Powell said. But the Fed must also consider the risk of cyberattacks, counterfeiting and fraud, as well as the impact on monetary policy and financial stability.

Mr. Powell said the dollar’s central role in global financial transactions makes it essential to get a digital currency right while remaining on the frontier of research and policy development. Some $2 trillion worth of dollar notes are in circulation, half held outside of the U.S.

From the CFO Journal's Morning Ledger on October 16, 2020

Good morning. Finance executives are weighing the potential impact of higher taxes on their companies’ cash flows, debt and other core items on the balance sheet ahead of the Nov. 3 U.S. elections.

Taxes play a crucial role in determining which strategies businesses pursue—even more so following the 2017 tax overhaul, which reduced corporate tax rates to 21% from 35%. About three years later, many executives expect the opposite: higher taxes to pay for pandemic-related economic relief measures and bring down the deficit.

“Everybody is modeling it right now,” said Kate Barton, global vice chair for tax at Ernst & Young. “Tax expense on the P&L [profit and loss statement] would probably be the top expense that chief financial officers are going to have to cope with.”

Companies in the S&P 100 paid an effective federal tax rate of 18.9% in 2019, slightly up from 18.2% the previous year, according to a recent report from WalletHub, a provider of credit reports.

From the CFO Journal's Morning Ledger on October 15, 2020

Good morning. Aid to U.S. small businesses still struggling amid the coronavirus pandemic is certain to be a priority next year no matter who wins the presidency, and President Trump and Democratic nominee Joe Biden are both highlighting the issue while emphasizing different solutions.

Mr. Trump’s efforts would likely rely on policy strategies that have been popular within his administration thus far, including the Paycheck Protection Program and tax breaks, and the recently released Platinum Plan for Black America. Mr. Biden’s platform on small businesses calls for reforming the PPP, including strengthening oversight of the program and broadening provisions for minority-owned businesses.

Some small businesses have already closed, despite federal coronavirus stimulus efforts. The next administration will be tasked with both keeping existing businesses alive and supporting the creation of new ones, according to John Lettieri, president of the Economic Innovation Group think tank. “We’re going to need a lot of new businesses to come take the place of the ones that have failed and to pick up the slack in the job market,” Mr. Lettieri said.

Mr. Biden’s platform proposes expanding small businesses’ access to capital through an initiative called the Small Business Opportunity Fund. Mr. Trump’s administration has so far aided small firms through a tax deduction that lowers income-tax bills for many small businesses and its focus on deregulation, according to Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business, an advocacy group.

 

From the CFO Journal's Morning Ledger on October 12, 2020

Good morning. People are deferring many routine medical treatments during the coronavirus pandemic, creating unexpected savings for some employers, while making it harder for companies to forecast health-benefit costs in the year ahead.

As U.S. companies prepare to open their enrollment periods for health-care plans, many are uncertain about how much medical care their employees will consume in the year ahead. Health benefits typically account for a large portion of a company’s personnel costs.

Health-benefits costs for global companies that are insured—meaning they purchase a policy to cover their employees’ health-care claims—are expected to rise by 8.1% in the 2021 calendar year over this year, as people rebook medical appointments they postponed, according to a report published earlier this week by advisory firm Willis Towers Watson. By comparison, health-care costs are expected to rise 5.9% this year from a year earlier, the report said. 

Some insured companies in industries hardest hit by the pandemic, including retail and restaurants, have begun pushing their providers for lower premiums, citing a drop in employee claims. Others are modeling the potential for costs to increase in the years ahead if the medical conditions employees have left untreated begin to worsen.

From the CFO Journal's Morning Ledger on October 8, 2020

Federal banking regulators fined Citigroup $400 million and ordered the bank to fix its risk-management systems, citing “significant ongoing deficiencies.”

Wells Notice --- https://en.wikipedia.org/wiki/Wells_notice

From the CFO Journal's Morning Ledger on October 7, 2020

Good morning. Federal securities regulators have warned General Electric of a civil-enforcement action over its accounting for a legacy insurance business, adding a fresh hurdle to efforts to turn around the once-mighty manufacturer.

The industrial giant said in a securities filing Tuesday that it received the so-called Wells notice on Sept. 30 over the company’s accounting for reserves related to an insurance business it has been trying to wind down for years. A Wells notice is a letter saying the SEC staff is recommending that the commission bring an enforcement action against the recipient and offers an opportunity to argue why the action shouldn’t be taken.

The company also made some executive changes, including the retirement of the head of the GE Capital unit, which houses the insurance business. GE said the new head of GE Capital, Jennifer VanBelle, would report to the company’s finance chief, Carolina Dybeck Happe.

Ms. Dybeck Happe, who was appointed GE’s chief financial officer last November, has been instrumental in increasing corporate disclosures through the company’s financial statements, said Deane Dray, an analyst at RBC Capital Markets. Her outsider perspective has helped lend fresh eyes to the accounting, he said.

“One of the long-term complaints about GE has been some of their opaque accounting, and from our perspective, that's all being addressed,” Mr. Dray said.

From the CFO Journal's Morning Ledger on October 5, 2020

Good morning. Finance chiefs are selling a new type of bond designed to attract socially minded investors that costs less and offers more leeway for companies than other types of sustainable debt.

These instruments, known as sustainability-linked bonds, are similar to traditional debt sales—with one major exception: They are usually structured such that companies pay a higher interest rate to investors if they fail to achieve a set of environmental and other goals before the maturity date. Also, the proceeds from these bonds can be used for general purposes, such as paying down existing debt, which sets it apart from other types of green, social and sustainability bonds.

Luxury fashion brand Chanel, pharmaceutical company Novartis and Brazilian paper maker Suzano SA all issued sustainability-linked bonds in September, according to the Climate Bonds Initiative, a nonprofit that tracks such debt sales. Italian utility Enel was the first company to issue this type of debt last fall.

The four companies together raised roughly $8 billion, according to Climate Bonds Initiative. There haven’t been any issuances by an American company.

Jensen Comment
This complicates accounting somewhat by adding uncertainty as to the present value of the debt obligation.

From the CFO Journal's Morning Ledger on October 1, 2020

Boeing Co. said it is ending production of its 787 Dreamliner in the Seattle area after more than a decade and plans to consolidate assembly of the popular wide-body jet to its factory in South Carolina next year

Jensen Comment
Amazon is also cutting back in Seattle in part because the city is increasingly hostile to private sector business climate with increased taxation, increased crime, and defunded policing ---
https://www.cnbc.com/2020/07/07/seattle-passes-payroll-tax-targeting-amazon-and-other-big-businesses.html

From the CFO Journal's Morning Ledger on October 1, 2020

Proposal for New Board to Oversee Sustainability Reporting

The foundation that oversees international accounting rulemakers is
proposing the creation of a new board for sustainability reporting.

The International Financial Reporting Standards Foundation on Wednesday published a paper asking for comments on its plan to set up protocols for climate-related and other disclosures.

The goal is to improve the consistency and comparability of
sustainability reporting across companies, the IFRS Foundation said.

The new sustainability board would work alongside the International
Accounting Standards Board, the foundation’s standard-setting body, according to the proposal.

There are several efforts already under way to standardize and improve the quality of corporate sustainability reporting. Last week, the Big Four accounting firms—Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte—backed a framework from the World Economic Forum to create a common set of metrics for corporate disclosures on environmental and social issues.

The IFRS Foundation is seeking comment on its proposal through Dec. 31.

From the CFO Journal's Morning Ledger on October 1, 2020

Good morning. Insurance companies are getting even more time to implement a new rule for valuing long-term contracts following a vote by the Financial Accounting Standards Board.

