caveIn 2017 my Website was migrated to the clouds and reduced in size.
Hence some links below are broken.
One thing to try if a “www” link is broken is to substitute “faculty” for “www”
For example a broken link http://www.trinity.edu/rjensen/Pictures.htm
can be changed to corrected link http://faculty.trinity.edu/rjensen/Pictures.htm
However in some cases files had to be removed to reduce the size of my Website
Contact me at rjensen@trinity.edu if you really need to file that is missing

Accountancy Theory
Bob Jensen at Trinity University 

My Accounting Theory Document Was Split into Two Files on December 15, 2010

Please do what you can to lend financial support to Wikipedia --- Keep Knowledge Open Sourced, Interactive, and Free ---
http://wikimediafoundation.org/wiki/WMFJA010/en/US?utm_medium=sitenotice&utm_campaign=20101125JA006&utm_source=20101124_JA011A_US&country_code=US
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Over 400 Examples of Critical Thinking and Illustrations of How to Mislead With Statistics ---
http://faculty.trinity.edu/rjensen/MisleadWithStatistics.htm

MAAW's Accounting Index Updated (great accounting literature guide) ---
https://maaw.info/AccountingForArticlesByTopic.htm

"Advice on Life and Creative Integrity from Calvin and Hobbes Creator Bill Watterson," by Maria Popova, Brain Pickings, May 20, 2013
http://www.brainpickings.org/index.php/2013/05/20/bill-watterson-1990-kenyon-speech/

U.S. GAAP Financial Reporting Taxonomy Now Available (2014)---
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176163688345

Recommendations for Change on the American Accounting Association's
Notable Contributions to Accounting Literature Award
http://faculty.trinity.edu/rjensen/TheoryNotable.htm

The Importance of Generally Accepted Accounting Principles (GAAP) --- http://www.accountingfoundation.org/gaap

Introductory Dilbert Cartoon --- http://dilbert.com/strip/2015-09-11

. . .

Bob Jensen's Threads on Return on Business Valuation, Business Combinations, Investment (ROI), and Pro Forma Financial Reporting ---
http://faculty.trinity.edu/rjensen/roi.htm

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

FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=11761563164

The 10 elements of financial statements, according to FASB ---
https://www.journalofaccountancy.com/news/2020/jul/elements-of-financial-statements-fasb.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=17Jul2020

CNBC Explains Accounting --- http://www.cnbc.com/id/100000341

Bob Jensen's threads on accounting theory

• Part 1 --- http://faculty.trinity.edu/rjensen/Theory01.htm
   
• Part 2 --- http://faculty.trinity.edu/rjensen/Theory02.htm

Hi Steve,

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

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

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

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

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

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

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

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

Our latest thread leads me to such questions as:

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

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

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

Respectfully,
Bob Jensen

 

Capsule Commentary Book Review, The Accounting Review, January 2012, pp. 356-357 ---
http://aaajournals.org/doi/full/10.2308/accr-10189

CAPSULE COMMENTARY

Stephen A. Zeff, Editor

HARRY I. WOLK (editor), Accounting Theory (London, U.K.: Sage Publications Ltd., 2009, ISBN 978-1-84787-609-6, pp. xlv, 1,518 in four volumes).

Harry I. Wolk, the compiler of this collection of 74 previously published articles and other essays, died in October 2009 at age 79. In 1984, he was assisted by two colleagues in writing a thoughtful, wide-ranging textbook on accounting theory, which is now in its seventh edition. He has, thus, been a close student of the accounting theory literature for many years.

Wolk's valedictory contribution is this anthology, which is divided into ten sections: philosophical background, accounting concepts, conceptual frameworks, accounting for changing prices, standard setting, applications of accounting theory to five measurement areas, agency theory, principles versus rules, international accounting standards, and accounting issues in East and Southeast Asia. Because he provides only a two-and-a-half-page general introduction, we cannot know the criteria he used to make these selections. The earliest of the articles dates from 1958, and one infers that this collection represents the body of work that, over his long career, mostly at Drake University, he found to be influential writings.

Among the major contributors to theory literature represented in the collection are Devine, Mattessich, Davidson, Solomons, Sterling, Thomas, Bell, Shillinglaw, Bedford, Ijiri, and Stamp. Conspicuous omissions are Chambers, Baxter, Staubus, Moonitz, Sorter, and Vatter. Although many of the earlier pieces have stood the test of time, a number of the more recent selections would, inevitably, be open to second-guessing. To be sure, most of these articles can be accessed electronically, yet it is instructive to know the works that Harry Wolk believed were worth remembering, and it is handy to have them all in one collection.

The price tag of £600/$1,050 for the four-volume set will, unfortunately, deter all but the most enthusiastic purchasers.

Jensen Comment
And to think my constantly-updated accounting theory book (in two volumes) has a price tag of $0 (Sigh!)---
http://faculty.trinity.edu/rjensen/Theory01.htm

But I do thank Harry for providing me with an accounting illustration that I turned into the most popular Excel illustration that I ever authored (i.e., popular in the eyes of my students over the years) ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

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

• With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier
• With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams
• With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR
• With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

Steven J. Kachelmeier's July 2011 Editorial as Departing Senior Editor of The Accounting Review (TAR)

"Introduction to a Forum on Internal Control Reporting and Corporate Debt," by Steven J. Kachelmeier, The Accounting Review, Vol. 86, No. 4, July 2011 pp. 1129–113 (not free online) ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000004001129000001&idtype=cvips&prog=normal

One of the more surprising things I have learned from my experience as Senior Editor of The Accounting Review is just how often a ‘‘hot topic’’ generates multiple submissions that pursue similar research objectives. Though one might view such situations as enhancing the credibility of research findings through the independent efforts of multiple research teams, they often result in unfavorable reactions from reviewers who question the incremental contribution of a subsequent study that does not materially advance the findings already documented in a previous study, even if the two (or more) efforts were initiated independently and pursued more or less concurrently. I understand the reason for a high incremental contribution standard in a top-tier journal that faces capacity constraints and deals with about 500 new submissions per year. Nevertheless, I must admit that I sometimes feel bad writing a rejection letter on a good study, just because some other research team beat the authors to press with similar conclusions documented a few months earlier. Research, it seems, operates in a highly competitive arena.

Fortunately, from time to time, we receive related but still distinct submissions that, in combination, capture synergies (and reviewer support) by viewing a broad research question from different perspectives. The two articles comprising this issue’s forum are a classic case in point. Though both studies reach the same basic conclusion that material weaknesses in internal controls over financial reporting result in negative repercussions for the cost of debt financing, Dhaliwal et al. (2011) do so by examining the public market for corporate debt instruments, whereas Kim et al. (2011) examine private debt contracting with financial institutions. These different perspectives enable the two research teams to pursue different secondary analyses, such as Dhaliwal et al.’s examination of the sensitivity of the reported findings to bank monitoring and Kim et al.’s examination of debt covenants.

Both studies also overlap with yet a third recent effort in this arena, recently published in the Journal of Accounting Research by Costello and Wittenberg-Moerman (2011). Although the overall ‘‘punch line’’ is similar in all three studies (material internal control weaknesses result in a higher cost of debt), I am intrigued by a ‘‘mini-debate’’ of sorts on the different conclusions reache  by Costello and Wittenberg-Moerman (2011) and by Kim et al. (2011) for the effect of material weaknesses on debt covenants. Specifically, Costello and Wittenberg-Moerman (2011, 116) find that ‘‘serious, fraud-related weaknesses result in a significant decrease in financial covenants,’’ presumably because banks substitute more direct protections in such instances, whereas Kim et al. Published Online: July 2011 (2011) assert from their cross-sectional design that company-level material weaknesses are associated with more financial covenants in debt contracting.

In reconciling these conflicting findings, Costello and Wittenberg-Moerman (2011, 116) attribute the Kim et al. (2011) result to underlying ‘‘differences in more fundamental firm characteristics, such as riskiness and information opacity,’’ given that, cross-sectionally, material weakness firms have a greater number of financial covenants than do non-material weakness firms even before the disclosure of the material weakness in internal controls. Kim et al. (2011) counter that they control for risk and opacity characteristics, and that advance leakage of internal control problems could still result in a debt covenant effect due to internal controls rather than underlying firm characteristics. Kim et al. (2011) also report from a supplemental change analysis that, comparing the pre- and post-SOX 404 periods, the number of debt covenants falls for companies both with and without material weaknesses in internal controls, raising the question of whether the

Costello and Wittenberg-Moerman (2011) finding reflects a reaction to the disclosures or simply a more general trend of a declining number of debt covenants affecting all firms around that time period. I urge readers to take a look at both articles, along with Dhaliwal et al. (2011), and draw their own conclusions. Indeed, I believe that these sorts . . .

Continued in article

Jensen Comment
Without admitting to it, I think Steve has been embarrassed, along with many other accountics researchers, about the virtual absence of validation and replication of accounting science (accountics) research studies over the past five decades. For the most part, accountics articles are either ignored or accepted as truth without validation. Behavioral and capital markets empirical studies are rarely (ever?) replicated. Analytical studies make tremendous leaps of faith in terms of underlying assumptions that are rarely challenged (such as the assumption of equations depicting utility functions of corporations).

Accounting science thereby has become a pseudo science where highly paid accountics professor referees are protecting each others' butts ---
"574 Shields Against Validity Challenges in Plato's Cave" --- http://faculty.trinity.edu/rjensen/TheoryTAR.htm
The above link contains Steve's rejoinders on the replication debate.

In the above editorial he's telling us that there is a middle ground for validation of accountics studies. When researchers independently come to similar conclusions using different data sets and different quantitative analyses they are in a sense validating each others' work without truly replicating each others' work.

I agree with Steve on this, but I would also argue that these types of "validation" is too little to late relative to genuine science where replication and true validation are essential to the very definition of science. The types independent but related research that Steve is discussing above is too infrequent and haphazard to fall into the realm of validation and replication.

When's the last time you witnesses a TAR author criticizing the research of another TAR author (TAR does not publish critical commentaries)?
Are TAR articles really all that above criticism?
Even though I admire Steve's scholarship, dedication, and sacrifice, I hope future TAR editors will work harder at turning accountics research into real science!

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

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

Jean-Paul Sartre Breaks Down the Bad Faith of Intellectuals --- Click Here
http://www.openculture.com/2011/12/jean-paul_sartre_on_the_bad_faith_of_modern_intellectuals.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

"Noam Chomsky on Where Artificial Intelligence Went Wrong," The Atlantic, November 1, 2012 ---
http://www.theatlantic.com/technology/archive/2012/11/noam-chomsky-on-where-artificial-intelligence-went-wrong/261637/?single_page=true

. . .

People tend to study what you know how to study, I mean that makes sense. You have certain experimental techniques, you have certain level of understanding, you try to push the envelope -- which is okay, I mean, it's not a criticism, but people do what you can do. On the other hand, it's worth thinking whether you're aiming in the right direction. And it could be that if you take roughly the Marr-Gallistel point of view, which personally I'm sympathetic to, you would work differently, look for different kind of experiments.

Continued in article

"Is Modern Portfolio Theory Dead? Come On," by Paul Pfleiderer, TechCrunch, August 11, 2012 ---
http://techcrunch.com/2012/08/11/is-modern-portfolio-theory-dead-come-on/

A few weeks ago, TechCrunch published a piece arguing software is better at investing than 99% of human investment advisors. That post, titled Thankfully, Software Is Eating The Personal Investing World, pointed out the advantages of engineering-driven software solutions versus emotionally driven human judgment. Perhaps not surprisingly, some commenters (including some financial advisors) seized the moment to call into question one of the foundations of software-based investing, Modern Portfolio Theory.

Given the doubts raised by a small but vocal chorus, it’s worth spending some time to ask if we need a new investing paradigm and if so, what it should be. Answering that question helps show why MPT still is the best investment methodology out there; it enables the automated, low-cost investment management offered by a new wave of Internet startups including Wealthfront (which I advise), Personal Capital, Future Advisor and SigFig.

The basic questions being raised about MPT run something like this:

• Hasn’t recent experience – i.e., the financial crisis — shown that diversification doesn’t work?
• Shouldn’t we primarily worry about “Black Swan” events and unforeseen risk?
• Don’t these unknown unknowns mean we must develop a new approach to investing?

Let’s begin by briefly laying out the key insights of MPT.

MPT is based in part on the assumption that most investors don’t like risk and need to be compensated for bearing it. That compensation comes in the form of higher average returns. Historical data strongly supports this assumption. For example, from 1926 to 2011 the average (geometric) return on U.S. Treasury Bills was 3.6%. Over the same period the average return on large company stocks was 9.8%; that on small company stocks was 11.2% ( See 2012 Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook, Morningstar, Inc., page 23. ).  Stocks, of course, are much riskier than Treasuries, so we expect them to have higher average returns — and they do.

One of MPT’s key insights is that while investors need to be compensated to bear risk, not all risks are rewarded. The market does not reward risks that can be “diversified away” by holding a bundle of investments, instead of a single investment. By recognizing that not all risks are rewarded, MPT helped establish the idea that a diversified portfolio can help investors earn a higher return for the same amount of risk.

To understand which risks can be diversified away, and why, consider Zynga. Zynga hit $14.69 in March and has since dropped to less than $2 per share. Based on what’s happened over the past few months, the major risks associated with Zynga’s stock are things such as delays in new game development, the fickle taste of consumers and changes on Facebook that affect users’ engagement with Zynga’s games.

For company insiders, who have much of their wealth tied up in the company, Zynga is clearly a risky investment. Although those insiders are exposed to huge risks, they aren’t the investors who determine the “risk premium” for Zynga. (A stock’s risk premium is the extra return the stock is expected to earn that compensates for the stock’s risk.)

Rather, institutional funds and other large investors establish the risk premium by deciding what price they’re willing to pay to hold Zynga in their diversified portfolios. If a Zynga game is delayed, and Zynga’s stock price drops, that decline has a miniscule effect on a diversified shareholder’s portfolio returns. Because of this, the market does not price in that particular risk. Even the overall turbulence in many Internet stocks won’t be problematic for investors who are well diversified in their portfolios.

Modern Portfolio Theory focuses on constructing portfolios that avoid exposing the investor to those kinds of unrewarded risks. The main lesson is that investors should choose portfolios that lie on the Efficient Frontier, the mathematically defined curve that describes the relationship between risk and reward. To be on the frontier, a portfolio must provide the highest expected return (largest reward) among all portfolios having the same level of risk. The Internet startups construct well-diversified portfolios designed to be efficient with the right combination of risk and return for their clients.

Now let’s ask if anything in the past five years casts doubt on these basic tenets of Modern Portfolio Theory. The answer is clearly, “No.” First and foremost, nothing has changed the fact that there are many unrewarded risks, and that investors should avoid these risks. The major risks of Zynga stock remain diversifiable risks, and unless you’re willing to trade illegally on inside information about, say, upcoming changes to Facebook’s gaming policies, you should avoid holding a concentrated position in Zynga.

The efficient frontier is still the desirable place to be, and it makes no sense to follow a policy that puts you in a position well below that frontier.

Most of the people who say that “diversification failed” in the financial crisis have in mind not the diversification gains associated with avoiding concentrated investments in companies like Zynga, but the diversification gains that come from investing across many different asset classes, such as domestic stocks, foreign stocks, real estate and bonds. Those critics aren’t challenging the idea of diversification in general – probably because such an effort would be nonsensical.

True, diversification across asset classes didn’t shelter investors from 2008’s turmoil. In that year, the S&P 500 index fell 37%, the MSCI EAFE index (the index of developed markets outside North America) fell by 43%, the MSCI Emerging Market index fell by 53%, the Dow Jones Commodities Index fell by 35%, and the Lehman High Yield Bond Index fell by 26%. The historical record shows that in times of economic distress, asset class returns tend to move in the same direction and be more highly correlated. These increased correlations are no doubt due to the increased importance of macro factors driving corporate cash flows. The increased correlations limit, but do not eliminate, diversification’s value. It would be foolish to conclude from this that you should be undiversified. If a seat belt doesn’t provide perfect protection, it still makes sense to wear one. Statistics show it’s better to wear a seatbelt than to not wear one.  Similarly, statistics show diversification reduces risk, and that you are better off diversifying than not.

