Bob Jensen's New Additions to Bookmarks

August 2017

Bob Jensen at Trinity University 


USA Debt Clock --- ubl

How Your Federal Tax Dollars are Spent ---

To Whom Does the USA Federal Government Owe Money (the booked obligation of $20+ trillion) ---
The US Debt Clock in Real Time --- 
Remember the Jane Fonda Movie called "Rollover" ---
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) ---
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 ---

For earlier editions of Fraud Updates go to
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For earlier editions of New Bookmarks go to 
Bookmarks for the World's Library --- 

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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

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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:  

Google Scholar ---

Wikipedia ---

Bob Jensen's search helpers ---

Bob Jensen's World Library ---

Possibly the Number 1 Resource for CPA Exam Candidates
AICPA:  Uniform CPA Exam Blueprints ---

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 ---

Bob Jensen's CPA Exam Helpers ---

Tracing the links between basic research and real-world applications ---

Jensen Comment
The distinction between basic and applied research is not a clear in accountancy as it is in science and medicine. Equally unrewarding is the tracing of significant innovative ideas in academic research that led to recognized implementations in professional practice.

What are some "aha" moments in the history of accounting that are attributed to one person's original/seminal idea? 
A short summary of the history of accounting is available at

Of course this lack of "aha" moments in academe that significantly changed practice does not mean that there are virtually no impacts of academic research on professional practice. Practitioners (an usually academics) are just not aware off the top of their heads when accounting standards setters have been influence (and occasionally funding) academic research that affects standards. For example, years ago I was appointed to a committee to choose among submitted proposals for a study of the impact of SFAS 13 on companies. Academic research was influential in the rescinding of SFAS 33 requiring large corporations to supply supplementary information on replacement costs.

In my opinion there's a great difference between how academic engineers versus academic accountants approach research problems. Academic engineers are more apt to identify problems faced by professional (practicing) engineers and make noteworthy contributiohons to solving real-world engineering problems. Practicing accountants tend to ignore academic accounting research literature and don't bother attending academic accounting conferences.

It is harder to find where companies themselves were directly impacted by academic accounting research.
If you have some examples I would really, really like to hear about them.

For example, the AAA has a monetary prize awarded each year for Notable Contributions to the Accounting Literature.
Without looking it up, can you name a single one of these contributions over the past 30 years?
Did I make my point?

Sageworks:  Private businesses that offer accounting, tax preparation, bookkeeping or payroll services had the highest profits over the past year, with margins of 18.4% ---

Four best ways to use advanced analytics ---

Could Puerto Rico Be the Next Hot Tax Haven?
A Loophole Allows Foreigners to hide cash ---

The University of Mississippi’s Patterson School of Accountancy is joining the KPMG Master of Accounting with Data and Analytics Program ---

Jensen Comment
There are many unanswered questions, especially the definition of "joining" the  KPMG Master of Accounting with Data and Analytics Program. Presumably the KPMG Master of Accounting program does not have AACSB accreditation (in North America the AACSB consistently refuses to accredit corporate higher education degrees).

There are of course various kinds of corporate partnerships with universities where the universities design and execute degree programs under contract for particular companies. The degree programs at Notre Dame, Georgia, and the University of Virginia come to mind where the university business schools design custom degree programs for employees of an accounting firm. To my knowledge the courses were always taught by faculty on the payroll of the university. The business school faculty had to approve the curriculum plan and course content. To my knowledge the AACSB did not object to these partnerships, My question was always issues of admission. Did these universities automatically accept students recommended by a firm for the program? My guess, however, is that the firm only recommended students with great credentials in terms of such things as GMAT scores and prior grades.

KPMG University ---

One of the really nice things about KPMG University is that it provides it's own learning materials (think videos and cases) free to educators around the world ---

But I'm still concerned about AACSB accreditation and this partnership with the Patterson School of Accountancy for a Master of Accounting With Data and Analytics Program.
Will employees of KPMG be assigning grades to Ole Miss students?

November 11, 2017 Reply from John Brovosky

They agreed to set one up at Virginia Tech last year.  My understanding (I was not in on any of the negotiations and have since retired and so have no idea how it has progressed) is that they will provide 25 students a year, some materials, potentially some design assistance, and access to professionals but it would be Virginia Tech's program that would in no way be limited to KPMG supplied students. VT has an accounting and information systems department so should be able to staff a data analytics program.   John

Harvard Goes Outside:   To Go Online With With edX  to Start a Technical Business Analytics Certificate Program (heavy in math and statistics)

Three schools at the oldest university in the United States team up with 2U to start an online program in an emergent field.

If any American university might be positioned to begin a new online program all by itself, Harvard University -- with its world-famous brand, many-billion-dollar endowment and founding relationship with the online course provider edX -- might be it. But the university announced Monday that three of its schools would create a new business analytics certificate program with 2U, the online program management company.

A collaboration between 2U and professors at the Harvard Business School, the John A. Paulson School of Engineering and Applied Sciences, and the department of statistics in Harvard's main college, the Faculty of Arts and Sciences, the program will teach students how to leverage data and analytics to drive business growth.

Aimed at executives in full-time work, the course will be delivered through 2U’s online platform and will feature live, seminar-style classes with Harvard faculty members. The course will cost around $50,000 for three semesters, with an estimated time requirement of 10 hours per week.

Continued in article

Also see

Jensen Comment
Unlike most MOOC courses from prestigious universities (including Harvard) this expensive certificate program is not free on a non-credit basis.

Bob Jensen's threads on free MOOC courses (with added fees for students who want transcript credits or certificates) ---

AICPA to Accounting Educators;  Apply for research funding, access to firm personnel ---

The Assurance Research Advisory Group (ARAG), comprised of representatives from academia and public practice, funds research projects addressing private company1 assurance topics that are of interest to practitioners. Accounting educators who submit an approved research proposal are eligible for up to $15,000 in funding and, where applicable, access to peer reviewers and firm personnel or anonymized firm data provided by the AICPA Peer Review Program with firm consent. The research proposals funded by the AICPA will provide the profession with valuable insight into the factors that affect the quality of assurance services.

The Assurance Research Advisory Group is currently accepting submissions. Accounting educators are encouraged to review the request for proposals and submit a proposal through the online proposal submission form. In developing a proposal, researchers are encouraged to utilize the ARAG proposal template. For more information on the Assurance Research Advisory Group, review the FAQs.

Continued in article

Small Iowa corporation successfully challenges California's $800 franchise tax ---

The Behavioural Economics Paradox ---
Link to the Study ---

How CPA's Rate Their Tax Software in 2017 ---

. . .

Of more than 3,500 responses to this year's survey, seven major tax software products accounted for about 92% of users, with three products having the highest percentages of users: UltraTax CS, ProSystem fx, and Lacerte. Users of Drake software gave it the highest overall rating and ranked it highly in several performance categories, although they rated it below average for integration with other accounting software and ease of importing data. In general, CCH Axcess Tax and ProSystem fx predominated among the largest practices represented, while Drake and ATX were most often used by sole practitioners and small practices.

A sharply lower percentage of respondents than a year earlier reported having clients whose identities had been stolen by thieves filing fraudulent refund claims. In the 2016 survey, nearly 59% of respondents had encountered tax ID theft in the preceding tax season; this year, that percentage was 43%. Moreover, those CPAs who did see ID theft this year said it affected a smaller percentage of their clients, and they reported lower levels of difficulty in resolving the problem with the IRS.

As in past years, price posed the sharpest divide among products in terms of most- and least-liked aspects. Price was most often picked as the best-liked feature of ATX and Drake, while it was most often the least-liked feature of UltraTax CS, Lacerte, ProSystem fx, CCH Axcess Tax, and ProSeries.

Continued in article

 Bob Jensen's tax helpers are at

Former U.S. Comptroller General David Walker says, "The 'Financial State of the States' appears to be the first study of its kind.  While other organizations have compared the states’ unfunded retirement liabilities, only this study has determined the overall financial condition of every state."
The report can now be downloaded for free ---

Jensen Comment
David Walker was inducted into the Accounting Hall of Fame in 2010 ---

When Do Differences in Credit Rating Methodologies Matter? Evidence from High Information Uncertainty Borrowers
by BonsallSamuel B. IV, Kevin Koharki, and Monica Neamtiu
The Accounting Review, July 2017, Vol. 92, No. 4, pp. 53-79

This study investigates whether and when differences in the credit rating agencies' methodologies result in differences in rating properties. In particular, this study focuses on differences in information processing constraints between a rating agency that utilizes qualitative analysis and direct access to borrowers' management in its rating process (Standard & Poor's) compared to one that does not (Egan Jones Ratings Company) and how these differences affect rating quality. We find that as information uncertainty about borrowers increases, Egan Jones's rating accuracy, informativeness, and timeliness decrease relative to Standard & Poor's. Our findings suggest that Egan Jones's more restricted rating methodology can lead to limitations in information processing and, thus, reductions in Egan Jones's rating quality advantage for borrowers with greater information uncertainty

Identification and Generalizability in Accounting Research: A Discussion of Christensen, Floyd, Liu, and Maffett (2017)
SSRN ---

22 Pages Posted: 8 Aug 2017 Last revised: 9 Aug 2017

Stephen Glaeser

University of Pennsylvania - Accounting Department

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: August 6, 2017


Christensen et al. (2017) provide evidence that the dissemination of mine safety information in SEC filings has real effects on mine safety. We discuss the extent to which Christensen et al.’s results generalize to a research question that we consider of broader interest to accounting researchers, specifically where and when mandated disclosure in SEC filings can increase the dissemination of information. We also discuss identification of causal effects and generalizability concerns more broadly in the context of large sample studies and quasi-natural experiments, as well as potential ways authors might address these concerns in accounting research.

Keywords: causal inference; accounting research; quasi-experimental methods; generalizability

JEL Classification: C12, C51, M40, M41

PCAOB International Inspections and Audit Quality
SSRN ---

The Accounting Review (Forthcoming)

Posted: 10 Aug 2017  

Jagan Krishnan

Temple University - Department of Accounting

Jayanthi Krishnan

Temple University - Department of Accounting

HakJoon Song

University of Akron

Date Written: September 2016


We investigate the impact of the Public Company Accounting Oversight Board’s (PCAOB) first-time inspections of foreign accounting firms by examining abnormal accruals around the inspection year, and the value relevance of accounting numbers around the inspection report date, for their U.S. cross-listed clients. We document lower abnormal accruals in the post-inspection period, and greater value relevance of accounting numbers in the post-report period for clients of the inspected auditors, compared with non-cross-listed clients or clients of non-inspected auditors within the inspected countries. Comparisons of the PCAOB’s joint inspections with PCAOB standalone inspections indicate that while both experience lower post-inspection abnormal accruals, the former benefit more than the latter. The value relevance measure, in contrast, shows greater increases for the PCAOB stand-alone inspections than for joint inspections. Comparing the inspection effects for auditors with and without deficiency reports, we find no systematic differences for accruals or for value relevance.

Keywords: Cross listing; Foreign auditors; PCAOB; Joint inspections; Sarbanes-Oxley Act

JEL Classification: G18, K22, M42, M48, M49

Data Management in Institutional Investing: A New Budgetary Approach
SSRN ---

30 Pages Posted: 9 Aug 2017  

Ashby H. B. Monk

Stanford University - Global Projects Center

Daniel Nadler

Kensho Technologies; Harvard University

Dane Rook

Stanford University

Date Written: August 4, 2017


Through a multi-modal empirical analysis of the data-management experiences of large institutional investors (‘Giants’), we find that these entities are struggling to:

1) utilize data efficiently; and

2) consistently achieve desired levels of data quality.

We use these findings to design a new tool for helping Giants more efficiently manage data quality: data budgets. Data budgets augment the current budgetary framework available to Giants by being able to ‘plug in’ to it directly, in a way that more comprehensively highlights how data quality links to other organizational resources to drive value, performance, and innovation among Giants. We present five practical illustrations of how data budgets can help Giants better manage overall resources.

Keywords: data management, institutional investing, resource accounting, strategic efficiency

Estimating Fiscal Multipliers with Correlated Heterogeneity
SSRN ---

IMF Working Paper No. 16/13

52 Pages Posted: 9 Aug 2017  

Emmanouil Kitsios

International Monetary Fund (IMF)

Manasa Patnam

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Date Written: February 2016


We estimate the average fiscal multiplier, allowing multipliers to be heterogeneous across countries or over time and correlated with the size of government spending. We demonstrate that this form of nonseparable unobserved heterogeneity is empirically relevant and address it by estimating a correlated random coefficient model. Using a panel dataset of 127 countries over the period 1994-2011, we show that not accounting for omitted heterogeneity produces a significant downward bias in conventional multiplier estimates. We rely on both crosssectional and time-series variation in spending shocks, exploiting the differential effects of oil price shocks on fuel subsidies, to identify the average government spending multiplier. Our estimates of the average multiplier range between 1.4 and 1.6.

Keywords: Panel analysis, Economic theory, Fiscal policy, Government expenditures, Economic growth, Fiscal Multipliers, Nonseparable Unobserved Heterogeneity, Oil Price, Models with Panel Data

JEL Classification: C33, E62, H23, E23

Human Capital and Investment Policy
SSRN ---

48 Pages Posted: 8 Aug 2017  

Shuangshuang Ji

University of North Carolina (UNC) at Charlotte, The Belk College of Business Administration, Finance, Students

Xinxin Li

University of North Carolina (UNC) at Charlotte - The Belk College of Business Administration; University of North Carolina (UNC) at Charlotte - Finance

Date Written: August 7, 2017


The literature relates human capital costs to firm leverage (Berk et al. (2010) and Chemmanur et al. (2013)) and mergers and acquisitions (Lee et al., 2017). In this paper, we study the relation between a firm’s human capital costs and investment policy. We first present a simple theoretical setting to illustrate the potential effects of risky investment on average employee pay. We then empirically examine the relation between firms’ investment policies and human capital costs. Using two proxies for risky investment (unlevered cash flow volatility and unlevered stock return volatility), we find a significantly positive relation between risky investment and human capital cost (as measured by CEO compensation and average employee pay). The effect is much stronger in high-pay firms than low-pay firms. We further investigate four channels through which risky investment policy influences human capital costs: corporate diversification, R&D expenditures, advertising expenditures, and total value of acquisitions in a firm-year. Our results remain robust after accounting for the endogeneity of leverage, investment, and compensation of CEOs along with other robustness tests. Our results indicate that human capital costs increased by taking on risky investments can significantly discourage firms’ decisions on valuable investments, resulting in potential under-investment problem.

Keywords: Investment Policy, Human Capital, Human Capital Costs

JEL Classification: G31

How Test Power Impacts Research Relevance: The Case of Earnings Management Research
SSRN ---

47 Pages Posted: 8 Aug 2017  

Zhuoan Feng

University of Technology Sydney (UTS) - School of Accounting

Yaowen Shan

University of Technology Sydney (UTS) - School of Accounting; Financial Research Network (FIRN)

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: August 8, 2017


We argue that the broader applicability of accounting research is often limited by the way accounting researchers typically place far greater weight on the relative cost of type I versus type II errors. To illustrate the extent of this problem, we examine the performance of simple financial ratio-type analysis for detecting earnings overstatements when the total misclassification costs are minimized subject to the relative cost of type I versus type II errors. We then contrast the likelihood of type I versus type II errors from this approach with those arising from several widely used measures of unexpected accruals. The results demonstrate how commonly-used unexpected accruals measures reduce the type I error rate by sacrificing the type II error rate. Given that accounting information users and auditors typically face much higher costs of type II errors, we explicitly identify why unexpected accruals models are likely far less useful in detecting earnings overstatements than a relatively simple approach using financial statement analysis red flags. Our results highlight the fundamentally contrasting incentives facing accounting researchers relative to those who might otherwise use the research in practice, and serve as a warning when the broader relevance of accounting research is increasingly under question.

Keywords: Research Relevance, Earnings Management, Test Power, Unexpected Accruals

JEL Classification: M41

Renewable Energy Credits As Tax Deductions: Tax Accounting for the Renewable Energy (Electricity) Act 2000
SSRN ---

39 Pages Posted: 8 Aug 2017 Last revised: 9 Aug 2017

Alexander Robert Fullarton

Curtin Business School

Date Written: March 6, 2017


Australia has committed to reduce greenhouse gas emissions and part of that commitment is the enactment of the Renewable Energy (Electricity) Act 2000 (Cth). This paper focuses on the Australian Renewable Energy Target and how the REE Act impacts on the electrical generation industry to dilute greenhouse gas emissions.

The paper considers the market of trading ‘carbon credits’ created under the provisions of the REE Act, and referred as renewable energy credits (RECs), to be a system of taxation and subsidisation. It aims to develop a clear understanding of the operations of the REE Act; how it interacts with Australia’s two other main taxes – Income Tax and Goods and Services Tax, and suggests how the trade of RECs may be treated in the accounts of the respective trading entities – the liable parties and renewable energy based electricity generators.

Keywords: Income Tax Deductions, Penalties, Tax Deductible Expenses, Non-Tax Deductible Penalties, Australian Renewable Energy Target, Renewable Energy (Electricity) Act 2000, Renewable Energy Credits

JEL Classification: K34, M41

Sustainability Accounting Standards in the USA – Procedural Legitimacy: Governance, Participation and Decision-Making Processes

Posted: 8 Aug 2017  

Delphine Gibassier

Toulouse Business School

Multiple version iconThere are 2 versions of this paper

Sustainability Accounting Standards in the USA – Procedural Legitimacy: Governance, Participation and Decision-Making Processes

Posted: 07 Aug 2017

Sustainability Accounting Standards in the USA – Procedural Legitimacy: Governance, Participation and Decision-Making Processes
SSRN ---

Posted: 08 Aug 2017

You are currently viewing this paper

Date Written: August 5, 2017


Purpose: The purpose of this paper is to examine the formal due process for the making of sustainability accounting standards and the participation of stakeholders in the due process. This paper contributes to refining our understanding of procedural legitimacy for multi-stakeholder initiatives.

Design/methodology/approach: The author analyzes all the public documents available for the consumption one group of standards developed by the US-based Sustainability Accounting Standards Board (SASB). The analysis will be qualitative to examine the due process and the participation of stakeholders and thereby contribute to our understanding of procedural legitimacy.

Findings: I explore the due process of sustainability accounting standards by looking at several key aspects of a multi-stakeholder process: effective consensus-building, knowledge sharing and interest representation. Three key processes are analyzed: governance, participation, and decision-making processes. I find that SASB developed an expert-based procedural legitimacy, which is an opposite model to the inclusive model by the Global Reporting Initiative. This has implications in regards to the voices that are silenced (civil society, SMEs, NGOs) and therefore on the content elements of standards that will be widely applied in the future – voluntarily or if recognized by the Security Exchange Commission in the future.

Research limitations/implications: The analysis is limited to the consideration of one of the standards of the SASB (Consumption I). Studying the whole process could engender slightly adjusted results. Moreover, our research is based only on publicly available documents of the SASB due process. Access to interviewing the SASB members or the participant organizations would allow refining the results in a future research.

Originality/value: The paper is, to the best of the knowledge, the first one to explore an entire due process in sustainability accounting, and the first to explore the SASB case study.

Keywords: Multi-Stakeholder Initiatives, SASB, Sustainability Accounting, Due Process, Procedural Legitimacy

JEL Classification: M4, M1

Do the FASB's Standards Add Shareholder Value?
SSRN ---

71 Pages Posted: 8 Apr 2017  

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Bin Li

University of Texas at Dallas - Naveen Jindal School of Management

Shivaram Rajgopal

Columbia Business School

Mohan Venkatachalam

Duke University - Fuqua School of Business

Multiple version iconThere are 2 versions of this paper

Do the FASB's Standards Add Shareholder Value?