The rule maker, which sets accounting standards for companies and nonprofits in the U.S., in June proposed a delay of another year in implementing the new guidelines amid the economic harm caused by the coronavirus pandemic. The rule already was delayed by a year last November to give companies more time to modernize their processes for reporting and valuation.

Columbus, Ga.-based insurer Aflac Inc. was prepared for another potential delay in the new standard, Chief Financial Officer Max Brodén said. Meanwhile, FM Global, a Johnston, R.I.-based private mutual insurer, will have to make significant changes to its disclosures under the new rule even though it doesn’t issue long-lasting contracts, CFO Kevin Ingram said. “I’d just as soon keep everything the way it is for as long as we possibly can,” he said.

FASB board member Christine Botosan said she hasn’t received convincing evidence showing that insurers are falling behind in their implementation efforts. “Most entities remain on track in their implementation despite the challenges of remote work,” Ms. Botosan said. She was the only one of seven board members voting against the delay.

Athene, MassMutual Made Over $3 Billion Takeover Offer to American Equity

 

As Covid-19 Cases Rise, Insurers Reduce Coverage for Telehealth Visits

 

From the CFO Journal's Morning Ledger on September 30, 2020

Former Amazon Finance Manager Charged With Insider Trading

The Securities and Exchange Commission has charged former Amazon.com Inc finance manager Laksha Bohra and two family members with insider trading.

The SEC alleges Ms. Bohra, who handled confidential financial information for Amazon, gave such information to her husband, Viky Bohra, and his father, Gotham Bohra, ahead of company earnings announcements between January 2016 and July 2018. Viky Bohra and his father allegedly then traded on this information using 11 separate accounts, with the family making approximately $1.4 million.

The U.S. Attorney’s Office for the Western District of Washington on Monday filed criminal charges against Laksha Bohra.

From the CFO Journal's Morning Ledger on September 30, 2020

Walt Disney Co. said it would lay off about 28,000 employees at its domestic theme parks, citing continuing restrictions due to the Covid-19 pandemic, particularly its inability to reopen Disneyland in Southern California.

The laid-off workers have been on furlough since April, the company said, collecting health benefits but not pay. About two-thirds of them are part-time employees, the company said, adding it would soon enter discussions with unions about “next steps” for their members.

From the CFO Journal's Morning Ledger on September 30, 2020

Good morning. Data firm Palantir Technologies Inc. and software company Asana Inc. are both poised to launch their direct listings Wednesday on the New York Stock Exchange, the biggest test yet for this still largely untested model for initial public offerings.

Only two companies of note—Spotify Technology SA and Slack Technologies Inc.—had ever completed direct listings before. Going public through a direct listing skirts investment-banking underwriters and means the companies don’t raise money for themselves. Instead, employees and early investors are able to sell their shares on the first day of trading.

In a direct listing, there is no matching of buyers and sellers the night before, as happens in a traditional IPO. Instead, the company simply floats its shares on the open market, meaning finding the right price at which to open the stock for trading can take a long time, traders say.

The two listings will land as investors are eagerly gobbling up shares of newly public companies. Despite a struggling economy weighed down by the coronavirus pandemic, U.S.-listed initial public offerings are likely to raise more money this year than any other—including the tech-bubble years of 1999 and 2000—if the feverish pace of IPOs keeps up, bankers, lawyers and executives said. 

From the CFO Journal's Morning Ledger on September 29, 2020

Rising insurance premiums are costing businesses millions of dollars they can ill afford as they navigate the pandemic. Many companies are responding by trying to manage risks on their own.
Some mainstream insurers have largely refused to pay out business-interruption claims made by companies hurt by shutdowns.

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 2, 2020

Blank-Check Firms Under Regulatory Scrutiny

By Alexander Osipovich Dave Michaels | September 24, 2020

Topics: Regulation , Initial Public Offering (IPO) , Business combinations , Special Purpose Acquisition Companies

Summary: The article reports on SEC Chairman Jay Clayton’s statements about examining disclosures by special-purpose acquisition companies (SPACs, also known as “blank-check companies”). It clearly describes the process of taking companies public through SPACs. This process avoids the need for private entities to conduct their own initial public offering of stock by instead agreeing to be acquired by a SPAC. A related article covering United Wholesale Mortgage going public by combining with SPAC Gores Holdings IV Inc. was covered in the Finance Weekly Review during the week ended September 25, 2020, and is available at https://www.wsj.com/articles/united-wholesale-mortgage-to-go-public-via-merger-with-gores-spac-11600828200

Classroom Application: The article may be used in a financial reporting class covering stock issuances or business combinations.

Questions:

·        What are “blank-check companies,” also known as special-purpose acquisition companies (SPACs)?

·        What steps are involved when an SPAC takes a private entity public in lieu of the private entity undertaking its own initial public offering of securities?

·        Based on the discussion in the article, why do you think the SEC is particularly concerned about SPACs in 2020?

·        What features about SPACs are the Securities and Exchange Commission (SEC) examining?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Blank-Check Firms Under Regulatory Scrutiny," by Alexander Osipovich and Dave Michaels, The Wall Street Journal, September 24, 2020
https://www.wsj.com/articles/blank-check-firms-offering-ipo-alternative-are-under-regulatory-scrutiny-11600979237

SEC chairman’s comments Thursday prompted a selloff in shares of so-called SPACs

Blank-check companies that have raised tens of billions of dollars to acquire hot startups are under the microscope at the Securities and Exchange Commission.

Such companies, also called special-purpose acquisition companies, or SPACs, are shell-like entities that go public in order to raise cash for acquisitions. Startups can then combine with a SPAC to go public, in an alternative to a traditional initial public offering.

SEC Chairman Jay Clayton said Thursday that the regulator is examining how sponsors of blank-check companies disclose their ownership and how any compensation is tied to an acquisition. Investors buy shares in SPACs before the SPACs have done a deal, and they have the option to exit before a transaction is finalized.

“One of the areas in the SPAC space I’m particularly focused on, and my colleagues are particularly focused on, is the incentives and compensation to the SPAC sponsors,” Mr. Clayton said in an interview on CNBC. “How much of the equity do they have now? How much of the equity do they have at the time of the IPO-like transaction? What are their incentives?”

Shares of Tortoise Acquisition Corp., a SPAC that has announced but not yet closed a deal with electric- and hybrid-vehicle startup Hyliion Inc., dropped 26% after the opening bell. They were down 9.7% when markets closed.

Mr. Clayton’s comments were intended to communicate that regulators are closely reviewing SPAC written disclosures, a person familiar with the matter said. The SEC staff reviews thousands of public-company disclosures every year and offers written comments about them, with an eye toward enhancing disclosure for investors. Mr. Clayton’s remarks weren’t intended to signal the existence or possibility of enforcement action, the person said.

Nikola and sports-betting operator DraftKings Inc. are among the larger firms that went public this year though SPAC deals. Earlier this week, Nikola’s founder stepped down as executive chairman after a short seller alleged he misled investors. Nikola and its founder, Trevor Milton, have denied the allegations of fraud.

This has been a record year for new SPAC listings. So far in 2020, IPOs of new blank-check companies have raised $41.2 billion, handily breaking last year’s haul of $13.5 billion, which was then a record, according to Dealogic.

After a SPAC goes public, the executives running it have a limited period of time, typically two years, in which to find a private company to merge with or acquire. The private company then gains the SPAC’s spot on an exchange, like in a reverse merger.