Timing the market

The obvious question to ask anyone who insists diversification across asset classes is not effective is: What is the alternative? Some say “Time the market.” Make sure you hold an asset class when it is earning good returns, but sell as soon as things are about to go south. Even better, take short positions when the outlook is negative. With a trustworthy crystal ball, this is a winning strategy. The potential gains are huge. If you had perfect foresight and could time the S&P 500 on a daily basis, you could have turned $1,000 on Jan. 1, 2000, into $120,975,000 on Dec. 31, 2009, just by going in and out of the market. If you could also short the market when appropriate, the gains would have been even more spectacular!

Sometimes, it seems someone may have a fairly reliable crystal ball. Consider John Paulson, who in 2007 and 2008 seemed so prescient in profiting from the subprime market’s collapse. It appears, however, that Mr. Paulson’s crystal ball became less reliable after his stunning success in 2007. His Advantage Plus fund experienced more than a 50% loss in 2011. Separating luck from skill is often difficult.

Some people try to come up with a way to time the market based on historical data. In fact a large number of strategies will work well “in the back test.” The question is whether any system is reliable enough to use for future investing.

There are at least three reasons to be cautious about substituting a timing system for diversification.

• First, a timing system that does not work can impose significant transaction costs (including avoidable adverse tax consequences) on the investor for no gain.
• Second, an ill-founded timing strategy generally exposes the investor to risk that is unrewarded.  In other words, it puts the investor below the frontier, which is not a good place to be.
• Third, a timing system’s success may create the seeds of its own destruction. If too many investors blindly follow the strategy, prices will be driven to erase any putative gains that might have been there, turning the strategy into a losing proposition. Also, a timing strategy designed to “beat the market” must involve trading into “good” positions and away from “bad” ones. That means there must be a sucker (or several suckers) available to take on the other (losing) sides. (No doubt in most cases each party to the trade thinks the sucker is on the other side.)

Black Swans

What about those Black Swans? Doesn’t MPT ignore the possibility that we can be surprised by the unexpected? Isn’t it impossible to measure risk when there are unknown unknowns?

Most people recognize that financial markets are not like simple games of chance where risk can be quantified precisely. As we’ve seen (e.g., the “Black Monday” stock market crash of 1987 and the “flash crash” of 2010), the markets can produce extreme events that hardly anyone contemplated as a possibility. As opposed to poker, where we always draw from the same 52-card deck, in financial markets, asset returns are drawn from changing distributions as the world economy and financial relationships change.

Some Black Swan events turned out to have limited effects on investors over the long term. Although the market dropped precipitously in October 1987, it was close to fully recovered in June 1988. The flash crash was confined to a single day.
This is not to say that all “surprise” events are transitory. The Great Depression followed the stock market crash of 1929, and the effects of the financial crisis in 2007 and 2008 linger on five years later.

The question is, how should we respond to uncertainties and Black Swans? One sensible way is to be more diligent in quantifying the risks we can see. For example, since extreme events don’t happen often, we’re likely to be misled if we base our risk assessment on what has occurred over short time periods. We shouldn’t conclude that just because housing prices haven’t gone down over 20 years that a housing decline is not a meaningful risk. In the case of natural disasters like earthquakes, tsunamis, asteroid strikes and solar storms, the long run could be very long indeed. While we can’t capture all risks by looking far back in time, taking into account long-term data means we’re less likely to be surprised.

Some people suggest you should respond to the risk of unknown unknowns by investing very conservatively. This means allocating most of the portfolio to “safe assets” and significantly reducing exposure to risky assets, which are likely to be affected by Black Swan surprises. This response is consistent with MPT. If you worry about Black Swans, you are, for all intents and purposes, a very risk-averse investor. The MPT portfolio position for very risk-averse investors is a position on the efficient frontier that has little risk.

The cost of investing in a low-risk position is a lower expected return (recall that historically the average return on stocks was about three times that on U.S. Treasuries), but maybe you think that’s a price worth paying. Can everyone take extremely conservative positions to avoid Black Swan risk? This clearly won’t work, because some investors must hold risky assets. If all investors try to avoid Black Swan events, the prices of those risky assets will fall to a point where the forecasted returns become too large to ignore.

Continued in article

Jensen Comment
All quant theories and strategies in finance are based upon some foundational assumptions that in rare instances turn into the Achilles' heel of the entire superstructure. The classic example is the wonderful theory and arbitrage strategy of Long Term Capital Management (LTCM) formed by the best quants in finance (two with Nobel Prizes in economics). After remarkable successes one nickel at a time in a secret global arbitrage strategy based heavily on the Black-Scholes Model, LTCM placed a trillion dollar bet that failed dramatically and became the only hedge fund that nearly imploded all of Wall Street. At a heavy cost, Wall Street investment bankers pooled billions of dollars to quietly shut down LTCM ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm#LTCM

So what was the Achilles heal of the arbitrage strategy of LTCM? It was an assumption that a huge portion of the global financial market would not collapse all at once. Low and behold, the Asian financial markets collapsed all at once and left LTCM naked and dangling from a speculative cliff.

There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video called "Trillion Dollar Bet" explaining why LTCM collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 
This video is in the media libraries on most college campuses.  I highly recommend showing this video to students.  It is extremely well done and exciting to watch.

One of the more interesting summaries is the Report of The President’s Working Group on Financial Markets, April 1999 --- http://www.ustreas.gov/press/releases/reports/hedgfund.pdf 

The principal policy issue arising out of the events surrounding the near collapse of LTCM is how to constrain excessive leverage. By increasing the chance that problems at one financial institution could be transmitted to other institutions, excessive leverage can increase the likelihood of a general breakdown in the functioning of financial markets. This issue is not limited to hedge funds; other financial institutions are often larger and more highly leveraged than most hedge funds.

What went wrong at Long Term Capital Management? --- http://www.killer-essays.com/Economics/euz220.shtml 

The video and above reports, however, do not delve into the tax shelter pushed by Myron Scholes and his other LTCM partners. A nice summary of the tax shelter case with links to other documents can be found at http://www.cambridgefinance.com/CFP-LTCM.pdf 

The above August 27, 2004 ruling by Judge Janet Bond Arterton rounds out the "Trillion Dollar Bet."

The classic and enormous scandal was Long Term Capital led by Nobel Prize winning Merton and Scholes (actually the blame is shared  with their devoted doctoral students).  There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video ("Trillion Dollar Bet") explaining why LTC collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 

Another illustration of the Achilles' heel of a popular mathematical theory and strategy is the 2008 collapse mortgage-backed CDO financial risk bonds based upon David Li's Gaussian copula function of risk diversification in portfolios. The Achilles' heel was the assumption that the real estate bubble would not burst to a point where millions of subprime mortgages would all go into default at roughly the same time.

"In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---
http://www.economist.com/specialreports/displaystory.cfm?story_id=12957753

ROBERT RUBIN was Bill Clinton’s treasury secretary. He has worked at the top of Goldman Sachs and Citigroup. But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.

A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives. The Black-Scholes options-pricing model was more than a piece of geeky mathematics. It was a manifesto, part of a revolution that put an end to the anti-intellectualism of American finance and transformed financial markets from bull rings into today’s quantitative powerhouses. Yet, in a roundabout way, Black’s approach also led to some of the late boom’s most disastrous lapses.

Derivatives markets are not new, nor are they an exclusively Western phenomenon. Mr Merton has described how Osaka’s Dojima rice market offered forward contracts in the 17th century and organised futures trading by the 18th century. However, the growth of derivatives in the 36 years since Black’s formula was published has taken them from the periphery of financial services to the core.

In “The Partnership”, a history of Goldman Sachs, Charles Ellis records how the derivatives markets took off. The International Monetary Market opened in 1972; Congress allowed trade in commodity options in 1976; S&P 500 futures launched in 1982, and options on those futures a year later. The Chicago Board Options Exchange traded 911 contracts on April 26th 1973, its first day (and only one month before Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts reached almost 1 trillion.

Trading has exploded partly because derivatives are useful. After America came off the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates, just as they sought protection against swings in interest rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed, tackled inflation in the 1980s. Equity options enabled investors to lay off general risk so that they could concentrate on the specific types of corporate risk they wanted to trade.

The other force behind the explosion in derivatives trading was the combination of mathematics and computing. Before Black-Scholes, option prices had been little more than educated guesses. The new model showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it, explains Emanuel Derman, a physicist who later took Black’s job at Goldman. Confidence in pricing gave buyers and sellers the courage to pile into derivatives. The better that real prices correlate with the unknown option price, the more confidently you can take on any level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr Derman has written, “someone had finally worked out how to synthesise H2O.”

Poetry in Brownian motion Black-Scholes is just a model, not a complete description of the world. Every model makes simplifications, but some of the simplifications in Black-Scholes looked as if they would matter. For instance, the maths it uses to describe how share prices move comes from the equations in physics that describe the diffusion of heat. The idea is that share prices follow some gentle random walk away from an equilibrium, rather like motes of dust jiggling around in Brownian motion. In fact, share-price movements are more violent than that.

Over the years the “quants” have found ways to cope with this—better ways to deal with, as it were, quirks in the prices of fruit and fruit salad. For a start, you can concentrate on the short-run volatility of prices, which in some ways tends to behave more like the Brownian motion that Black imagined. The quants can introduce sudden jumps or tweak their models to match actual share-price movements more closely. Mr Derman, who is now a professor at New York’s Columbia University and a partner at Prisma Capital Partners, a fund of hedge funds, did some of his best-known work modelling what is called the “volatility smile”—an anomaly in options markets that first appeared after the 1987 stockmarket crash when investors would pay extra for protection against another imminent fall in share prices.

The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants’ tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.

The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest. And in this crash foreign-exchange, interest-rate and equity derivatives models have so far behaved roughly as they should.

A muddle of mortgages Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralised-debt obligations (CDOs). The principle is simple enough. Imagine a waterfall of mortgage payments: the AAA investors at the top catch their share, the next in line take their share from what remains, and so on. At the bottom are the “equity investors” who get nothing if people default on their mortgage payments and the money runs out.

Despite theory, CDOs were hopeless, at least with hindsight (doesn’t that phrase come easily?). The cash flowing from mortgage payments into a single CDO had to filter up through several layers. Assets were bundled into a pool, securitised, stuffed into a CDO, bits of that plugged into the next CDO and so on and on. Each source of a CDO had interminable pages of its own documentation and conditions, and a typical CDO might receive income from several hundred sources. It was a lawyer’s paradise.

This baffling complexity could hardly be more different from an equity or an interest rate. It made CDOs impossible to model in anything but the most rudimentary way—all the more so because each one contained a unique combination of underlying assets. Each CDO would be sold on the basis of its own scenario, using central assumptions about the future of interest rates and defaults to “demonstrate” the payouts over, say, the next 30 years. This central scenario would then be “stress-tested” to show that the CDO was robust—though oddly the tests did not include a 20% fall in house prices.

This was modelling at its most feeble. Derivatives model an unknown price from today’s known market prices. By contrast, modelling from history is dangerous. There was no guarantee that the future would be like the past, if only because the American housing market had never before been buoyed up by a frenzy of CDOs. In any case, there are not enough past housing data to form a rich statistical picture of the market—especially if you decide not to include the 1930s nationwide fall in house prices in your sample.

Neither could the models take account of falling mortgage-underwriting standards. Mr Rajan of the University of Chicago says academic research suggests mortgage originators, keen to automate their procedures, stopped giving potential borrowers lengthy interviews because they could not easily quantify the firmness of someone’s handshake or the fixity of their gaze. Such things turned out to be better predictors of default than credit scores or loan-to-value ratios, but the investors at the end of a long chain of securities could not monitor lending decisions.

The issuers of CDOs asked rating agencies to assess their quality. Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.

Issuers like to have an edge over the rating agencies. By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest. With help from companies like Codefarm, an outfit from Brighton in Britain that knew the agencies’ models for corporate CDOs, issuers could build securities with any risk profile they chose, including those made up from lower-quality ingredients that would nevertheless win AAA ratings. Codefarm has recently applied for administration.

There is a saying on Wall Street that the test of a product is whether clients will buy it. Would they have bought into CDOs had it not been for the dazzling performance of the quants in foreign-exchange, interest-rate and equity derivatives? There is every sign that the issuing banks believed their own sales patter. The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on. They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment. With CDOs in deep trouble, the lenders are now suffering.

Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark. According to Mr Derman, with Black-Scholes “you know what you are assuming when you use the model, and you know exactly what has been swept out of view, and hence you can think clearly about what you may have overlooked.” By contrast, with CDOs “you don’t quite know what you are ignoring, so you don’t know how to adjust for its inadequacies.”

Now that the world has moved far beyond any of the scenarios that the CDO issuers modelled, investors’ quantitative grasp of the payouts has fizzled into blank uncertainty. That makes it hard to put any value on them, driving away possible buyers. The trillion-dollar bet on mortgages has gone disastrously wrong. The hope is that the trillion-dollar bet on companies does not end up that way too.

Continued in article

Closing Jensen Comment
So is portfolio diversification theory dead? I hardly think so. But if any lesson is to be learned is that we should question those critical underlying assumptions in Plato's Cave before worldwide strategies are implemented that overlook the Achilles' heel of those critical underlying assumptions.

Purpose of Theory:  Prediction Versus Explanation

"Higgs ahoy! The elusive boson has probably been found. That is a triumph for the predictive power of physics," The Economist, February 17, 2012 ---
http://www.economist.com/node/21541825

IN PHYSICS, the trick is often to ask a question so obvious no one else would have thought of posing it. Apples have fallen to the ground since time immemorial. It took the genius of Sir Isaac Newton to ask why. Of course, it helps if you have the mental clout to work out the answer. Fortunately, Newton did.

It was in this spirit, almost 50 years ago, that a few insightful physicists asked themselves where mass comes from. Like the tendency of apples to fall to the ground, the existence of mass is so quotidian that the idea it needs a formal explanation would never occur to most people. But it did occur to Peter Higgs, then a young researcher at Edinburgh University, and to five other scientists whom the quirks of celebrity have not treated so kindly. They, too, had the necessary mental clout. They got out their pencils and papers and scribbled down equations whose upshot was a prediction.

The reason that fundamental particles have mass, the researchers calculated, is their interaction with a previously unknown field that permeates space. This field came to be named (with no disrespect to the losers in the celebrity race) the Higgs field. Technically, it is needed to explain a phenomenon called electroweak symmetry breaking, which divides two of the fundamental forces of nature, electromagnetism and the weak nuclear force. When that division happens, a bit of leftover mathematics manifests itself as a particle. This putative particle has become known as the Higgs boson, whose possible discovery was announced to the world on December 13th (see article).

Physicists demand a level of proof that would in any other human activity (including other scientific ones) be seen as ludicrously high—that a result has only one chance in 3.5m of being wrong. The new results—from experiments done at CERN, the world’s premier particle-physics laboratory, using its multi-billion-dollar Large Hadron Collider, the LHC—do not individually come close to that threshold. What has excited physicists, though, is that they have got essentially identical results from two experiments attached to the LHC, which work in completely different ways. This coincidence makes it much more likely that they have discovered the real deal.

If they have, it would be a wonderful thing, and not just for science. Though nations no longer tremble at the feet of particle physicists—the men, and a few women, who once delivered the destructive power of the atom bomb—physics still has the power to produce awe in another way, by revealing the basic truths that underpin reality.

Model behaviour

Finding the Higgs would mark the closing of one chapter in this story. The elusive boson rounds off what has become known as the Standard Model of physics—an explanation that relies on 17 fundamental particles and three physical forces (though it stubbornly refuses to accommodate a fourth force, gravity, which is separately explained by Albert Einstein’s general theory of relativity). Much more intriguingly, the Higgs also opens another chapter of physics.

The physicists’ plan is to use the Standard Model as the foundation of a larger and more beautiful edifice called Supersymmetry. This predicts a further set of particles, the heavier partners of those already found. How much heavier, though, depends on how heavy the Higgs itself is. The results just announced suggest it is light enough for some of the predicted supersymmetric particles to be made in the LHC too.

That is a great relief to those at CERN. If the Higgs had proved much heavier than this week’s announcement implies they might have found themselves with a lot of redundant kit on their hands. Now they can start looking for the bricks of Supersymmetry, to see if it, too, resembles the physicists’ predictions. In particular, in a crossover between particle physics and cosmology, they will be trying to find out if (as the maths suggest) the lightest of the supersymmetric partner particles are the stuff of the hitherto mysterious “dark matter” whose gravity holds galaxies together.