Number of pages: 71 Posted: 08 Apr 2017

You are currently viewing this paper

Downloads 193

Do the FASB's Standards Add Shareholder Value?

The Accounting Review, Forthcoming

Number of pages: 97 Posted: 07 Aug 2017

Downloads 7

Date Written: April 6, 2017


We examine the cost-effectiveness, from the shareholders’ perspective, of the accounting standards issued by the FASB during 1973-2009. In particular, we evaluate (i) the stock market reactions of firms affected by the standards surrounding events that changed the probability of issuance of these standards and (ii) whether the market reactions are related, in the cross-section, to affected firms’ agency problems, information asymmetry, proprietary costs, contracting costs, and changes in estimation risk. The average standard is a non-event from the investors’ perspective. We find that 104 of the 138 standards we examine are associated with no change in shareholder value. Thirty-four standards are associated with significant abnormal returns. Of these 19 (15) decreased (increased) shareholder value. Thus, a mere 11% of the standards improved shareholder value. The fair value pronouncements (SFAS 105, 107, 115) and the R&D expensing standard (SFAS 2) are associated with the highest negative stock price reactions, whereas standards related to the securitization of mortgage-backed securities (SFAS 134) and the disclosure of derivative instruments (SFAS 119) are associated with the highest positive returns. Surprisingly, 25 standards are associated with an increase in estimation risk. In cross-section, we find that firms with higher levels of information asymmetry, lower contracting costs, and firms that experience a decrease in estimation risk are those that experience most positive returns. Principles-based standards are associated with more positive stock price reactions than rules-based standards are. However, standards that require greater use of managerial estimates are associated with negative stock price reactions.

Keywords: FASB, Standard Setting, Mandatory Disclosure, Event Study, Shareholder Value

JEL Classification: D80, G14, K22, L51, M40, M41, M48

Revised Version on August 7, 2017
Forthcoming in The Accounting Review

From Share Value to Shared Value: Exploring the Role of Accountants in Developing Integrated Reporting in Practice
SSRN ---

IMA (Institute of Management Accountants) – ACCA (The Association of Chartered Certified Accountants) Joint Research Report, January 2016

41 Pages Posted: 7 Aug 2017  

Delphine Gibassier

Toulouse Business School

Michelle Rodrigue

École de comptabilité, Université Laval

Diane-Laure Arjaliès

Ivey Business School at Western University

Date Written: January 1, 2016


Overview: The corporate reporting landscape has evolved in the last 20 years from financial reporting to sustainability reporting to “integrated reporting.” Since 2010, the IIRC (International Integrated Reporting Council) has led the work on building the first Integrated Reporting (IR) framework, published in December 2013.

The accounting profession has played a crucial role in pushing the idea of integrated reporting forward. Now, accountants are looking at how they can best participate in IR corporate practice. This report is aimed at accountants who would like to get involved more closely, or even drive, the IR efforts within their organization.

“From Share Value to Shared Value” is the result of a joint IMA/ACCA call for research proposals. The report is based on participative observation within a leading multinational company — pilot of the IIRC — interviews with international experts, and other multinational companies on their IR journey, as well as documentary evidence collected from 2011 to 2015.

Key Insights: The global tide is turning in favor of integrated reporting, and accountants have a fundamental role to play. They must equip themselves with new skills to help steer integrated reporting properly.

Ultimately, creating shared value acknowledges both the work that corporations need to do to reduce negative impacts on society as well as, and more fundamentally, how they can be part of progress on global challenges, such as climate change and the enforcement of human rights.

Central to IR is the value-creation process. The objective of an integrated report is to expose how an organization creates value over time, taking into consideration that this process is influenced by the company’s external environment, as well as its stakeholders, and relies on multiple resources.

Keywords: Integrated Reporting, Social and Environmental Accounting

JEL Classification: H83, M41

Audit Firms as Networks of Offices
SSRN ---

Auditing: A Journal of Practice & Theory, Forthcoming

Posted: 4 Aug 2017  

Scott Seavey

University of Nebraska at Lincoln

Michael J. Imhof

Wichita State University

Tiffany J. Westfall

Ball State University

Date Written: July 19, 2017


Prior audit research suggests that most, if not all, audit quality can be explained at the office-level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impacts office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.

Keywords: Intracorporate Networks, Network Connectedness, Audit Quality

JEL Classification: M41, M42

Derivatives and Funding Value Adjustments: A Simple Corporate Finance Approach
SSRN ---

INSEAD Working Paper No. 2017/46/FIN

52 Pages Posted: 3 Aug 2017  

Pierre Hillion

INSEAD - Finance

Date Written: December 15, 2016


In the aftermath of the GFC, banks have adjusted their books of derivatives for funding costs and have made Funding Valuation Adjustments (FVA). These adjustments are surprising for two reasons. First, they are made on a voluntary basis. They are neither imposed by banking regulation nor suggested by accounting guidelines. Second, there are controversial within the academic community. The issue of whether the valuation of derivatives should account for funding costs has been highly debated in the recent years and remains unsettled. The goal of paper is to suggest a simple corporate finance approach to assess and illustrate the impact of funding costs on the valuation of derivatives and on the value of a dealer bank. In line with the conclusions of Hull and White (2012, 2014) and Andersen, Duffie and Song (2016), among others, it argues that the funding of derivative contracts leaves the bank value unaffected and that derivatives’ valuation should not be adjusted for funding costs or benefits. The paper highlights the issues of wealth transfers between the shareholders and the creditors, and raises the issues of conflicts of interests between derivatives dealers, creditors, and the bank’s shareholders.

Accounting Measurements, Profit, and Loss: A Science Fiction Play in One Act by Harold C. Edey
SSRN ---

50 Pages Posted: 3 Aug 2017  

Martin Emanuel Persson

Ivey School of Business, University of Western Ontario

Stephan Fafatas

Washington and Lee University - Department of Accounting

Date Written: July 26, 2017


This study presents a hereto unpublished one-act play that was used in the teaching of advanced accounting seminars at the London School of Economics and Political Science in the 1960s. The original author of this play, Harold C. Edey, is one of the intellectual forefathers in the development of British accounting thought and the aim of his exercise was to explore the problem of profit determination, and appropriate taxation, during a period of changes in specific and general prices. To contextualize this play, the study also traces the history of the institution, the author, and some of the ideas from the accounting measurement literature that would have been familiar to students attending these advanced accounting seminars.

Keywords: Harold C. Edey, London School of Economics, LSE triumvirate, Market Price, One-Act Play, Purchasing Power, Replacement Cost, Theory, History, Measurements

JEL Classification: B31, M40, M41, M49

An Introduction to Corporate Accounting Standards: Detecting Paton's and Littleton's Influences
SSRN ---

44 Pages Posted: 3 Aug 2017  

Stephen A. Zeff

Rice University - Jesse H. Jones Graduate School of Business

Date Written: July 29, 2017


The aim of this paper is to trace the principal ideas in Paton and Littleton’s influential 1940 monograph to their previous and contemporaneous writings, and thus to uncover the ideas’ origins in the literature.

Keywords: Paton, Littleton, intellectual history

JEL Classification: M41

Jensen Comment
It's important that one of AC Littleton's main contribution to the theory of historical costs is to stress that historical costs are not valuations in the same sense as discounted cash flows, exit values, entry (replacement) values, etc.

Financial statements in general under both IASB and FASB are mixed-model combinations of historical cost measurement and fair value estimates (where there are reliable markets such as for financial instruments).

One of the huge limitations of historical cost arose with newer types of speculation and hedging contracts known as derivative financial instruments. Firms were neither disclosing nor measuring enormous financial risks of forward contracts, swap contracts, and options contracts until the late 1990s when SFAS 133 went into effect followed by IFRS 39. The big problem derivatives is that the historical cost is often zero or very small relative to financial risks as in the case of both purchased and written options.

An important Paton and Littleton concept that the FASB and IASB over the years have tried to eliminate is the "Matching Concept" that was central to the Paton and Littleton monograph. This is pointed out by Professor Zeff on Page 10 of the SSRN article cited above.

During her tenure on the FASB Stanford's Mary Barth tried to kill and bury the "Matching Concept" that she calls the "Matching Principle" below:

"Global Financial Reporting: Implications for U.S.," by Mary Barth, The Accounting Review, Vol. 83, No. 5, September 2008 
On Page 1166 she flatly asserts:

First, there is no “matching principle.” That is, matching is not an end in itself and matching is not an acceptable justification for asset or liability recognition or measurement. The conceptual framework explains that matching involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events (FASB 1985, para. 146; IASB 2001, para. 95). Matching will be an outcome of applying standards if the standards require accounting information that meets the qualitative characteristics and other criteria in the conceptual framework. Matched economic positions will naturally result in matched accounting outcomes. However, the application of a matching concept in the conceptual framework does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (IASB 2001, para. 95). Thus, there would be no justification for deferring expense recognition for an expenditure that provides no future economic benefit or for deferring income recognition for a cash inflow that will not result in a future economic sacrifice.

 In my opinion, however, Professor Barth overstates her case. The "Matching Principle" remains with us in many ways in both the FASB and IASB standards. Except when overridden by the Lower of Cost of Market Principle it dominates the measurement of inventories in the balance sheet. It is the basis for acrruals such as depreciation and depletion.

My point is that the Paton and Littleton monograph still underlies 21st Century accounting standards, especially their "Matching Concept."

How the U.S. Accounting Profession Got Where It Is Today: Part II ---
Accounting Horizons Vol. 17, No. 4 December 2003 pp. 267-286, Part II (print).pdf

Commentary on Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns
SSRN ---

The Journal of Financial Reporting (Forthcoming)

Posted: 29 Jul 2017  

Charles C. Y. Wang

Harvard Business School

Date Written: July 2017


The expected rate of equity returns is a central input into various managerial and investment decisions that affect the allocation of scarce resources. Research on capital markets has devoted significant effort to studying how and why expected returns vary over time and across firms. Cochrane (2011) called these questions the central organizing agenda in contemporary asset-pricing research.

At the heart of this research agenda lies a longstanding measurement problem: ex-ante expected returns are unobservable and ex-post realized returns are noisy proxies (Campbell, 1991; Vuolteenaho, 2002). Since Botosan (1997), the accounting literature offered a promising solution to this measurement problem: the development of a novel class of expected-return proxies (ERPs), collectively known as the implied cost of equity capital (ICC).

Jensen Comment
Unlike The Accounting Review, The Journal of Financial Reporting encourages submissions that are commentaris.

The Usefulness of Financial Accounting Information: Evidence from the Field
SSRN ---

114 Pages Posted: 28 Jul 2017  

Stefano Cascino

London School of Economics

Mark Clatworthy

University of Bristol, Department of Accounting and Finance

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Joachim Gassen

Humboldt University of Berlin - School of Business and Economics; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Shahed Imam

University of Warwick - Warwick Business School

Date Written: July 24, 2017


We conduct a survey experiment to provide causal evidence on the determinants of financial accounting information usefulness. Based on quantitative and verbal survey response data from 81 face-to-face interviews with experienced investment professionals, we test whether their assessments of usefulness are affected by their information acquisition objectives and by compensation-induced earnings management incentives of the reporting manager. In addition, we present novel descriptive evidence on experienced investment professionals’ assessments of the usefulness of financial accounting information. Our causal analyses reveal that investment professionals primed with a managerial performance evaluation objective assess financial accounting information to be less relevant than those primed with a firm valuation objective. However, we find no robust evidence that tying managerial compensation to financial accounting information affects assessments of representational faithfulness. Finally, we document that investment professionals’ assessments of representational faithfulness are positively associated with their assessments of corporate governance quality and negatively associated with assessed complexity of the accounting measurement system.

Keywords: Decision Usefulness, Financial Reporting Objectives, Investment Professionals, Relevance, Representational Faithfulness

Some Recent Advances in the Theory of Financial Reporting and Disclosures
by Ronald A. Dye (Northwestern University)
Accounting Horizons: September 2017, Vol. 31, No. 3, pp. 39-54.  \

This is a personal essay that contains my views on some of the recent history and evolution of the theory of financial accounting and disclosures. The essay starts by discussing how research on information economics by Hirshleifer and Akerlof combined with Demski's critique of academic assessments of accounting standards shifted theoretical research toward emphasizing the role of voluntary disclosures. Grossman's and Milgrom's “unravelling result” is reviewed, as are recent modeling efforts that provide a foundation for studying firms' incomplete voluntary disclosures. The paper also speaks to some contemporary financial reporting problems, such as fair value accounting, and also to an assessment of some recent financial innovations, such as so-called flash trading.


I will conclude this section with one more example of the application of this disclosure framework in the context of SEC 10b-5 litigation (this is based on Dye [forthcoming]). If a firm is caught having withheld material information, then it is liable for damages, and it has to pay a penalty to investors who purchased the firm's shares while the firm withheld information. This penalty is a (possibly fractional) multiple of the difference between the amount investors paid for the shares and the price the investors would have paid for the shares had the firm disclosed its information. Calling the (possibly fractional) multiple of the investors' overpayment used to assess the penalty “the damages multiplier,” in Dye (forthcoming). I show that, counter intuitively, an increase in the damages multiplier induces the firm to disclose the information it receives less often and, also counterintuitively, that an increase in the probability that the fact finder detects that the firm withheld information also induces the firm to disclose the information it receives less often. Since an explanation for these results requires delving more deeply into the model than I have allotted space for presently, I will forgo the explanation here and instead encourage the interested reader to review the paper.


The preceding covers but a small part of my own research on disclosures and a fortiori an even smaller part of the contributions of the profession's research on disclosures. But, I hope it serves to give at least a sense of the evolution of a portion of the research literature in financial reporting and disclosures with which I have been associated, and I hope it also serves as encouragement to readers, particularly young researchers, to develop their own contributions to the literature. There is still much to be learned about how disclosures work and what can be done to improve them.


Summaries of the Teaching Domain Statements of the 2015 and 2016 Cook Prize Winners I
Valaria P. Vendrzyk (2017)
ssues in Accounting Education: August 2017, Vol. 32, No. 3, pp. 1-15. 

I first mentioned the possibility of publishing portions of the 2015 and 2016 Cook Prize winners' applications to Michael Diamond (former AAA president and convener of the 2015–2016 Cook Prize committees) and Terry Shevlin (former AAA vice president for research and publications) at the 2016 AAA Annual Meeting in New York City. We discussed my intent to recognize more fully the contributions these six excellent teachers have made to the field of accounting education, as well as the generosity of J. Michael and Mary Anne Cook and the Deloitte Foundation.

As I reviewed previous editorials appearing in Issues in Accounting Education, I found one introducing a trilogy of articles that David Stout commissioned and published during his tenure (1998–2001) as editor of Issues in Accounting Education. David organized a special panel session at the 1998 AAA Annual Meeting (Stout 1999) titled “Energizing Your Teaching.” Panelists for this special session included Dennis M. Hanno, Billie M. Cunningham, and G. Peter (Pete) Wilson. Positive feedback from this session led David to invite each of the three panelists to write and submit to him a more formal document that related to the session topic. The trilogy of papers by Cunningham (1999), Hanno (1999), and Wilson (1999) are as relevant today as they were almost 20 years ago. Interestingly, two of the panelists, Billie M. Cunningham and G. Peter Wilson, are winners of the Cook Prize. The third panelist, Dennis M. Hanno, has served as president of Wheaton College since 2014.

Shortly after my conversations with Michael Diamond and Terry Shevlin, David Stout approached me with an idea for a research project, comparing insights from the Cook Prize winners to those of exemplary accounting educators documented in previous research. The result of these conversations is twofold: a compilation of portions of the Cook Prize winners' applications (presented below), followed by the Wygal, Stout, and Cunningham (2017) article, “Shining Additional Light on Effective Teaching Best Practices in Accounting: Self-Reflective Insights from Cook Prize Winners.” As we look forward to recognizing another group of Cook Prize winners in August 2017, I hope you find these combined statements from the 2015 and 2016 recipients as inspiring and humbling as I did, as well as a useful extension of the earlier works referenced above.


The American Accounting Association (AAA)/ J. Michael and Mary Anne Cook /Deloitte Foundation Prize (Cook Prize) is “the foremost recognition of an individual who consistently demonstrates the attributes of a superior teacher in the discipline of accounting. The Prize will serve to recognize, inspire and motivate members to achieve the status of a superior teacher” (AAA 2015). In August 2015, the AAA recognized the inaugural recipients of the Cook Prize established with an initial million-dollar gift from Mary Anne and J. Michael Cook. In 2016, the AAA recognized three additional recipients of the Cook Prize and announced that the Deloitte Foundation was also providing support for the prize (AAA 2016). An October 3 press release from Deloitte (2016) revealed that the Foundation, founded in 1928, had committed $1 million in additional funding for the prize and included the following quote from Mr. J. Michael Cook: “The future success of the accounting profession depends greatly on how we educate the next generation … We're pleased to recognize professors [who] not only go above and beyond to educate students, but who, as part of that education, are also instilling important values and best practices which will enable the profession to continue to thrive.” Mr. Cook, who was instrumental in successfully merging Deloitte Haskins & Sells with Touche Ross to create Deloitte & Touche in 1989, retired from Deloitte & Touche LLP as its chairman and chief executive officer.

The process for awarding the Cook Prize includes developing a pool of nominees, based on recommendations from a separate nominations committee of the AAA, for faculty in each of three categories: graduate, undergraduate, and two-year college. I asked each of the six recipients who have already won the Cook Prize to share portions of their teaching domain statements (with supporting examples included in the prize application) with a broader audience.

As Joe Hoyle (the 2015 undergraduate winner) explained, providing these materials placed him in a difficult position. He felt he needed to put his accomplishments in their best light, since the Cook Prize selection committee relies primarily on what each candidate submits within the application. He found it awkward to “toot his own horn,” but he also knew that the selection committee in making its choice did not solicit any outside recommendation letters. All six provided me with their statements, which I edited and returned to them for their approval. Although the recipients removed statements about teaching awards and other formal recognition from their summaries, I have included them as part of my introduction to each recipient's statement.

Markus Ahrens: Winner of the 2016 Two-Year College Cook Prize

. . .

Billie M. Cunningham: Winner of the 2016 Undergraduate Cook Prize

. . .

Joe Ben Hoyle: Winner of the 2015 Undergraduate Cook Prize

. . .

Tracie Miller-Nobles: Winner of the 2015 Two-Year College Cook Prize

. . .

Mark W. Nelson: Winner of the 2015 Graduate Cook Prize

. . .

G. Peter Wilson: Winner of the 2016 Graduate Cook Prize

Continued in article

Also see

Incorporating Whiteboard Voice-Over Video Technology into the Accounting Curriculum
by Camillo Lento (Lakehead University)
Issues in Accounting Education: August 2017, Vol. 32, No. 3, pp. 153-168

This article discusses how accounting instructors can adopt whiteboard voice-over (WBVO) video technology as a supplemental resource in traditional classroom designs or as an integral resource in a flipped or online classroom design. WBVO technology can facilitate a blended learning classroom design by allowing instructors and/or students to create short videos that can be posted in a learning management system or public domain. The benefits of utilizing WBVO technology are analyzed through the lens of variation theory, and include (1) providing students with additional instructional design materials to increase learning opportunities, (2) aiding instructors in focusing on the “process of learning” as opposed to the “product of knowledge” in order to make it easier for students to learn, (3) developing instructional design resources that are unique to the classroom learning environment to reduce the unintended consequences of adopting third-party materials that may have been designed for different learning objectives, (4) freeing up class time for active learning activities that focus on higher-order cognitive skills, and (5) reinforcing a student-centered learning environment. Observations from the classroom provide some preliminary empirical evidence to support the efficacy of utilizing WBVO technology to create instructional design materials.