SPACs can be a healthy alternative to a traditional IPO, and the competition they offer to traditional stock offerings is probably a good thing, Mr. Clayton said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 2, 2020

Grocers Stockpile, Build ‘Pandemic Pallets’ Ahead of Winter

By Annie Gasparro Jaewon Kang | September 27, 2020

Topics: Inventory Management , Just-In-Time Inventory Management

Summary: “Supermarkets are stockpiling groceries and storing them early to prepare for the fall and winter months when some health experts warn the country could see another widespread outbreak of virus cases and new restrictions….Southeastern Grocers LLC secured holiday turkeys and hams over the summer, months before it normally starts inventory planning, said Chief Executive Anthony Hucker. And grocery wholesaler United Natural Foods Inc. has loaded up on extra inventory of cranberry sauce, herbal tea and cold remedies, said President Chris Testa.” The stockpiling amounts to “a shift from the just-in-time inventory management practices that have guided the fast-moving retail business for decades.”

Classroom Application: The article may be used in a managerial accounting course discussing inventory management, including just-in-time inventory management. A related article from the onset of the Coronavirus pandemic is available at https://www.wsj.com/articles/grocers-stopped-stockpiling-food-then-came-coronavirus-11584982605

Questions:

·        What types of items are food stores stockpiling? List different inventory categories from the discussion you read in the article.

·        What supply chain and inventory management changes are needed for grocers to stockpile these items ahead of the oncoming U.S. holiday season and potential Covid-19 resurgence?

·        How do these inventory management changes represent a strategic shift for grocers? In your answer, contrast this approach with just-in-time inventory management and define this inventory management approach.

·        How do you think these inventory management changes affect costs incurred by grocers, food producers, and manufacturers of grocery-related products? Be specific in the example(s) of inventory costs you discuss: materials, labor, overhead, selling expense, or other periodic expense.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Grocers Stockpile, Build ‘Pandemic Pallets’ Ahead of Winter," by Annie Gasparro and Jaewon Kang, The Wall Street Journal, September 27, 2020
https://www.wsj.com/articles/grocers-stockpile-build-pandemic-pallets-ahead-of-winter-11601199000

Resurgence of Covid-19 cases and the impending holiday rush prompt retailers to sideline lean-inventory strategies

Grocery stores and food companies are preparing for a possible surge in sales amid a new rise in Covid-19 cases and the impending holiday rush.

Supermarkets are stockpiling groceries and storing them early to prepare for the fall and winter months, when some health experts warn the country could see another widespread outbreak of virus cases and new restrictions. Food companies are accelerating production of their most popular items, and leaders across the industry are saying they won’t be caught unprepared in the face of another pandemic surge.

Southeastern Grocers LLC secured holiday turkeys and hams over the summer, months before it normally starts inventory planning, said Chief Executive Anthony Hucker. And grocery wholesaler United Natural Foods Inc. has loaded up on extra inventory of cranberry sauce, herbal tea and cold remedies, said President Chris Testa.

“We started talking about Thanksgiving in June. That’s earlier than we ever have,” he said.

Associated Food Stores recently started building “pandemic pallets” of cleaning and sanitizing products so it always has some inventory in warehouses, said Darin Peirce, vice president of retail operations for the cooperative of more than 400 stores. The company is establishing protocols so it can better manage scenarios of high demand.

“We will never again operate our business as unprepared for something like this,” he said.

These changes, a reaction to the sudden and massive shortages grocers experienced in the spring, amount to a shift from the just-in-time inventory management practices that have guided the fast-moving retail business for decades.

Now, food sellers are stockpiling months, rather than weeks, worth of staples such as pasta sauce and paper products to better prepare for this winter, when people are expected to hunker down at home. Ahold Delhaize USA, SpartanNash Co. SPTN 2.26% and others say they are buying more food as soon as they can, stocking warehouses with wellness and holiday items. Many retailers are expanding distribution capacity, augmenting warehouse space and modifying shifts.

They say they want to be ready for a potential Covid-19 surge that experts are warning could hit as soon as this fall, as daily reported cases are increasing again in many states after falling in the summer. More than 200,000 people have died from the coronavirus in the U.S.

A fresh increase in demand in the event that officials reinstate restrictions on restaurants or workplaces would also run up against the normal holiday boom in grocery sales, further elevating demand for items like baking products, pasta, meat and paper towels.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 2, 2020

Finance Chiefs Call on Executives to Help Fight Poverty, Climate Change

By Kristin Broughton | September 21, 2020

Topics: Chief Financial Officer (CFO) , ESG

Summary: A group of chief financial officers (CFOs) “are calling on other executives to make sure their businesses help fight poverty and climate change....[They have] published a framework to help guide companies’ decision-making in areas such as corporate finance and investing to support the United Nations’ Sustainable Development Goals.”

Classroom Application: The article focuses on environmental, social and governance (ESG) issues. It may be used in any level of accounting class focusing on financial reporting or managerial topics. Questions ask students to consider the role of the CFO and points made in the article that ESG initiatives can be in shareholders’ best interests.

Questions:

·        What is the role of the chief financial officer (CFO)?

·        What has a group of CFOs agreed to do through their involvement in the United Nations?

·        How can CFOs influence and help find solutions to world problems such as poverty, climate change, and access to clean water?

·        What evidence is there that the CFO actions described in this article are consistent with investor demands for high rates of return on their investments in these companies?

·        What is ESG reporting? Does this reporting fall under the umbrella of financial reporting? Explain your answer and cite any sources you use.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

Finance Chiefs Call on Executives to Help Fight Poverty, Climate Change," by Kristin Broughton, The Wall Street Journal, September 21, 2020
https://www.wsj.com/articles/finance-chiefs-call-on-executives-to-help-fight-poverty-climate-change-11600715230

CFOs at global companies urge their counterparts to make investment decisions that help achieve the U.N.’s Sustainable Development Goals

Chief financial officers at companies including Anheuser-Busch InBev SA, Ford Motor Co. and Verizon Communications Inc. are calling on other executives to make sure their businesses help fight poverty and climate change.

A group of CFOs on Monday published a framework to help guide companies’ decision-making in areas such as corporate finance and investing to support the United Nations’ Sustainable Development Goals. These goals, adopted in 2015, include ending poverty by 2030, taking action against climate change and improving access to clean water.

The CFOs are urging other finance executives to allocate their companies’ resources to projects that support the development goals and expand their set of funding instruments to include green bonds and other sustainability-oriented tools, executives said.

“Because of the seats we sit in within our companies, us being seen as supporting it…makes people take a second look and say, ‘Hey, maybe there are things we can do,’” Verizon CFO Matthew Ellis said.

The telecommunications company last week issued a $1 billion green bond and said it would use the proceeds to support four of the U.N.’s 17 goals in areas such as clean energy and economic growth. Verizon plans to invest in solar and wind facilities to power its networks.

Investors increasingly take interest in environmental, social and governance issues. Funds that pursued sustainability targets in their investment strategy during the first half of 2020 attracted $20.9 billion in net new assets from investors. That is roughly on par with the whole of 2019 and about four times as much as in 2018, according to Morningstar Inc., a ratings company. Morningstar analyzed 334 U.S. funds in its tally.

The CFO group, which made its announcement amid this year’s virtual General Assembly, wants companies to set clear goals for contributing to the sustainable development targets and assess the investments that would be necessary to achieve those goals. Finance executives also should obtain financing that meets sustainability targets and develop sound reporting practices, the group said.

“We’re calling for large, impactful shifts that are companywide,” said Sanda Ojiambo, executive director of U.N. Global Compact, an organization that focuses on sustainable business practices. The CFO group was established by the U.N. Global Compact.