A critique of pure reason

One of the most extraordinary things about the universe is this predictability—that it is possible to write down equations which describe what is seen, and extrapolate from them to the unseen. Newton was able to go from the behaviour of bodies falling to Earth to the mechanism that holds planets in orbit. James Clerk Maxwell’s equations of electromagnetism, derived in the mid-19th century, predicted the existence of radio waves. The atom bomb began with Einstein’s famous equation, E=mc{+2}, which was a result derived by asking how objects would behave when travelling near the speed of light. The search for antimatter, that staple of science fiction, was the consequence of an equation about electrons which has two sets of solutions, one positive and one negative.

Eugene Wigner, one of the physicists responsible for showing, in the 1920s, the importance of symmetry to the universe (and who was thus a progenitor of Supersymmetry), described this as the “unreasonable effectiveness of mathematics”. Not all such predictions come true, of course. But the predictive power of mathematical physics—as opposed to the after-the-fact explanatory power of maths in other fields—is still extraordinary.

Continued in article

Bob Jensen's threads on theory ---
http://faculty.trinity.edu/rjensen/Theory01.htm

The Rivals Paul Samuelson and Milton Friedman arrive at the University of Chicago (in 1932) ---
http://www.economicprincipals.com/issues/2015.07.12/1758.html

Essays on Positive Economics --- https://en.wikipedia.org/wiki/Essays_in_Positive_Economics

The F-Twist and Purpose of Theory: Prediction Versus Explanation ---
http://faculty.trinity.edu/rjensen/Theory01.htm#Purpose

The History of Economics & Economic Theory Explained with Comics, Starting with Adam Smith ---
http://www.openculture.com/2013/12/the-history-of-economics-economic-theory-explained-with-comics.html
This is not a free download ---
http://www.amazon.com/gp/product/0810988399/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0810988399&linkCode=as2&tag=openculture-20

. . .

The book covers two (plus) centuries of economic history. It starts with the Physiocrats, Adam Smith and theoretical development of capitalism, and then steams ahead into the 19th century, covering the Industrial Revolution, the rise of big business and big finance. Next comes the action packed 20th century: the Great Depression, the New Deal, the threat from Communism during the Cold War, the tax reforms of the Reagan era, and eventually the crash of 2008 and Occupy Wall Street. Along the way, Goodwin and the illustrator Dan E. Burr demystify the economic theories of figures like Ricardo, Marx, Malthus, Keynes, Friedman and Hayek — all in a substantive but approachable way.

As with most treatments of modern economics, the book starts with Adam Smith. To get a feel for Goodwin’s approach, you can dive into the first chapter of Economix, which grapples with Smith’s theories about the free market, division of labor and the Invisible Hand. Economix can be purchased online here.

Related Content:

An Introduction to Great Economists — Adam Smith, the Physiocrats & More — Presented in a Free Online Course

60-Second Adventures in Economics: An Animated Intro to The Invisible Hand and Other Economic Ideas

Reading Marx’s Capital with David Harvey (Free Course)

Jensen Comment
I ordered a used copy of this book from Amazon. This book is a most interesting way to learn the history of economics succinctly.

One surprise is that the book has a relatively good index. Another surprise is that the book has some small sections on my special interest --- derivative financial instruments and hedging, although these play a miniscule role in the comic book.

A few interesting quotations are shown below:

Page 17and Page 19
Enter Jean-Baptiste Colbert (1619-1683), who became the finance minister of France in 1665. He thought money was wealth, end of story. ... French thinking on economics change. Maybe wealth wasn't a stockpile of silver like Colbert thought. Maybe wealth circulated, like blood circultes throght a body. Laws, regulations, tariffs, subsidies, and so on would get in the way of that natural circulation.

Page 61
Marx's logic applied to the Ricardo model and we don't live in that model. (Neither does Greece)

Page 22and Page 23
Bakers didn't work because some Bread Planner told them to, or because they were saints who wanted people to be well fed. They worked because it was good for them ... So in Smith's economy, competition kept everyone honest. Every baker --- saint or greedhead alike --- was led, "as if by an invisible hand," to sell bread at  fair price, high enough to pay for the baker costs and work, low enough that others didn't steal the customers.

Page 183
Way back in the 1920s, the Austrian economists Ludwig von Mises (1881-1973) and Freederick Hayek (1899-1992) saw economic planning become political dictatorship in country after country. They saw that when people lose their economic liberty, they lose their political liberty. ... Haye especially was a formidable thinker; instead of assuming the market worked, which economists had be doing since Ricardo, Hayek looked to how it worked --- how interaction of small units (people) creates a complex intelligence (the market), which responds to shortages, changes in taste, or new technologies far better than any human planner can ("invisible brain" might be a better term than "invisible hand.") . . .  People who try to replace this brain with their own systems will fail, and in the process of failing, they'll do a lot of dmagbe.

Page 184
Like Hayek, Friedman stressed that concentrated power is  threat to freedom. But he didn't seem to see that power cn concentrate in more than one form.

Page 185
(Market failure) refers to how --- even textbook-perfect markets--- can give bad results. for instance, with externalities which are essentially side effects of economic transactions. Bad externalities are everywhere, because the people mking decisions aren't the ones getting hurt. (in mathematical models these externalities are sometimes called non-convexities).

Page 240
By the 1980s, the IMF was full of neoliberals. Strure adjustment came down to adopting neoliberalism. Structural adjustment was hard to refuse; The World Bank, private lenders, business, the US Treasury, even aid donors would all steer cler of a country that the IMF was unsound (say what?) Still, people hated structural adjustment, and the IMF knew it. So part of the program was protected democracy in which the economic program was protected from democracy.

Continued in a nice summary of Economix

Added Comment
If you want to learn more about controversial Keynesian economics you might start with this book.

Monty Hall Paradox Video ---
http://www.youtube.com/watch?v=mhlc7peGlGg

Monty Hall Paradox Explanation ---
http://en.wikipedia.org/wiki/Monte_Hall_paradox

Jensen Comment
Of course the paradox in real life decision making, that takes it out of the real of the Monty Hall solutions and game theory in general, is that in the real world the probabilities of finding what's behind closed doors are unknown.

An alternate solution when probabilities are unknown for paths leading to closed doors is the Robert Frost solution to choose the door least opened.---
http://faculty.trinity.edu/rjensen/tidbits/2007/tidbits070905.htm

What the Monty Hall Paradox teaches us, at least symbolically, is that sometimes the most obvious common sense solutions to problems are not necessarily optimal. The geniuses in life discover better solutions that most of would consider absurd at the time --- such as that time is relative and not absolute ---
http://en.wikipedia.org/wiki/Theory_of_relativity

Richard Sansing forwarded the link
http://en.wikipedia.org/wiki/Principle_of_restricted_choice_(bridge)

Hi Steve and Jagdish,

Buried in the 2011Denver presentation by Greg Waymire is a lament about two of my hot buttons. Greg mentions the lack of replication (shall we call them reproductions?) in findings (harvests)  published in academic accounting research journals. Secondly, he mentions the lack of commentary and debate concerning these these findings. It seems that there's not a whole lot of interest (debate) about those findings among practitioners or in our academy ---
http://commons.aaahq.org/hives/629d926370/summary 


At long last we are making progress in finally getting the attention of the American Accounting Association leaders regarding how to broaden research methods and topics of study (beyond financial reporting)  in academic accounting research. The AAA Executive Committee now has annual retreats devoted to this most serious hole that accountics researchers have dug (Steve calls it a "dig" in the message from Jagdish) us into over the past four decades.


Change in academic accounting research will come very slowly. Paul Williams blames the slowness of change on the accountics scientist-conspired monopoly. I'm less inclined to blame the problem of conspiracy. I think the biggest problem is that accountics research in capital markets studies is so much easier since the data is provided like manna from heaven from CRSP, Compustat, AuditAnalytics, etc. No added scientific effort to collect data is required by accountics scientists. At CERN, however, physics scientists had to collect new data to cast doubt on prevailing speed of light theory.


Two years ago, at a meeting, I encountered one of my former students who eventually entered a leading accounting PhD program and was completing his dissertation. When I asked him why he was doing a traditional accountics-science dissertation he admitted that this was much easier than having to collect his own data.


Now more to the point concerning the messaging of Jagdish and Steve is my message earlier this week about the physics of economics in general.

Purpose of Theory:  Prediction Versus Explanation

"Milton Friedman's grand illusion," by Mark Buchanan, The Physics of Finance: A look at economics and finance through the lens of physics, September 16, 2011 ---
http://physicsoffinance.blogspot.com/2011/09/milton-friedmans-grand-illusion.html

Three years ago I wrote an Op-Ed for the New York Times on the need for radical change in the way economists model whole economies. Today's General Equilibrium models -- and their slightly more sophisticated cousins, Dynamic Stochastic General Equilibrium models -- make assumptions with no basis in reality. For example, there is no financial sector in these model economies. They generally assume that the diversity of behaviour of all an economy's many firms and consumers can be ignored and simply included as the average behaviour of a few "representative" agents.

I argued then that it was about time economists started using far more sophisticated modeling tools, including agent based models, in which the diversity of interactions among economic agents can be included along with a financial sector. The idea is to model the simpler behaviours of agents as well as you can and let the macro-scale complex behaviour of the economy emerge naturally out of them, without making any restrictive assumptions about what kinds of things can or cannot happen in the larger economy. This kind of work is going forward rapidly. For some detail, I recommend this talk earlier this month by Doyne Farmer.

After that Op-Ed I received quite a number of emails from economists defending the General Equilibrium approach. Several of them mentioned Milton Friedman in their defense, saying that he had shown long ago that one shouldn't worry about the realism of the assumptions in a theory, but only about the accuracy of its predictions. I eventually found the paper to which they were referring, a classic in economic history which has exerted a huge influence over economists over the past half century. I recently re-read the paper and wanted to make a few comments on Friedman's main argument. It rests entirely, I think, on a devious or slippery use of words which makes it possible to give a sensible sounding argument for what is actually a ridiculous proposition. 

The paper is entitled The Methodology of Positive Economics and was first published in 1953. It's an interesting paper and enjoyable to read. Essentially, it seems, Friedman's aim is to argue for scientific standards for economics akin to those used in physics. He begins by making a clear definition of what he means by "positive economics," which aims to be free from any particular ethical position or normative judgments. As he wrote, positive economics deals with...
 

"what is," not with "what ought to be." Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields.

Friedman then asks how one should judge the validity of a hypothesis, and asserts that...
 

...the only relevant test of the validity of a hypothesis is comparison of its predictions with experience. The hypothesis is rejected if its predictions are contradicted ("frequently" or more often than predictions from an alternative hypothesis); it is accepted if its predictions are not contradicted; great confidence is attached to it if it has survived many opportunities for contradiction. Factual evidence can never "prove" a hypothesis; it can only fail to disprove it, which is what we generally mean when we say, somewhat inexactly, that the hypothesis has been "confirmed" by experience."

So far so good. I think most scientists would see the above as conforming fairly closely to their own conception of how science should work (and of course this view is closely linked to views made famous by Karl Popper).

Next step: Friedman goes on to ask how one chooses between several hypotheses if they are all equally consistent with the available evidence. Here too his initial observations seem quite sensible:
 

...there is general agreement that relevant considerations are suggested by the criteria "simplicity" and "fruitfulness," themselves notions that defy completely objective specification. A theory is "simpler" the less the initial knowledge needed to make a prediction within a given field of phenomena; it is more "fruitful" the more precise the resulting prediction, the wider the area within which theory yields predictions, and the more additional lines for further research it suggests.

Again, right in tune I think with the practice and views of most scientists. I especially like the final point that part of the value of a hypothesis also comes from how well it stimulates creative thinking about further hypotheses and theories. This point is often overlooked.

Friedman's essay then shifts direction. He argues that the processes and practices involved in the initial formation of a hypothesis, and in the testing of that hypothesis, are not as distinct as people often think, Indeed, this is obviously so. Many scientists form a hypothesis and try to test it, then adjust the hypothesis slightly in view of the data. There's an ongoing evolution of the hypothesis in correspondence with the data and the kinds of experiments of observations which seem interesting.

To this point, Friedman's essay says nothing that wouldn't fit into any standard discussion of the generally accepted philosophy of science from the 1950s. But this is where it suddenly veers off wildly and attempts to support a view that is indeed quite radical. Friedman mentions the difficulty in the social sciences of getting
new evidence with which to test an hypothesis by looking at its implications. This difficulty, he suggests,
 

... makes it tempting to suppose that other, more readily available, evidence is equally relevant to the validity of the hypothesis-to suppose that hypotheses have not only "implications" but also "assumptions" and that the conformity of these "assumptions" to "reality" is a test of the validity of the hypothesis different from or additional to the test by implications. This widely held view is fundamentally wrong and productive of much mischief.

Having raised this idea that assumptions are not part of what should be tested, Friedman then goes on to attack very strongly the idea that a theory should strive at all to have realistic assumptions. Indeed, he suggests, a theory is actually superior insofar as its assumptions are unrealistic:
 

In so far as a theory can be said to have "assumptions" at all, and in so far as their "realism" can be judged independently of the validity of predictions, the relation between the significance of a theory and the "realism" of its "assumptions" is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have "assumptions" that are wildly inaccurate descriptive representations of reality, and, in general, the more significant theory, the more unrealistic the assumptions... The reason is simple. A hypothesis is important if it "explains" much by little,...   To be important, therefore, a hypothesis must be descriptively false in its assumptions...

This is the statement that the economists who wrote to me used to defend unrealistic assumptions in General Equilibrium theories. Their point was that having unrealistic assumptions isn't just not a problem, but is a positive strength for a theory. The more unrealistic the better, as Friedman argued (and apparently proved, in the eyes of some economists).

Now, what is wrong with Friedman's argument, if anything?  I think the key issue is his use of the provocative terms such as "unrealistic" and "false" and "inaccurate" in places where he actually means "simplified," "approximate" or "incomplete."  He switches without warning between these two different meanings in order to make the conclusion seem unavoidable, and profound, when in fact it is simply not true, or something we already believe and hardly profound at all.

To see the problem, take a simple example in physics. Newtonian dynamics describes the motions of the planets quite accurately (in many cases) even if the planets are treated as point masses having no extension, no rotation, no oceans and tides, mountains, trees and so on. The great triumph of Newtonian dynamics (including his law of gravitational attraction) is it's simplicity -- it asserts that out of all the many details that could conceivably influence planetary motion, two (mass and distance) matter most by far. The atmosphere of the planet doesn't matter much, nor does the amount of sunlight it reflects. theory of course goes further to describe how other details do matter if one considers planetary motion in more detail -- rotation does matter, for example, because it generates tides which dissipate energy, taking energy slowly away from orbital motion. 

But I don't think anyone would be tempted to say that Newtonian dynamics is a powerful theory because it is descriptively false in its assumptions. It's assumptions are actually descriptively simple -- that planets and The Sun have mass, and that a force acts between any two masses in proportion to the product of their masses and in inverse proportional to the distance between them. From these assumptions one can work out predictions for details of planetary motion, and those details turn out to be close to what we see. The assumptions are simple and plausible, and this is what makes theory so powerful when it turns out to make powerful and accurate predictions.

Indeed, if those same predictions came out of a theory with obviously false assumptions -- all planets are perfect cubes, etc. -- it would be less powerful by far because it would be less believable. It's ability to make predictions would be as big a mystery as the original phenomenon of planetary motion itself -- how can a theory that is so obviously not in tune with reality still make such accurate predictions?

So whenever Friedman says "descriptively false" I think you can instead write "descriptively simple", and clarify the meaning by adding a phrase of the sort "which identify the key factors which matter most." Do that replacement in Friedman's most provocative phrase from above and you have something far more sensible:
 

A hypothesis is important if it "explains" much by little,...   To be important, therefore, a hypothesis must be descriptively simple in its assumptions. It must identify the key factors which matter most...

That's not quite so bold, however, and it doesn't create a license for theorists to make any assumptions they want without being criticized if those assumptions stray very far from reality.

Continued in article

Jensen Comment
Especially note the comments at the end of this article.

My favorite is the following:

Herbert Simon (1963) countered Friedman by stating the purpose of scientific theories is not to make predictions, but to explain things - predictions are then tests of whether the explanations are correct.

Both Friedman and Simon's views are better directed to a field other than economics. The data at some point will always expose the frailest of assumptions; while the lack of repeatable results supports futility in the explanation of heterogeneous agents.

September 16, 2011 3:27 PM

That's perceptive. Scientists should just steer clear of economics. Economics is so complex it is better suited to astrologists.

Also see the following comment"

David K. Waltz said...