Blockchain ---

How Blockchain Will Change How CPAs Work ---

From the CFO Journal's Morning Ledger on August 21, 2017

PCAOB reports high deficiencies in broker-dealer audits
Federal inspectors found problems in 83% of the audits of broker-dealers they reviewed in 2016, the Public Company Accounting Oversight Board said. The findings mean the PCAOB believes the audits that were assessed were flawed or inadequate, not that the broker-dealers themselves have any operational problems

From the CFO Journal's Morning Ledger on August 23, 2017

Where was Wells Fargo’s auditor? 
Wells Fargo & Co.
’s external auditor KPMG should have served as the first line of defense against the misbehavior that toppled the bank’s CEO and left thousands of workers without jobs.

England:  'Big Four' auditing firms KPMG and PwC have both just been fined millions for auditing failures ---

LONDON — "Big Four" accounting firms KPMG and PwC have both been handed multi-million-pound fines for auditing failures, amid growing concerns about the quality of audits from the major providers.

Auditor KPMG has been fined more than $6.2 million (£4.8 million) by the US Securities and Exchanges Commission (SEC) for failing to properly audit an energy company that grossly overstated the value of its assets.

KPMG issued an unqualified audit of oil and gas company Miller Energy Resources in 2011, despite the fact that the company had overvalued various assets bought in Alaska by 100 times their real worth. The facts presented to auditors "should have raised serious doubts," the SEC said.

Separately, PwC was also hit with a £5.1 million fine on Wednesday and "severely reprimanded" by UK watchdog the Financial Reporting Council, after admitting misconduct when auditing professional services company RSM Tenon Group in 2011.

Earlier this year, the watchdog issued a damning report stating that KPMG, Deloitte and Grant Thornton were producing below-quality audits. The fines will do little to dispel fears that auditing standards are slipping, leaving investors exposed.

Continued in article

KPMG Settles With SEC Over a Giant Failure of an Audit ---

How the U.S. Accounting Profession Got Where It Is Today: Part II ---
Accounting Horizons Vol. 17, No. 4 December 2003 pp. 267-286, Part II (print).pdf

Jensen Comment

All the largest CPA firms have been fined in the USA by the PCAOB for negligence in auditing.

The sad thing is that repeat offenders seemingly shrug off their relatively small PCAOB fines as being part of the cost of being in the auditing business. In other words fines and even adverse publicity don't seem to be working as intended. Civil court actions such as the recent lawsuits against PwC exceeding a billion dollars are more troublesome for the firms.

In the public sector the Government Audit Agency (GAO) has a more disheartening approach. Just declare some enormous "clients" like the Pentagon and the IRS as incapable of being audited.

Bob Jensen's threads on the fines and other legal woes of the largest multinational auditing firms are at

Tito Antoni and the Internationalization of Accounting History Scholarship
by Valerio Antonelli
Accounting Historians Journal June 2017, Vol. 44, No. 1, pp. 109-111

Jensen Comment
Note that in June 2017 the AHJ became one of the section journals of the American Accounting Association.
Section journals are "free" only to members of those sections. Other readers must pay a downloading fee.

Archives of 1974-2013 articles may still be downloaded at

The new astrology:  By fetishising mathematical models, economists turned economics into a highly paid pseudoscience ---

Jensen Comment
Academic accounting and finance professors followed like lemmings ---

Accountics Science Became a Cargo Cult
"How Can Accounting Researchers Become More Innovative? by Sudipta Basu, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 851-87 ---
Scroll down for excerpts from Sudipta's excellent paper

WebMD:  Student Motivation 101: There's an App for That ---

VIDEO: Companies Clamor for New Hedge Accounting: FASB Official ---

Floyd Mayweather, widely regarded as one of boxing's greatest, apparently owes the Internal Revenue Service unpaid 2015 taxes. As penalties and interest accrue over time, his bill could deliver a knockout blow.---

Jensen Comment
Some of you older folks recall how the famous heavyweight Joe Louis (who won 66 of his 69 lifetime prize fights) tried but never could fight his way out of IRS debt

A combination of this largesse and government intervention eventually put Louis in severe financial straits. His entrusting of his finances to former manager Mike Jacobs haunted him. After the $500,000 IRS tax bill was assessed, with interest accumulating every year, the need for cash precipitated Louis's post-retirement comeback.Even though his comeback earned him significant purses, the incremental tax rate in place at the time (90%) meant that these boxing proceeds did not even keep pace with interest on Louis's tax debt. As a result, by the end of the 1950s, he owed over $1 million in taxes and interest. In 1953, when Louis's mother died, the IRS appropriated the $667 she had willed to Louis.[60] To bring in money, Louis engaged in numerous activities outside the ring. He appeared on various quiz shows,[80] and an old Army buddy, Ash Resnick, gave Louis a job greeting tourists to the Caesars Palace hotel in Las Vegas, where Resnick was an executive.[80] For income, Louis even became a professional wrestler. He made his professional wrestling debut on March 16, 1956 in Washington, D.C., defeating Cowboy Rocky Lee. After defeating Lee in a few matches, Louis discovered he had a heart ailment and retired from wrestling competition. However, he continued as a wrestling referee until 1972.]

How a Finance Chief Winds Down The World’s Oldest Mutual Insurer ---

Simon Small has an unusual task as finance chief of Equitable Life Assurance Society: he is winding down the business, instead of growing it.

The world’s oldest mutual insurer can trace its roots back to 1762, but the company’s demise began in 1998. That’s when it started to become clear that Equitable Life would not be able to fulfill promises to buyers of its retirement savings products.

The firm stopped taking in new funds in December 2000 and some customers withdrew their capital. But other policyholders chose to stay put, which is why Equitable Life has been closing for over 16 years. The process will take another 20 or 25 years, Mr. Small said in an interview with CFO Journal.

The finance chief needs to keep shrinking his costs in line with the number of insurance holders. That means shaving costs with the help of job cuts, zero-based budgeting, automation and other consolidation efforts.

“I have the same toolkit as every other CFO, but I use it for a different purpose,” Mr. Small said.

Since taking office — he joined in 2012 from Lloyds Banking Group PLC — Mr. Small has reduced the number of employees from 437 at the end of 2011 to 221 at the end of 2016. He renegotiated most of the company’s existing contracts, outsourced certain tasks and reduced floor space.

Mr. Small also drove down procurement costs, sold the annuities book and reduced the number of products in the portfolio. At the moment, he is consolidating the firm’s cash books and slashing the number of bank accounts. Costs at Equitable Life’s German, Irish and Channel Islands business are shrinking, too.

Zero-based budgeting, an old-school budget tactic that makes finance managers plan each year’s budget from scratch, is helping to identify additional savings. “I am trying to run the business as efficient as I can,” Mr. Small said.

While the number of policies has gone down from 2 million in 2000 to 407,000 at the end of 2016, assets declined from around £35 billion ($45.4 billion) to £7 billion over the same period.

Mr. Small last year spent £250,000 on a big data system to get better visibility on when customers will most likely withdraw their capital. A guaranteed 3.5%-increase in annual policy value in one type of fund and the 2014 Pension Act result in some policyholders staying longer than originally forecast, he said.

“Some people have decided to sit it out,” said Laith Khalaf, an analyst at Hargreaves Lansdown PLC. “Because of that, Equitable is dying a slow death.”

Low interest rates mean that customers think twice before they withdraw their money. The average age of policyholders is 54, so payouts will peak during the next decade, Mr. Small said. He has budgeted all the costs needed to run the firm until all existing policies expire, he said.

Equitable Life invests a large part of its remaining assets in corporate bonds and U.K. gilts.

One of the challenges is to keep the team motivated while it keeps shrinking. The firm offers to pay for education qualifications for key people. Mr. Small himself did a management program at Harvard University. “Our employees understand that our life as a business will end,” Mr. Small said. “We are trying to make them as employable as possible.”

Some of the products Equitable Life promoted before December 2000 were so called “with profit”-funds that guaranteed annual increases in policy value. Equitable Life was not the only one selling these funds, but its malaise tarnished the reputation of the whole sector, Hargreaves’ Mr. Khalaf said.

It also led to stricter regulatory oversight and the U.K. government compensating investors with £1.5 billion. Investors’ losses totalled to £4.1 billion, according to government calculations.

The Equitable Members Action Group representing investors said Mr. Small is doing a good job. “They [the management] seem to be very effective in trying to return as much capital to investors as possible,” said EMAG representative Paul Braithwaite. The group continues to campaign for additional government compensation for the lack of regulatory scrutiny.

Continued in article

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 ---

A megateam of reproducibility-minded scientists is renewing a controversial proposal to raise the standard for statistical significance in research studies. They want researchers to dump the long-standing use of a probability value (p-value) of less than 0.05 as the gold standard for significant results, and replace it with the much stiffer p-value threshold of 0.005.

Backers of the change, which has been floated before, say it could dramatically reduce the reporting of false-positive results—studies that claim to find an effect when there is none—and so make more studies reproducible. And they note that researchers in some fields, including genome analysis, have already made a similar switch with beneficial results.

“If we’re going to be in a world where the research community expects some strict cutoff … it’s better that that threshold be .005 than .05. That’s an improvement over the status quo,” says behavioral economist Daniel Benjamin of the University of Southern California in Los Angeles, first author on the new paper, which was posted 22 July as a preprint article on PsyArXiv and is slated for an upcoming issue of Nature Human Behavior. “It seemed like this was something that was doable and easy, and had worked in other fields.”

But other scientists reject the idea of any absolute threshold for significance. And some biomedical researchers worry the approach could needlessly drive up the costs of drug trials. “I can’t be very enthusiastic about it,” says biostatistician Stephen Senn of the Luxembourg Institute of Health in Strassen. “I don’t think they’ve really worked out the practical implications of what they’re talking about.”

A fraught value

The p-value is a notoriously elusive concept for nonstatisticians. Too often, it is misinterpreted to be the probability that the hypothesis being tested is true, says Valen Johnson, a statistician Texas A&M University in College Station and an author on the new paper. The reality is more complicated. For a test of a new drug in a clinical trial, for example, a p-value of 0.05 really means the results observed—or even more extreme results—would occur in one in 20 trials if the drug really had no benefit over the current standard of care. But it’s often wrongly described as a 95% chance that the drug actually works.

To explain to a broader audience how weak the .05 statistical threshold really is, Johnson joined with 71 collaborators on the new paper (which partly reprises an argument Johnson made for stricter p-values in a 2013 paper). Among the authors are some big names in the study of scientific reproducibility, including psychologist Brian Nosek of the University of Virginia in Charlottesville, who led a replication effort of high-profile psychology studies through the nonprofit Center for Open Science, and epidemiologist John Ioannidis of Stanford University in Palo Alto, California, known for pointing out systemic flaws in biomedical research.

The authors set up a scenario where the odds are one to 10 that any given hypothesis researchers are testing is inherently true—that a drug really has some benefit, for example, or a psychological intervention really changes behavior. (Johnson says that some recent studies in the social sciences support that idea.) If an experiment reveals an effect with an accompanying p-value of .05, that would actually mean that the null hypothesis—no real effect—is about three times more likely than the hypothesis being tested. In other words, the evidence of a true effect is relatively weak.

But under those same conditions (and assuming studies have 100% power to detect a true effect)—requiring a p-value at or below .005 instead of .05 would make for much stronger evidence: It would reduce the rate of false-positive results from 33% to 5%, the paper explains.

“The whole choice of .05 as a default is really a kind of numerology—there’s no scientific justification for it,” says Victor De Gruttola of the Harvard School of Public Health in Boston. The paper “exposes that there can be a false sense of security with the .05 default.” He doubts the results will be news to statisticians, “but I think a lot of investigators whose primary focus is not on these kinds of issues may be surprised.”

Significant, or just suggestive?

The authors are careful not to endorse the use of p-values as the ultimate measure of significance; many scientists have argued that they should be abolished altogether. But in the many fields where a p-value below .05 has become a gold standard, the authors propose a rule of thumb for new findings: “Significant” results should require a p-value below .005; results with p-values below .05 but above .005 should be called merely “suggestive.”

Continued in article

Jensen Comment
As long as multiple regression software packages keep cranking out p-values accounting research journals will still be worshipping at the alter of p-values. The reason is that taking a way p-values adds immensely to the labor of research.

The quickest way to change data analysts is for the software packages to stop computing the p-values. But there will be ice skating in Hell before that happens.

Stanford University 2017 Update:  Fixing Big Data’s Blind Spot Susan Athey wants to help machine-learning applications look beyond correlation and into root causes ---

July 28m 2017 reply from Dan N. Stone

The problem isn't that p values are set at the wrong the level, the problem is that p
values tell us almost nothing that is useful. The way forward is to report useful
statistics rather than mostly irrelevant ones. See the large, emerging literature on the
so, called "new statistics".

I have a paper that, I hope, will soon be forthcoming at Accounting Horizons that
addresses this issue. Here's the title and current abstract of that paper:

Title: The “New Statistics” and Nullifying the Null: Twelve Actions for Improving
Quantitative Accounting Research Quality and Integrity

Abstract: Leveraging accounting scholars’ expertise in the integrity of information
and evidence, and in managers’ self-interested discretion in information collection
and reporting, offers the possibility of accounting scholars creating, promoting, and
adapting methods to ensure that accounting research is of exemplary integrity and
quality. This manuscript uses the six principles from the recent American Statistical
Association (ASA) report on p-values as an organizing framework, and considers
some implications of these principles for quantitative accounting research. It also
proposes twelve actions, in three categories (community actions, redefining research
quality, and ranking academic accounting journals) for improving quantitative
accounting research quality and integrity. It concludes with a clarion call to our
community to create, adopt and promote scholarship practices and policies that lead
in scholarly integrity

Bob Jensen's threads on p-values ---

"Accounting Craftspeople versus Accounting Seers: Exploring the Relevance and Innovation Gaps in Academic Accounting Research," by William E. McCarthy, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 833-843 --- 

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


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

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

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

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

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

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

From David Giles
August 2017 Econometrics Reading List

Calzolari, G., 2017. Econometrics exams and round numbers: Use or misuse of indirect estimation methods? Communications in Statistics - Simulation and Computation, in press.

Chakraborti, S., F. Jardim, & E. Epprecht, 2017. Higher order moments using the survival function: The alternative expectation formula. American Statistician, in press.

Clarke, J. A., 2017. Model averaging OLS and 2SLS: An application of the WALS procedure. Econometrics Working Paper EWP1701, Department of Economics, University of Victoria.

Hotelling, H., 1940. The teaching of statistics, Annals of Mathematical Statistics, 11, 457-470.

Knaeble, B. & S. Dutter, 2017. Reversals of least-square estimates and model-invariant estimation for directions of unique effects. American Statistician, 71, 97-105.

Megerdichian, A., 2017. Further results on interpreting coefficients in regressions with a logarithmic dependent variable. Journal of Econometric Methods, in press.

FASB proposes changes to grant and contribution accounting ---

Current Developments at the SEC ---

MAAW 2017 Promotional Post Card ---

From MAAW's Table of Contents Service on August 11, 2017

Abacus Update 2017

Abacus 1965-2017

Jensen Comment
I especially draw your attention to the following great article:

Dyckman, T. R. 2016. Significance testing: We can do better. Abacus 52(2): 319-342.

Index Funds ---
Especially note the advantages and disadvantages

The Atlantic:  Are Index Funds Evil?

EY:  Common Challenges for Implementing the New Revenue Recognition Standard ---$FILE/TechnicalLine_04837-171US_CommonChallengesRevenue_24August2017.pdf

What you need to know

Many entities are finding that the implementation of the new revenue recognition standard requires significantly more effort than they expected because they have to rethink how they record and disclose revenue.  

This publication highlights aspects of the standard that some entities are finding particularly challenging to implement and provides examples of how to apply the guidance in these areas.

Entities need to make sure they have internal controls in place to address the new risks associated with applying the standard, which requires more judgments and estimates than legacy guidance.


Many entities are finding that implementing the new revenue recognition standard1 issued by the Financial Accounting Standards Board (FASB) requires more effort than they anticipated. With just a few months until the standard’s effective date,2 public companies likely need to accelerate their work to complete their implementation. This publication highlights aspects of the standard, including disclosures that some entities are finding particularly challenging to implement. This publication also addresses challenges public companies are facing as they consider the effects on internal control over financial reporting (ICFR) and how to apply certain Securities and Exchange Commission (SEC) reporting requirements. This publication supplements our Financial reporting developments (FRD) publication, Revenue from contracts with customers (ASC 606), and should be read in conjunction with it.


Sustainability Accounting ---

EY:  AICPA issues new attestation guide amid growing investor interest in sustainability reporting ---$FILE/TothePoint_04558-171US_AICPASustainability_3August2017.pdf

What you need to know

To address the growing interest in sustainability reporting, the AICPA issued a new attestation guide to assist accountants in performing and reporting on companies’ sustainability information.

Investors and other stakeholders are more often taking into account sustainability issues in their decision making, and many believe it is important for this information to be subject to independent assurance. Most large companies publicly disclose sustainability information.

Attestation engagements can be used to enhance the credibility of an entity’s disclosures and communications about its environmental, social and governance performance and sustainability risk management programs


The Hijacking of the Brillante Virtuoso ---
A mysterious assault. An unsolved murder. And a ship that hasn’t given up all its secrets

Jensen Comment
This is long and fascinating article how the Somali pirates were seemingly blamed for an oil tanker hijacking that looks more and more insurance fraud that staged a pirate takeover.

It would seem that screenplay for a thriller movie could almost be taken directly from court documents and this article.

The article also illustrates the immense complexity of accounting for the historic insurance company called Lloyd's of London ---
There's no concise way of disclosing the contingent liability of insurance cases like the Brillante Viruoso Case.
Bob Jensen's threads on accounting for contingencies ---

Break Out the Champaign
Martin Shkreli was convicted of fraud ---

What PCAOB Inspectors Are Looking For ---

Crytocurrency ---

Blockchain ---

From MIT

What Bitcoin Is, and Why It Matters

First, here’s your primer: what the cryptocurrency is, how it works, and why the hell people seem to like it so much. If you prefer, you can also check out our 2-minute explainer video on blockhain.

Technical Roadblock Might Shatter Bitcoin Dreams


The root of this week’s fork was a software limitation in Bitcoin that limited the currency to a paltry seven transactions per second. That essentially crippled its chances for growth.



A Weekend in Bitcoin City: Arnhem, the Netherlands


What’s it like to actually live on Bitcoin? Our writer sweated through huge swings in the currency’s value and endured strange looks from shopkeepers when he toured one of Europe’s most Bitcoin-friendly cities.



Leaderless Bitcoin Struggles to Make Its Most Crucial Decision


The decentralized nature of Bitcoin, often seen as a strength, posed a real headache when it came to making an upgrade to boost transaction rates—because nobody could decide what to do.



Bitcoin Transactions Get Stranded as Cryptocurrency Maxes Out


Then the theoretical problem started to became a painful reality: Bitcoin got so popular that that transactions starting queuing up. It was time for the cryptocurrency community to do or die.



Wait, Bitcoin Just Did What?


Which brings us right up to this week, when an upgrade to its software caused Bitcoin to split in two. But for now, we simply don’t know what it means for the future of the currency.



Can Bitcoin Be the Foundation of a Fairer Financial System?


Still, even if Bitcoin falters, its legacy may live on. As the first successful cryptocurrency, it could inspire whole new ways of running the world’s financial systems .

April 7, 2017 message from Barbara Scofield

I met accounting on a vacation visit to Gilcrease Museum in Tulsa, OK, and  I thought I would share this use of ledger books.  My photos of the ledgers are attached.