Members of the group include CFOs and other senior finance executives from over 30 companies in a range of industries across the globe. The group is planning to issue guidance, case studies and research on sustainable corporate finance in the months ahead, executives said.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 9, 2020

FASB Further Delays Accounting Rule on Insurance Contracts

By Mark Maurer | September 30, 2020

Topics: Insurance Industry

Summary: The article describes the FASB’s delay of a new standard for insurer accounting for long-term contracts until 2023 (years beginning after December 15, 2022) for large publicly traded entities and 2025 (years beginning after December 15, 2024) for smaller entities. The delay is due to the difficulties of implementing the new standard during the Covid-19 pandemic. One Board member, Christine Botosan, voted against the delay. The article describing the issuance of the new standard is available at https://www.wsj.com/articles/new-rules-look-to-make-insurance-contracts-more-transparent-for-investors-1534341601 It describes the intent of the new standard as a means to increase “transparency and better understanding of the economics” behind long-term insurance contracts. Those types of contracts “…can extend over decades, but often the assumptions that governed their value at the outset—life expectancy and the costs of long-term care...—aren’t updated."

Classroom Application: The article may be used in classes covering insurance contracts and accounting for them as well as accounting for long-term contracts in general. It also may be used when discussing the FASB standard-setting process.

Questions:

  • What types of insurance generate long-term obligations for insurers? What types generate short-term?
  • Why do you think this distinction between types of insurance contracts is important for accounting determinations?
  • What are actuaries? What types of information do they use and produce? How is this information used in accounting for long-term insurance contracts?
  • What changes has the FASB required in accounting for long-term insurance contracts? (Hint: you may find a good description through the links in the article, or directly in the 2018 article available at https://www.wsj.com/articles/new-rules-look-to-make-insurance-contracts-more-transparent-for-investors-1534341601).
  • When did the FASB propose and pass the delay in this change in insurance company reporting? Why did they do so?
  • What is your reaction to the statement by FM Global, Inc. Chief Financial Officer Kevin Ingram? Support your answer, considering the type of contracts FM Global issues as well as the comments by FASB member Christine Botosan.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"FASB Further Delays Accounting Rule on Insurance Contracts," by Mark Maurer, The Wall Street Journal, September 30, 2020
https://www.wsj.com/articles/fasb-further-delays-accounting-rule-on-insurance-contracts-11601500326

Insurers get another year to prepare for changes in measuring value of long-term obligations

Insurance companies are getting even more time to implement a new rule for valuing long-term contracts following a vote by the Financial Accounting Standards Board on Wednesday.

The rule maker, which sets accounting standards for companies and nonprofits in the U.S., in June proposed a delay of another year for the new rule amid the economic harm caused by the coronavirus pandemic. The rule was first delayed by a year last November to give companies more time to modernize their processes for reporting and valuation.

Insurance firms must review assumptions used to measure the value of their long-term contractual obligations and make revisions if needed. Long-term contracts include agreements on annuities, endowments and title insurance. Short-duration contracts usually cover property and liability protection.

Publicly listed insurers, excluding small ones, may now delay implementing the new standard until after Dec. 15, 2022. All others are allowed to wait until after Dec. 15, 2024.

Insurance companies in comment letters to FASB said a delay would give them time to address coronavirus hurdles and adequately prepare for the new standard by, for example, testing internal controls and educating management and investors.

Columbus, Ga.-based insurer Aflac Inc. was prepared for another potential delay in the new standard, Chief Financial Officer Max Brodén said. Challenges stemming from the pandemic have forced Aflac to revise its business goals and timelines, including for issues such as implementing new accounting rules, Chief Accounting Officer June Howard wrote in an Aug. 6 letter to FASB.

 

Principal Financial Group Inc., a Des Moines, Iowa-based insurer, is currently developing new valuation models and will update its actuarial systems to comply with the new rule, finance chief Deanna Strable-Soethout said. The delay will be helpful for employees tasked with implementing the rule while working remotely, she added.

FM Global, a Johnston, R.I.-based privately held mutual insurer, will have to make significant changes to its disclosures under the new rule even though it doesn’t issue long-lasting contracts, CFO Kevin Ingram said. “I’d just as soon keep everything the way it is for as long as we possibly can,” he said.

FASB board member Christine Botosan said on Wednesday she hasn’t received convincing evidence showing that insurers are falling behind in their implementation efforts. “Most entities remain on track in their implementation despite the challenges of remote work,” Ms. Botosan said. She was the only one of seven board members voting against the delay.

FASB said it plans to issue documents formalizing the changes later this year.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 9, 2020

Companies Test a New Type of ESG Bond With Fewer Restrictions

By Kristin Broughton | October 5, 2020

Topics: Bonds , Debt Covenants , Sustainability

Summary: Pharmaceutical company Novartis AG has issued sustainability-linked bonds in September 2020 totaling €1.85 billion ($2.2 billion). “The company set itself targets for increasing patients’ access to treatment for malaria and other illnesses in certain countries by 2025. If an external verifier determines that Novartis failed to meet those targets by the 2025 deadline, then the coupon rate on the bonds, which is set at zero, will increase to 0.25% for the following three annual coupon payments until the bond matures in September 2028, a spokesman said.” The company spokesman stated the issuance allow Novartis AG to make ESG goals more visible when “it is…not practical… to separate out specific ESG projects from… ‘regular’ business activities.”

Classroom Application: The article may be used when discussing bond issuances or ESG reporting issues.

Questions:

  • What are debt covenants?
  • What types of debt covenants are being written into sustainability bonds?
  • What are the benefits of issuing sustainability-linked bonds as opposed to “green bonds.” In your answer, define the term green bonds.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Companies Test a New Type of ESG Bond With Fewer Restrictions," by Kristin Broughton, The Wall Street Journal,  October 5, 2020
https://www.wsj.com/articles/companies-test-a-new-type-of-esg-bond-with-fewer-restrictions-11601890200

Novartis, Suzano and Chanel issued billions of dollars in sustainability-linked bonds in September

Finance chiefs are selling a new type of bond designed to attract socially minded investors that costs less and offers more leeway for companies than other types of sustainable debt.

These instruments, known as sustainability-linked bonds, are similar to traditional debt sales—with one major exception: They are usually structured such that companies pay a higher interest rate to investors if they fail to achieve a set of environmental and other goals before the maturity date. Also, the proceeds from these bonds can be used for general purposes, such as paying down existing debt, which sets it apart from other types of green, social and sustainability bonds.

Luxury fashion brand Chanel, pharmaceutical company Novartis AG and Brazilian paper maker Suzano SA all issued sustainability-linked bonds in September, according to the Climate Bonds Initiative, a nonprofit that tracks such debt sales. Italian utility Enel SpA was the first company to issue this type of debt last fall.

The four companies together raised roughly $8 billion, according to Climate Bonds Initiative. There haven’t been any issuances by an American company.

This new type of debt is gaining popularity as companies take advantage of historically low interest rates to shore up cash as they weather the pandemic. Chief financial officers, whose job it is to review their company’s funding tools on a regular basis, are increasingly using new types of debt to demonstrate their social consciousness credentials to investors, and to attract new types of investors.

Corporate green-bond issuance has increased by about eightfold over the past five years, to $77.4 billion, according to data provider Dealogic. In comparison, investment-grade companies issued $2.3 trillion in traditional bonds through Oct. 1, a 9% increase compared with the whole year of 2019, Dealogic said.

Generally, proceeds from green bonds must be spent on a designated ESG project—such as construction of a renewable-energy facility—and companies have to track and report to investors how they spent the money. Before issuing a green bond, companies also adopt a formal ESG financing framework, which is reviewed by an external firm such an ESG ratings agency.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 9, 2020

U.K. Regulator Wants Pension Funds, Other Organizations to Provide Better Disclosures

By Mark Maurer | October 1, 2020

Topics: ESG

Summary: A WSJ article linked in the current one under review reported on the issuance of the U.K. Financial Reporting Council’s (FRC) stewardship code in October 2019. It is available at https://www.wsj.com/articles/u-k-regulator-asks-asset-owners-managers-to-consider-esg-11571871660 The code asks “asset managers and other financial firms to demonstrate how they protect and enhance the value of their investments for the long term.” The FRC has now reviewed 21 reports of financial entities and found them lacking: few businesses met its expectations for financial reporting in 2019; “some organizations failed to provide specific evidence supporting their statements, the watchdog said.”