There are certainly financial theories with patently false assumptions. For example, the Capital Asset Pricing Model:

> all investors are rational
> all investors have perfect information
> all investors can borrow and lend at the risk-free rate
> all investors can buy and short the market in unlimited quantities

We know none of these assumptions are true. How many of us can borrow at the risk-free rate? Yet they are some of the assumptions that underlie Nobel Prize winning theories.

As suggested in the blog, these false assumptions are made because they are ancillary to the main point of theory, which speaks to asset pricing being a function of risk vs. return, and how these assets together comprise portfolios.

For these items the above does not matter.

However, if we were to go about modeling the stock or bond market for a month to assess our own portfolio, the false assumptions would matter greatly.

I wrote a brief blog post along similar track a couple months back if you are interested -
http://treasurycafe.blogspot.com/2011/07/capm-interlude-theory-of-theory.html 

September 16, 2011 9:39 PM

Bob Jensen's threads on accounting theory are at
http://faculty.trinity.edu/rjensen/Theory01.htm

You may want to look at Carla Carnagha's slide show entitled
"Strategies for Teaching the Accounting Theory Course:
Curriculum, Pedagogy and Resources"
http://commons.aaahq.org/files/8ba2111d71/AAA_Presentation_final.ppt

Bob Jensen's continuously updated two volumes on accounting theory ---
http://faculty.trinity.edu/rjensen/Theory01.htm 


 

Financial Accounting Theory Extensions of the Following Topics:
Structured Finance --- http://en.wikipedia.org/wiki/Structured_finance 
Securitization --- http://en.wikipedia.org/wiki/Securitization 
Portfolio Theory (including the CAPM and Options Pricing) --- http://en.wikipedia.org/wiki/Portfolio_theory
M&M Theory --- http://en.wikipedia.org/wiki/Modigliani-Miller_theorem 
Financial Instruments --- http://en.wikipedia.org/wiki/Financial_instruments 
Derivative Financial Instruments --- http://en.wikipedia.org/wiki/Derivative_%28finance%29 
Other topics listed at
http://faculty.trinity.edu/rjensen/Theory01.htm 
 

The last time I taught a contemporary accounting theory course, the 2006 syllabus was the one at
http://faculty.trinity.edu/rjensen/acct5341/acct5341.htm 
 

Managerial and Organizational Accounting Theory Extensions could build on the following: ---

Great Minds in Management:  The Process of Theory Development --- http://faculty.trinity.edu/rjensen//theory/00overview/GreatMinds.htm

Great Minds in Sociology ---
http://www.sociosite.net/topics/sociologists.php
Also see Also see http://www.sociologyprofessor.com/ 

Research at the University of Rochester ---  https://urresearch.rochester.edu/home.action

Jensen Comment
Note that this site includes a long listing of research in accounting, finance, and economics, much of it based on positivism and financial markets.

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following the handsome Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc

My threads on Deidre McCloskey and my own talk are at
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

September 13, 2012 reply from Jagdish Gangolly

Bob,

Thanks you so much for posting this.

What a wonderful speaker Deidre McCloskey! Reminded me of JR Hicks who also was a stammerer. For an economist, I was amazed by her deep and remarkable understanding of statistics.

It was nice to hear about Gossett, perhaps the only human being who got along well with both Karl Pearson and R.A. Fisher, getting along with the latter itself a Herculean feat.

Gosset was helped in the mathematical derivation of small sample theory by Karl Pearson, he did not appreciate its importance, it was left to his nemesis R.A. Fisher. It is remarkable that he could work with these two giants who couldn't stand each other.

In later life Fisher and Gosset parted ways in that Fisher was a proponent of randomization of experiments while Gosset was a proponent of systematic planning of experiments and in fact proved decisively that balanced designs are more precise, powerful and efficient compared with Fisher's randomized experiments (see http://sites.roosevelt.edu/sziliak/files/2012/02/William-S-Gosset-and-Experimental-Statistics-Ziliak-JWE-2011.pdf )

I remember my father (who designed experiments in horticulture for a living) telling me the virtues of balanced designs at the same time my professors in school were extolling the virtues of randomisation.

In Gosset we also find seeds of Bayesian thinking in his writings.

While I have always had a great regard for Fisher (visit to the tree he planted at the Indian Statistical Institute in Calcutta was for me more of a pilgrimage), I think his influence on the development of statistics was less than ideal.

Regards,

Jagdish

Jagdish S. Gangolly
Department of Informatics College of Computing & Information
State University of New York at Albany
Harriman Campus, Building 7A, Suite 220
Albany, NY 12222 Phone: 518-956-8251, Fax: 518-956-8247

Hi Jagdish,

You're one of the few people who can really appreciate Deidre's scholarship in history, economics, and statistics. When she stumbled for what seemed like forever trying to get a word out, it helped afterwards when trying to remember that word.


Interestingly, two Nobel economists slugged out the very essence of theory some years back. Herb Simon insisted that the purpose of theory was to explain. Milton Friedman went off on the F-Twist tangent saying that it was enough if a theory merely predicted. I lost some (certainly not all) respect for Friedman over this. Deidre, who knew Milton, claims that deep in his heart, Milton did not ultimately believe this to the degree that it is attributed to him. Of course Deidre herself is not a great admirer of Neyman, Savage, or Fisher.

Friedman's essay "The Methodology of Positive Economics" (1953) provided the epistemological pattern for his own subsequent research and to a degree that of the Chicago School. There he argued that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism but by its simplicity and fruitfulness as an engine of prediction. That is, students should measure the accuracy of its predictions, rather than the 'soundness of its assumptions'. His argument was part of an ongoing debate among such statisticians as Jerzy Neyman, Leonard Savage, and Ronald Fisher.

.
 

Implications of Bad Auditing on Capital Markets and Client's Cost of Capital (Bayesian, Bayes)
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

"Milton Friedman's grand illusion," by Mark Buchanan, The Physics of Finance: A look at economics and finance through the lens of physics, September 16, 2011 ---
 http://physicsoffinance.blogspot.com/2011/09/milton-friedmans-grand-illusion.html

Many of us on the AECM are not great admirers of positive economics ---
http://faculty.trinity.edu/rjensen/theory02.htm#PostPositiveThinking

Everyone is entitled to their own opinion, but not their own facts.
Senator Daniel Patrick Moynihan --- FactCheck.org --- http://www.factcheck.org/

Then again, maybe we're all entitled to our own facts!

"The Power of Postpositive Thinking," Scott McLemee, Inside Higher Ed, August 2, 2006 --- http://www.insidehighered.com/views/2006/08/02/mclemee

In particular, a dominant trend in critical theory was the rejection of the concept of objectivity as something that rests on a more or less naive epistemology: a simple belief that “facts” exist in some pristine state untouched by “theory.” To avoid being naive, the dutiful student learned to insist that, after all, all facts come to us embedded in various assumptions about the world. Hence (ta da!) “objectivity” exists only within an agreed-upon framework. It is relative to that framework. So it isn’t really objective....

What Mohanty found in his readings of the philosophy of science were much less naïve, and more robust, conceptions of objectivity than the straw men being thrashed by young Foucauldians at the time. We are not all prisoners of our paradigms. Some theoretical frameworks permit the discovery of new facts and the testing of interpretations or hypotheses. Others do not. In short, objectivity is a possibility and a goal — not just in the natural sciences, but for social inquiry and humanistic research as well.

Mohanty’s major theoretical statement on PPR arrived in 1997 with Literary Theory and the Claims of History: Postmodernism, Objectivity, Multicultural Politics (Cornell University Press). Because poststructurally inspired notions of cultural relativism are usually understood to be left wing in intention, there is often a tendency to assume that hard-edged notions of objectivity must have conservative implications. But Mohanty’s work went very much against the current.

“Since the lowest common principle of evaluation is all that I can invoke,” wrote Mohanty, complaining about certain strains of multicultural relativism, “I cannot — and consequently need not — think about how your space impinges on mine or how my history is defined together with yours. If that is the case, I may have started by declaring a pious political wish, but I end up denying that I need to take you seriously.”

PPR did not require throwing out the multicultural baby with the relativist bathwater, however. It meant developing ways to think about cultural identity and its discontents. A number of Mohanty’s students and scholarly colleagues have pursued the implications of postpositive identity politics. I’ve written elsewhere about Moya, an associate professor of English at Stanford University who has played an important role in developing PPR ideas about identity. And one academic critic has written an interesting review essay on early postpositive scholarship — highly recommended for anyone with a hankering for more cultural theory right about now.

Not everybody with a sophisticated epistemological critique manages to turn it into a functioning think tank — which is what started to happen when people in the postpositive circle started organizing the first Future of Minority Studies meetings at Cornell and Stanford in 2000. Others followed at the University of Michigan and at the University of Wisconsin in Madison. Two years ago FMS applied for a grant from Mellon Foundation, receiving $350,000 to create a series of programs for graduate students and junior faculty from minority backgrounds.

The FMS Summer Institute, first held in 2005, is a two-week seminar with about a dozen participants — most of them ABD or just starting their first tenure-track jobs. The institute is followed by a much larger colloquium (the part I got to attend last week). As schools of thought in the humanities go, the postpositivists are remarkably light on the in-group jargon. Someone emerging from the Institute does not, it seems, need a translator to be understood by the uninitated. Nor was there a dominant theme at the various panels I heard.

Rather, the distinctive quality of FMS discourse seems to derive from a certain very clear, but largely unstated, assumption: It can be useful for scholars concerned with issues particular to one group to listen to the research being done on problems pertaining to other groups.

That sounds pretty simple. But there is rather more behind it than the belief that we should all just try to get along. Diversity (of background, of experience, of disciplinary formation) is not something that exists alongside or in addition to whatever happens in the “real world.” It is an inescapable and enabling condition of life in a more or less democratic society. And anyone who wants it to become more democratic, rather than less, has an interest in learning to understand both its inequities and how other people are affected by them.

A case in point might be the findings discussed by Claude Steele, a professor of psychology at Stanford, in a panel on Friday. His paper reviewed some of the research on “identity contingencies,” meaning “things you have to deal with because of your social identity.” One such contingency is what he called “stereotype threat” — a situation in which an individual becomes aware of the risk that what you are doing will confirm some established negative quality associated with your group. And in keeping with the threat, there is a tendency to become vigilant and defensive.

Steele did not just have a string of concepts to put up on PowerPoint. He had research findings on how stereotype threat can affect education. The most striking involved results from a puzzle-solving test given to groups of white and black students. When the test was described as a game, the scores for the black students were excellent — conspicuously higher, in fact, than the scores of white students. But in experiments where the very same puzzle was described as an intelligence test, the results were reversed. The black kids scores dropped by about half, while the graph for their white peers spiked.

The only variable? How the puzzle was framed — with distracting thoughts about African-American performance on IQ tests creating “stereotype threat” in a way that game-playing did not.

Steele also cited an experiment in which white engineering students were given a mathematics test. Just beforehand, some groups were told that Asian students usually did really well on this particular test. Others were simply handed the test without comment. Students who heard about their Asian competitors tended to get much lower scores than the control group.

Extrapolate from the social psychologist’s experiments with the effect of a few innocent-sounding remarks — and imagine the cumulative effect of more overt forms of domination. The picture is one of a culture that is profoundly wasteful, even destructive, of the best abilities of many of its members.

“It’s not easy for minority folks to discuss these things,” Satya Mohanty told me on the final day of the colloquium. “But I don’t think we can afford to wait until it becomes comfortable to start thinking about them. Our future depends on it. By ‘our’ I mean everyone’s future. How we enrich and deepen our democratic society and institutions depends on the answers we come up with now.”

Earlier this year, Oxford University Press published a major new work on postpositivist theory, Visible Identities: Race, Gender, and the Self,by Linda Martin Alcoff, a professor of philosophy at Syracuse University. Several essays from the book are available at the author’s Web site.

Special Notice:

Accounting Scholarship that Advances Professional Knowledge and Practice
Robert S. Kaplan
The Accounting Review, March 2011, Volume 86, Issue 2, 

Recent accounting scholarship has used statistical analysis on asset prices, financial reports and disclosures, laboratory experiments, and surveys of practice. The research has studied the interface among accounting information, capital markets, standard setters, and financial analysts and how managers make accounting choices. But as accounting scholars have focused on understanding how markets and users process accounting data, they have distanced themselves from the accounting process itself. Accounting scholarship has failed to address important measurement and valuation issues that have arisen in the past 40 years of practice. This gap is illustrated with missed opportunities in risk measurement and management and the estimation of the fair value of complex financial securities. This commentary encourages accounting scholars to devote more resources to obtaining a fundamental understanding of contemporary and future practice and how analytic tools and contemporary advances in accounting and related disciplines can be deployed to improve the professional practice of accounting. ©2010 AAA

 

The videos of the three plenary speakers at the 2010 Annual Meetings in San Francisco are now linked at
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.

Although all three speakers provided inspirational presentations, Steve Zeff and I both concluded that Bob Kaplan’s presentation was possibly the best that we had ever viewed among all past AAA plenary sessions. And we’ve seen a lot of plenary sessions in our long professional careers.

Now that Kaplan’s video is available I cannot overstress the importance that accounting educators and researchers watch the video of Bob Kaplan's August 4, 2010 plenary presentation
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
Don’t miss the history map of Africa analogy to academic accounting research!!!!!

This dovetails with my Web document at
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

Also see (slow loading)
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Trivia Questions
1.  Why did Bob wish he’d worn a different color suit?

2.  What does JAE stand for besides the Journal of Accounting and Economics?

Note that to watch the entire Kaplan video ---
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.

PS
I think Bob Kaplan overstates the value of the academic valuation models in leading accounting research journals, at least he overvalues their importance to our practicing profession.

September 9, 2011 reply from Paul Williams

Bob,
I have avoided chiming in on this thread; have gone down this same road and it is a cul-de-sac.  But I want to say that this line of argument is a clever one.  The answer to your rhetorical question is, No, they aren't more ethical than other "scientists."   As you tout the Kaplan speech I would add the caution that before he raised the issue of practice, he still had to praise the accomplishments of "accountics" research by claiming numerous times that this research has led us to greater understanding about analysts, markets, info. content, contracting, etc.  However, none of that is actually true.  As a panelist at the AAA meeting I juxtaposed Kaplan's praise for what accountics research has taught us with Paul Krugman's observations about Larry Summer's 1999 observation that GAAP is what makes US capital markets so stable and efficient.  Of course, as Krugman noted, none of that turned out to be true.  And if that isn't true, then Kaplan's assessment of accountics research isn't credible, either.  If we actually did understand what he claimed we now understand much better than we did before, the financial crisis of 2008 (still ongoing) would not have happened.  The title of my talk was (the panel was organized by Cheryl McWatters) "The Epistemology of Ignorance."  An obsessive preoccupation with method could be a choice not to understand certain things-- a choice to rigorously understand things as you already think they are or want so desperately to continue to believe for reasons other than scientific ones. 

Paul

Gaming for Tenure as an Accounting Professor ---
http://faculty.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F

Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html

Jensen Comment
Here are some added positives and negatives to consider, especially if you are currently a practicing accountant considering becoming a professor.

Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html 

Why must all accounting doctoral programs be social science (particularly econometrics) "accountics" doctoral programs?
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

Advice and Bibliography for Accounting Ph.D. Students and New Faculty by James Martin ---
http://maaw.info/AdviceforAccountingPhDstudentsMain.htm

"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F

Why accountancy doctoral programs are drying up and why accountancy is no longer
required for admission or graduation in an accountancy doctoral program ---
http://faculty.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Bob Jensen's threads on what went wrong with "accountics research" can be found at
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

 

What went wrong in accounting/accountics research?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#BadNews

"The Accounting Doctoral Shortage: Time for a New Model,"
by Neal Mero, Jan R. Williams and George W. Krull, Jr. .
Issues in Accounting Education 24 (4)
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=IAEXXX000024000004000427000001&idtype=cvips&gifs=Yes&ref=no

ABSTRACT:
The crisis in supply versus demand for doctorally qualified faculty members in accounting is well documented (Association to Advance Collegiate Schools of Business [AACSB] 2003a, 2003b; Plumlee et al. 2005; Leslie 2008). Little progress has been made in addressing this serious challenge facing the accounting academic community and the accounting profession. Faculty time, institutional incentives, the doctoral model itself, and research diversity are noted as major challenges to making progress on this issue. The authors propose six recommendations, including a new, extramurally funded research program aimed at supporting doctoral students that functions similar to research programs supported by such organizations as the National Science Foundation and other science-based funding sources. The goal is to create capacity, improve structures for doctoral programs, and provide incentives to enhance doctoral enrollments. This should lead to an increased supply of graduates while also enhancing and supporting broad-based research outcomes across the accounting landscape, including auditing and tax. ©2009 American Accounting Association

Bob Jensen's threads on accountancy doctoral programs are at
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

Some Things You Might Want to Know About the Wolfram Alpha (WA) Search Engine:  The Good and The Evil
as Applied to Learning Curves (Cumulative Average vs. Incremental Unit)
http://faculty.trinity.edu/rjensen/theorylearningcurves.htm

The quick and dirty answer to your question Marc is that the present dominance of accountics scientists behind a wall of silence on our Commons is just not sustainable. They cannot continue to monopolize AACSB accounting doctoral programs by limiting supply so drastically in the face of rising demand for accounting faculty ---
http://faculty.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms 

They cannot continue to monopolize the selection of editors of their favored journals (especially TAR and AH) in the face of increasing democracy in the AAA.