From Gilcrease Museum, Tulsa, OK, visited on 8/4/2017

Artistry of Plains Warriors

For centuries, Plains Indian men recorded their warfare successes through art, including rock engravings and drawings and paintings on hides and clothing.  This artistry accompanied by oral recitations of events validated warriors’ heroic deeds and courageous acts in battle performed for the protection of family and homelands.  In the 1860s as warfare with the U.S. military increased, warriors began to illustrate their battle exploits in ink, pencil and watercolor, drawings in ledger and sketch books obtained through traders, military posts, and other government agencies.  Through the late nineteenth century, men continued to recount their past warfare deeds and new experiences of reservation life through ledger art.

Ledger Book of Drawings

Cheyenne and Arapaho artists,
Fort Reno Army Scouts
Oklahoma, 1887
Leather, paper, ink, graphite and colored pencil, watercolor
GM 4526.11


The Indian Scout Unit, Company A, operated at Fort Reno from 185 to 1895.  The Indian Scouts were formed primarily to keep peace and prevent trespassing of cattlemen and others from reservation lands.  For Cheyenne and Arapaho men, scouting during the early reservation years was a viable and honorable role that allowed them to use their skills as warriors and skilled horsemen while earning income.  Through the 139 drawings in the book, the Scouts recount warfare with Pawnee, Crow and Shoshone enemies and depict scenes of domestic life and courtship.

Bob Jensen's threads on accounting history ---

Tom Selling:  A Perspective on “Professional Skepticism” — Part 2 of 2 ---

Globalscape plunges 23% after internal audit reveals company overstated profit ---

Jensen Comment
If only the FASB and/or the IASB could define "profit" as something more than an ambiguous and ill-defined plug that makes the balance sheet balance. Sigh!

Meeting the challenge of the Psychonomic Society’s 2012 Guidelines on Statistical Issues: Some success and some room for improvement ---

. . .

It was not possible to examine every topic addressed in the Guidelines, but we were able to explore many of the issues raised. These included the reporting of a priori power analyses (e.g., Faul, Erdfelder, Lang, & Buchner, 2007) to estimate the number of participants required to have a given probability (e.g., 80%) of obtaining a significant result for a particular size of effect, if the effect does exist. We also recorded whether there was any discussion of power in the papers. The Guidelines emphasize the benefits of going beyond NHST by routinely reporting effect sizes (e.g., Fritz et al., 2012; Morris & Fritz, 2013a, b) and their confidence intervals (CIs; e.g., Cumming, 2012, 2014; Masson & Loftus, 2003; Smith & Morris, 2015). We therefore coded the papers for these practices. The Guidelines state: “It is important to report appropriate measures of variability around means and around effects (e.g., confidence intervals around means and/or around standardized effect sizes).” We surveyed the reporting of measures of variability both of the sample data, such as standard deviations (SDs), and of the sample means, through standard errors (SEs) and confidence intervals (CIs). There are two principle ways in which variability is reported: in error bars in figures or in numerals within the text or tables. Error bars can visually convey the likely values of means in other data samples, but the figures are often too small to allow the error bars to be translated into numbers for further analysis (e.g., Morris & Fritz, 2013a). Therefore, we coded both the use of error bars and numbers in reporting variability within each article. We also took the opportunity to survey the types of statistical tests being reported in the papers surveyed, and we catalogued the types of effect size measures reported.

Finally, we noted the types of figures used in presenting means and variability. Newman and Scholl (2012) demonstrated that the use of bar charts to present means leads to a within-the-bar bias such that values within the bar are perceived as more likely than values outside (e.g., above) the bar (see also Fritz, Morris, Cherchar, Smith, & Roe, 2015; Okan, Garcia-Retamero, Cokely, & Maldonado, 2017).

Our purpose in this research was to document recent practices in the conduct and reporting of experimental research in both Psychonomic Society journals and another experimental psychology journal. Where practice falls short of the Guidelines, we hope to encourage improvement.

Continued in article

Bob Jensen's threads on the evolving p-value reporting controversy ---


From the CFO Journal's Morning Ledger on August 31, 2017

India demonetization fails to purge black money
India’s central bank has estimated that 99% of the high denomination banknotes cancelled last year were deposited or exchanged for new currency, dashing hopes that the government’s demonetization move would expunge huge amounts of illicit cash, reports Financial Times.

From the CFO Journal's Morning Ledger on August 28, 2017

Call for audit research proposals.
The Center for Audit Quality and American Accounting Association have announced a call for the sixth annual Annual Audit Personnel initiative, writes Accounting Today. The initiative aims to join academics and audit practitioners to participate in research projects. Proposals are due Feb. 1, 2018

Jensen Comment
This may be a pipe dream. One of the main differences between engineers versus accountants in academe is that engineering professors commonly work on research needs of the practicing profession and make discoveries that are noted in the practitioner journals of engineering after they are published in the academic journals of engineering. The same is true in finance and sometimes even (gasp) economics.

When is the last time you've noted an article from an academic accounting journal highlighted and praised in an accounting practitioner journal?

I'm serious here. Can you answer the above question?

From the CFO Journal's Morning Ledger on August 28, 2017

FASB to release new hedging standard
 The Financial Accounting Standards Board will unveil its new hedge accounting rules at
10 a.m. ET on Monday. The new standard will expand the application of hedge accounting to a broader set of circumstances and give companies more time to meet the strict documentation requirements. The new rules also simplify the way hedges are recorded and offer relief for companies that made small errors in applying the rules. The hedge accounting standard goes into effect in 2019 for public companies and 2020 for private companies, however, early adoption is allowed in any interim period.

From the CFO Journal's Morning Ledger on August 23, 2017

Where was Wells Fargo’s auditor? 
Wells Fargo & Co.
’s external auditor KPMG should have served as the first line of defense against the misbehavior that toppled the bank’s CEO and left thousands of workers without jobs.

From the CFO Journal's Morning Ledger on August 22, 2017

Norway’s oil fund hits $1 trillion
Norway’s sovereign-wealth fund, the world’s biggest, topped a $1 trillion valuation after the best half-year return in its history. The fund announced a 2.6% return on its investments in the second quarter of this year, helped by a solid performance from its stock-market portfolio.

Jensen Comment
Do the math on how much this works out per person among Norway's 5 million people. It's no wonder so many refugees are trying to get into Norway. And Norway is now paying its refugees to leave.

From the CFO Journal's Morning Ledger on August 21, 2017

PCAOB reports high deficiencies in broker-dealer audits
Federal inspectors found problems in 83% of the audits of broker-dealers they reviewed in 2016, the Public Company Accounting Oversight Board said. The findings mean the PCAOB believes the audits that were assessed were flawed or inadequate, not that the broker-dealers themselves have any operational problems.

From the CFO Journal's Morning Ledger on August 21, 2017

New rules could bring more transparency to U.S. markets by requiring annual reports to include information about some of the most important issues raised by accountants in the annual audit, writes WSJ’s Jason Zweig.

The Securities and Exchange Commission is considering whether to adopt the rule proposed by the Public Company Accounting Oversight Board, which would put the U.S. on the same footing as the United Kingdom and Europe and other parts of the world.

After years of negotiating, the biggest accounting firms have been generally supportive of the new rules in their recent comments.

However, the U.S. Chamber of Commerce has asked the SEC to reject the new rule, arguing that the changes would foster confusion and increase legal costs for companies and audit firms, reports WSJ’s Michael Rapoport


From the CFO Journal's Morning Ledger on August 11, 2017

Good morning. Inc. founder Jeff Bezos appears set to tangle with a formidable new adversary in India: Masayoshi Son, the brash billionaire who leads Japan’s SoftBank Group Corp. The prize: e-commerce superiority in one of the last great untapped internet economies, WSJ's Newley Purnell and Mayumi Negishi write. 

After failing to capture much of the market in China, Mr. Bezos is investing $5 billion to expand Amazon’s India operations. Since launching in 2013, the firm has used its technological expertise and slick advertising campaigns to pull neck-and-neck with homegrown e-commerce leader, Flipkart Group, in a country where many consumers are only now shopping online for the first time via inexpensive smartphones.

Meanwhile, Mr. Son’s conglomerate is set to inject roughly $2.5 billion into Flipkart, a person familiar with the matter said on Thursday. While declining to confirm the amount, Flipkart said the investment, combined with $1.4 billion raised in April from Tencent Holdings Ltd., eBay Inc. and Microsoft Corp., would lift Flipkart’s cash level to more than $4 billion.

From the CFO Journal's Morning Ledger on August 9, 2017

A great year for public sector pensions doesn’t solve their problems
A run-up in U.S. stocks following the presidential election produced double-digit returns for many public pensions. But even a banner year doesn’t come close to solving their problems.

Jensen Comment
Great investment returns can't help when you've not invested enough in the first place. This is the problem faced by troubled states like California, Connecticut, Kentucky, and Illinois.

Social Security trust funds were raided by Congress and spent on other programs. Congressional IOUs in those trust funds aren't returning a penny.

From the CFO Journal's Morning Ledger on August 8, 2017

Merck to move finance back office to Poland, Philippines
German pharmaceutical giant Merck KGaA is relocating parts of its accounting and book-keeping team
to shared service centers in Poland and the Philippines to cut costs.

From the CFO Journal's Morning Ledger on August 7, 2017

Toshiba might secure auditor-sign off
Toshiba Corp.
may gain a partial endorsement from its auditor for its annual financial results after disagreements over accounting for the much of the year, Reuters reports.

From the CFO Journal's Morning Ledger on August 4, 2017

How U.S. firms dug a pension hole
A majority of S&P 500 companies don't have enough money set aside to cover their obligations to current and future retirees. The 200 largest pension plans have a funding gap of at least $375 billion, reports Bloomberg Businessweek.

Jensen Comment
It's no consolation that so many public sector pension funds are in far worse shape than private sector pension funds ---

From the CFO Journal's Morning Ledger on August 4, 2017

Pearson to ax 3000 jobs
Education company Pearson PLC on Friday said it plans to cut around 3,000 jobs and would slash its dividend, as tough conditions in the industry are forcing it to reshape its business.

From the CFO Journal's Morning Ledger on August 3, 2017

PwC to settle audit allegations
Accounting firm PricewaterhouseCoopers LLP agreed Wednesday to pay $1 million to settle a regulator’s allegations that its audit of Bank of America Corp.’s Merrill Lynch brokerage had been inadequate.

Bob Jensen's threads on the legal woes of PwC are at

A Real World Illustration of Zero-Based Budgeting and Beer
From the CFO Journal's Morning Ledger on August 1, 2017

Heineken seeks further cost savings
Heineken NV
, the Dutch brewer, is targeting further savings from its zero-based budgeting effort and a push to automate certain processes across the organization, finance chief Laurence Debroux told Nina Trentmann.


Accounting Measurements, Profit, and Loss: A Science Fiction Play in One Act by Harold C. Edey
SSRN ---

50 Pages Posted: 3 Aug 2017  

Martin Emanuel Persson

Ivey School of Business, University of Western Ontario

Stephan Fafatas

Washington and Lee University - Department of Accounting

Date Written: July 26, 2017


This study presents a hereto unpublished one-act play that was used in the teaching of advanced accounting seminars at the London School of Economics and Political Science in the 1960s. The original author of this play, Harold C. Edey, is one of the intellectual forefathers in the development of British accounting thought and the aim of his exercise was to explore the problem of profit determination, and appropriate taxation, during a period of changes in specific and general prices. To contextualize this play, the study also traces the history of the institution, the author, and some of the ideas from the accounting measurement literature that would have been familiar to students attending these advanced accounting seminars.

Keywords: Harold C. Edey, London School of Economics, LSE triumvirate, Market Price, One-Act Play, Purchasing Power, Replacement Cost, Theory, History, Measurements

JEL Classification: B31, M40, M41, M49

Teaching Case:  St George Hospital: Flexible Budgeting, Volume Variance, and Balanced Scorecard Performance Measurement
Issues in Accounting Education
August 2017, Vol. 32, No. 3, pp. 103-116

Gillian Vesty

RMIT University

Albie Brooks

The University of Melbourne

We thank the clinicians who were extremely helpful during the conceptual stage of this case study. We are extremely grateful to the two anonymous referees for their insightful comments, as well as the comments and feedback from the editor and associate editor. We also thank Naomi Soderstrom, at The University of Melbourne, who provided advice on the international use of this case. Finally, we thank our students who trialed our case study at varying stages throughout its development.

Editor's note: Accepted by Lori Holder-Webb.


This case deals with funding, budgeting, and performance measurement in public hospitals. Data from the Orthopedic Unit at St George Hospital is used to examine efficiency and effectiveness of management in meeting budgeted targets. The Orthopedic Unit provides treatment for two common diagnosis-related group (DRG) treatments: hip replacement surgery, commonly performed on older patients with arthritic pain or hip fractures; and arthroscopy surgery for soft tissue knee injuries, commonly a result of sporting injuries in the younger population. As a business consultant, you will help Vera Jones, a newly graduated accountant, to develop a flexible budget, and calculate price, cost, and patient volume variances. You will then review the results in conjunction with St George Hospital's balanced scorecard to determine the quality of public sector service delivery and the ability to meet patient demands within the bounds of budgetary constraints.

Keywords: public hospital budgeting, flexible budgets, volume variances, balanced scorecard performance evaluation, DRG accounting, activity-based funding

Received: October 2014; Accepted: June 2016; Published: September 2016


Teaching Case From The Wall Street Journal's Weekly Accounting Review on July 28, 2017

EPA Wants to Expedite Superfund Cleanups

By Eli Stokols | Jul 26, 2017

TOPICS: Environmental Cleanup Costs

SUMMARY: Scott Pruitt leads the Environmental Protection Agency under President Donald Trump. On Tuesday, Mr. Pruitt "signed off on recommendations from a task force to reduce the more than 1,300 Superfund sites on the agency's priorities list." The article discusses methods that the EPA is implementing to expedite the clean up processes.

CLASSROOM APPLICATION: Questions ask students to access the FASB Accounting Codification section on Environmental Obligations in order to make the accounting connection from the topics in the article.



1. (Advanced) Access the FASB Codification. What is the reference to the section containing requirements to account for environmental obligations?


2. (Advanced) Refer to the overview and background section in the FASB Codification section on environmental obligations. What are Superfund Laws?


3. (Advanced) Refer to the FASB Codification glossary and define the terms remediation and potentially responsible parties.


4. (Advanced) How do Superfund laws make it possible for the Environmental Protection Agency (EPA) to expedite remediation of Superfund sites even "amid dwindling budgets"?


5. (Introductory) What types of costs are associated with remediation of polluted sites?

"EPA Wants to Expedite Superfund Cleanups," by Eli Stokols, The Wall Street Journal, July 26, 2017 ---

New recommendations aim to speed rehabilitation of sites now on the agency’s priorities list

President Donald Trump’s administration is moving ahead with a plan to accelerate the rehabilitation of Superfund sites, polluted locations designated by the government for long-term cleanup projects.

Environmental Protection Agency Administrator Scott Pruitt  on Tuesday signed off on recommendations from a task force that will accelerate cleanup efforts to reduce the more than 1,300 Superfund sites on the agency’s priorities list amid dwindling budgets.

Mr. Trump has proposed cutting another $330 million from the program annually, but Mr. Pruitt doesn’t see that as an impediment to cleaning up the contaminated areas and making them ready for business investment.

“This is something that is core to this agency,” Mr. Pruitt said Tuesday. “The statute puts it upon this agency to get accountability from those companies [responsible for the pollutants at the sites]. Our job is to get sites remediated. Let’s set some goals, let’s set some objectives and get some of these sites off the list.”

Among the strategies the EPA plans to implement: targeting specific sites that are “not showing sufficient progress,” clarifying and streamlining agency policies and guidance to expedite remediation and encouraging private investment in the cleanup process and reuse of contaminated facilities.

When Mr. Pruitt convened the Superfund task force in May, some environmental groups expressed concern with the former Oklahoma Attorney-General’s close contact with the oil-and-gas industry and his early efforts to unwind several of President Barack Obama’s environmental protections. The groups also worried that speeding up the process may lead to inadequate cleanup efforts.

But Mr. Pruitt believes the new plan will help to determine the best method for cleaning a site, as well as the total cost. This will help the EPA in its efforts to hold the responsible parties accountable.

“Those companies need to be held responsible,” he said.

“One of the most fundamental and important things for us to do is just decide,” Mr. Pruitt continued, noting that sites have been “languishing” for years without a decision about how to remediate sites. “And I think there has been hesitancy, or a reluctance, to do that.

“This shouldn’t be a list that you never get off of,” he continued. “We’re going to evaluate each of these on a case-by-case basis and move them towards remediation.”

The Superfund program was created in 1980. Some sites have been on the list for more than a decade.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on July 28, 2017

Digital Coin Sales Set Off SEC Alarm

By Paul Vigna and Dave Michaels | Jul 26, 2017

TOPICS: Regulation, SEC, Securities and Exchange Commission

SUMMARY: On Tuesday, July 25, 2017, the Securities and Exchange Commission issued comments stating that a 2016 offering of digital currency DAO is a security offering subject to U.S. disclosure and other reporting requirements. The SEC did not take an enforcement action against the issuer. Other virtual currency prices fell on the news. The related article documents their response.

CLASSROOM APPLICATION: The article may be used in any class to discuss a current topic, virtual currency, and regulatory requirements for financial disclosure.



1. (Introductory) What are digital currencies such as bitcoin and ether?


2. (Introductory) Why did the prices of virtual currencies fall recently?


3. (Advanced) Why might the Securities and Exchange Commission (SEC) have authority to regulate transactions with online coins such as bitcoin? Hint: Consider how offering virtual currency funds a startup operation based on the description in the article. Also consider the related article.


4. (Advanced) What accounting and reporting requirements exist for entities issuing securities subject to SEC regulation?

"Digital Coin Sales Set Off SEC Alarm," by Paul Vigna and Dave Michaels, The Wall Street Journal, July 26, 2017 ---

At issue is sector where more than $1 billion has been raised this year but which has been criticized for lacking standards

The Securities and Exchange Commission on Tuesday moved to restrain a hot new fundraising method involving sales of digital coins, saying rules meant for everyday stock sales may apply to these offerings, too.

The comments were the first from the SEC specifically to address initial coin offerings, a nascent area where more than $1 billion has been raised so far this year, but which has also been criticized for a lack of standards.

The SEC’s report will likely “chill the waters a bit for these offerings,” said David B.H. Martin, a senior counsel at Covington & Burling LLP who was formerly a top SEC official.

The price of bitcoin and ether, the two most popular cryptocurrencies, fell on the announcement. Bitcoin lost 7% of its value, trading at $2,592. Ether was also down 12% to $201, according to CoinDesk.

The SEC report was related specifically to a coin offering that debuted last summer called DAO, which raised more than $150 million for an investment fund before a hacker exploited its code and stole $55 million. The commission decided against pursuing an enforcement action against the DAO’s creators, but rather used the report to clarify its authority over the burgeoning market and to raise awareness of potential problems.

The SEC report is just a “shot across the bow,” said Marco Santori, a partner at the law firm Cooley LLC, who has advised a number of startups on coin offerings. “The interesting question is not whether the DAO was a security - it was - it’s whether the other stuff is a security.”

The SEC wrote that he DAO became the functional equivalent to a share of stock because it offered investors the potential for a return on their investment.

In an initial coin offering, a company, usually associated with the digital-currency sector, creates a bitcoin-like coin and offers it to the public. In effect, they are like a cross between traditional initial public offerings and crowd funding.

These offerings have become more common this year, with more than 70 different startups using the structure to raise money.

Many of the coins are designed to be used with an online service, and many of the more recent offerings have stressed that they are not equity or securities but “utility coins,” and do not carry any of the shareholder rights of equity or debt. Many startups even barred U.S. investors from their offerings, out of concern about how the SEC would rule on them.