Classroom Application: The article may be used to discuss concepts in financial reporting, specifically meeting the objective of financial reporting; the notion of stewardship in general; and the notion of stewardship in relation to environmental, social, and governance (ESG) reporting.

Questions:

  • Define the term “stewardship.”
  • What is the U.K.’s Financial Reporting Council (FRC)?
  • What document did the U.K. FRC issue in relation to stewardship?
  • How does ESG reporting relate to the notion of stewardship?
  • What is ESG reporting? Cite your source for this definition.
  • What did the U.K. Financial Reporting Council (FRC) find in a review of financial reporting during 2019? In your answer, define the types of entities’ financial reporting that was reviewed.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"U.K. Regulator Wants Pension Funds, Other Organizations to Provide Better Disclosures," by Mark Maurer, The Wall Street Journal, October 1, 2020
https://www.wsj.com/articles/u-k-regulator-wants-pension-funds-other-organizations-to-provide-better-disclosures-11601575631

The Financial Reporting Council found that some financial reports didn’t meet its expectations

U.K. pension funds, insurance firms and asset managers need to better explain the purpose and governance structure of their organization, a regulator found.

In a report Wednesday, the Financial Reporting Council stated that few businesses met its expectations for financial reporting in 2019. Some organizations failed to provide specific evidence supporting their statements, the watchdog said. “There’s plenty of room for improvement,” said Claudia Chapman, head of stewardship at the FRC.

The U.K. audit and accounting regulator launched a new stewardship code last year, asking asset managers and other financial firms to demonstrate how they protect and enhance the value of their investments for the long term.

 

The new code places a greater emphasis on environmental, social and governance factors, which are becoming increasingly important to investors across a range of industries.

The code, which took effect in January, replaced an existing one from 2012. The FRC said it would accept applications from companies to sign up to the new code in the first quarter of 2021. Those organizations will be required to report annually on their stewardship activity.

Wednesday’s report only covered 21 financial reports by a select group of organizations that volunteered to provide their materials. They could become signatories to the new code, the FRC said. It said it expects about 200 entities to apply in 2021.

The watchdog said it plans to review how companies apply the new code. The FRC has the authority to delist signatories if they don’t comply with the code.

It is, however, in companies’ interest to remain on the list, Ms. Chapman said. Asset managers and pension funds can point to the code to demonstrate to members and beneficiaries that they are giving priority to long-term interests and environmental issues, she said.

Another U.K. regulator, the Financial Conduct Authority, said last year it would require asset managers that don’t follow the code to provide additional explanations on their finances.

Continued in article

Teaching Cases:  Data Analytics Resources for Introductory Accounting ---
https://accountingisanalytics.com/

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 16, 2020

GE Says It Received ‘Wells Notice’ Tied to Accounting Investigation

By Ted Mann Theo Francis | October 6, 2020

Topics: Securities and Exchange Commission , Disclosure , Contingent Liabilities

Summary: GE “said in a securities filing Tuesday [October 6, 2020] that it received the so-called Wells notice on Sept. 30 over the company’s accounting for reserves related to an insurance business it has been trying to wind down for years.” The article summarizes the accounting steps related to January 2018 disclosure of a boost in insurance reserves by $15 billion, and a $6 billion charge to the income statement. A related article, SEC Has Opened Probe of GE’s Accounting, addresses the onset of this issue. It is available at https://www.wsj.com/articles/ge-shows-long-road-ahead-in-restructuring-push-1516797761

Classroom Application: The article may be used in a financial reporting class when discussing accounting for contingent liabilities or disclosure.

Questions:

  • What is an Enforcement Action? A Wells Notice? Cite your source for this information.
  • What part of GE’s business is responsible for the problems leading to this Wells Notice?
  • What accounting practice is specifically generating the SEC investigation? Based on the article, summarize the steps leading to the accounting announcement in January 2018.
  • What happened to GE’s financial statement disclosure related to the area of accounting for which the company now faces problems?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"GE Says It Received ‘Wells Notice’ Tied to Accounting Investigation," by Ted Mann and Theo Francis, The Wall Street Journal,  October 6, 2020
 https://www.wsj.com/articles/ge-says-it-has-received-wells-notice-from-sec-relating-to-accounting-investigation-11602008493

SEC staff recommend civil action against the company for allegedly violating securities laws

Federal securities regulators have warned General Electric Co. of a civil-enforcement action over its accounting for a legacy insurance business, adding a fresh hurdle to efforts to turn around the once-mighty manufacturer.

The industrial giant said in a securities filing Tuesday that it received the so-called Wells notice on Sept. 30 over the company’s accounting for reserves related to an insurance business it has been trying to wind down for years.

A Wells notice is a letter saying the SEC staff is recommending that the commission bring an enforcement action against the recipient and offers an opportunity to argue why the action shouldn’t be taken. It often serves to cap investigations that can drag on for years, as the final step before formal litigation begins.

The SEC and the Justice Department have been investigating GE’s accounting for about two years after the company disclosed large write-downs tied to the insurance business and its power business.

In a statement, GE said it has cooperated with the SEC and strongly disagrees with the staff’s recommendation that the commission sue. The company said it would respond through the Wells notice process.

The company also made some executive changes on Tuesday, including the retirement of the head of the GE Capital unit, which houses the insurance business. GE for years has been shrinking GE Capital, once a sprawling lending operation that rivaled the biggest U.S. banks, but nearly sank the company during the 2008 financial crisis.

Accounting problems surfaced in late 2017 as GE was struggling with declining profits and cash flow following the departure of former CEO Jeff Immelt. The company later disclosed, in January 2018, that it needed to bolster its insurance reserves by $15 billion and booked a $6 billion charge. In early 2018, GE said it was also the subject of a criminal probe by the Justice Department.

Many investors were surprised by the insurance situation, partly because GE executives had repeatedly declared the company had shed its insurance risk. GE spun off most of its insurance holdings into Genworth Financial Inc. in 2004 and sold much of the rest to Swiss Reinsurance Co. two years later.

But GE kept the risk for a bloc of long-term-care insurance policies, written by GE Capital until 2006. Such policies pay for nursing homes and assisted-living facilities. They have proved to be an expensive problem for the insurance industry, which underestimated how much the policies would need to pay out.

GE removed the long-term-care liabilities from its annual report for 2012 and didn’t put them back until 2018. That’s when GE reported insurance liabilities of $38 billion, up from $11.1 billion the previous year.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 16, 2020

Companies Face Uncertain Health Costs as Employees Defer Treatments

By Kristin Broughton | October 11, 2020

Topics: Budgeting , Health Care Costs

Summary: The coronavirus pandemic has prompted many people to defer regular medical treatments, making it harder for financial professionals to predict future health-care costs. Reduced medical costs have helped profitability this year, particularly for the self-insured. “CBIZ Inc., a New York-based financial consulting firm, said health-benefit costs declined by $3.2 million during the first half of the year, and accounted for about half of the improvement in its year-to-date earnings through June 30.” The company is self-insured. “Normally, there is only minor volatility to this expense compared with estimates,” said Ware Grove, chief financial officer at CBIZ, during an earnings call this summer. CBIZ is an accounting firm that is publicly traded; it may be familiar to students interviewing for accounting staff positions.

Classroom Application: The article may be used when discussing budgeting for health care costs in a managerial accounting course.