The Emperor cannot continue to parade without any clothes in the presence of increasing criticism from AAA Presidents, including criticisms raised by President Waymire ( who's an accountics scientist )  in the 2011 Annual Meetings ---
Watch the Video:  http://commons.aaahq.org/posts/b60c7234c6 

What we cannot do is expect change to happen overnight. For the past four decades our doctoral programs have cranked out virtually nothing but accountics scientists. Something similar happened in the Pentagon in the 1920s when West Point and Naval Academy graduates dominated the higher command until the 1940s. We began to see the value of air power, but it took decades to split the Air Force out from under the Army and to create an Air Force Academy. More importantly Pentagon budgets began to shift more and more to air power in both the Air Force and the Naval Air Force.

It's been a long and frustrating fight in the AAA dating back to Bob Anthony when it was beginning to dawn on genuine accountants that we had created an accountics scientist monster.

I don't know if you were present when Bob Anthony gave his 1989 Outstanding Educator Award Address to the American Accounting Association. It was one of the harshest indictments I've ever heard concerning the sad state of academic research in serving the accounting profession. Bob never held back on his punches.

We built the most formidable military in the world by adapting to changes and innovations. Eventually the Luddite accountics scientists will own up to the fact they never did become real scientists and that their research methods and models are just too limited and out of date. His colleague at Harvard, Bob Kaplan, now carries on the laments of Bob Anthony.

Now that Kaplan’s video is available I cannot overstress the importance that accounting educators and researchers watch the video of Bob Kaplan's August 4, 2010 plenary presentation
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video 
Don’t miss the history map of Africa analogy to academic accounting research!!!!!

The accountics scientist monopoly of our doctoral programs is just not a sustainable model.  But don't expect miracles overnight. For 40 years our accounting doctoral graduates have never learned any research methods other than those analytical and inference models favored by accountics scientists.

Respectfully,
Bob Jensen

In an IAE paper, Wood et al. issues its rankings of the best college accounting research programs.
Issues in Accounting Education, November 2010, Volume 25, Issue 4, pp. 613-xv
Also see http://www.byuaccounting.net/rankings/univrank/rankings.php

Although I will not dwell on details here, practitioners are generally interested in clever discoveries of how to make computer software, XBRL, Google Wave, cloud computing, computer gadgets, cloud computing, pattern recognition, data visualization, and many other technology innovations relative to the practice of accountancy. For example, I've attempted (thus far unsuccessfully) to discover useful ways of visualizing multi-dimensional accounting variables (including Chernoff faces) ---
http://faculty.trinity.edu/rjensen/352wpvisual/000datavisualization.htm
Alas, I'm a failure, along with most academic accounting researchers, as an applied researcher thus far in life. My leading journal publications, like other leading accounting research publications, have mostly been irrelevant "accountics" contributions ---
http://faculty.trinity.edu/rjensen/resume.htm#Published

Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.
Bob Jensen --- http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

“Research should be problem driven rather than methodologically driven," said Lisa Garcia Bedolla, a member of the task force who teaches at the University of California at Berkeley.
Scott Jascik --- http://www.insidehighered.com/news/2009/09/04/polisci  

"I understand your point, Jim." He could not identify one issue that (accountics) researchers had been able to "put to bed" after all that effort.
P. Kothari, one of the Editors of JAE and a full professor at MIT, as quoted by Jim Peters below.

Do we forecast? You bet. Do we have confidence in our forecasts? Never! Confidence about a non-linear chaotic system can only come in degrees, and even those degrees of confidence are guesses. Not all hope is lost. There are times when it seems our ability to predict is better than others. Thus we need to take advantage of it if we see it. Trading ranges, pivot points, support and resistance, and the like can help, and do help the trader.
Michael Covel, Trading Black Swans, September 2009 --- http://www.michaelcovel.com/pdfs/swan.pdf

The second is the comment that Joan Robinson made about American Keynsians: that their theories were so flimsy that they had to put math into them. In accounting academia, the shortest path to respectability seems to be to use math (and statistics), whether meaningful or not.
Professor Jagdish Gangolly, SUNY Albany

American Economist and Nobel Prize Winning Paul Samuelson died on December 13, 2009 ---
http://en.wikipedia.org/wiki/Paul_Samuelson
Among many other things, his textbook was perhaps the all-time best selling economics textbook. Students in my generation were weaned on Samuelson who, in my viewpoint, was a fence sitter, albeit a scholarly fence sitter, with respect to economic theory. He was a mathematician with hundreds of scholarly papers in his craft.

Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage: That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.

Probably be an accountant. I like to figure out stuff. In accounting, if you miss one number you get the whole thing wrong. You have to be perfect --- I'm a perfectionist.
Giovani Soto (catcher for the Chicago Cubs when asked what he'd like to be if he wasn't in professional baseball), as quoted in an interview with Mary Burns in Sports Illustrated, June 2008
Jensen Comment
If Soto only knew that accountants are second only to economists in terms of inaccuracies. When accountants total up the numbers on a balance sheet the total is always accurate, but the numbers being added up can be off by 1000% or more. Accuracy varies of course. Cash counts are highly accurate. Fixed assets, net of depreciation, are make-pretend within limits. Intangible asset valuations are about as accurate as ground eyesight measurements of floating cloud dimensions on a windy day. Accountants make highly inaccurate estimates of assets, liabilities, and equities. Then accountants change hats and chairs and add these estimates up very accurately and pretend that the total must mean something --- but accountants aren't sure what.

If Soto wants accuracy perhaps he should become a baseball statistician collecting up subjective estimates of the umpires. In the business world, accountants are the statisticians and the umpires. Therein lies the problem. An umpire decides what's a ball/strike, hit/foul, etc. and then leaves it up to baseball statisticians to book the numbers. In the world of business, accountants decide what are current versus deferred revenues, current versus capitalized costs, and additionally make highly subjective estimates about values of such things as forward contracts and interest rate swaps. After making their inaccurate estimates they then put on another hat, change chairs, and record their own estimates to the nearest penny. They're the business world's umpires and statisticians who simply change hats and chairs and wait for the investors to file lawsuits against them.

Humor about understanding research literature --- http://maaw.info/ArticleSummaries/ArtSumIngram87.htm
Thank you Rob Ingram and James Martin

Yale Rolls Out 10 New Courses – All Free --- Click Here
http://www.openculture.com/2011/04/yale_rolls_out_10_new_open_courses.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Walter Kaufmann’s Lectures on Nietzsche, Kierkegaard and Sartre (1960) --- Click Here
http://www.openculture.com/2011/04/walter_kaufmanns_lectures.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Bob Jensen's threads on free courses and/or course materials from prestigious universities ---
http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Brief Very Long Summary of Accounting Theory

Bob Jensen at Trinity University

Warning 1:  Many of the links were broken when the FASB changed all of its links.  If a link to a FASB site does not work , Go to the new FASB link and search for the document.  The FASB home page is at http://www.fasb.org/ 

Warning 2:  The document below has not been updated for the FASB's Codification Database. Although the database is off to a great (albeit dumb, dumb, dumb) start, there is much information in this document and in prior FASB hard copy standards and in the FASB standards that cannot be found in the Codification Database. You can read the following at http://asc.fasb.org/asccontent&trid=2273304&nav_type=left_nav

Welcome to the Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (Codification).

The Codification is the result of a major four-year project involving over 200 people from multiple entities. The Codification structure is significantly different from the structure of existing accounting standards. The Notice to Constituents provides information you should read to obtain a good understanding of the Codification history, content, structure, and future consequences.

Click here to view the Notice to Constituents (Adobe Acrobat format).

Accounting, Fraud, and XBRL News --- #News

Daily News Sites for Accountancy, Tax, Fraud, IFRS, XBRL, Accounting History, and More ---
http://faculty.trinity.edu/rjensen/AccountingNews.htm

FASB's Accounting Standards Codification --- http://asc.fasb.org/home

Accounting for Derivative Financial Instruments and Hedging Activities
Bob Jensen's free tutorials and videos for FAS 133 and IAS 39 are at
http://faculty.trinity.edu/rjensen/caseans/000index.htm

Teaching Cases:  Hedge Accounting Scenario 1 versus Scenario 2
Two Teaching Cases Involving Southwest Airlines, Hedging, and Hedge Accounting Controversies ---
http://faculty.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm

A nice timeline on the development of U.S. standards and the evolution of thinking about the income statement versus the balance sheet is provided at:
"The Evolution of U.S. GAAP: The Political Forces Behind Professional Standards (1930-1973)," by Stephen A. Zeff, CPA Journal, January 2005 --- http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm
Part II covering years 1974-2003 published in February 2005 --- http://archives.cpajournal.com/

**************************

“Accounting for Business Firms versus Accounting for Vegetables” ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#BadNews 

Take the Enron Quiz ---
http://faculty.trinity.edu/rjensen/FraudEnronQuiz.htm

Where I Made My Consulting Money and How

Accounting History in a Nutshell

Re-branding the CPA Profession

History of Accountics

Accounting Theory Courses

Thoughts on Bill Paton and Some Other Historical Writers in Accountancy

"Why Accounting Matters," by Edith Orenstein

Accounting for the Shadow Economy

Behavioral and Cultural Economics and Finance

Media Reporting Controversies

Efficient Markets (EMH) versus Inefficient Markets
(including Black Swans and Fat Tails)

Islamic and Social Responsibility Accounting

Key Differences Between International (IFRS) and U.S. GAAP (SFAS)

Accounting Research Versus the Accountancy Profession
Some ideas for applied research

Learning at Research Schools Versus "Teaching Schools" Versus "Happiness"
With a Side Track into Substance Abuse

Why must all accounting doctoral programs be social
science (particularly econometrics) "accountics" doctoral programs?
Why accountancy doctoral programs are drying up and
why accountancy is no longer required for admission or
graduation in an accountancy doctoral program
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
 

GMAT: Paying for Points

Accounting Journal Lack of Interest in Publishing Replications

Rankings of Academic Accounting Research Journals and Schools

Role of Accounting Standards in Efficient Equity Markets

Controversies in Setting Accounting Standards

Popular IFRS, IAS, and Other IASB Learning Resources:

Bright Lines Versus Principles-Based Rules

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

Should "principles-based" standards replace more detailed requirements for complex
financial contracts such as structured financing contracts and financial instruments derivatives contracts?

Why Let the I.R.S. See What the S.E.C. Doesn't?

Radical Changes in Financial Reporting

The Controversy Between OCI versus Current Earnings

Accrual Accounting and Estimation 

Controversy Over  the SEC's Rule 144a

Cookie Jar Accounting and FAS 106

Why do sales discounts have such high annual percentage rates?

FIN 48 Liability if Transaction Is Later Disallowed by the IRS

Controversy Over FAS 2 versus IAS 38 on Research and Development (R&D)

Management ((Managerial) and Cost Accounting

Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books 

Goodwill Impairment Issues 

Purchase Versus Pooling: The Never Ending Debate

Minority Interests:  Lambs being led to slaughter?

Off-Balance Sheet Financing (OBSF)

Insurance:  A Scheme for Hiding Debt That Won't Go Away

How do we account for lifetime warranties?

Disclosure provisions aimed at financing receivables
and Other Dislcosure Issues

CDOs: A Securitization Scheme for Hiding Debt That Won't Go Away

Pensions and Post-retirement benefits:  Schemes for Hiding Debt 

Leases:  A  Scheme for Hiding Debt That Won't Go Away 

Accounting for Executory Contracts Such as
Purchase/Sale Commitments and Loan Commitments

Debt Versus Equity (including shareholder earn-out contracts)

Synthetic Assets and Liabilities Accounting  

Time versus Money

Intangibles and Contingencies:   Theory Disputes Focus Mainly on the Tip of the Iceberg

Intangibles:  An Accounting Paradox

Intangibles:  Selected References On Accounting for Intangibles

EBR:  Enhanced Business Reporting (including non-financial information)

The Controversy Over Revenue Reporting and HFV 
--- http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm

The Controversy Over Employee Stock Options as Compenation  

Accounting for Options to Buy Real Estate

The Controversy over Accounting for Securitizations and Loan Guarantees  

The Controversy Over Pro Forma Reporting

Triple-Bottom (Social, Environmental) Reporting  

The Sad State of Government (Governmental) Accounting and Accountability

The Cost Conundrum:  What a Texas town can teach us about health care

Which is More Value-Relevant: Earnings or Cash Flows?

LIFO Sucks Teaching Case on LIFO Layers in Years of Rising Prices

The Controversy Over Fair Value (Mark-to-Market) Financial Reporting

Underlying Bases of Balance Sheet Valuation

Online Resources for Business Valuations
See http://faculty.trinity.edu/rjensen/roi.htm

Fade, Gain, and Cost Shifting Analysis  in gross profit analysis in construction accounting

Critical Thinking:  Why's It So Hard to Teach

Understanding the Issues 

Issues of Auditor Professionalism and Independence 
http://faculty.trinity.edu/rjensen/fraud001.htm#Professionalism

Quality of Earnings, Restatements, and Core Earnings

Sale-Leaseback Accounting Controversies
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm#SaleLeasback

Economic Theory of Accounting (including Game Theory)

Socionomics Theory of Finance and Fraud

Facts Based on Assumptions:  The Power of Postpositive Thinking

Critical Postmodern Theory --- http://www.uta.edu/huma/illuminations/

Mike Kearl's great social theory site

What's Right and What's Wrong With SPEs, SPVs, and VIEs --- 
http://faculty.trinity.edu/rjensen//theory/00overview/speOverview.htm

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on GAAP comparisons (with particular stress upon derivative financial
instruments accounting rules) are at http://faculty.trinity.edu/rjensen/caseans/canada.htm
The above site also links to more general GAAP comparison guides between nations.

Implications of Bad Auditing on Capital Markets
and Client's Cost of Captial
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Bob Jensen's threads on corporate governance are at
http://faculty.trinity.edu/rjensen/fraud.htm#Governance

Accounting Theory Courses

Modern Science and Ancient Wisdom  --- http://faculty.trinity.edu/rjensen/theory01.htm#AncientWisdom

"A Wisdom 101 Course!" February 15, 2010 ---
http://www.simoleonsense.com/a-wisdom-101-course/

"Overview of Prior Research on Wisdom," Simoleon Sense, February 15, 2010 ---
http://www.simoleonsense.com/overview-of-prior-research-on-wisdom/

"An Overview Of The Psychology Of Wisdom," Simoleon Sense, February 15, 2010 ---
http://www.simoleonsense.com/an-overview-of-the-psychology-of-wisdom/

August 3, 2014 reply from David Johnstone

The idea is that we never know “true probabilities”, even if they “exist”, we only have subjective beliefs. These beliefs are the basis on which actions are chosen (i.e. by maximizing subjective expected utility, if we go to this next step). Observed frequencies feed into our beliefs, and sometimes they are the major influence. Similarly, subjective “symmetry” arguments (we think we see symmetry in a coin) might be a major influence in saying that “the probability of heads” is 0.5. But a coin does not have a probability, at least not in the sense that it has weight, metal content, and other physical attributes.

Big names Bayesian authors with this general philosophy are Kadane (ex editor of J American Stat Assoc), Lindley, Savage, de Finnetti, Lad, O’Hagen, Bernardo, and others. The only rule in this world is that your beliefs must be “coherent” in the sense that they are mutually consistent in terms of the laws of probability. New evidence must therefore be used via Bayes theorem to get new probabilities.