Tuesday, the SEC said “the definition of a security under the federal securities laws is broad, covering traditional notions … such as a stock or bond, as well as novel products or instruments where value may be represented and transferred in digital form.”

Many of the coin-offering tokens fell in value Tuesday before the SEC’s report, and continued falling after it. Some were down 20% to 30%, according to . Specifically, Status was down 28%, iconomi was down 25%, veritaseum was down 22%. EOS was down 16%, and gnosis was down 15%. Of the top 50 coins by market value, 46 were in the red, the website said.

The report doesn’t exonerate all other initial coin offerings, or ICO ’s , that happened before the SEC weighed in with its view on the DAO, according to a person familiar with the agency’s thinking. The SEC continues to scrutinize other initial coin offerings, the person said.

Still, “to the extent that the facts are similar enough, the SEC would be hard pressed to take enforcement action,” said Michael Liftik, a former SEC enforcement lawyer who is now a partner at Quinn Emanuel Urquhart & Sullivan LLP.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on July 28, 2017

Google Sees Ad Growth But Earns Less for Each Click

By Jack Nicas | Jul 25, 2017


TOPICS: Contingent Liabilities, Segment Reporting, Segments

SUMMARY: The article analyzes the results for the second quarter of 2017 announced by Google's parent company, Alphabet, Inc. The earnings release was filed with the SEC on Form 8-K on July 24, 2017 and is available at The article presents analysis of costs and comparative data, the breakdown of segment revenues (further than is given in notes to the 10-Q filing, also referenced in questions), and the impact of a European Commission (EC) fine. Alphabet's actual10-Q filing for the second quarter 2017, also used in this review, is available on the SEC website at

CLASSROOM APPLICATION: The article may be used to cover basic financial reporting using only the first 3 questions, contingent liability accounting for the EC fine, and/or segment reporting.



1. (Advanced) Access the Alphabet, Inc. announcement of second quarter 2017 results available on the SEC web site at What information does the company provide in summary?


2. (Introductory) How is the summary information analyzed in the article? For example, describe the ways in which the article emphasizes changes or otherwise analyzes the results independently.


3. (Introductory) What was the European Commission (EC) fine against Alphabet?


4. (Introductory) How significant was the impact of the EC fine on the company's operating results in the second quarter 2017?


5. (Advanced) Why is the entire amount of the EC fine expensed in the second quarter of 2017 when the fine was imposed? Doesn't this fine relate to activities in previous accounting periods? In your answer, refer to authoritative accounting requirements for contingent liabilities.


6. (Advanced) Refer to Alphabet's 10-Q filing for the second quarter 2017 available on the SEC website at Click on Notes Tables, then Information about Segments and Geographic Areas. What operating segments does Alphabet, Inc. report? What is contained in each of those segments?


7. (Advanced) Compare the reporting on Form 10-Q discussed above to the analysis in the earnings release. How is the earnings release different from the 10-Q?

"Google Sees Ad Growth But Earns Less for Each ClickM" by Jack Nicas , The Wall Street Journal, July 25, 2017 ---

Alphabet’s quarterly profit fell by 28% because of $2.7 billion fine from European regulators

Google parent Alphabet Inc. GOOGL 0.61% said its advertising business continued to hum, but its fastest-growing segments—mobile and YouTube advertising—are less lucrative than desktop ads.

Alphabet said clicks on its ads surged 52% in the second quarter from a year earlier. But ads on smartphones and with YouTube videos generally earn less money per ad than search ads on traditional computers, the highly targeted ads that appear atop search results. As a result, Google said its revenue per click fell 23% in the quarter, the widest spread between the two metrics in at least six years.

The growth in the number of clicks helped boost second-quarter revenue 21% to $26.01 billion over a year prior.

“The results are reflecting two basic trends: an ongoing shift to mobile and an increasing amount of their revenue coming from YouTube,” said Mark Mahaney, internet analyst at RBC Capital Markets. “The growth remains very impressive for a company this size.”

That shift in its business has also pressured margins. Alphabet’s operating margin was 26.4% in the quarter, compared with 27.8% a year ago, marking the first drop in eight quarters, said Brian Wieser, analyst at Pivotal Research Group.

The shift to smartphones is increasing the fees Google pays to smartphone partners, such as Apple Inc., to be the default search engine on smartphones. Google’s payments to partners, including phone makers and websites on which it places ads, increased 28% to $5.09 billion in the quarter from a year earlier. YouTube’s growth also drives up costs because Google must pay to license some videos on the site.

Such payments to partners will likely continue to increase given the shift to mobile, “but our focus remains on growing profit dollars,” Alphabet Chief Financial Officer Ruth Porat said on a call with analysts. “We’re just really pleased with the strength of our mobile business.”

Alphabet’s net profit fell by 28% to $3.52 billion because of a $2.74 billion fine from European regulators. EU regulators last month fined Google after their seven-year investigation concluded Google favors its shopping ads in its search results at the expense of competitors. Google denies the charges and said it is considering an appeal.

Alphabet shares, up 26% this year, fell 3% in after-hours trading.

Google, the world’s biggest advertising company, dominates the digital-ad landscape with fellow tech giant Facebook Inc. The two firms captured about 77% of the $12 billion increase in spending on online ads in the U.S. last year, according to eMarketer. Given Google’s size, if it continues to earn less per ad click, it could depress online-ad prices across the internet.

Continued in article

Video:  How Amazon's warehouse robots work ---
Thank you Dennis Beresford for the heads up on Amazon's warehouse robots.


Teaching Case From The Wall Street Journal's Weekly Accounting Review on July 28, 2017

Robots Picking, Retailers Grinning

By Brian Baskin | Jul 24, 2017

TOPICS: Inventory, Return on Investment

SUMMARY: The article explains the difficulty of developing robotic capabilities to grab items from warehouse shelves and pack them for delivery. With increasing e-commerce, these warehousing functions have contributed to significant job growth and these labor costs are the biggest in most e-commerce distribution centers. Developing the robotics technology has proven to be challenging and the article describes many collaborative efforts to produce the first successful robot for this application.

CLASSROOM APPLICATION: The article may be used in a managerial accounting class to address robotics, return on investment stemming from reduced cost, and means of investing in research and development for innovation.



1. (Introductory) According to the article, why is it challenging for robotic inventory pickers to be implemented in distribution centers?


2. (Introductory) What methods are robotics companies and others using to develop this difficult technology? List all that you can identify in the article and describe how these methods share the cost of research and development.


3. (Advanced) How high is the potential return on investment in robotic picking as a replacement for human workers handling inventory? Explain all expected cost savings you find listed in the article and how they would contribute to this return.


4. (Introductory) Why has employment in the warehousing and storage sector of the economy increased in recent years?


5. (Advanced) Is this trend likely to change as robotic picking capabilities improve? Explain.

"Robots Picking, Retailers Grinning," by Brian Baskin , The Wall Street Journal, July 24, 2017 ---

Developers close in on systems to move products off shelves and into boxes, as retailers aim to automate labor-intensive process

Robot developers say they are close to a breakthrough—getting a machine to pick up a toy and put it in a box.

It is a simple task for a child, but for retailers it has been a big hurdle to automating one of the most labor-intensive aspects of e-commerce: grabbing items off shelves and packing them for shipping.

Several companies, including Saks Fifth Avenue owner Hudson’s Bay Co. HBC -1.58% and Chinese online-retail giant Inc., JD 0.13% have recently begun testing robotic “pickers” in their distribution centers. Some robotics companies say their machines can move gadgets, toys and consumer products 50% faster than human workers.

Retailers and logistics companies are counting on the new advances to help them keep pace with explosive growth in online sales and pressure to ship faster. U.S. e-commerce revenues hit $390 billion last year, nearly twice as much as in 2011, according to the U.S. Census Bureau. Sales are rising even faster in China, India and other developing countries.

That is propelling a global hiring spree to find people to process those orders. U.S. warehouses added 262,000 jobs over the past five years, with nearly 950,000 people working in the sector, according to the Labor Department. Labor shortages are becoming more common, particularly during the holiday rush, and wages are climbing.

Picking is the biggest labor cost in most e-commerce distribution centers, and among the least automated. Swapping in robots could cut the labor cost of fulfilling online orders by a fifth, said Marc Wulfraat, president of consulting firm MWPVL International Inc.

“When you’re talking about hundreds of millions of units, those numbers can be very significant,” he said. “It’s going to be a significant edge for whoever gets there first.”

Until recently, robots had to be trained to identify and grab each item, which is impractical in a distribution center that might stock an ever-changing array of millions of products.

Automation companies such as Kuka AG KU2 1.56% , Dematic Corp. and Honeywell International Inc. unit Intelligrated, as well as startups like RightHand Robotics Inc. and IAM Robotics LLC are working on automating picking.

In RightHand Robotics’ Somerville, Mass., test facility, mechanical arms hunt around the clock through bins containing packages of baby wipes, jars of peanut butter and other products. Each attempt—successful or not—feeds into a database. The bigger that data set, the faster and more reliably the machines can pick, said Yaro Tenzer, the startup’s co-founder.

Hudson’s Bay is testing RightHand’s robots in a distribution center in Scarborough, Ontario.

“This thing could run 24 hours a day,” said Erik Caldwell, the retailer’s senior vice president of supply chain and digital operations, at a conference in May. “They don’t get sick; they don’t smoke.” is developing its own picking robots, which it started testing in a Shanghai distribution center in April. The company hopes to open a fully automated warehouse there by the end of next year, said Hui Cheng, head of’s robotics-research center in Silicon Valley.

Swisslog, a subsidiary of Kuka, sells picking robots that can be integrated into the company’s other warehouse automation systems or purchased separately. The company sold its first unit in the U.S., to a large retailer, earlier this year, said A.K. Schultz, Swisslog’s vice president for retail and e-commerce. Mr. Schultz declined to name the retailer.

Previous waves of warehouse automation didn’t lead to sudden mass layoffs, partly because order volumes have been growing so fast. And automated picking is still at least a year away from commercial use, robotics experts say. The main challenge lies in creating the enormous databases of 3D-rendered objects that robots need to determine the best way to grip new objects.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on July 28, 2017

Retailers Check Out Automation

By Sarah Nassauer | Jul 20, 2017

TOPICS: Accounting Careers

SUMMARY: The article describes the impact on one store employee when Wal-Mart installed a Cash360 machine which "...counts eight bills per second and 3,000 coins a minute. [It also] digitally deposits money at the bank, earning interest for Wal-Mart sooner than if sent by armored car." The machine also uses software analysis to predict daily cash needs.

CLASSROOM APPLICATION: The article may be used in any class to discuss trends in accounting-related jobs or in a managerial accounting class to discuss automation in the retail sector.



1. (Introductory) What accounting position at a Wal-Mart store was replaced by a robot? How many such positions are facing this replacement?


2. (Advanced) Does this robotics replacement mean that all accounting functions face replacement by robots? Consider also in your answer the implication for the type of work accountants may be hired to do.


3. (Introductory) What are the retail positions that will "always be there" according to Wal-Mart's chief operating officer?


4. (Advanced) What is the likely trend in retail positions overall? How is that trend reflected in the specific job change that impacted the accountant described in this article?

"Retailers Check Out Automation," by Sarah Nassauer  , The Wall Street Journal, July 20, 2017 ---

Wal-Mart and other large retailers, under pressure from Amazon, turn to technology to do workers’ rote tasks

Last August, a 55-year-old Wal-Mart WMT 0.04% employee found out her job was being taken over by a robot. Her task was to count cash and track the accuracy of the store’s books from a desk in a windowless backroom. She earned $13 an hour.

Instead, Wal-Mart Stores Inc. WMT 0.04% started using a hulking gray machine that counts eight bills per second and 3,000 coins a minute. The Cash360 machine digitally deposits money at the bank, earning interest for Wal-Mart sooner than if sent by armored car. And the machine uses software to predict how much cash is needed on a given day to reduce excess.

“They think it will be a more efficient way to process the money,” said the employee, who has worked with Wal-Mart for a decade.

Now almost all of Wal-Mart’s 4,700 U.S. stores have a Cash360 machine, making thousands of positions obsolete. Most of the employees in those positions moved into store jobs to improve service, said a Wal-Mart spokesman. More than 500 have left the company. The store accountant displaced last August is now a greeter at the front door, where she still earns $13 an hour.

“The role of service and customer-facing associates will always be there,” said Judith McKenna, Wal-Mart’s U.S. chief operating officer. But, she added, “there are interesting developments in technology that mean those roles shift and change over time.”

Shopping is moving online, hourly wages are rising and retail profits are shrinking—a formula that pressures retailers, ranging from Wal-Mart to Tiffany & Co., to find technology that can do the rote labor of retail workers or replace them altogether.

As Inc. makes direct inroads into traditional retail with its plans to buy grocer Whole Foods Market  Inc., Wal-Mart and other large retailers are under renewed pressure to invest heavily to keep up.

Economists say many retail jobs are ripe for automation. A 2015 report by Citi Research, co-authored with researchers from the Oxford Martin School, found that two-thirds of U.S. retail jobs are at “high risk” of disappearing by 2030.

Self-checkout lanes can replace cashiers. Autonomous vehicles could handle package delivery or warehouse inventory. Even more complex tasks like suggesting what toy or shirt a shopper might want could be handled by a computer with access to a shopper’s buying history, similar to what already happens online today.

“The primary predictor for automation is how routine a task is,” said Ebrahim Rahbari, an economist at Citi Research. “A big issue is that retail is a sizable percentage of the workforce.”

Nearly 16 million people, or 11% of nonfarm U.S. jobs, are in the retail industry, mostly as cashiers or salespeople. The industry eclipsed the shrinking manufacturing sector as the biggest employer 15 years ago. Now, as stores close, retail jobs are disappearing. Since January, the U.S. economy has lost about 71,000 retail jobs, according to data from the Bureau of Labor Statistics.

“The decline of retail jobs, should it occur on a large scale—as seems likely long-term—will make the labor market even less hospitable for a group of workers who already face limited opportunities for stable, well-paid employment,” said David Autor, an economist at the Massachusetts Institute of Technology.

Earlier this year, Beverly Henderson took a pay cut and gave up her health-care benefits when she left Wal-Mart in the wake of the back-office changes. “I’m 59 years old,” she said. “I never worked on the floor. I’ve always worked office positions and I had no desire.”

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 4, 2017

Credit-Card Losses Flash Warning

By AnnaMaria Andriotis | Aug 01, 2017

TOPICS: Banking, Loan Loss Allowance

SUMMARY: The article discusses trends in net charge-off (write-off) rates. The rates are clearly defined early in the article. The accounting information is the first focus of the article, then the information is combined with discussion of overall increases in consumer credit card balances, loosening bank lending policies since 2014, and the overall economic status of employment.

CLASSROOM APPLICATION: The article focuses on banking and loans receivable but also can be used when covering accounts receivable.



1. (Introductory) What are loan charge-offs? What are net charge-off rates?


2. (Introductory) What trend in charge-off rates is occurring now?


3. (Advanced) How does this trend hurt bank earnings? Hint: explain the accounting for bad debts and consider how charge-offs affect the amount that must be recorded as bad debt expense in the following accounting period.


4. (Advanced) Refer to the related graphic entitled Taking a Loss. How is the accounting information about charge-offs compared across time and across large banks? How does the way that the rates are computed make them comparable for this purpose?

"Credit-Card Losses Flash Warning," by AnnaMaria Andriotis, The Wall Street Journal, August 4, 2017 ---

Average net charge-off rate for large U.S. card issuers increased to 3.29% in the second quarter, its highest level in four years.

Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.

The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., C -0.81% Capital One Financial Corp. COF -1.71% and Discover Financial Services , DFS -1.34% had increases for the quarter.

The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.

While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.

Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 4, 2017

Amazon's Expansion Costs Take a Toll

By Laura Stevens | Jul 28, 2017

TOPICS: Capital Expenditures, Long-Term Assets

SUMMARY: Amazon reported falling profits even as sales increased to $38 billion during the second quarter of 2017. The company is investing in warehousing and delivery capacity as well as online service offerings and technology-related products such as its Echo device. As noted in the related article, "capital expenditures surged 46% year over year to $2.5 billion, while property and equipment acquired under capital leases nearly doubled to $2.7 billion. This brings the company's total capital investment for the quarter to a record $5.2 billion."

CLASSROOM APPLICATION: The article may be used when discussing property, plant and equipment in a financial reporting class or capital expenditures in a managerial accounting class. Questions ask students to discuss the types of costs incurred by Amazon and identify which costs impact profits immediately and which will impact future operations.



1. (Introductory) Amazon's revenues totaled $38 billion and it made profits of nearly $200 million. What factors are posing a concern that led to a stock price drop after the announcement of these results?


2. (Advanced) What types of costs are growing at Amazon? The related article is helpful with this answer.


3. (Advanced) From the list of costs in answer to the question above, identify which of these costs immediately reduce earnings in the period the costs are incurred. Explain your response.


4. (Advanced) What recent acquisition into traditional "brick and mortar" operations did Amazon make? How might that acquisition drive the company to make even further capital and operating expenditures?

"Amazon's Expansion Costs Take a Toll," by Laura Stevens , The Wall Street Journal, July 28, 2017 ---

Retailer pours funds into new warehouses, data centers and Alexa service. Inc. AMZN -2.14% said quarterly profit fell 77% even as sales jumped, a sign of the high cost of its increasing dominance of retail.

The Seattle-based retailer eked out its smallest quarterly profit in nearly two years. The company reported $197 million in profit on $38 billion in sales in the second quarter as it spent on new warehouses and delivery capacity for its retail business and data centers for its cloud services business. The company also poured funds into hiring engineers to work on its artificial intelligence Alexa service as well as warehouse workers.

“We are continuing to invest in businesses that will achieve four goals...Customers love them, they can grow to be large, they have strong financial returns and they are durable and can last for decades,” Chief Financial Officer Brian Olsavsky said on a media call. “That is, in essence, our investment philosophy.”

Amazon’s 25% sales growth comes at the expense of traditional retailers, which are struggling with declining foot traffic and the shift of consumer spending online. At a time when Amazon is investing heavily and expanding, other retailers are saddled with high debt loads and falling sales, forcing them to close stores and cut jobs—and extending Amazon’s advantage.

“Amazon is a great disrupter in traditional retail,” said Trip Miller, founder and managing partner at Amazon investor Gullane Capital LLC. “Everyone is pivoting and trying to change their game to deal with Amazon. I would hate to be the competition in anything they get involved in.”

Amazon’s stock price was down 2.3% in after-hour trading as the company missed profit and guidance expectations, a tempered reaction given that other retail stocks often drop in the double digits when Amazon makes a move to compete in the same market. Amazon shares, which finished Thursday at $1,046, were up about 39% year-to-date at the close.

High expectations for Amazon temporarily made founder and Chief Executive Jeff Bezos the world’s richest person on Thursday. Amazon’s stock hit a record in the morning ahead of the results, edging Mr. Bezos in front of Microsoft Corp. founder Bill Gates, before closing down. According to Forbes, which tracks a list of billionaires, Mr. Bezos reached a net worth of $90.6 billion as the market opened.

Amazon is now making a big push into brick-and-mortar, something expected to further hurt traditional retail competitors. Last month, Amazon announced a $13.7 billion including debt acquisition of Whole Foods Market Inc., immediately catapulting it into a major player in brick-and-mortar retail and grocery. Whole Foods reported Wednesday that comparable sales fell again in its latest quarter, a trend it has promised to reverse by September.

Adding Whole Foods “will be a big boost for us as we expand our offerings in consumables and grocery,” Mr. Olsavsky said.

The shift from shopping in-store to online has left many powerful brands unable to ignore Amazon, increasing the retailer’s dominance. Fifty-five percent of product searches now start at Amazon, according to personalization platform company BloomReach, compared with 28% on search engines. In recent weeks, Amazon has become an official seller for Nike Inc. and Sears Holding Corp.’s Kenmore brand of appliances.