Questions:

  • What has been the impact of the Coronavirus pandemic on health care costs covered by employers?
  • What is the difference between a company that is self-insured and one that is insured?
  • Refer to the graphic labeled “Delayed Treatments.” Summarize what is presented in the chart.
  • How does this information given in answer to the above questions make it difficult to prepare budgets for 2021?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Companies Face Uncertain Health Costs as Employees Defer Treatments," by Kristin Broughton, The Wall Street Journal, October 11, 2020
https://www.wsj.com/articles/companies-face-uncertain-health-costs-as-employees-defer-treatments-11602421200

As companies head into enrollment periods, they are finding it harder to forecast how much medical care their employees will consume in the year ahead

People are deferring many routine medical treatments during the coronavirus pandemic, creating unexpected savings for some employers, while making it harder for companies to forecast health-benefit costs in the year ahead.

As U.S. companies prepare to open their enrollment periods for health-care plans, many are uncertain about how much medical care their employees will consume in the year ahead. Health benefits typically account for a large portion of a company’s personnel costs.

Health-benefits costs for global companies that are insured—meaning they purchase a policy to cover their employees’ health-care claims—are expected to rise by 8.1% in the 2021 calendar year over this year, as people rebook medical appointments they postponed, according to a report published earlier this week by advisory firm Willis Towers Watson. By comparison, health-care costs are expected to rise 5.9% this year from a year earlier, the report said. The projections are based on responses from 287 medical insurers.

Before the pandemic, health-benefit costs, while rising, were generally easy for companies to forecast, said Francis Coleman, a managing director at Willis Towers Watson. But the task has become more challenging for finance chiefs as people have altered their habits and postponed medical care not considered urgent.

Some insured companies in industries hardest hit by the pandemic, including retail and restaurants, have begun pushing their providers for lower premiums, citing a drop in employee claims, Mr. Coleman said. Others are modeling the potential for costs to increase in the years ahead if the medical conditions employees have left untreated begin to worsen, he said.

Meanwhile, companies that are self insured—meaning they foot most of their employees’ health-care bills—have recognized immediate savings, though it isn’t clear how long that side benefit will last.

“It’s difficult to say how much of this delayed treatment—is it all coming back?” Mr. Coleman said. “There are just a lot of unknowns.”

Health-benefit costs have plunged by a double-digit percentage since the beginning of the pandemic at Leidos Holdings Inc., a self-insured government contractor based in Reston, Va., said Roger Krone, the company’s chairman and chief executive. Mr. Krone declined to provide specific figures. Health-care costs were rising steadily before the pandemic, and the company thought they would increase even more as the coronavirus crisis began to unfold.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 16, 2020

Bed Bath & Beyond CFO Looks to Declutter Shelves, Reduce Working Capital

By Nina Trentmann | October 12, 2020

Topics: Inventory , Working Capital

Summary: Chief Financial Officer Gustavo Arnal joined Bed Bath and Beyond (BBB) in May 2020. He is “playing a key role in accelerating the retail chain’s transformation and freeing up cash for the business. ‘The way to get cash flow is working capital optimization,’ Mr. Arnal said.” Steps being taken by the company include store closures as well as investment in online sales and distribution systems. All are discussed in the article as well as analysts’ assessments of the company’s progress. The company has been trying to reduce inventory from a high point in 2016.

Classroom Application: The article may be used in a financial reporting or managerial accounting class discussing working capital and/or inventory.

Questions:

  • What is working capital?
  • What steps is Bed Bath and Beyond taking to reduce its working capital?
  • Explain how each of these steps reduces inventory and improves working capital.
  • Based on your reading of the article, explain why you think that the 89% increase in online sales did not translate into an improvement in overall sales at Bed Bath and Beyond. Is this contributing to the inventory management problems? Explain.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"Bed Bath & Beyond CFO Looks to Declutter Shelves, Reduce Working Capital," by Nina Trentmann, The Wall Street Journal,  October 12, 2020 ---
https://www.wsj.com/articles/bed-bath-beyond-cfo-looks-to-declutter-shelves-11602530349

Home-goods retailer plans to close 200 stores over the course of two years and unveil a new store model later this month

Bed Bath & Beyond Inc. is looking at fewer stores stocked with less stuff as a way to limit the amount of cash trapped in its operations.

The Union, N.J.-based company, which is known for stacking its home goods to the ceiling, is in the process of reducing the number of stores, bringing down its inventory and building out its distribution channels. Bed Bath & Beyond wants to close 63 stores by the end of its fiscal year in February 2021, for a total of 200 over the course of the next two years.

The home-goods retailer has been struggling with falling sales for years and had to temporarily close about 90% of its stores in the early days of the pandemic. Its stores have since reopened, and digital sales are up 89% in the three months ended Aug. 29. Still, revenue in its fiscal second quarter fell to $2.69 billion from $2.72 billion in the prior-year period, Bed Bath Beyond said earlier this month.

Chief Financial Officer Gustavo Arnal, who joined the company in May, is playing a key role in accelerating the retail chain’s transformation and freeing up cash for the business. “The way to get cash flow is working capital optimization,” Mr. Arnal said.

Bed Bath & Beyond’s working capital increased by nearly 10% to $1.24 billion in the year to the end of August, compared with the prior year period, according to CreditRiskMonitor, a provider of commercial credit reports.

The company has been trying to reduce its inventory levels for years, following a peak of $2.9 billion in fiscal 2016, but analysts said it still has room to go. Its fiscal 2019 inventory at $2.1 billion was down 20% from the previous year, and by the end of this year, inventory is expected to drop to $1.9 billion, said Peter Benedict, a managing director at Robert W. Baird & Co., an investment bank.

Bed Bath & Beyond said last fall it wants to cut $1 billion in inventory over a period of 18 months. It was slightly more than halfway to achieving that target at the end of its fiscal quarter ended May 30. The company said it is targeting another $1 billion on top of the existing target over the next 24 months, including through store closures.

Bed Bath & Beyond is hoping that fewer stores overall, more deliveries from stores to customers’ homes and shorter lead times could all contribute to lower inventory held, he said.

The home-goods store also is planning to reduce the range of items it offers in a certain product category and also centralize its order and replenishment system, said Seth Basham, an analyst at Wedbush Securities Inc., a financial services firm.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 23, 2020

String of Firms That Imploded Have Something in Common: Ernst & Young Audited Them

By Jing Yang Mark Maurer Patricia Kowsmann | October 16, 2020

Topics: Accounting Fraud , Audit Quality

Summary: The article describes the frauds at EY clients Wirecard AG and Luckin Coffee as well as two related U.K. entities, NMC Health PLC and sister company Finablr PLC, which owned the Travelex currency service. The article analyzes EY client acquisition strategies, audit fees per $100,000 of client revenue in comparison to other Big 4 firms, as well as other factors related to specific failed clients. In response to the overall audit quality issues, “EY says it is launching a ‘redesigned audit quality strategy’ including a focus on developing professional skepticism.’” Regarding specific issues at Wirecard AG, EY has said “it was ultimately the work of EY Germany that exposed a fraud expertly designed to circumvent all the checks and balances.”

Classroom Application: The article may be used in an auditing class to discuss audit quality, auditor’s responsibility to detect fraud, or audit step details such as the confirmation process.