Cheers,
David

"Why Bayesian Rationality Is Empty, Perfect Rationality Doesn’t Exist, Ecological Rationality Is Too Simple, and Critical Rationality Does the Job,"
Simoleon Sense, February 15, 2010 --- Click Here
http://www.simoleonsense.com/why-bayesian-rationality-is-empty-perfect-rationality-doesn%e2%80%99t-exist-ecological-rationality-is-too-simple-and-critical-rationality-does-the-job/

Easier than Bayes
"Chances Are," by Steven Strogatz, The New York Times, April 25, 2010 ---
http://opinionator.blogs.nytimes.com/2010/04/25/chances-are/

Great Minds in Management:  The Process of Theory Development --- http://faculty.trinity.edu/rjensen//theory/00overview/GreatMinds.htm

Great Minds in Sociology ---
http://www.sociosite.net/topics/sociologists.php
Also see Also see http://www.sociologyprofessor.com/ 

A Special Tribute to My Open Sharing Friend Will Yancey ---
http://faculty.trinity.edu/rjensen/Yancey.htm

Giving Stuff Away Free on the Internet ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm#Free 

A Course in Game Theory ---
http://www.simoleonsense.com/a-course-in-game-theory-martin-j-osborne/

"Saturn (Now Defunct Automobile): A Wealth of Lessons from Failure," University of Pennsylvania's Knowledge@Wharton, October 28, 2009 --- http://knowledge.wharton.upenn.edu/article.cfm?articleid=2366

"Cornell Theory Center Aids Social Science Researchers," PR Web, June 19, 2006 --- http://www.prweb.com/releases/2006/6/prweb400160.htm

"The Ph.D. Problem On the professionalization of faculty life, doctoral training, and the academy’s self-renewal," by Louis Menand, Harvard Magazine, November/December 2009 ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm#DoctoralProgramChange

How Do Scholars Search? --- http://faculty.trinity.edu/rjensen/Searchh.htm#Scholars

Some of the many, many lawsuits settled by auditing firms can be found at http://faculty.trinity.edu/rjensen/Fraud001.htm

Higher Education Controversies ---
http://faculty.trinity.edu/rjensen/HigherEdControversies.htm

Wonderful Video on the History and Controversies of Logical Positivism (Vienna Circle) and Philosophy of Science
Pragmatism under William James --- http://en.wikipedia.org/wiki/William_James
Metaphysics --- http://en.wikipedia.org/wiki/Metaphysics
Logical Positivism under Karl Popper --- http://en.wikipedia.org/wiki/Karl_Popper
Logical Positivism under Sir Alfred Jules (A.J.) Ayer --- http://en.wikipedia.org/wiki/Alfred_Ayer

• Interview with Sir Alfred Jules (A.J.) Ayer (Section 1) ---  http://www.youtube.com/watch?v=DMlXmLbGKJY
• Interview with Sir Alfred Jules (A.J.) Ayer (Section 2) ---- http://www.youtube.com/watch?v=QQS9fFg0cGY
• Interview with Sir Alfred Jules (A.J.) Ayer (Section 3) ---- http://www.youtube.com/watch?v=ip6p6Y7IUrE
• Interview with Sir Alfred Jules (A.J.) Ayer (Section 4) ---- http://www.youtube.com/watch?v=4cnRJGs08hE&feature=related
  Link forwarded by Jagdish Gangolly
   
• What happened when Ayer cleverly encountered prize fighter Mike Tyson?
  http://www.associatedcontent.com/article/268510/when_mike_tyson_met_aj_ayer.html?cat=60
  Link forwarded by Roger Collins
   
• A Lecture on Logical Positivism --- http://www.youtube.com/watch?v=HjBOuycK7uI
• Summary of Links --- http://www.youtube.com/results?search_type=search_playlists&search_query=Ayer+on+Logical+Positivism%3A

The philosophy of leadership, management, and theory development --- http://faculty.trinity.edu/rjensen/theory/00overview/GreatMinds.htm

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

• With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier
• With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams
• With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR
• With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

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

Table of Contents

• Tom Lehrer on Mathematical Models and Statistics 
• TAR versus AMR
• Introduction to Replication Commentaries
• TAR Versus JEC
• Accounting Research Versus Social Science Research
• Mathematical Analytics in Plato's Cave TAR Researchers Playing by Themselves in an Isolated Dark Cave That the Sunlight Cannot Reach
• High Hopes Dashed for a Change in Policy of TAR Regarding Commentaries on Previously Published Research
• Rejoinder from the Current Senior Editor of TAR, Steven J. Kachelmeier
• Conclusion and Recommendation for a Journal Named Supplemental Commentaries and Replication Abstracts
• Appendix 1: Business Firms and Business School Teachers Largely Ignore TAR Research Articles
• Appendix 2: Integrating Academic Research Into Undergraduate Accounting Courses
• Appendix 3: Audit Pricing in the Real World
• Appendix 4: Replies from Jagdish Gangolly and Paul Williams

Steven J. Kachelmeier's July 2011 Editorial as Departing Senior Editor of The Accounting Review (TAR)

"Introduction to a Forum on Internal Control Reporting and Corporate Debt," by Steven J. Kachelmeier, The Accounting Review, Vol. 86, No. 4, July 2011 pp. 1129–113 (not free online) ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000004001129000001&idtype=cvips&prog=normal

One of the more surprising things I have learned from my experience as Senior Editor of The Accounting Review is just how often a ‘‘hot topic’’ generates multiple submissions that pursue similar research objectives. Though one might view such situations as enhancing the credibility of research findings through the independent efforts of multiple research teams, they often result in unfavorable reactions from reviewers who question the incremental contribution of a subsequent study that does not materially advance the findings already documented in a previous study, even if the two (or more) efforts were initiated independently and pursued more or less concurrently. I understand the reason for a high incremental contribution standard in a top-tier journal that faces capacity constraints and deals with about 500 new submissions per year. Nevertheless, I must admit that I sometimes feel bad writing a rejection letter on a good study, just because some other research team beat the authors to press with similar conclusions documented a few months earlier. Research, it seems, operates in a highly competitive arena.

Fortunately, from time to time, we receive related but still distinct submissions that, in combination, capture synergies (and reviewer support) by viewing a broad research question from different perspectives. The two articles comprising this issue’s forum are a classic case in point. Though both studies reach the same basic conclusion that material weaknesses in internal controls over financial reporting result in negative repercussions for the cost of debt financing, Dhaliwal et al. (2011) do so by examining the public market for corporate debt instruments, whereas Kim et al. (2011) examine private debt contracting with financial institutions. These different perspectives enable the two research teams to pursue different secondary analyses, such as Dhaliwal et al.’s examination of the sensitivity of the reported findings to bank monitoring and Kim et al.’s examination of debt covenants.

Both studies also overlap with yet a third recent effort in this arena, recently published in the Journal of Accounting Research by Costello and Wittenberg-Moerman (2011). Although the overall ‘‘punch line’’ is similar in all three studies (material internal control weaknesses result in a higher cost of debt), I am intrigued by a ‘‘mini-debate’’ of sorts on the different conclusions reache  by Costello and Wittenberg-Moerman (2011) and by Kim et al. (2011) for the effect of material weaknesses on debt covenants. Specifically, Costello and Wittenberg-Moerman (2011, 116) find that ‘‘serious, fraud-related weaknesses result in a significant decrease in financial covenants,’’ presumably because banks substitute more direct protections in such instances, whereas Kim et al. Published Online: July 2011 (2011) assert from their cross-sectional design that company-level material weaknesses are associated with more financial covenants in debt contracting.

In reconciling these conflicting findings, Costello and Wittenberg-Moerman (2011, 116) attribute the Kim et al. (2011) result to underlying ‘‘differences in more fundamental firm characteristics, such as riskiness and information opacity,’’ given that, cross-sectionally, material weakness firms have a greater number of financial covenants than do non-material weakness firms even before the disclosure of the material weakness in internal controls. Kim et al. (2011) counter that they control for risk and opacity characteristics, and that advance leakage of internal control problems could still result in a debt covenant effect due to internal controls rather than underlying firm characteristics. Kim et al. (2011) also report from a supplemental change analysis that, comparing the pre- and post-SOX 404 periods, the number of debt covenants falls for companies both with and without material weaknesses in internal controls, raising the question of whether the

Costello and Wittenberg-Moerman (2011) finding reflects a reaction to the disclosures or simply a more general trend of a declining number of debt covenants affecting all firms around that time period. I urge readers to take a look at both articles, along with Dhaliwal et al. (2011), and draw their own conclusions. Indeed, I believe that these sorts . . .

Continued in article

Jensen Comment
Without admitting to it, I think Steve has been embarrassed, along with many other accountics researchers, about the virtual absence of validation and replication of accounting science (accountics) research studies over the past five decades. For the most part, accountics articles are either ignored or accepted as truth without validation. Behavioral and capital markets empirical studies are rarely (ever?) replicated. Analytical studies make tremendous leaps of faith in terms of underlying assumptions that are rarely challenged (such as the assumption of equations depicting utility functions of corporations).

Accounting science thereby has become a pseudo science where highly paid accountics professor referees are protecting each others' butts ---
"574 Shields Against Validity Challenges in Plato's Cave" --- http://faculty.trinity.edu/rjensen/TheoryTAR.htm
The above link contains Steve's rejoinders on the replication debate.

In the above editorial he's telling us that there is a middle ground for validation of accountics studies. When researchers independently come to similar conclusions using different data sets and different quantitative analyses they are in a sense validating each others' work without truly replicating each others' work.

I agree with Steve on this, but I would also argue that these types of "validation" is too little to late relative to genuine science where replication and true validation are essential to the very definition of science. The types independent but related research that Steve is discussing above is too infrequent and haphazard to fall into the realm of validation and replication.

When's the last time you witnesses a TAR author criticizing the research of another TAR author (TAR does not publish critical commentaries)?
Are TAR articles really all that above criticism?
Even though I admire Steve's scholarship, dedication, and sacrifice, I hope future TAR editors will work harder at turning accountics research into real science!

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

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

"Is Modern Portfolio Theory Dead? Come On," by Paul Pfleiderer, TechCrunch, August 11, 2012 ---
http://techcrunch.com/2012/08/11/is-modern-portfolio-theory-dead-come-on/

A few weeks ago, TechCrunch published a piece arguing software is better at investing than 99% of human investment advisors. That post, titled Thankfully, Software Is Eating The Personal Investing World, pointed out the advantages of engineering-driven software solutions versus emotionally driven human judgment. Perhaps not surprisingly, some commenters (including some financial advisors) seized the moment to call into question one of the foundations of software-based investing, Modern Portfolio Theory.

Given the doubts raised by a small but vocal chorus, it’s worth spending some time to ask if we need a new investing paradigm and if so, what it should be. Answering that question helps show why MPT still is the best investment methodology out there; it enables the automated, low-cost investment management offered by a new wave of Internet startups including Wealthfront (which I advise), Personal Capital, Future Advisor and SigFig.

The basic questions being raised about MPT run something like this:

• Hasn’t recent experience – i.e., the financial crisis — shown that diversification doesn’t work?
• Shouldn’t we primarily worry about “Black Swan” events and unforeseen risk?
• Don’t these unknown unknowns mean we must develop a new approach to investing?

Let’s begin by briefly laying out the key insights of MPT.

MPT is based in part on the assumption that most investors don’t like risk and need to be compensated for bearing it. That compensation comes in the form of higher average returns. Historical data strongly supports this assumption. For example, from 1926 to 2011 the average (geometric) return on U.S. Treasury Bills was 3.6%. Over the same period the average return on large company stocks was 9.8%; that on small company stocks was 11.2% ( See 2012 Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook, Morningstar, Inc., page 23. ).  Stocks, of course, are much riskier than Treasuries, so we expect them to have higher average returns — and they do.

One of MPT’s key insights is that while investors need to be compensated to bear risk, not all risks are rewarded. The market does not reward risks that can be “diversified away” by holding a bundle of investments, instead of a single investment. By recognizing that not all risks are rewarded, MPT helped establish the idea that a diversified portfolio can help investors earn a higher return for the same amount of risk.

To understand which risks can be diversified away, and why, consider Zynga. Zynga hit $14.69 in March and has since dropped to less than $2 per share. Based on what’s happened over the past few months, the major risks associated with Zynga’s stock are things such as delays in new game development, the fickle taste of consumers and changes on Facebook that affect users’ engagement with Zynga’s games.

For company insiders, who have much of their wealth tied up in the company, Zynga is clearly a risky investment. Although those insiders are exposed to huge risks, they aren’t the investors who determine the “risk premium” for Zynga. (A stock’s risk premium is the extra return the stock is expected to earn that compensates for the stock’s risk.)

Rather, institutional funds and other large investors establish the risk premium by deciding what price they’re willing to pay to hold Zynga in their diversified portfolios. If a Zynga game is delayed, and Zynga’s stock price drops, that decline has a miniscule effect on a diversified shareholder’s portfolio returns. Because of this, the market does not price in that particular risk. Even the overall turbulence in many Internet stocks won’t be problematic for investors who are well diversified in their portfolios.

Modern Portfolio Theory focuses on constructing portfolios that avoid exposing the investor to those kinds of unrewarded risks. The main lesson is that investors should choose portfolios that lie on the Efficient Frontier, the mathematically defined curve that describes the relationship between risk and reward. To be on the frontier, a portfolio must provide the highest expected return (largest reward) among all portfolios having the same level of risk. The Internet startups construct well-diversified portfolios designed to be efficient with the right combination of risk and return for their clients.

Now let’s ask if anything in the past five years casts doubt on these basic tenets of Modern Portfolio Theory. The answer is clearly, “No.” First and foremost, nothing has changed the fact that there are many unrewarded risks, and that investors should avoid these risks. The major risks of Zynga stock remain diversifiable risks, and unless you’re willing to trade illegally on inside information about, say, upcoming changes to Facebook’s gaming policies, you should avoid holding a concentrated position in Zynga.

The efficient frontier is still the desirable place to be, and it makes no sense to follow a policy that puts you in a position well below that frontier.

Most of the people who say that “diversification failed” in the financial crisis have in mind not the diversification gains associated with avoiding concentrated investments in companies like Zynga, but the diversification gains that come from investing across many different asset classes, such as domestic stocks, foreign stocks, real estate and bonds. Those critics aren’t challenging the idea of diversification in general – probably because such an effort would be nonsensical.

True, diversification across asset classes didn’t shelter investors from 2008’s turmoil. In that year, the S&P 500 index fell 37%, the MSCI EAFE index (the index of developed markets outside North America) fell by 43%, the MSCI Emerging Market index fell by 53%, the Dow Jones Commodities Index fell by 35%, and the Lehman High Yield Bond Index fell by 26%. The historical record shows that in times of economic distress, asset class returns tend to move in the same direction and be more highly correlated. These increased correlations are no doubt due to the increased importance of macro factors driving corporate cash flows. The increased correlations limit, but do not eliminate, diversification’s value. It would be foolish to conclude from this that you should be undiversified. If a seat belt doesn’t provide perfect protection, it still makes sense to wear one. Statistics show it’s better to wear a seatbelt than to not wear one.  Similarly, statistics show diversification reduces risk, and that you are better off diversifying than not.

Timing the market

The obvious question to ask anyone who insists diversification across asset classes is not effective is: What is the alternative? Some say “Time the market.” Make sure you hold an asset class when it is earning good returns, but sell as soon as things are about to go south. Even better, take short positions when the outlook is negative. With a trustworthy crystal ball, this is a winning strategy. The potential gains are huge. If you had perfect foresight and could time the S&P 500 on a daily basis, you could have turned $1,000 on Jan. 1, 2000, into $120,975,000 on Dec. 31, 2009, just by going in and out of the market. If you could also short the market when appropriate, the gains would have been even more spectacular!

Sometimes, it seems someone may have a fairly reliable crystal ball. Consider John Paulson, who in 2007 and 2008 seemed so prescient in profiting from the subprime market’s collapse. It appears, however, that Mr. Paulson’s crystal ball became less reliable after his stunning success in 2007. His Advantage Plus fund experienced more than a 50% loss in 2011. Separating luck from skill is often difficult.

Some people try to come up with a way to time the market based on historical data. In fact a large number of strategies will work well “in the back test.” The question is whether any system is reliable enough to use for future investing.

There are at least three reasons to be cautious about substituting a timing system for diversification.

• First, a timing system that does not work can impose significant transaction costs (including avoidable adverse tax consequences) on the investor for no gain.
• Second, an ill-founded timing strategy generally exposes the investor to risk that is unrewarded.  In other words, it puts the investor below the frontier, which is not a good place to be.
• Third, a timing system’s success may create the seeds of its own destruction. If too many investors blindly follow the strategy, prices will be driven to erase any putative gains that might have been there, turning the strategy into a losing proposition. Also, a timing strategy designed to “beat the market” must involve trading into “good” positions and away from “bad” ones. That means there must be a sucker (or several suckers) available to take on the other (losing) sides. (No doubt in most cases each party to the trade thinks the sucker is on the other side.)