Amazon has claimed more than 40 cents out of every dollar spent online over the past year, according to receipt tracker Slice Intelligence, which has an online shopping panel of more than 5 million. Wal-Mart Stores Inc., in comparison, claimed about 1.7% of online spending over the same period.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 4, 2017

GOP Tax Plan Drops Levy on Imports

By Richard Rubin | Jul 28, 2017

TOPICS: Tax Laws, Tax Reform

SUMMARY: On Thursday, July 27, Republicans released a statement eliminating consideration of the border adjustment from any proposed tax overhaul legislation. Political imperative from Republicans facing mid-term elections mean the legislation will get done "one way or the other" according to a quote from a GOP tax lobbyist. Details are still lacking: "the statement also doesn't include a target for revenue, making it unclear whether Republicans are proposing a net tax cut or the revenue-neutral plan they have previously discussed."

CLASSROOM APPLICATION: The article may be used in a tax class to discuss policy and political influence on the tax system.



1. (Advanced) What is the "border adjustment" tax proposal that "was a central part of the strategy of House Republicans"? You may refer to the related article to assist with this question.


2. (Introductory) How did differences between Republican Party members in the two houses of Congress impact the viability of the proposed border adjustment tax?


3. (Advanced) Does the overall tax overhaul debate relate only to corporate income taxes? Explain your answer.


4. (Advanced) Does the overall tax overhaul debate relate only to corporate income taxes? Explain your answer.


5. (Introductory) What overall political factors make it likely that tax reform legislation will be proposed this year?

"GOP Tax Plan Drops Levy on Imports, by Richard Rubin, The Wall Street Journal, July 28, 2017 ---

Proposal jettisons Republicans’ calls for a border-adjusted corporate tax

WASHINGTON—Top congressional Republicans and the Trump administration abandoned a controversial House GOP plan to tax imports and exempt exports from taxes, as they announced tax policy principles that resolved few other crucial issues.

Border adjustment, as the proposal was known, was a central part of the strategy House Speaker Paul Ryan outlined last year. Its goal was to generate $1 trillion in revenue over a decade to help pay for corporate-tax cuts and to prevent companies from shifting profits to low-tax foreign countries. The idea had been politically imperiled for months amid objections from retailers and Republican senators.

The final blow came Thursday, in a broad statement of principles released by party leaders to build Republican unity on tax policy and create momentum for advancing legislation this fall.

The statement emphasized a common goal of reducing individual and corporate rates and individual tax rates “as much as possible.” It also called for faster writeoffs for capital expenses, an idea meant to promote investment, though it stopped short of a House Republican proposal for immediate writeoffs.

The shared principles in effect represent a starting point for the approaching debate. Party leaders’ willingness to release a framework is also a sign of their confidence in getting a bill written and passed.

Still, Thursday’s statement left critical questions unanswered, such as how much individual and corporate rates would be cut, and avoided addressing many of the tough trade-offs Republicans would need to make to achieve substantial reductions in tax rates, such as what deductions to eliminate.

Taken together, it included less detail than President Donald Trump’s campaign plan, the House GOP’s June 2016 blueprint or the one-page White House offering in April.

“This was a clear gate that we just went through with the White House and the senate,” said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, whose panel will write the first version of the bill. “It just signals another big step we have to take.”

An additional unknown remains how much revenue Republicans expect to generate with a new tax plan, making it unclear whether a tax overhaul will add to the deficit or leave it unchanged. The statement emphasizes permanent tax changes, which provide a fiscal constraint because congressional rules they are using won’t allow bigger deficits after a decade.

“This tax reform has to move us toward a balanced budget, not away from it,” Mr. Brady said.

The document released Thursday stems from meetings held by the so-called Big Six: Mr. Ryan, Mr. Brady, Senate Majority Leader Mitch McConnell (R., Ky.), Senate Finance Chairman Orrin Hatch (R., Utah), Treasury Secretary Steven Mnuchin and White House economic-policy chief Gary Cohn.

“We are confident that a shared vision for tax reform exists, and are prepared for the two committees to take the lead and begin producing legislation for the president to sign,” the statement said.

The statement says Mr. Trump “fully supports these principles and is committed to this approach.”

“Hey, every step forward is progress, right?” said Rep. Pat Tiberi (R., Ohio), a senior Ways and Means member. “This is about everybody trying to be closer to coming together.”

As top negotiators sell the plan publicly, the pressure turns up on members of the tax writing committees who will turn principles into detailed legislation. They can draw from years of past studies and the bill that former Ways and Means Chairman Dave Camp wrote in 2014

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 4, 2017

Shell Girds for 'Lower Forever' Oil

By Sarah Kent | Jul 28, 2017

TOPICS: Profitability, Return on Investment, Capital Spending, Cash Flow

SUMMARY: The article covers a variety of topics related to the impact on Royal Dutch Shell PLC of low oil prices. The company's views and plans were discussed in an earnings conference call for second quarter 2017 financial results. Strategic shifts to deal with permanently-lower oil prices rather than "lower for longer" expectations were the focus of comments by chief executive officer Ben van Beurden. Earnings results and cash flow from operations are discussed at the end of the article.

CLASSROOM APPLICATION: The article may be used in a financial reporting class to cover the earnings and cash flow topics or in a managerial accounting class to highlight the uncertainty of information used in calculations such as expected return on investment.



1. (Introductory) In what event did Royal Dutch Shell executives discuss the company's view on when demand for petroleum products will peak? Does this discussion surprise you? Explain.


2. (Introductory) According to the article, what are the viewpoints of Shell's competitors Exxon Mobil and Chevron? Of the International Energy Agency?


3. (Advanced) How does the uncertainty about demand for oil impact Shell's decision-making for capital investment? Be specific about the links to items such as determining expected return on investment that you learn about in managerial accounting.


4. (Advanced) What strategic shift is Shell Oil making to cope with changing demand for oil? How does uncertain about demand for oil impact analyses supporting those decisions? Again, be as specific as you can.

"Shell Girds for 'Lower Forever' Oil." by Sarah Kent , The Wall Street Journal, July 28, 2017 ---

CEO touts cost-cutting, strategy shift for $1.9 billion profit

LONDON— Royal Dutch Shell RDS.B -1.13% PLC presented a pessimistic vision for the future of oil on Thursday, even as the company reported success in generating cash during a prolonged energy downturn.

Shell has cut costs and said it is preparing for a world in which crude prices may never regain precrash levels and petroleum demand eventually declines. Shell Chief Executive Ben van Beurden said the company has a mind-set that oil prices would remain “lower forever”—a riff on the “lower for longer” mantra the industry adopted for a price slump that has proved unexpectedly lasting.

“We have to have projects that are resilient in a world where oil has peaked,” Mr. van Beurden told reporters on a conference call discussing the company’s second-quarter financial results. “When it will happen we don’t know, but that it will happen we are certain.”

The views of the British-Dutch oil company reflect the transition under way in a global energy industry grappling with the twin forces of an oil-supply glut and a looming consumer shift away from petroleum. These trends are even more pronounced for oil companies in Europe, where local and national governments are trying to phase out vehicles with internal-combustion engines, encourage electric automobiles and reduce overall carbon emissions.

Experts differ on the timing of peak oil demand. In its most-guarded scenario, Shell sees oil peaking within the coming decade. The International Energy Agency says the timing will be more like 2040. The advent of declining demand—after decades of unrelenting growth—would likely erode the value of oil and the companies that produce it.

On the other hand, U.S. energy giants such as Exxon Mobil Corp. and Chevron Corp. have said peak oil demand is still far off. And even when oil consumption eventually stops growing, Shell isn’t expecting it to drop off a cliff.

“It doesn’t mean it’s game over straight away,” Mr. van Beurden said. “There will be a continued need for investment in oil projects.”

Mr. van Beurden’s comments are broadly in line with Shell’s overall strategy of moving toward producing fuel for electricity, such as natural gas and even renewables, and focusing on keeping costs low. The company now produces more gas than oil. It is also building a massive wind farm off the Dutch coast and envisions spending as much as $1 billion a year on developing new energy sources such as renewables by the end of the decade.

Despite Shell’s warnings on oil, the company posted what analysts said was a strong second quarter.

Shell’s equivalent of net profit rose to $1.9 billion from $239 million a year earlier and its cash flow from operations—a metric that has become increasingly important to investors—soared to $11.3 billion. The company said it generated $38 billion of cash from its business over 12 months, enough to cover dividend payments and pare debt.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 4, 2017

Toshiba is Facing Difficult Choices

By Kosaku Narioka, Takashi Mochizuki and Peter Landers | Jul 28, 2017

TOPICS: Audit Reports, Bankruptcy

SUMMARY: This article follows on several covered in this weekly review about Toshiba's woes stemming from subsidiary Westinghouse losses. The focus in this article is on bankruptcy filing but also covers liabilities lingering after Westinghouse Electric's bankruptcy from which Toshiba could be freed. Also mentioned at the end of the article is the fact that Toshiba's auditors have refused to issue a report on the Japanese company's financial statements-though the wording in the article decribes auditors as "approving financial statements."

CLASSROOM APPLICATION: The article may be used when covering insolvency, bankruptcy, and audit opinions.



1. (Introductory) What is insolvency?


2. (Introductory) Is Toshiba Corp. insolvent? Explain your answer.


3. (Advanced) What is Toshiba's relationship to Westinghouse Electric? How did Westinghouse's bankruptcy filing lead to Toshiba's financial difficulties? You may refer to the related article to assist with this answer.


4. (Advanced) Near the end of the article, the author writes that Toshiba's auditors "have refused to approve financial statement this year." Do auditors "approve" financial statements? Explain and comment on the concern about public understanding of the role of an auditor and an audit opinion.


Toshiba Warns It May Be Unable to Stay in Business
by Takashi Mochizuki
Apr 02, 2017
Page: B3

Reviewed By: Judy Beckman, University of Rhode Island

"Toshiba is Facing Difficult Choices," byy Kosaku Narioka, Takashi Mochizuki and Peter Landers , The Wall Street Journal, July 28, 2017 ---

Japanese conglomerate’s effort to raise money by selling its chip unit has stalled

TOKYO—A number of creditors and others involved in Toshiba Corp.’s TOSYY -1.61% restructuring are pushing for a Toshiba bankruptcy filing as the best path to rebirth after its effort to raise money through a chip-unit sale stalled.

People involved in talks over Toshiba’s workout, including business partners, lawyers and people with ties to the company’s main bankers, said bankruptcy is worth serious study. Some of them said it is the best available option and that they are advocating it in discussions with Toshiba or creditors. They said a bankruptcy filing by Toshiba, the core of an industrial conglomerate, could free it of burdens that include lingering liabilities from the March bankruptcy of its Westinghouse Electric Co. nuclear unit in the U.S.

Toshiba’s chief executive, Satoshi Tsunakawa, said at a recent news conference that seeking debt relief through the courts isn’t an option. A Toshiba spokesman reiterated this week that the company has “no specific plan” to seek bankruptcy protection.

A person familiar with deliberations at one of Toshiba’s main lenders compared the conglomerate to a hole that might have treasure at the bottom but also lurking snakes. Bankruptcy, this person said, could kill any snakes and let the lenders access the treasure.

A filing would be among the largest in Japan’s history and carry drawbacks including possible political backlash in the U.S. Toshiba has committed $3.68 billion to nuclear-plant operator Southern Co. to cover its Westinghouse-related obligations from an unfinished project in Georgia. On Thursday, it reached a deal with Scana Corp. and a partner to pay $2.17 billion to cover obligations on a second half-completed U.S. nuclear project Westinghouse was building, in South Carolina.

Japanese government officials and Toshiba executives are aware of those drawbacks and may be deterred from a bankruptcy filing, people involved in the discussions said.

Toshiba in June estimated that its liabilities exceeded assets by more than $5 billion as of March 31. That followed its warning in April that it had “substantial doubt” about being able to continue as a going concern because of losses connected to Westinghouse.

Toshiba has said it plans to recover financial health by selling its memory-chip business, which has been booming recently thanks to demand for chips in smartphones and servers. On June 21, Toshiba designated a consortium led by a Japanese government-backed investment fund as the preferred bidder for the unit.

But the sale talks have bogged down since The Wall Street Journal reported earlier this month that the consortium’s bid could include an equity stake for SK Hynix Inc. of South Korea. A role for SK Hynix could raise antitrust issues and contradict the government’s stance that Toshiba’s technology shouldn’t fall into foreign rivals’ hands. Also, Toshiba’s joint-venture partner in the chip business, Western Digital Corp. WDC -1.67% , has filed suit in California to block the sale, arguing that its joint-venture contract with Toshiba gives it veto power over any sale. Toshiba, which rejects that interpretation, is contesting the suit; a hearing is scheduled for Friday in San Francisco.

The stalemate and Toshiba’s long battle with its auditors—who have refused to approve financial statements this year—are eroding trust among creditors. Japan’s three largest banks have taken reserves for a portion of their Toshiba loans, according to bank officials.

Japan has far fewer bankruptcies annually than the U.S., especially among major corporations, in part because of the stigma attached to failure.

Nonetheless, people involved in the discussions described Toshiba as a classic case of a company burdened by obligations with large and uncertain costs that could be lessened under bankruptcy protection. Those obligations include a multibillion-dollar 20-year contract involving liquefied natural gas in the U.S.

One person directly involved in a portion of the Toshiba recovery plan said “everyone thinks” bankruptcy has to be looked at—but it is difficult to say so publicly.

Two other people familiar with deliberations at one of Toshiba’s main lenders said that even if the memory-chip sale were completed, the company would still be likely to run short of funds.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 18, 2017

Blue Apron Costs Eat into Profit; Shares Fall

By Heather Haddon and Cara Lombardo | Aug 11, 2017

TOPICS: Earnings Per Share, Interim Financial Statements, Profitability

SUMMARY: Blue Apron Holdings Inc. shares have fallen as it has reported significant losses even greater than the amounts expected by analysts. The company reported increasing costs as it hired additional employees and opened an additional fulfillment center. "Delayed product launches also hurt Blue Apron's ability to attract and retain new customers..."

CLASSROOM APPLICATION: The article may be used in any financial reporting class to discuss overall quarterly reporting of operations by a newly public entity. Questions about earnings per share calculations are appropriate for students at a more advanced level.



1. (Introductory) What does Blue Apron do?


2. (Introductory) What business challenges does the company face?


3. (Introductory) How long has the company been in operation? How long has it been publicly traded?


4. (Introductory) How has Blue Apron fared financially?


5. (Introductory) What significant cost change did the company report in its first earnings update since going public? How have share prices reacted?


6. (Advanced) Define earnings per share (EPS).


7. (Advanced) Consider Blue Apron's loss of $31.6 million "worse than the $30.8 million loss anlaysts...expected", a 2.6% difference. But the loss was 47 cents per share when analysts expected 30 cents loss per share, a 56.67% difference. How is this possible?

"Blue Apron Costs Eat into Profit; Shares Fall," by Heather Haddon and Cara Lombardo , The Wall Street Journal, August 11, 2017 ---

CEO acknowledges battle for market share, saying focus is on building ‘sustainable long-term brand’

Shares in Blue Apron Holdings Inc. dropped nearly 18% as the meal-kit maker struggled to reassure investors that it can contain costs and fend off competition in the fast-growing food delivery business.

In its first earnings update since going public in June, Blue Apron said its costs jumped 86% to $65.7 million, as the New York-based company hired more employees and opened an additional fulfillment center in New Jersey. Blue Apron said last week that hundreds of employees could be laid off as it closes a separate New Jersey facility to retool its distribution network.

Delayed product launches also hurt Blue Apron’s ability to attract and retain new customers, executives said. They also acknowledged increasing competition from other food, grocery and meal-kit delivery services such as Inc.

“We’re not a business that is just focused on market share,” Chief Executive Matt Salzberg said in an interview. “We’re a business that’s focused on building a healthy, sustainable long-term brand for our customers.”

Meal kits are gaining popularity as consumers gravitate toward the convenient format for making meals at home with pre-proportioned ingredients. With roughly a million customers, Blue Apron is one of the most successful companies in the sector.

But competition has grown since Blue Apron made its debut in 2012. Kroger Co. and other large grocery chains are selling meal-kits in their stores that don’t require shoppers to commit to a subscription. Meal-kits currently sold on Amazon are attracting customers, and the e-commerce giant is also pushing into the space. It filed a trademark for prepared food kits last month.

Blue Apron executives said they are learning more about their customers and fine-tuning their menus to give customers more of what they want. The five-year-old company said revenue grew 18% to $238.1 million in the quarter ended June 30, but it posted a loss of $31.6 million. That was worse than the $30.8 million loss analysts polled by Thomson Reuters expected. On a per-share basis, Blue Apron reported a loss of 47 cents -- 17 cents worse than expected.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 18, 2017

CFOs Learn to Survive

By Joann S. Lublin | Aug 14, 2017

TOPICS: Accounting Careers, Chief Financial Officer

SUMMARY: The article lists the longest tenured chief financial officers (CFOs). There currently are 85 CFOs who have been in their positions for 10 years or more. Their companies on average have generated far better returns than the S&P 500 index. The article discusses the corporate performance achieved by these leaders and their strategies for success.

CLASSROOM APPLICATION: The article may be used to discuss skills needed in advancing to the highest levels of corporate accounting. It may also be used to develop critical thinking about the metrics cited in the article in support of the assertion that "CFOs stay on the job longer and that is good for companies"--the online title of the article.



1. (Introductory) What is the measure used in this article to asses whether having a long-standing chief financial officer (CFO) is "good for companies"?


2. (Advanced) Do you think other factors could account for this company performance trend associated with long-tenured CFOs?


3. (Introductory) What is the measure used in the article to support the argument that boards of directors show a growing preference for retaining experienced CFOs?


4. (Advanced) Do you think the evidence is convincing? Explain your answer.

"CFOs Learn to Survive," by Joann S. Lublin , The Wall Street Journal, August 14, 2017 ---

Shareholder returns of companies with long-tenured CFOs largely outperform S&P500 index

Few chief financial officers hold their high-pressured post for a decade, but that elite club is growing.

Jeff Julien belongs to this rare breed, whose longevity often reflects their sustained performance. Named CFO of brokerage Raymond James Financial Inc. RJF -2.72% 30 years ago, he helped lead his 118th quarterly earnings call last month.

Not a single analyst question surprised the 61-year-old executive. “We prepare days ahead of time for the call,’’ he says.

Mr. Julien’s tenure is longer than any other finance chief at the 673 biggest U.S. businesses—a group that comprises all companies belonging to the S&P 500 or Fortune 500, or to both—according to an analysis for The Wall Street Journal conducted in late July by executive recruiters Crist|Kolder Associates.

Ten years ago, 64 CFOs of the largest companies had served for more than a decade. Today, 85 have.

“Most of the 85 companies have been efficient users of capital,’’ notes Peter Crist, Crist|Kolder’s chairman.

Seven of the 10 most-tenured finance chiefs help run companies whose investors reaped far better returns during the past decade than the S&P 500 index, Crist|Kolder found. Those businesses include Raymond James, health-care information-technology company Cerner Corp. and energy-drinks maker Monster Beverage Corp.

Total shareholder return at Raymond James—which consists of stock price changes plus reinvested dividends—was 182% as of July 25, compared with 86% for the S&P 500 index. The 10-year return at Cerner was 378% and 646% at Monster Beverage.

Mr. Julien partly attributes Raymond James’s performance to “consistent, long-term focus instead of overreacting to the crisis du jour.’’

Monster Beverage couldn’t be reached for comment. Cerner CFO Marc Naughton “has played a critical role’’ in helping Cerner to outperform the S&P500, company president Zane Burke said in an emailed statement.