Questions:

  • What is the purpose of an audit? Reference a source outside of this article then compare your answer with the description in the article.
  • What is an auditor’s responsibility for fraud detection? Again cite your source for this answer.
  • The article notes that EY has acknowledged that “auditors must play a bigger role in detecting fraud…” How is that statement a “U-turn” in the audit profession’s position?
  • What is the notion of audit quality? Again cite your source for this answer.
  • What factors in the article are cited in explaining the recent high rate of frauds at EY audit clients? Include in your answer points made about EY’s business development practices as well as comments by regulators.
  • How does auditor independence impact audit quality?
  • What auditor independence concerns are raised in the article? Do you think these concerns are unique to EY? Explain your response.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island

 

"String of Firms That Imploded Have Something in Common: Ernst & Young Audited Them," by Jing Yang, Mark Maurer, and Patricia Kowsmann, The Wall Street Journal,  October 16, 2020
https://www.wsj.com/articles/string-of-firms-that-imploded-have-something-in-common-ernst-young-audited-them-11602863319

This year, $2 billion is missing at a German fintech company, $300 million of sales has been found to be fabricated at a Chinese coffee chain and $5 billion in undisclosed debt has been uncovered at two related companies listed in the U.K. Together, the incidents cost shareholders of the companies roughly $30 billion.

All had been audited by Ernst & Young. Last year, EY also audited office-space company WeWork, which nearly collapsed after fumbling a planned initial public offering.

EY is one of the Big Four accounting firms, whose audits are meant to give investors confidence in companies’ figures. EY missed red flags or failed to aggressively pursue them at some of the companies ahead of their scandals, and for the most part it was outsiders who raised questions first, a review based on publicly available documents and interviews with people close to the events shows. Now, regulators are scrutinizing EY’s work.

The EY audit clients that faced financial issues were German payments processor Wirecard AG WDI 2.33% ; China’s Luckin Coffee Inc. LKNCY 5.87% ; hospital operator NMC Health PLC; and NMC sister company Finablr PLC, which owned the Travelex currency service.

EY says it stands by its work and has high global audit standards. The firm says it played key roles in uncovering fraud at two of the companies, and it says China’s regulator has found it to be prudent and independent.

“We take all issues extremely seriously,” said Andy Baldwin, EY’s global client service managing partner, who said EY conducts around 150,000 audits annually.

The firm also recently said that auditors must play a bigger role in detecting fraud at companies, which would represent a U-turn in an industry that for long has denied that was part of its job.

While it wasn’t possible to pinpoint why EY has had so many recent audit clients with financial scandals, certain elements of EY’s business strategy might help explain the cluster of blowups.

EY had ties with executives and board members at some of its troubled audit clients. In some cases, former EY partners sat on the companies’ boards, including on their audit committees.

EY charges lower fees for audits, which are labor intensive and time consuming, than other Big Four firms in the U.S. and Europe on average, an analysis of data from research firm Audit Analytics shows.

EY also focuses more than other firms on auditing young, fast-growing technology companies. All of the recent troubled clients portrayed themselves as tech-driven industry disrupters. EY helped some prepare for IPOs. Among mature tech companies, EY audits Google parent Alphabet Inc., Amazon.com Inc., Apple Inc., Facebook Inc. and Netflix Inc., having worked with several since they went public.

EY has a history of trying to attract companies gearing up to go public, developing relationships with venture-capital firms that fund them, said Lynn Turner, a former U.S. Securities and Exchange Commission chief accountant. EY prices its audits “exceedingly competitively low to attract these companies with the hope that when they go public, they will make up for the initial discounts of audit fees,” he added.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 23, 2020

SEC Approves Changes to Ease Auditor-Independence Rules for Companies, Audit Firms

By Mark Maurer | October 16, 2020

Topics: Auditor Independence

Summary: A ruling passed by the U.S. Securities and Exchange Commission (SEC) on Friday, October 16, 2020, “gives auditors more discretion in assessing conflicts of interest in their relationships with the businesses they audit…” according to the author of this article. “The SEC, however, said the changes…[would] boost audit quality by increasing the number of qualified audit firms from which a company can choose….” Among other things, the rule shortens the “look back” from three years to one year during which U.S. companies planning to go public must ensure their auditor’s independence. A related article announcing the proposal was published in December 2019 and is available at https://www.wsj.com/articles/sec-proposes-loosening-of-auditor-independence-rules-11577729220

Classroom Application: The article may be used in an auditing class discussing independence.

Questions:

  • Why does the U.S. Securities and Exchange Commission establish independence rules?
  • Must auditors of non-publicly traded companies remain independent from their clients? Explain your answer.
  • What three areas at issue in determining an auditor’s independence were recently revised by the Securities and Exchange Commission? Put the description in your own words as much as possible.

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"SEC Approves Changes to Ease Auditor-Independence Rules for Companies, Audit Firms." by Mark Maurer, The Wall Street Journal, October 16, 2020
https://www.wsj.com/articles/sec-approves-changes-to-ease-auditor-independence-rules-for-companies-audit-firms-11602868427

The changes will make it easier for companies and audit firms to avoid violations, especially involving IPOs and lending relationships

The U.S. Securities and Exchange Commission adopted changes that relax some conflict-of-interest rules for companies and audit firms, making it easier for them to avoid violating auditor independence in certain situations.

The amendment, passed by the SEC on Friday, gives auditors more discretion in assessing conflicts of interest in their relationships with the businesses they audit, in situations such as those involving affiliates of their clients or past lenders. The rule also intends to lessen the burden for companies trying to go public.

The SEC, however, said the changes won’t loosen the requirements but rather boost audit quality by increasing the number of qualified audit firms from which a company can choose.

“These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees and auditors on areas that may threaten an auditor’s objectivity and impartiality,” said SEC Chairman Jay Clayton.

An SEC official said the amendment won’t result in any changes to the scope of an audit firm’s services or to a company’s approach to financial statements.

SEC Commissioners Caroline Crenshaw and Allison Herren Lee opposed the changes, saying they introduce greater opportunity for error and uncertainty and reduce investors’ visibility into how auditors make judgments.

The regulator had proposed the revisions last December.

The new rule revises the definition of affiliates of an audit client, which states that the independence rules governing an auditor of a portfolio company also extend to any other portfolio company controlled by the same private fund. The amendment allows companies and auditors to determine whether another portfolio company under the fund is material to the fund. If they determine it isn’t material, the other portfolio company wouldn’t be considered an affiliate under the rule.

The rule shortens the period during which U.S. companies planning to go public ensure their auditor’s independence before an IPO. It reduces the time frame, known as a “look-back” period, to one year from three years for U.S. companies.

The rule also builds on loan-related changes the regulator made to auditing rules last year. Under the new rule, the student loans of certain employees who are involved in or are in a position to influence an audit are no longer deemed compromising to the independence of the audit firm. The existing rules applied restrictions to those employees who had obtained student loans from an audit client through normal lending procedures before their employment at the firm.

The rule change will take effect 180 days after publication in the Federal Register.

Continued in article

Teaching Case From The Wall Street Journal Weekly Accounting Review on September October 23, 2020

Tax Moves Worth Considering Before the End of the Year

By Tom Herman | October 15, 2020

Topics: Charitable Deduction , Standard Deduction , Individual Income Taxation , Itemized Deductions

Summary: This article by the former WSJ Tax Report columnist discusses some end-of-2020 strategies for $250 and $300 deductions by ordinary taxpayers and teachers as well as those who can afford to transfer as much as $100,000 out of an IRA directly to a charity.

Classroom Application: The article may be used in an individual income tax class when discussing itemized versus standard deductions, charitable deductions, or the CARES Act.

Questions:

  • What is(are) the “tax move(s)” that are proposed in this article?
  • Why do you think this article is presented at this time, describing steps that can be taken from October through December 2020?
  • Do you think the upcoming U.S. presidential election may impact the tax strategies discussed in this article? Explain your answer.
  • What is a “tax filing unit” as opposed to an individual tax filer?
  • What is the difference between a standard deduction and itemized deductions?
  • How is the wording in the Coronavirus Aid, Relief, and Economic Security (CARES) Act confusing with regard to a $300 cash charitable deduction allowed by taxpayers who take the standard deduction for the 2020 tax year?