Black Swans

What about those Black Swans? Doesn’t MPT ignore the possibility that we can be surprised by the unexpected? Isn’t it impossible to measure risk when there are unknown unknowns?

Most people recognize that financial markets are not like simple games of chance where risk can be quantified precisely. As we’ve seen (e.g., the “Black Monday” stock market crash of 1987 and the “flash crash” of 2010), the markets can produce extreme events that hardly anyone contemplated as a possibility. As opposed to poker, where we always draw from the same 52-card deck, in financial markets, asset returns are drawn from changing distributions as the world economy and financial relationships change.

Some Black Swan events turned out to have limited effects on investors over the long term. Although the market dropped precipitously in October 1987, it was close to fully recovered in June 1988. The flash crash was confined to a single day.
This is not to say that all “surprise” events are transitory. The Great Depression followed the stock market crash of 1929, and the effects of the financial crisis in 2007 and 2008 linger on five years later.

The question is, how should we respond to uncertainties and Black Swans? One sensible way is to be more diligent in quantifying the risks we can see. For example, since extreme events don’t happen often, we’re likely to be misled if we base our risk assessment on what has occurred over short time periods. We shouldn’t conclude that just because housing prices haven’t gone down over 20 years that a housing decline is not a meaningful risk. In the case of natural disasters like earthquakes, tsunamis, asteroid strikes and solar storms, the long run could be very long indeed. While we can’t capture all risks by looking far back in time, taking into account long-term data means we’re less likely to be surprised.

Some people suggest you should respond to the risk of unknown unknowns by investing very conservatively. This means allocating most of the portfolio to “safe assets” and significantly reducing exposure to risky assets, which are likely to be affected by Black Swan surprises. This response is consistent with MPT. If you worry about Black Swans, you are, for all intents and purposes, a very risk-averse investor. The MPT portfolio position for very risk-averse investors is a position on the efficient frontier that has little risk.

The cost of investing in a low-risk position is a lower expected return (recall that historically the average return on stocks was about three times that on U.S. Treasuries), but maybe you think that’s a price worth paying. Can everyone take extremely conservative positions to avoid Black Swan risk? This clearly won’t work, because some investors must hold risky assets. If all investors try to avoid Black Swan events, the prices of those risky assets will fall to a point where the forecasted returns become too large to ignore.

Continued in article

Jensen Comment
All quant theories and strategies in finance are based upon some foundational assumptions that in rare instances turn into the Achilles' heel of the entire superstructure. The classic example is the wonderful theory and arbitrage strategy of Long Term Capital Management (LTCM) formed by the best quants in finance (two with Nobel Prizes in economics). After remarkable successes one nickel at a time in a secret global arbitrage strategy based heavily on the Black-Scholes Model, LTCM placed a trillion dollar bet that failed dramatically and became the only hedge fund that nearly imploded all of Wall Street. At a heavy cost, Wall Street investment bankers pooled billions of dollars to quietly shut down LTCM ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm#LTCM

So what was the Achilles heal of the arbitrage strategy of LTCM? It was an assumption that a huge portion of the global financial market would not collapse all at once. Low and behold, the Asian financial markets collapsed all at once and left LTCM naked and dangling from a speculative cliff.

There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video called "Trillion Dollar Bet" explaining why LTCM collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 
This video is in the media libraries on most college campuses.  I highly recommend showing this video to students.  It is extremely well done and exciting to watch.

One of the more interesting summaries is the Report of The President’s Working Group on Financial Markets, April 1999 --- http://www.ustreas.gov/press/releases/reports/hedgfund.pdf 

The principal policy issue arising out of the events surrounding the near collapse of LTCM is how to constrain excessive leverage. By increasing the chance that problems at one financial institution could be transmitted to other institutions, excessive leverage can increase the likelihood of a general breakdown in the functioning of financial markets. This issue is not limited to hedge funds; other financial institutions are often larger and more highly leveraged than most hedge funds.

What went wrong at Long Term Capital Management? --- http://www.killer-essays.com/Economics/euz220.shtml 

The video and above reports, however, do not delve into the tax shelter pushed by Myron Scholes and his other LTCM partners. A nice summary of the tax shelter case with links to other documents can be found at http://www.cambridgefinance.com/CFP-LTCM.pdf 

The above August 27, 2004 ruling by Judge Janet Bond Arterton rounds out the "Trillion Dollar Bet."

The classic and enormous scandal was Long Term Capital led by Nobel Prize winning Merton and Scholes (actually the blame is shared  with their devoted doctoral students).  There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video ("Trillion Dollar Bet") explaining why LTC collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 

Another illustration of the Achilles' heel of a popular mathematical theory and strategy is the 2008 collapse mortgage-backed CDO financial risk bonds based upon David Li's Gaussian copula function of risk diversification in portfolios. The Achilles' heel was the assumption that the real estate bubble would not burst to a point where millions of subprime mortgages would all go into default at roughly the same time.

"In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---
http://www.economist.com/specialreports/displaystory.cfm?story_id=12957753

ROBERT RUBIN was Bill Clinton’s treasury secretary. He has worked at the top of Goldman Sachs and Citigroup. But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.

A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives. The Black-Scholes options-pricing model was more than a piece of geeky mathematics. It was a manifesto, part of a revolution that put an end to the anti-intellectualism of American finance and transformed financial markets from bull rings into today’s quantitative powerhouses. Yet, in a roundabout way, Black’s approach also led to some of the late boom’s most disastrous lapses.

Derivatives markets are not new, nor are they an exclusively Western phenomenon. Mr Merton has described how Osaka’s Dojima rice market offered forward contracts in the 17th century and organised futures trading by the 18th century. However, the growth of derivatives in the 36 years since Black’s formula was published has taken them from the periphery of financial services to the core.

In “The Partnership”, a history of Goldman Sachs, Charles Ellis records how the derivatives markets took off. The International Monetary Market opened in 1972; Congress allowed trade in commodity options in 1976; S&P 500 futures launched in 1982, and options on those futures a year later. The Chicago Board Options Exchange traded 911 contracts on April 26th 1973, its first day (and only one month before Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts reached almost 1 trillion.

Trading has exploded partly because derivatives are useful. After America came off the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates, just as they sought protection against swings in interest rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed, tackled inflation in the 1980s. Equity options enabled investors to lay off general risk so that they could concentrate on the specific types of corporate risk they wanted to trade.

The other force behind the explosion in derivatives trading was the combination of mathematics and computing. Before Black-Scholes, option prices had been little more than educated guesses. The new model showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it, explains Emanuel Derman, a physicist who later took Black’s job at Goldman. Confidence in pricing gave buyers and sellers the courage to pile into derivatives. The better that real prices correlate with the unknown option price, the more confidently you can take on any level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr Derman has written, “someone had finally worked out how to synthesise H2O.”

Poetry in Brownian motion Black-Scholes is just a model, not a complete description of the world. Every model makes simplifications, but some of the simplifications in Black-Scholes looked as if they would matter. For instance, the maths it uses to describe how share prices move comes from the equations in physics that describe the diffusion of heat. The idea is that share prices follow some gentle random walk away from an equilibrium, rather like motes of dust jiggling around in Brownian motion. In fact, share-price movements are more violent than that.

Over the years the “quants” have found ways to cope with this—better ways to deal with, as it were, quirks in the prices of fruit and fruit salad. For a start, you can concentrate on the short-run volatility of prices, which in some ways tends to behave more like the Brownian motion that Black imagined. The quants can introduce sudden jumps or tweak their models to match actual share-price movements more closely. Mr Derman, who is now a professor at New York’s Columbia University and a partner at Prisma Capital Partners, a fund of hedge funds, did some of his best-known work modelling what is called the “volatility smile”—an anomaly in options markets that first appeared after the 1987 stockmarket crash when investors would pay extra for protection against another imminent fall in share prices.

The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants’ tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.

The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest. And in this crash foreign-exchange, interest-rate and equity derivatives models have so far behaved roughly as they should.

A muddle of mortgages Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralised-debt obligations (CDOs). The principle is simple enough. Imagine a waterfall of mortgage payments: the AAA investors at the top catch their share, the next in line take their share from what remains, and so on. At the bottom are the “equity investors” who get nothing if people default on their mortgage payments and the money runs out.

Despite theory, CDOs were hopeless, at least with hindsight (doesn’t that phrase come easily?). The cash flowing from mortgage payments into a single CDO had to filter up through several layers. Assets were bundled into a pool, securitised, stuffed into a CDO, bits of that plugged into the next CDO and so on and on. Each source of a CDO had interminable pages of its own documentation and conditions, and a typical CDO might receive income from several hundred sources. It was a lawyer’s paradise.

This baffling complexity could hardly be more different from an equity or an interest rate. It made CDOs impossible to model in anything but the most rudimentary way—all the more so because each one contained a unique combination of underlying assets. Each CDO would be sold on the basis of its own scenario, using central assumptions about the future of interest rates and defaults to “demonstrate” the payouts over, say, the next 30 years. This central scenario would then be “stress-tested” to show that the CDO was robust—though oddly the tests did not include a 20% fall in house prices.

This was modelling at its most feeble. Derivatives model an unknown price from today’s known market prices. By contrast, modelling from history is dangerous. There was no guarantee that the future would be like the past, if only because the American housing market had never before been buoyed up by a frenzy of CDOs. In any case, there are not enough past housing data to form a rich statistical picture of the market—especially if you decide not to include the 1930s nationwide fall in house prices in your sample.

Neither could the models take account of falling mortgage-underwriting standards. Mr Rajan of the University of Chicago says academic research suggests mortgage originators, keen to automate their procedures, stopped giving potential borrowers lengthy interviews because they could not easily quantify the firmness of someone’s handshake or the fixity of their gaze. Such things turned out to be better predictors of default than credit scores or loan-to-value ratios, but the investors at the end of a long chain of securities could not monitor lending decisions.

The issuers of CDOs asked rating agencies to assess their quality. Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.

Issuers like to have an edge over the rating agencies. By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest. With help from companies like Codefarm, an outfit from Brighton in Britain that knew the agencies’ models for corporate CDOs, issuers could build securities with any risk profile they chose, including those made up from lower-quality ingredients that would nevertheless win AAA ratings. Codefarm has recently applied for administration.

There is a saying on Wall Street that the test of a product is whether clients will buy it. Would they have bought into CDOs had it not been for the dazzling performance of the quants in foreign-exchange, interest-rate and equity derivatives? There is every sign that the issuing banks believed their own sales patter. The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on. They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment. With CDOs in deep trouble, the lenders are now suffering.

Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark. According to Mr Derman, with Black-Scholes “you know what you are assuming when you use the model, and you know exactly what has been swept out of view, and hence you can think clearly about what you may have overlooked.” By contrast, with CDOs “you don’t quite know what you are ignoring, so you don’t know how to adjust for its inadequacies.”

Now that the world has moved far beyond any of the scenarios that the CDO issuers modelled, investors’ quantitative grasp of the payouts has fizzled into blank uncertainty. That makes it hard to put any value on them, driving away possible buyers. The trillion-dollar bet on mortgages has gone disastrously wrong. The hope is that the trillion-dollar bet on companies does not end up that way too.

Continued in article

Closing Jensen Comment
So is portfolio diversification theory dead? I hardly think so. But if any lesson is to be learned is that we should question those critical underlying assumptions in Plato's Cave before worldwide strategies are implemented that overlook the Achilles' heel of those critical underlying assumptions.

"History, Not Politics," by Serena Golden, Inside Higher Ed, May 21, 2010 ---
http://www.insidehighered.com/news/2010/05/21/spence

Jonathan Spence came here to deliver a speech, but don't let that fool you: his address -- the 39th Annual Jefferson Lecture in the Humanities, which took place Thursday -- in no way resembled the sort typically associated with D.C.

The Jefferson Lecture is sponsored by the National Endowment for the Humanities, which describes the lecture as "the most prestigious honor the federal government bestows for distinguished intellectual achievement in the humanities." Those chosen for the distinction are typically academics or creative types (or both) -- but, given the setting, the sponsor, and the nature of the award (which "recognizes an individual... who has the ability to communicate the knowledge and wisdom of the humanities in a broad, appealing way"), Jefferson Lecturers have historically taken the opportunity to make a larger (and sometimes tacitly political) point related to the humanities. Last year, controversial bioethicist Leon Kass used his lecture to criticize the way the humanities are taught and researched at American universities; in 2007, Harvey Mansfield argued, with many subtle political allusions, that the social sciences are in dire need of "the help of literature and history"; Tom Wolfe's 2006 lecture discussed how the humanities shed light on modern culture (and lamented the current state of that culture on campuses); 2005 lecturer Donald Kagan and 2004 lecturer Helen Vendler offered opposing views on which disciplines of the humanities are most crucial, and why.

If any of those in the crowd (noticeably larger than last year's) at the Warner Theater last night were familiar with the Jefferson Lectures of years prior, they were in for a surprise.

Spence is Sterling Professor of History Emeritus at Yale University, whose faculty he joined in 1966. His specialty has always been China -- his 14 books on Chinese history include 1990's The Search for Modern China, upon whose publication the New York Times accurately predicted that it would "undoubtedly become a standard text on the subject" -- and his lecture was entitled "When Minds Met: China and the West in the Seventeenth Century." Even this relatively specific appellation, however, conveys a misleading breadth, for Spence's lecture focused almost exclusively on three men -- Shen Fuzong, an exceptionally learned Chinese traveler; Thomas Hyde, an English scholar of history and language; and Robert Boyle, also English, a scientist and philosopher of considerable renown -- and one year: 1687.

In his lecture, Spence gave what may (or may not) have been one brief acknowledgment that he'd chosen an unusually narrow topic of discourse: "It is a commonplace, I think, that the sources that underpin our concept of the humanities, as a focus for our thinking, are expected to be broadly inclusive." But, for himself, Spence dismissed that notion in one more sentence: "...as a historian I have always been drawn to the apparently small-scale happenings in circumscribed settings, out of which we can tease a more expansive story."

Thus he dedicated the rest of his lecture to the story of those three historical figures in the year 1687. Shen had traveled to Europe in the company of one of his teachers, a Flemish Jesuit priest who was co-editing a book of the sayings of Confucius from Chinese into Latin. Hyde, librarian at the University of Oxford's Bodleian Library, invited Shen there to assist him with the cataloging of some Chinese books -- and also because Hyde, who in that era would have been called an Orientalist, wanted to learn Chinese himself. After a brief stay at Oxford, Shen returned to London, bearing a letter of introduction from Hyde to his friend Boyle; the letter recommended that Boyle meet and converse with the Chinese scholar. The letter had to be convincing, Spence explained, because Boyle's reputation was by then widespread, and "he was so inundated with curious visitors that at times he had to withdraw into self-enforced seclusion...."

Shen did meet Boyle at least once; Boyle's work diary mentions their discussion of the Chinese language and its scholars (a conversation that, like all of those between Shen and Hyde, must have taken place in Latin: Shen's Latin was excellent, but he did not, evidently, know English). And Hyde maintained correspondence not only with his old friend Boyle -- over the years, the two had "discussed Arabic and Persian texts, Malay grammars... and how to access books from Tangier, Constantinople and Bombay" as well as "the chemical constituents of sal ammoniac and amber, the effectiveness of certain Mexican herbs... current studies of human blood and air, the nature of papyrus, the writings of Ramon Llull and the use of elixirs and alchemy in the treatment of illnesses" -- but also with Shen, until around the time of the latter's departure from England for Portugal in the spring of 1688.The letters between Shen and Hyde covered such topics as "Chinese vocabulary... China's units of weights and measurements... the workings of the Chinese examination system and bureaucracy... [and] the Chinese Buddhist belief in the transmigration of souls."

"All three men," Spence ultimately concluded, "though so different, shared certain basic ideas about human knowledge: these included... the importance of linguistic precision, the need for broad-based comparative studies, the role of clarity in argument, the need for thorough scrutiny of philosophical and theological principles.... Theirs, though brief, had been a real meeting of the minds. And the values they shared remain, well over three hundred years later, the kind that we can seek to practice even in our own hurried lives."

That final point was the closest Spence came to suggesting a particular take-home message for his audience; however, in an interview with Inside Higher Ed, held that morning in the lobby of the Willard Hotel, he did mention a few ideas that he was hoping to convey. For one thing, Spence said, given the current importance of U.S.-China relations, he hopes this much older, smaller-scale example of dialogue between the East and West will "give some perspective to that."