There are signs of boards’ growing preference for experienced finance chiefs to remain longer in their posts. While decadelong stints are rare, the average tenure of CFOs at Fortune 500 companies rose to 5.7 years in 2016 from 4.7 years in 2005, according to search firm Spencer Stuart.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 18, 2017

FBI Says ISIS Used eBay to Send Terror Cash to U.S.

By Mark Maremont and Christopher S. Stewart | Aug 11, 2017

TOPICS: Auditing, Internal Controls

SUMMARY: "U.S. investigators uncovered a global financial network run by a senior Islamic State official that funneled money to an alleged ISIS operative in the U.S. through fake eBay transactions...." The article is based on a "recently unsealed FBI affidavit [that was] filed in federal court in Baltimore...." The affidavit filing was made " support of search warrants requested by federal prosecutors for information from U.S. technology firms on social media and email accounts....[Its unsealing] was brought to public attention on Thursday [August 10, 2017] by a researcher with George Washington University's program on extremism."

CLASSROOM APPLICATION: The article may be used in an accounting systems or auditing class to discuss financial controls, detection of illegal financial activity, and an auditor's responsibilities in light of the risks discussed in the article.



1. (Introductory) How does the U.S. Federal Bureau of Investigation (FBI) say that Mohamed Elshinawy received ISIS funds to support terrorist activities here in the U.S.?


2. (Advanced) How do online platforms such as eBay and PayPal represent holes "in the vast online financial world"?


3. (Advanced) Company spokespersons from eBay and PayPal say they work with authorities to prevent terrorist activities on their platforms. Think of one control that might be used to detect possible illegal or terrorist activities on these platforms. Describe how the control would work.


4. (Advanced) Suppose you are the audit partner on the PayPal audit engagement. Do these potential uses of the online platform pose an audit risk? How must an auditor plan work to address this risk?


5. (Advanced) Do you think this audit responsibility is as extensive as those held by auditors of banks or other financial institutions? Explain your reasoning.


"FBI Says ISIS Used eBay to Send Terror Cash to U.S.," by Mark Maremont and Christopher S. Stewart , The Wall Street Journal, August 11, 2017 ---

Affidavit alleges American citizen Mohamed Elshinawy was part of a global network stretching from Britain to Bangladesh

U.S. investigators uncovered a global financial network run by a senior Islamic State official that funneled money to an alleged ISIS operative in the U.S. through fake eBay transactions, according to a recently unsealed FBI affidavit.

The alleged recipient of the funds was an American citizen in his early 30s who had been arrested more than a year ago in Maryland after a lengthy Federal Bureau of Investigation surveillance operation that found the first clues to the suspected network.

The government had alleged in a 2016 indictment that the American suspect, Mohamed Elshinawy, pledged allegiance to Islamic State and had pretended to sell computer printers on eBay as a cover to receive payments through PayPal, potentially to fund terror attacks.

The recently unsealed FBI affidavit, filed in federal court in Baltimore, alleges that Mr. Elshinawy was part of a global network stretching from Britain to Bangladesh that used similar schemes to fund Islamic State and was directed by a now-dead senior ISIS figure in Syria, Siful Sujan.

The U.S. has said Mr. Elshinawy told investigators he was instructed to use the money for “operational purposes” in the U.S., such as a possible terror attack. He has pleaded not guilty to supporting the terror group, and currently is in federal custody awaiting trial. His lawyer declined to comment.

The case suggests how Islamic State is trying to exploit holes in the vast online financial world to finance terror outside its borders.

The U.S. and other countries for years since 9/11 have focused on the formal international banking systems that terror networks might use to transfer money to would-be terrorists.

But some alleged perpetrators inspired by Islamic State have gotten small sums through low-level fraud such as check scams, or through financial channels where regulators have been paying less attention.

Those include social-media fundraising, student-loan withdrawals and online lending fraud, according to the Financial Action Task Force, an intergovernmental body that makes counterterror recommendations.

That is making it more challenging for law enforcement to spot and stop terror attacks and terrorism recruits. A former Treasury official equated policing terror funding in the burgeoning financial marketplace to “looking for a needle in a massive haystack.”

A spokesman for eBay Inc. said the company “has zero tolerance for criminal activities taking place on our marketplace” and said that they are working with law enforcement on the case.

A spokeswoman for PayPal Holdings Inc. said that it “invests significant time and resources in working to prevent terrorist activity on our platform….We proactively report suspicious activities and respond quickly to lawful requests to support law enforcement agencies in their investigations.”

The affidavit indicates that several other alleged operatives of the network had been arrested in Britain and Bangladesh, making it one of the most significant suspected Islamic State financial networks yet uncovered.

The operation pulled in investigators across the U.S. intelligence empire and involved coordination with several other countries, according to a person familiar with the matter.

Some of the key players in the alleged network, also used to buy military supplies, were arrested or killed in a coordinated global sweep in December 2015, according to the FBI affidavit. Mr. Sujan was killed in a drone strike on Dec. 10, 2015, according to a person familiar with the matter. At the time, Mr. Sujan was Islamic State’s director of computer operations, according to the affidavit.

The financial network, according to the FBI affidavit, operated through a British technology company founded by Mr. Sujan. His company had offices in Bangladesh, and Mr. Sujan also was setting up a branch in Turkey, according to the affidavit. It is unclear when Mr. Sujan left to join Islamic State in Syria.

The FBI affidavit was filed under seal in January in support of search warrants requested by federal prosecutors for information from U.S. technology firms on social-media and email accounts established by Mr. Elshinawy and other suspects

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 18, 2017

News Corp Posts a Loss on U.K. Asset Write-Down

By Lukas I. Alpert | Aug 11, 2017

TOPICS: Earnings Per Share, Ebitda, Segment Reporting

SUMMARY: This Wall Street Journal article reports on its parent company's operating performance that follows closely the earnings release provided by the company in an a filing with the SEC on Form 8-K and available at While performance at its news and information services business is declining due to a drop in ad revenue and other factors, the company's digital real estate business is growing.

CLASSROOM APPLICATION: Questions cover asset impairments, segment reporting and earnings per share. It may be used in a financial reporting class, likely intermediate level or above.



1. (Introductory) What is News Corp.? Describe the major components of this business as discussed in the article. How is the company related to Dow Jones and the Wall Street Journal?


2. (Advanced) Access the earnings press release on which this article is based on the EDGAR database from the U.S. Securities and Exchange Commission at Compare the reporting in the WSJ article to the earnings release. How similar are they? Explain your answer.


3. (Introductory) What are the segments of New Corp's business?


4. (Introductory) What financial items are reported by segment in the earnings release and discussed in the article?


5. (Advanced) What is total segment EBITDA? Is that the same as EBITDA based on the company's consolidated income statement? Explain.


6. (Introductory) What is an asset write-down? What was the driving reason behind the $464 million write down taken by News Corp in the fourth quarter ending in June 2017?


7. (Advanced) Define earnings per share. Based on the information in the article, estimate the weighted average number of common shares outstanding during the quarter ending in June 2017. Explain your calculations.

"News Corp Posts a Loss on U.K. Asset Write-Down," by Lukas I. Alpert | , The Wall Street Journal, August 11, 2017 ---

Company reports 7% decline in revenue, but circulation revenue at Dow Jones rises 10%

News Corp swung to a loss in the quarter ended in June, as the company wrote down the value of its U.K. newspaper assets while print advertising declines weighed on revenue.

The company reported a loss of $429 million, or 74 cents a share, compared with net income of $90 million, or 16 cents a share, in the same period a year earlier. The 16 cents didn’t include the impact of a penny loss from discontinued operations.

Excluding a $464 million impairment charge to reflect the lower value of fixed assets at the U.K. properties and other adjustments, the company recorded adjusted earnings of 11 cents a share.

News Corp—which publishes The Wall Street Journal, the New York Post and major newspapers in the U.K. and Australia—reported a 7% decline in revenue to $2.08 billion for the fiscal fourth quarter.

Analysts polled by Thomson Reuters had forecast adjusted earnings of 9 cents a share on revenue of $2.1 billion.

The news and information-services business, which accounts for just under two-thirds of the company’s top line, reported a 10% decline in revenue to $1.28 billion. That was driven by a 12% drop in advertising revenue due to weakness in the print market, currency fluctuations and the fact that the year-earlier quarter had an extra week compared with this year’s quarter.

Advertising revenue at Dow Jones, the unit that includes the Journal, fell 14%, and digital ad revenue comprised about 37% of the unit’s total ad sales for the quarter, the company disclosed on its earnings call.

“I think it’s fair to say on the digital advertising front that in the last half of the fiscal year we didn’t see the growth that we wanted,” said News Corp Chief Executive Robert Thomson. “We’re confident there will be an improvement in advertising, coordinated with the improvement in digital audience.”

Circulation revenue at Dow Jones rose 10% from a year ago. The Journal’s digital subscriptions rose to 1.27 million at the end of June, up 72,000 from the end of March.

Many media companies, including newspapers and cable news outlets, have said that keen interest in the news following the tumultuous 2016 presidential election and the start of President Donald Trump’s administration has helped boost subscribers and viewers. In late July, the New York Times reported a gain of 93,000 new subscribers in the latest quarter, a slowdown from the record growth of the prior quarter.

At Dow Jones, the company reduced costs by about $60 million in the fiscal year that ended in June as part of its WSJ2020 reorganization. The division is on track to “achieve at least $100 million in underlying cost savings on an annualized basis by the end of fiscal 2018,” said Chief Financial Officer Susan Panuccio.

Revenue in News Corp’s book-publishing segment totaled $407 million, a 6% decline compared with the year-earlier period, with the impact of currency fluctuations and the shorter accounting period offset by strong sales of “Dragon Teeth” by Michael Crichton and J.D. Vance’s “Hillbilly Elegy.”

The digital real-estate business reported a 10% gain in revenue to $251 million

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 18, 2017

Estimated-Tax Penalties Hitting More Filers

By Laura Saunders | Aug 12, 2017

TOPICS: Estimated Tax Payments, Individual Taxation, Penalty

SUMMARY: The article reports on a finding from Internal Revenue Service data that penalties for underpayment of estimated tax has grown from 2012 through 2015 at very high rates. The phenomenon is somewhat of a mystery; "the data suggest that millions of people don't understand they need to pay quarterly taxes, or at least increase their withholding to avoid penalties," says an IRS spokesperson. The significant increase may stem from baby boomers reaching retirement age and receiving payouts subject to tax, growth in the "gig economy" such as rentals through Airbnb, or economic factors such as low interest rates leading some people not to mind paying the penalties at tax time.

CLASSROOM APPLICATION: The article may be used in an individual income tax class.



1. (Advanced) What are estimated tax payments? When are they due and how are they reported?


2. (Introductory) When do taxpayers owe penalties related to estimated payments? In your answer, specifically explain the statement that "if total payments don't meet certain thresholds, then the taxpayer owes a penalty...." That is, what are those thresholds?


3. (Advanced) How is it possible that "in 2015, the total number of filers owing penalties may have exceeded the number filing estimated taxes"?

"Estimated-Tax Penalties Hitting More Filers By Laura Saunders , The Wall Street Journal, August 12, 2017 ---

People who pay taxes quarterly—such as gig workers, retirees and business owners—are getting their payments wrong

Attention gig workers, retirees, business owners and investors: Double-check your estimated-tax payments to Uncle Sam.

For reasons that aren’t clear, a growing number of people who pay taxes quarterly are getting their payments wrong and incurring penalties as a result. These taxpayers often owe estimated taxes because they have income that’s not subject to the same withholding as wages earned by employees.

According to Internal Revenue Service data, the number of filers penalized for underpaying estimated taxes rose nearly 40% between 2010 and 2015—to 10 million from 7.2 million.

In 2015, the total number of filers owing penalties may have exceeded the number filing estimated taxes, although final results aren’t out yet. This is possible because some who paid quarterly taxes may have made mistakes, and others who didn’t pay them should have.

“The data suggest that millions of people don’t understand they need to pay quarterly taxes, or at least increase their withholding to avoid penalties,” says Eric Smith, an IRS spokesman.

Adding to the mystery is that total estimated-tax penalties over the same period held steady. For 2015, the average penalty was about $130, compared with about $210 for 2010.

Estimated tax payments are Congress’s way of keeping non-wage earners from having an advantage over wage earners. More than 80% of taxpayers have wages that are typically subject to withholding, and most people pay most of their income tax this way. Thus the law requires people with other types of income to make quarterly payments based on amounts received during each period.

Taxpayers with a mixture of wage and non-wage income must either pay tax quarterly or raise their withholding to cover the non-wage income. If total payments don’t meet certain thresholds, then the taxpayer owes a penalty on the underpayment based on interest rates charged by the IRS. Currently the rate is 4%.

The surge in estimated-tax penalties is puzzling experts, even at the IRS. The agency says it hasn’t mounted an enforcement campaign in this area.

Tax preparers suspect several factors are at work. For most of the period penalties grew, the interest rate was 3%—the lowest in decades, making the pain of paying them lower as well.

“Some people don’t mind paying the toll, especially if their income bunches in the last quarter, and they just owe it for a few months,” says Don Williamson, noting the decision also could explain why average penalties have declined. Mr. Williamson is a certified public accountant who heads the Kogod Tax Policy Center at American University and has a private practice.

In addition, more baby boomers are now retiring from full-time work or else taking required distributions from retirement plans after age 70.5. In either case, says Mr. Williamson, they may be unaware they’ll owe quarterly payments on some or all income.

These people also may be unaware that Congress has cut them a break. According to an exception in Section 6654, taxpayers who retire or become disabled at 62 or older can often have estimated-tax penalties abated for a year before or after the change. Request this abatement on Form 2210.

Then there is the growth in the gig economy, as millions of Americans look to earn income through platforms such as Airbnb. These earners are often unfamiliar with the idea of paying quarterly taxes and thus incur penalties at first, says Miguel Centeno of Shared Economy CPA, a firm that specializes in serving taxpayers who receive 1099 forms instead of W-2s.

A 2016 survey conducted by Caroline Bruckner, a managing director at the Kogod Center, found that 69% of self-employed workers in the gig economy received no tax information from the platform they used.

Workers who don’t know about estimated-tax payments also may be missing out on useful write-offs.

“Deducting costs, such as complimentary bottles of wine or a portion of the utilities or Netflix bill for Airbnb hosts, can really lower the tax bill,” says Mr. Centeno.

For the IRS, growth in estimated-tax penalties in this sector could be ominous. While such penalties tend to be small, every one of them signifies a larger amount of unpaid taxes. Between 2010 and 2015, taxes due at time of filing grew about 60%, to $161 billion from $101 billion.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 25, 2017

If the CEO is Overpaid, Blame the Compensation Committee

By Robert C. Pozen and S.P. Kothari | Aug 21, 2017

TOPICS: Non-GAAP, Board of Directors, Executive Compensation

SUMMARY: "This op-ed is based on a study published in the July-August issue of the Harvard Business Review. Mr. Pozen is a senior lecturer and Mr. Kothari is a professor at MIT's Sloan School of Management." The authors describe the types of non-GAAP adjustments that are common in executive compensation contracts using individual examples and summaries of data findings from their research.

CLASSROOM APPLICATION: The article may be used in a financial reporting class to introduce academic research in general, use of financial information for purposes other than reporting to investors and creditors, or to discuss the use of non-GAAP metrics.



1. (Advanced) What are non-GAAP metrics or "adjusted earnings"? Cite your source for this information.


2. (Advanced) Regulations require earnings press releases to give GAAP figures equal prominence to non-GAAP numbers. How does this help provide decision-useful information to investors?


3. (Introductory) What is different about public companies' contracts with executives in regards to using adjusted numbers rather than GAAP earnings?


4. (Introductory) What is the "solution" recommended by these authors?


5. (Introductory) Does the U.S. Securities and Exchange Commission have the authority to regulate this proposed solution? Explain your answer.


"If the CEO is Overpaid, Blame the Compensation Committee," by Robert C. Pozen and S.P. Kothari, The Wall Street Journal, August 21, 2017 ---

Every year, shareholders of U.S. companies weigh in on executive pay by casting advisory votes on the reports of compensation committees. The committees are appointed by corporate boards to make recommendations about appropriate pay levels. Shareholders tend to take their reports at face value, voting to approve them in over 97% of cases. But their confidence is undermined by a lack of awareness about the often flawed methods compensation committees use to determine pay.

The trouble is that compensation committees frequently rely on faulty performance metrics that inflate executive pay. But the committee reports do not provide a sufficient explanation of these metrics to shareholders.

First, their reports routinely use “adjusted” earnings that are much higher than the figures calculated under Generally Accepted Accounting Principles. While many companies tout adjusted numbers in their press releases on earnings, regulations require these releases to give their GAAP figures equal prominence. By contrast, there is no similar rule for compensation reports, which may use only the adjusted numbers without quantifying their differences from GAAP.

Take Merck & Co., whose CEO had a bonus goal for 2015 of $3.40 in adjusted earnings per share. The compensation committee concluded that he had met that target, since the company’s adjusted earnings were $3.56 per share. But the committee’s report failed to mention that GAAP earnings were only $1.56 per share.

This example is not unique. In 2015, 93 companies in the S&P 500 announced adjusted earnings that were more than 50% above their GAAP earnings. At most of these firms, the compensation committees set executive pay using the adjusted earnings without quantifying how they differed from GAAP metrics.

There are valid reasons for excluding certain expenses from the GAAP figures. The costs of one-time events like layoffs might reasonably be omitted when calculating CEO pay. But most compensation reports don’t provide sufficient justifications for these omissions. For example, they may write-off “one-time” restructurings that their companies actually undergo almost every year.

More broadly, compensation reports often leave out expenses that truly ought to factor into executive pay, such as litigation settlements for alleged financial misstatements by management. Depreciation and amortization are excluded on the grounds that they are not core operating expenses. Yet they represent wear and tear on the plant and equipment that generate operating income. Committees also exclude taxes, although tax management is clearly relevant to financial performance.

Committees frequently exclude expenses for granting restricted shares or stock options. In 2014 LinkedIn projected adjusted income of $950 million for the following year, but only by excluding $630 million of stock-related grants given to its executives. But it seems wrong to calculate pay packages for top managers with a metric that omits the cost of grants made to those same managers.

A second problem is that when compensation committees compare what CEOs make at similar firms, they often use an inappropriate set of peers. To provide a fair benchmark, peer companies should be of similar size. But often compensation committees choose peers bigger than themselves, most likely because bigger companies have higher executive pay.

In 2010, the Investor Responsibility Research Center Institute found that companies with relatively high executive pay were 25% smaller than their self-selected peers by revenue and 45% smaller by market cap. Or consider Office Depot , whose filings we examined. Of the 20 companies in its peer group, all had higher market capitalizations and 13 had higher revenues. It isn’t hard to see how this is likely to skew executive compensation upward.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 25, 2017

How a New Audit Rule Could Bring Sunshine to U.S Markets

By Jason Zweig | Aug 18, 2017

TOPICS: Audit Report, CAMs, critical audit matters, PCAOB, Securities and Exchange Commission

SUMMARY: The article describes the PCAOB's new requirements in AS 3101 for an expanded auditors' report identifying critical audit matters (CAMs, known internationally as key audit matters or KAMs) and explaining challenging, subjective or complex judgment areas of the audit. Also newly required is disclosure of the engagement partner's tenure in the form of the year in which he or she began serving consecutively as the company's auditor. Links to the Securities and Exchange Commission document to implement this new auditing standard is here This link is provided and referred to in questions. Also linked is an excellent example of Dutch company Aegon N.V. who has both a U.S. and an international auditor's report showing the stark contrast between today's reporting and what can be expected under the new standard which is similar to international requirements.