READ THE ARTICLE

Reviewed By: Judy Beckman, Ph.D., CPA, University Of Rhode Island 

 

"Tax Moves Worth Considering Before the End of the Year," by Tom Herman, The Wall Street Journal,  October 15, 2020
https://www.wsj.com/articles/tax-moves-worth-considering-before-the-end-of-the-year-11602773100

Some of the strategies stem from the economic-relief legislation passed earlier in the year

Before saying goodbye and good riddance to 2020, many of us may benefit from a few tax-smart moves that are easy to overlook.

Among these are several changes enacted earlier this year as part of a record economic relief package in reaction to the coronavirus pandemic. Others are long-cherished techniques, such as donating to charity directly from your individual retirement account.

“There’s still a lot of tax planning that can be done in the last few months of the year,” says Mark Luscombe, principal federal tax analyst at Wolters Kluwer WTKWY -0.32% Tax & Accounting.

Depending on the presidential and congressional election results, there may be other maneuvers to consider, but that’s a story for another day when a clearer political picture emerges. Meanwhile, here are a few ideas that tax pros say are worth considering before 2021 arrives:

Charitable-giving deduction: Part of the Coronavirus Aid, Relief, and Economic Security Act carved out a new deduction of as much as $300 for donors who choose the standard deduction for the 2020 tax year. This is available only if you take the standard deduction, instead of itemizing. “Many taxpayers can potentially benefit from the new provision,” says Jackie Perlman, principal tax research analyst for the Tax Institute at H&R Block Inc.

Moreover, this deduction will appear on tax returns for 2020 above the line for calculating adjusted gross income, or AGI. That’s important since your adjusted gross income can affect many other tax items, such as how much of your Social Security benefits may be subject to tax.

Watch out for important exceptions. This new break applies to “cash” donations (such as cash, check and credit cards). Gifts of “noncash” items, such as securities or clothing, don’t qualify for this provision, says Ms. Perlman. Also, donations must be made to “qualified” charities. Gifts to donor-advised funds don’t count for this break. (These funds have surged in popularity as a way to make donations and nail down deductions for the current tax year even though you can wait until future years to dole out the gifts.) Carry-over contributions from prior years don’t count either.

Because of vague statutory wording, there has been confusion about whether the $300 limit applies to each return or each person. However, according to a footnote in a publication (JCX-12R-20) by the staff of Congress’s Joint Committee on Taxation, that limit “applies to the tax-filing unit,” not to each person. “Thus, for example, married taxpayers who file a joint return and do not elect to itemize deductions are allowed to deduct up to a total of $300 in qualified charitable contributions on the joint return.” The publication says this “above-the-line” deduction is scheduled to expire at the end of this year.

Charitable groups have urged lawmakers to do more, and legislation has been proposed to increase the amount. The $300 is “a critically important first step in recognition of the need but insufficient for the size of the financial crisis nonprofits face,” says Jeff Moore, chief strategy officer at Independent Sector, a national organization representing nonprofits, foundations and corporate-giving programs. “More clearly needs to be done.”

Be sure to get proper receipts for donations. For more details, see IRS Publication 526.

Suspension of charitable-deduction limits: This temporary suspension could affect donors who itemize deductions and want to contribute a larger share of their income this year than was allowed previously. As the IRS website explains, the total amount you could deduct for 2019 generally was limited to “no more than 60%” of adjusted gross income, although that percentage could be further limited to 50%, 30% or 20%, depending on “the type of property you give and the type of organization you give it to.” For 2020, the adjusted-gross-income limit generally “has been eliminated for cash donations” by individuals, says Mr. Luscombe.

RMD changes: The Cares Act waived required minimum distributions during 2020 for IRAs and most other retirement plans. That includes for beneficiaries with inherited accounts, the IRS says. More details on this and other changes can be found in publication JCX-12R-20 on the Joint Committee on Taxation website.

IRA charitable transfers: Here is an old technique that many older investors have used. Once you are 70½ or older, you typically are eligible to transfer as much as $100,000 a year from an IRA directly to qualified charities and have this “qualified charitable distribution” be considered nontaxable. This also counts toward your required minimum distribution for the year (although it isn’t tax-deductible as a charitable contribution). Just be sure to make the transfer directly to the charity, says Mr. Luscombe of Wolters Kluwer.

Educator expenses: Many teachers and certain other educators shouldn’t overlook a longstanding deduction of as much as $250 a year for “unreimbursed trade or business expenses,” as the IRS puts it. For a married couple filing jointly, the maximum is $500 if both spouses are eligible educators, “but not more than $250 each,” the IRS says. This deduction applies to amounts paid or incurred for “participation in professional development courses, books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom.” You’re eligible “if, for the tax year you’re a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.” This is another “above-the-line” deduction that affects the AGI calculation. Nearly 3.5 million returns took this deduction for 2018.

Continued in article

Humor for October 2020

Photographs That Made Me Smile --- https://www.reddit.com/r/aww/comments/crpjwk/every_year_this_mama_duck_brings_her_babies_to_my/

Charlie Chaplin & Buster Keaton Go Toe to Toe (Almost) in a Hilarious Boxing Scene Mash Up from Their Classic Silent Films ---
http://www.openculture.com/2020/10/charlie-chaplin-buster-keaton-go-toe-to-toe-almost-in-a-hilarious-boxing-scene-mash-up-from-their-classic-silent-films.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Nostalgia:  Where are the Clowns? --- https://www.theretrosite.com/uploads/videos/6c636bd484d7.mp4

Forwarded by Auntie Bev

Bread is like the sun. It rises in the yeast and sets in the waist.

The nurse informed the doctor that there was a man in the waiting room claiming to be invisible. The doctor replied to tell the patient that the doctor would not be able to see him today.

You know you're old if you actually had to win to get a trophy when you were a kid.

The last thing a turkey wants on Thanksgiving is to be surrounded by family.

Forwarded by Maria

Turning vegan would be a missed steak

If you can't laugh at yourself, call me and I will

Our mountains aren't just funny, they're hill areas

The Time When National Lampoon Parodied Mad Magazine: A Satire of Satire (1971) ---
https://www.openculture.com/2020/10/the-time-when-national-lampoon-parodied-mad-magazine.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Forwarded by Tina

Ketchup with Jesus
Lettuce praise and relish him
Cuz he loves me from my head to-ma-toes

Love is grand
Divorce is $20,000

Tweet others like you would like to be tweeted

 

Humor October 2020 --- http://faculty.trinity.edu/rjensen/book20q4.htm#Humor1020.htm  

Humor September 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0920.htm 

Humor August 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0820.htm 

Humor July 2020 --- http://faculty.trinity.edu/rjensen/book20q3.htm#Humor0720.htm 

Humor June 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0620.htm

Humor May 2020 --- http://faculty.trinity.edu/rjensen/book20q2.htm#Humor0520.htm

Humor April 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0420.htm 

 Humor March 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0320.htm  

Humor February 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0220.htm 

Humor January 2020 --- http://faculty.trinity.edu/rjensen/book20q1.htm#Humor0120.htm

Humor December 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1219.ht

Humor November 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1119.htm

Humor October 2019--- http://faculty.trinity.edu/rjensen/book19q4.htm#Humor1019.htm  

Humor September 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0919.htm 

Humor August 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0819.htm 

Humor July 2019--- http://faculty.trinity.edu/rjensen/book19q3.htm#Humor0719.htm 

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

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

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

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

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

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

 

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

And that's the way it was on October 31, 2020 with a little help from my friends.

 

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

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

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

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

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