CLASSROOM APPLICATION: The article may be used in an auditing class to cover significant changes in audit reports in the U.S. or internationally.



1. (Advanced) Describe the standard form of audit report currently used in the U.S. How long has this form of report been in use?


2. (Introductory) What changes has the Public Company Accounting Oversight Board (PCAOB) proposed to audit report? You may access the proposed SEC requirement to implement the requirement at Read Parts I and II. A. (Summary). You may also use the links in the article to access the PCAOB's process for implementing these new requirements.


3. (Advanced) Click on the link to the Aegon N.V. international annual report available through the link in the article at Proceed to the auditors' report beginning on p. 319. List at least one similarity to the current U.S. form of audit report. Then list the most interesting item you find among the ensuing report that differs from U.S. practice.


4. (Advanced) In the article, the author describes the current pass/fail audit report. "A thumbs-up states that the accounting firm obtained 'reasonable assurance' that the financial statements are 'free of material misstatement' and represent the company's condition 'fairly.' A thumbs-down casts doubt on whether the company can 'continue as a going concern.' Are these the only two options for forms of an audit report under current requirements? Explain your answer.


5. (Advanced) There is a correction noted at the bottom of this article and copied here. Why is this an important distinction? CORRECTION: Independent accountants audit a company's financial statements. An "Intelligent Investor" column Aug. 18 incorrectly said independent auditors prepare a company's financial statements.


"How a New Audit Rule Could Bring Sunshine to U.S Markets," by Jason Zweig, The Wall Street Journal, August 18, 2017 ---

New rules under consideration at the SEC would make auditors describe significant issues they raised with companies they audit

With luck, it may soon become a little harder for companies to keep investors in the dark.

The Securities and Exchange Commission is considering whether to adopt a ruleproposed by the Public Company Accounting Oversight Board that would require companies’ annual reports to include information about some of the most important issues raised by accountants in the annual audit.

Similar rules are already in force in the United Kingdom and Europe and other parts of the world; all told, 124 countries have adopted or are adopting those standards, says Matt Waldron, technical director at the International Auditing and Assurance Standards Board, a global accounting organization based in New York.

Should the U.S. join them?

Corporate audits have long been conducted in a kind of twilight. An independent accounting firm confidentially pores over a company’s books and records and other aspects of the business, and then gives a terse thumbs-up or thumbs-down in the company’s annual report.

A thumbs-up states that the accounting firm obtained “reasonable assurance” that the financial statements are “free of material misstatement” and represent the company’s condition “fairly.” A thumbs-down casts doubt on whether the company can “continue as a going concern.”

That’s it. These certifications — a handful of paragraphs typically indistinguishable from one company to another — offer no further information for investors.

The new rules would make auditors describe any significant issues they raised with the audit committee of the company’s board of directors. The auditors will have to explain any “challenging, subjective or complex” judgments.

Auditors in other countries are already disclosing the areas where they have challenged management’s assumptions and where estimates are conservative or optimistic.

So companies whose shares trade both overseas and in the U.S. may have the same auditor but two drastically different reporting formats.

The 2016 U.S. annual report for Aegon N.V., the Dutch insurer and asset manager, has a cookie-cutter communiqué of less than 650 words; the international version is more than seven times as long and delves into the potential risks of specific assets and transactions. (Both were prepared by the Amsterdam affiliate of PricewaterhouseCoopers.)

After years of negotiating, the biggest accounting firms have been generally supportive of the new rules in their recent comments on the rule.

Some companies have argued that the rule could prompt their audit firm to disclose sensitive information about them that could be exploited by competitors. “I find that argument bizarre,” says Linda de Beer, an accountant and corporate director in South Africa who helped develop the international standards. “All investors are asking auditors for is, ‘We want to see a little of the detail, through your eyes, of what you drove deeper on.’ That doesn’t involve giving away any competitive edge.”

Would accountants be sued more often if they spelled out the reasoning behind their analysis? Lynn Turner, a former chief accountant at the SEC, thinks the opposite: “The obligation to come clean on critical items in the report means that auditors will have more ability to push back on management.”

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 25, 2017

CSX Sparks an Epic Railroad Traffic Jam

By Paul Ziobro | Aug 23, 2017

TOPICS: Just-In-Time Inventory Management, Supply Chains

SUMMARY: The article describes operating changes at CSX Railroads that have led to supply chain problems for its customers. "It's a colossal mess for business that have spent years streamlining supply chains to run with just-in-time inventories," writes the author. More positive viewpoints in two quotes from CSX customers are left to the end of the article. The article covers varied stakeholder views about CSX and the changes being implemented by its new CEO, Hunter Harrison.

CLASSROOM APPLICATION: The article may be used in a managerial accounting class to discuss risks of just-in-time inventory management, supply chains and logistics, and assessing stakeholder views. A question about quotation of positive viewpoints only at the end of the article is intended to lead students to think critically about how the author has presented the issues.



1. (Advanced) What is just-in-time inventory (JIT) management? In your answer, identify the benefits of implementing such a system.


2. (Introductory) How does use of JIT require good logistics and supply chain management? In your answer, define these two terms, logistics and supply chain.


3. (Introductory) What is "dwell time"? How has CSX's performance on this metric changed since August 2016? According to the article, what is the driving force behind this trend?


4. (Advanced) Chemical Company Chemours Co. (a spinoff of DuPont Co.) says it slowed production to make sure to avoid stoppages from materials delivery issues with CSX. Why is it better to slow production than just to stop altogether and wait until needed raw materials are delivered? Describe your answer in terms of costs as best you can.


5. (Advanced) Positive viewpoints about CSX Railroad's service in the summer of 2017 are quoted from of two chief executives, one from coal producer Hallador Energy Co. and one from Agricultural Commoditiies, Inc. How does placement of these quotes impact the tone of the article?


"CSX Sparks an Epic Railroad Traffic Jam," by Paul Ziobr, The Wall Street Journal, August 23, 2017 ---

The freight-train ride from Chicago to Colesburg, Tenn., usually takes a few days. Earlier this month, though, the ride was 18 days, 13 hours and 57 minutes, logs show.

Congestion, delays and erratic service are hitting CSX Corp., one of only two railroad operators that handle nearly all the shipments that move by train east of the Mississippi River. The problems began in May and became much worse this summer, according to customers and weekly performance data reported by the Jacksonville, Fla., company.

It's a colossal mess for businesses that have spent years streamlining supply chains to run with just-in-time inventories.

Coal producers say their stockpiles are growing because CSX is taking longer than it should to pick up coal-filled railcars from mines in Ohio and West Virginia. Food makers have slowed production in hopes that ingredients such as oils and sweeteners will last until the next delivery. Some companies are trying to avoid the worst bottlenecks in CSX's system, including by switching to trucks and other railroads.

McDonald's Corp. has supplemented its regular train shipments of frozen french fries into the Nashville, Tenn., area with truck deliveries, according to a person familiar with the matter. Kellogg Co. has called in truck-hauled tankers of cooking oil to ensure uninterrupted production of Pringles at a Jackson, Tenn., factory, a person familiar with the matter said.

A spokeswoman for McDonald's said french fry eaters haven't been affected because "we have contingencies in place to ensure there is no disruption in our supply." Kellogg didn't respond to a request for comment.

Much of the blame is aimed at Hunter Harrison, the 72-year-old railroad-industry veteran who became CSX's president and chief executive in March as part of a shake-up led by an activist investor. He promised to run the company's 21,000-mile network more efficiently by idling excess equipment, closing some freight yards and running trains on a tighter schedule.

Mr. Harrison used a similar strategy to turn around Canada's two largest railroads, Canadian National Railway Co. and Canadian Pacific Railway Ltd. He conceded that the program is off to a rocky start at CSX but said any short-term problems will lead to improved service in the long run.

"I'm sensitive to the issues that we've had. I don't want to give the impression that I'm not," Mr. Harrison said in an interview. "Some of the characterizations of some of the issues have been inaccurate and have been far overstated."

He added: "Each one that has come to our attention, we have worked and continue to work very diligently" to address the problem.

Mr. Harrison said some of the recent snarls were beyond his control, such as a derailment in Pennsylvania that interrupted service in that region for more than a week in July. Some CSX employees also are resisting the efficiency plan, he said.

In June, CSX fired nine employees in Cincinnati who Mr. Harrison said falsified computer reports about train-car movements to avoid being criticized about delaying customer shipments. He said this month's derailment of a CSX freight train in South Carolina appears to be suspicious. Local news reports said a bulldozer was partially blocking the tracks.

Unions representing CSX workers disputed Mr. Harrison's comments. In a letter to Mr. Harrison earlier this month, they said the unions refuse "to accept responsibility for service disruptions that negatively affect the customers when we have no input on operational changes."

Late last month, the federal Surface Transportation Board ordered CSX to hold weekly meetings with the railroad regulator to discuss the problems. Last week, the STB told Mr. Harrison in a letter that it is concerned about "widespread degradation" of rail service.

"The network needs to be fluid," Ann Begeman, the agency's acting chairwoman, said in an interview. Several companies have told the STB that they were close to shutting down factories because of service-related problems at CSX, she added.

A broad group of freight shippers, the Rail Customer Coalition, told lawmakers in a letter that the service woes "put the health of our nation's economy in jeopardy." The group called on Congress to investigate the problems.

CSX's Mr. Harrison responded that the letter contains "unfounded and grossly exaggerated" statements.

Chemical company Chemours Co. expected Mr. Harrison to make big changes at CSX but was in the dark about when they would occur, said Eddie Johnston, federal government affairs manager at Chemours. The Wilmington, Del., company, spun off from DuPont Co. in 2015, makes Teflon coatings, pigments for automotive paints and cosmetics ingredients.

In May, CSX trains started missing expected stops at Chemours plants in the eastern U.S., according to Mr. Johnston. Sometimes, CSX trains delivered raw materials to Chemours but left behind outbound freight cars meant for customers farther up the supply chain.

Other times, he said, CSX picked up finished goods from Chemours but didn't deliver raw materials or empty freight cars needed for the next pickup.

Mr. Johnston said one Chemours plant came within hours of shutting down in late July before a CSX train arrived with a critical ingredient. Chemours has slowed production at one plant to make sure it can keep running.

"We're sort of hanging by a thread," he said. More than once, Chemours complained to a CSX employee about the problems and then found out the next day that the employee had left. CSX has eliminated 2,300 jobs this year. It had about 27,000 employees in December.

Chemours is using trucks to keep its plants running and deliver finished products to customers. A conversation last month between Mr. Harrison and Mark Vergnano, president and CEO of Chemours, has led to better communications, but service levels haven't improved. "There are people that think normalcy still could be months away," said Mr. Johnston.

Mr. Harrison said CSX customers were "well-informed" of what the changes would look like, given his record at other railroads. "I don't think anyone got caught by surprise," he said.

One of the most jarring changes by Mr. Harrison was the elimination of hump yards, massive facilities that sort long trains by rolling them down an incline and directing them toward tracks where new trains are built. Those trains then roll out to new destinations.

CSX's Mr. Harrison wants more freight trains sorted when the railroad picks them up and to use locomotive power to break apart and reassemble trains. Soon after taking over at CSX, he closed eight of 12 hump yards, adding more strain to the four remaining locations.

One of the closed hump yards, the Avon Yard in Indianapolis, has since been reopened. "We might have made a mistake" there, said Mr. Harrison.

CSX's closed Radnor hump yard in Nashville, Tenn., was part of a 500-acre facility. The entire terminal has struggled to adjust.

A measurement of freight-yard delays called dwell time averaged 53.5 hours in Nashville in the latest week for which CSX has released figures, up 63% from a year earlier. Dwell time has more than doubled since April.

Mr. Harrison said the Nashville terminal "didn't have the best culture," so he brought in some new managers to try to unclog it. He said the worst is behind CSX in Nashville, and dwell times have begun to rebound.

After this article was published online Tuesday, CSX said it has revised how it calculates three service measurements "to more accurately reflect the company's operational performance." Using the new methodology, average dwell time throughout CSX's network was 12.5 hours in the week ended Aug. 18, an improvement of 2.3% from a week earlier.

Some shippers complain that freight is taking roundabout routes that add days to the travel time. The railroad industry calls it ping-ponging.

"All of a sudden, we're seeing a flood of these types of things," said Dennis Wilmot, chief executive of Iron Horse Logistics Group, of Aurora, Ohio, which manages railcars for customers. CSX took an Alabama-bound metals shipment to New Orleans, where it was handed off to a Union Pacific Corp. train and then headed west before turning around and eventually reaching Alabama, according to Mr. Wilmot.

CSX said it has been "sending some cars to less-congested, out-of-route terminals for sorting" to keep "customer deliveries moving as efficiently as possible through some congested terminals."

Poultry farmers are "incurring hundreds of thousands of dollars in additional business costs to make emergency purchases of ingredients transported by truck to keep poultry alive," according to a letter to regulators last week from the National Grain and Feed Association and other agricultural trade groups. The groups said some CSX feed deliveries were delayed nearly three weeks.

Each day that a railcar is delayed costs the owner as much as $100, estimates Herman Haksteen, president of the Private Railcar Food and Beverage Association, which represents large food companies like PepsiCo Inc. and Kraft Heinz Co. For now, companies are absorbing the higher costs.

"They're doing everything they can so the consumer doesn't see it," said Mr. Haksteen. "The customer might see it next year."

Brent Bilsland, chief executive of coal producer Hallador Energy Co., of Denver, said service improved in July and August after "subpar" performance in the second quarter. "The performance of the CSX has been much more precise and really, really quite good," he told analysts Aug. 9.

Continued in article

Teaching Case From The Wall Street Journal's Weekly Accounting Review on August 25, 2017

Wisconsin Assembly Approves Tax Incentives for Foxconn

By Shayndi Raice | Aug 18, 2017

TOPICS: Governmental Accounting, State and Local Taxation, Tax Laws

SUMMARY: "The Wisconsin state assembly voted to approve a $3 billion tax-incentive package for the Taiwanese firm to build a display-panel plant that Gov. Scott Walker says will bring thousands of jobs to the state." The related article gives a broader overview of the issues in Asian companies' investment in U.S. and state governments' role in the process.

CLASSROOM APPLICATION: The article may be used in a governmental accounting, tax, or managerial accounting class. Specifically, the last question asks students to consider what skills are necessary make an assessment of the costs and benefits of enacting tax incentive legislation.



1. (Introductory) Who is Foxconn and what does the company do?


2. (Advanced) Why would a U.S. state legislature vote to allow a $3 billion tax reduction for a specific company? Is this common? Cite any source you use to answer this question.


3. (Introductory) According to the article, what steps remain for Wisconsin to enact this tax incentive legislation?


4. (Advanced) "A state fiscal analysis found that taxpayers wouldn't recoup their investment in the 15-year tax-credit deal until the 2042-2043 fiscal year." What expertise do you think is required to conduct this analysis? How much judgment and uncertainty would be involved in such an assessment?

"Wisconsin Assembly Approves Tax Incentives for Foxconn." by Shayndi Raice, The Wall Street Journal, August 18, 2017 ---

State Senate would then take up measure giving incentives to build display-panel plant

Taiwan’s Foxconn Technology Group got one step closer Thursday to setting up shop in Wisconsin.

The Wisconsin state assembly voted to approve a $3 billion tax-incentive package for the Taiwanese firm to build a display-panel plant that Gov. Scott Walker says will bring thousands of jobs to the state.

The vote, which gained bipartisan support, allows the bill to proceed to the Wisconsin state senate.

Mr. Walker said the vote was “the next big step in bringing a high-tech ecosystem to Wisconsin.”

Foxconn, best known for assembling Apple Inc. iPhones in China, is planning to build a $10 billion, 20 million square-foot campus that will primarily produce high-resolution liquid-crystal displays used in smartphones and car dashboards in addition to TVs. The deal was announced last month at a White House ceremony as part of President Donald Trump’s efforts to revive the U.S. manufacturing industry.

Mr. Walker has touted the benefits of the plant, including claims that it would hire 3,000 people initially and up to 13,000 workers eventually. Tens of thousands of other jobs would be created indirectly, according to reports from consulting firms hired by the state and Foxconn.

Mr. Walker has also argued the deal would be transformational for the state’s economy, attracting an influx of investment and talent.

But a state fiscal analysis found that taxpayers wouldn’t recoup their investment in the 15-year tax-credit deal until the 2042-2043 fiscal year. The hefty tax bill has led some lawmakers to question whether the deal as it is currently structured makes sense. Others have also raised concerns about an easing of some environmental requirements for Foxconn.

Speaking on the assembly floor earlier in the day, Rep. Gary Hebl, a Democrat who represents Sun Prairie, said “I don’t want to gamble with the taxpayers money and if I’m going to break even in 25 years, that’s a horrible gamble. I’m better off putting my money in a mattress.” He voted against the bill.

The state Senate hasn’t given a firm date for when it will take up the bill, but the majority leader expects the bill to pass before a Sept. 30 deadline.

Foxconn, formally known as Hon Hai Precision Industry Co. , is the world’s foremost contract manufacturer and one of China’s largest exporters, making products for a range of companies, including Apple.

Continued in article


Humor for August 2017

If your like me you have trouble remembering the names of many people you've been casually introduced to at parties, receptions, bars, etc.
What I have noticed is that some people have names that are just easier to remember than most other names.
In my next life I want the name Christopher Paul Bacon and will choose the nickname Chris.
Jewish people and Moslems will especially remember my name.

"So long, Mom, I'm Off to Drop the Bomb" - Tom Lehrer for Man from Uncle ---
Not quite so funny in 2017

Video:  You're Kidding Me Dog ---

The Funniest Messages Left on Windshields of Terrible Parkers (some aren't so funny) ---

Forwarded by Scott Bonacker

Why did the auditor get run over crossing the road?
Auditors never actually do the risk assessment well until after the
accident happens.

There was an accountant named Phil, 
his clients he'd overbill, 
He charged them all double, 
and if they caused trouble, 
he'd add $100 more for a thrill.

Q: Why did the auditor cross the road?
A: Because it was in prior year workpapers.

What do cannibal auditors do after their Office Christmas dinner?
Toast Their Clients.,

Forwarded by Tina

Subject: Fwd: The "Learning" curve explained.

You start with a cage containing four monkeys, and inside the cage you
hang a banana on a string,

and then you place a set of stairs under the banana.

    Before long a monkey will go to the stairs and climb toward the banana.

      You then spray ALL the monkeys with cold water.

   After a while, another monkey makes an attempt. As soon as he
touches the stairs, you spray ALL the monkeys with cold water again.

     Pretty soon, when another monkey tries to climb the stairs, the
other monkeys will try to prevent it.

   Now, put away the cold water. Remove one monkey from the cage and
replace it with a new monkey.

The new monkey sees the banana and attempts to climb the stairs. To
his shock, ALL of the other monkeys beat the crap out of him. After
another attempt and attack, he knows that if he tries to climb the
stairs he will be assaulted.

    Next, remove another of the original four monkeys, replacing it
with a new monkey. The newcomer goes to the stairs and is attacked.
The previous newcomer takes part in the punishment – with enthusiasm
-- because he's now part of the "team."

   Then, replace a third original monkey with a new monkey, followed
by the fourth. Every time the newest monkey

takes to the stairs, he is attacked.

     Now, the monkeys that are beating him up have no idea why they
were not permitted to climb the stairs. Neither do they know why they
are participating in the beating of the newest monkey. Having replaced
all of the original monkeys, none of the remaining monkeys will have
ever been sprayed with cold water. Nevertheless, not one of the
monkeys will try to climb the stairway for the



     Why, you ask? Because in their minds, that is the way it has always been!

This is how today's Congress and Senate operates, and this is
why, from time to time, ALL of the monkeys need to be REPLACED..... AT


Forwarded by Paula:  Oldies About Oldies



























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