"Historians," he said, "try to get people away from just focusing on the present; they try to give them some sort of stronger sense of continuity, human continuity. And I just like the range of things, these three people that draw together, and they're writing their letters to each other, and their few meetings... and in that short time they talk about examination systems, they talk about language, competition, they talk about medicine, they talk about -- I was fascinated, they talk about chess..... All these things seemed to me to flow together, and I think they'd make an interesting -- I hope they'd make an interesting -- package about cultural contact."

There's a message in that, Spence said: "to make our range of contact as wide as possible, and to use our intelligence about how to do this."

Another issue raised in the lecture, Spence said -- "maybe a small point, but perhaps worth making" -- has to do with the teaching and learning of languages; Hyde dreamed of bringing native speakers of various Eastern languages to Oxford, to establish a college of languages. "Why should everybody else on the planet speak English?" Spence asked. "I mean, why should they?"

But on the larger importance of the humanities, and their current status in higher education and society at large, Spence was reluctant to make a strong argument. "It's not just a case of encouraging humanities in the abstract; it's having something to say.... The main search should be for what is the most meaningful thing you can achieve with the humanities, how can you share some kind of broader cultural values, or how can you learn things about yourself or other societies. The challenge is to use the humane intelligence and see what can be built on that."

And when it comes to funding, "any government has to put its priorities somewhere, and this does usually mean cutting something."

His lecture, Spence said, isn't "meant to be exactly a political speech, you know, I hope people understand that."

For the most part, those in attendance seemed more than satisfied. Spence's talk was punctuated frequently by warm laughter from the audience -- whom he indulged shamelessly, often departing from his prepared remarks to expound upon details that interested him, or to make additional jokes whenever the crowd found one of his remarks especially humorous. When he finished, the applause was long and loud, and one woman remarked audibly, "That was amazing!"; her companion replied, "Nice, really nice!"

But at least a few people reacted with more ambivalence. One group of young attendees, who identified themselves as fans of Spence, having been students of his as undergraduates at Yale, said that while they'd enjoyed the lecture, they had been hoping that Spence would make a more explicit connection between his topic and issues of current cultural or political relevance. One noted that, in his introductory remarks that evening, NEH Chairman James Leach had described the purpose of the Jefferson Lecture as being "to narrow the gap between the world of academia and public affairs," and had emphasized the Endowment's goal of "bridging cultures."

There was an "irony," this young man said, in the fact that Spence's lecture precisely addressed the bridging of two cultures, but Spence hadn't made a bridge between his own remarks -- which the audience member interpreted as "a clarion call for better scholarship" -- and any other realm. "Listeners," he said (possibly referring to himself), "want something that's cut and dry, that's tweetable."

The possibility of such complaints about his speech had arisen during Inside Higher Ed's interview with Spence that morning; he hadn't seemed concerned. "I'm not going to sort of over-apologize to the audience... they've chosen to come to hear about the seventeenth century" -- he chuckled -- "I think we announced that!"

History of the CMA Examination and Revisions

October 30, 2010 message from James Martin

For an update and history of the CMA program see VanZante, N. R. 2010. IMA's
professional certification program has changed. Management Accounting
Quarterly (Summer): 48-51.

or my summary of VanZante's article at
http://maaw.info/ArticleSummaries/ArtSumVanZante2010.htm

The information provided in this paper is very similar to the information
provided by Brausch and Whitney earlier this year. However, VanZante adds a
chronological history of the CMA program and explains why the CFM exam was
discontinued and merged into the new CMA exam.

For more information see MAAW's professional exams section at
http://maaw.info/ProfessionalExamsMain.htm

Bob Jensen's threads on managerial accounting are at
http://faculty.trinity.edu/rjensen/theory01.htm#ManagementAccounting

Bob Jensen’s call for better research in the accounting academy ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

Bob Jensen's threads on accounting history are at
http://www.insidehighered.com/news/2010/05/21/spence

February 22, 2011 message from Gary Mueller

Hi, Bob + Erika -

We didn't get around to putting together our usual "annual report" this year. We did a fair bit of travel during the 2nd half of 2010, had a number of family get-togethers, and time got away from us. But thankfully we are reasonably healthy and well. Our major downsizing was a pain, but now we are glad we tackled it in 2009. How are you both? Hopefully you did not have to suffer through the cold, cold winter in the N.E.

Since you are both quite family oriented, I thought you might be interested in the completion of my professional biography by Dale Flesher at Ole Miss. I am very happy with the outcome. So I am enclosed the flyer about the book in the attachment hereto.

Be well and keep warm! Best greetings and regards,

Gary & Coralie

Jensen Comment
Although the above message from Gary Mueller is somewhat personal, I thought readers might like to hear from Gary and to know about the recent biography about Gary that was written by accounting historians Dale Flesher and Gary Previts:

Gerhard G. Mueller: Father of International Accounting Education
By Dale L. Flesher and Gary Previts
 Excerpts --- Click Here
 http://snipurl.com/Garymueller
 http://books.google.com/books?id=AJVMGhLy-sEC&pg=PR9&lpg=PR9&dq=Flesher+Biography+%22Gerhard+Mueller%22&source=bl&ots=ke6Ixd4eYY&sig=caAPec9xbxIALLaj0pdfOXSW3Ww&hl=en&ei=2qBjTYD2JcSAlAeOmd3gCw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBkQ6AEwAA#v=onepage&q=Flesher%20Biography%20%22Gerhard%20Mueller%22&f=false

Although I've known Gary and Coralie for years, we became much closer in the years that we were both on the Executive Committee of the American Accounting Association. Because there was significant outside funding for our EC meetings in those years, we had some wonderful trips with spouses to places like Amsterdam and Puerto Rico and Hawaii. When we met outside the U.S., Gary usually had a purpose. For example, when we met in Amsterdam he organized meetings where we interacted with leaders of European accounting education. Gary had more global contacts in accounting education than any person I've ever known other than the very, very long term serving international accounting professor Paul Garner.

These were exciting times for the Executive Committee because it was a time when the Big Eight accounting firms gave the AAA $4 million to establish the Accounting Education Change Commission ---
http://aaahq.org/AECC/history/cover.htm
Gary Mueller was instrumental in organizing the entire AECC Program.

For  36 years when Gary was at the University of Washington he was arguably the best known international accounting professor in the world. Gary grew up in Germany and was fluent in several languages (including difficult German dialects). In addition to his various books on international accounting, Gary chaired the doctoral dissertations of some outstanding international accounting students.

In addition to serving a AAA President, Gary was on the FASB for a full five year appointment before he retired.

Gary served the accounting profession and the Academy very well and was a mover and shaker in the globalization of accountancy.

My life is much richer for having served with Gary!

Accounting History
The September 2011 edition of The Accounting Review has some really interesting biographical book reviews and tributes to historical scholars ---
 

Anthony Hopwood (Deceased)
Gerhard G. Mueller
George J. Benston (Deceased)

CHRISTOPHER S. CHAPMAN, DAVID J. COOPER, and PETER B. MILLER (editors), Accounting, Organizations, and Institutions: Essays in Honour of Anthony Hopwood (Oxford, U.K.: Oxford University Press, 2009, ISBN 978-0-19-954635-0, pp. xi, 441) ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000005001835000001&idtype=cvips&prog=normal&bypassSSO=1

This collection of essays memorializes the life and work of Anthony Hopwood, a thought leader in management accounting research who was renowned for developing communities of accounting scholars. These essays, written by his students, co-authors, and colleagues, were presented to Anthony in a conference of international researchers. Thus, they have benefited from the counsel of the editors, from vigorous discussion among conference participants, and from reactions by Anthony himself. Consistent with Anthony’s distinguished career, in what may be his final research endeavor he contributed to the creation of a collection of serious scholarly works, worthy of consideration by all accounting researchers.

The volume is comprised of 18 chapters that collectively cover themes that animated Anthony’s work. Chief among these is the importance of studying accounting in the organizational and social contexts in which it operates, with an aim of understanding how accounting shapes and is shaped by its environment. In the introductory chapter, the editors delineate a tripartite schema of accounting, organizations, and institutions that guided their commissioning of pieces for the volume. Given the title of the journal that Anthony founded and edited for decades, Accounting, Organizations and Society (AOS), I wondered why the authors chose ‘‘institutions’’ over ‘‘societies’’ as the third element of the framework. In particular, I was curious about whether Anthony might in hindsight have preferred this, acknowledging the growing importance and use of institutional theory in accounting research. While the authors acknowledge the limitations of adhering too literally to the framework in light of indistinct conceptual boundaries (i.e., ‘‘to what extent is accounting itself an ‘institution’?’’, p. 2), they nonetheless argue convincingly for the usefulness of the framework in understanding a significant body of research that has been published in journals such as: AOS, Critical Perspectives on Accounting, and Accounting, Auditing and Accountability Journal. In Chapter 1, the editors provide a nice history and synthesis of these works. Although Anthony clearly played a major part in the genesis and intellectual development of the literature, the chapter is not a biographical sketch. It locates Anthony’s contributions in relation to other management scholars and in the context of current events and influential practitioner-led studies.

The editors conclude their history by reiterating Anthony’s concern: that much of the current-day neglect of accounting by social scientists stems from new modes of accountability in higher education that have been made operational through simplified, standardized performance metrics. Their hope is that these essays from ‘‘within and beyond’’ the discipline of accounting will reinvigorate research on accounting in its social context, and thereby address Anthony’s apprehension that ‘‘the only consumers of accounting research are other accounting researchers’’ (p. 22). Opting for a mix of ‘‘depth’’ strategy and ‘‘breadth’’ strategy for this review, I have selected one of the 17 contributed chapters for extensive comment and two others for brief summary.

Continued in article

DALE L. FLESHER, Gerhard G. Mueller: Father of International Accounting Education (Bingley, U.K.: Emerald Group Publishing Limited, 2010, ISBN 978-0-85724-333-1, pp. x, 222).
Scroll Down to Page 1838
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000005001835000001&idtype=cvips&prog=normal&bypassSSO=1

A biography, the title of which anoints its subject as the ‘‘Father of International Accounting Education,’’ raises two immediate questions. First, what exactly is international accounting and, second, what does it mean to be a ‘‘father’’ of an educational discipline?

The first question arises because it is not obvious as to what is international about international accounting. After all, the underlying concepts of accounting, like those of physics, are universal. The principles of accounting articulated by Fr. Luca Pacioli (often referred to as the ‘‘father of accounting’’) are no more confined to the boundaries of Italy than are the principles of physics described by Galileo. Yet it is doubtful that any academic physicists consider themselves specialists in ‘‘international physics.’’ ‘‘International accounting’’ is, at best, an ill-defined sub-discipline of accounting. To many—and probably to most U.S. accountants—international accounting is mainly a description of accounting practices in countries other than the United States. Needless to say, that definition would be unlikely to be embraced by our colleagues in those ‘‘other’’ countries. To others, international accounting deals primarily with measurement and reporting issues involving currency translation and related issues of consolidation. To still others, it pertains to the unique problems of controlling and auditing the accounting systems of multinational enterprises.

In his biography of Gerhard G. Mueller, Professor Dale L. Flesher never explicitly answers that first question. Yet it is apparent from the extraordinary length and breadth of Mueller’s publications that international accounting incorporated almost anything that involved entities outside of the United States. Indeed, he himself defined international accounting as ‘‘the producing, exchanging, using, and interpreting of accounting data across national borders’’ (p. 45).

As for the second question, what it means to be the ‘‘father’’ of international accounting education, Flesher concedes that Mueller was certainly not its biological father; others both wrote about and taught international accounting prior to him. But he leaves no doubt that Mueller adopted the discipline and can take credit for nurturing it up to adulthood.

. . .

Book review author Mike Granof states the following on Page 1841:
Flesher’s treatise leaves one significant question unanswered: Why has Gerhard Mueller not yet been elected to the Accounting Hall of Fame?

Continued in article

JAMES D. ROSENFELD (editor), The Selected Works of George J. Benston: Volume 2, Accounting and Finance (New York, NY: Oxford University Press, 2010, ISBN: 978- 0-19-538902-9, Vol. 2, pp. xviii, 426).
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http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000005001835000001&idtype=cvips&prog=normal&bypassSSO=1

This volume, which is edited by James D. Rosenfeld, the late George Benston’s friend and colleague at Emory University, consists of 16 articles arranged consecutively in two parts: nine accounting articles and seven finance articles. I will discuss all nine accounting articles in chronological order. I will then discuss two accounting articles that were omitted from the volume that were more highly cited than eight of the nine accounting articles included in the volume (source of citations: scholar.google.com as of February 10, 2011). Before beginning my discussion of the 11 articles, I opine that George Benston (hereafter, George) was one of the few and last Renaissance men of our profession, making numerous contributions to the accounting, finance, economics, and banking literatures.1 Indeed, while I focus on his contributions to accounting, George was best known for his expertise in banking, an area in which he was often cited by The Economist. As additional evidence of his expertise in banking, George was an Associate Editor of The Journal of Money, Credit, and Banking.2

Volume 1 of this two-volume collection covers George’s contributions to banking and financial services.

Continued in article

Jensen Comment
It saddens me that my friends Tony Hopwood and George Benston passed on. It thrills me, however, to still correspond with Gary Mueller. I was honored to serve on the Executive Committee when Gary was President of the American Accounting Association. The task fell upon Gary's shoulders to set up the Accounting Education Change Commission that received $4 million from the Big Eight to fund change in accounting education. We chose Gary's then colleague Gary Sundem to serve as CEO of the AECC.

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

More Detailed Differences (Comparisons) between FASB and IASB Accounting Standards

2011 Update

"IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

• Revised introduction reflecting the current status, likely next steps, and what companies should be doing now
  (see page 2);
• Updated convergence timeline, including current proposed timing of exposure drafts, deliberations, comment periods, and final standards
  (see page 7);
• More current analysis of the differences between IFRS and US GAAP -- including an assessment of the impact embodied within the differences
  (starting on page 17); and
• Details incorporating authoritative standards and interpretive guidance issued through July 31, 2011
  (throughout).

This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

To request a hard copy of this publication, please contact your PwC engagement team or contact us.

Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

Bob Jensen's threads on accounting standards setting controversies ---
http://faculty.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

 

"Canadian regulator decides against allowing early adoption of recent IFRSs by certain entities," IAS Plus, November 1, 2011 ---
http://www.iasplus.com/index.htm

. . .

In making its decision, the OSFI considered a number of factors such as industry consistency, OSFI policy positions on accounting and capital, operational capacity and resource constraints of Federally Regulated Entities (FREs), the ability to benefit from improved standards arising from the financial crisis and the notion of a level playing field with other Canadian and international financial institutions. OSFI concluded that FREs should not early adopt the following new or amended IFRSs, but instead should adhere to their mandatory effective dates:

Continued

 

Jensen Comment
The clients, auditors, and the AICPA clamoring that U.S. firms should be able to voluntarily choose IFRS instead of U.S. GAAP even before it has not been decided that IFRS will ever replace FASB standards seem to ignore the problems that voluntary choice of IFRS might cause for investors and analysts. The above reasoning by the OSFI makes sense to me.

But then outfits like the AICPA have a self-serving interest in earning millions of dollars selling IFRS training courses and materials.
 

November 2, 2011 reply from Patricia Walters

Does that mean you oppose options to early adopt standards in general, not just IFRSs?

Pat

 

November 2, 2011 reply from Bob Jensen

Hi Pat,

It's hard to say regarding early adoption of a particular national or international standard, because there can be unique circumstances. For example, FAS 123R simply altered how to make disclosures rather than alter the disclosures themselves since employee option expenses had to be disclosed before the FAS 123R adoption date. But even here early adoption of FAS 123R by Company A versus late adoption by Company B made simple comparisons of eps and P/E ratios between these companies less easy.

There's a huge difference between early adoption of a particular standard and early adoption of an entire system of standards like switching from FASB accounting standards to IFRS.

I think the Canadian position of early adoption of IFRS is probably correct because of the mess early adoption of IFRS makes with comparisons of companies using different accounting standards and the added costs of regulation of more than one set of standards. Also think of the added burden placed upon the courts to adjudicate disputes when differing sets of standards are being used.

Even though we allow IFRS for SEC registered foreign companies, I think it would be a total mess for the SEC, the PCAOB, investors, analysts, educators, trainers, auditing, and even the IRS (where tax and reporting treatments must sometimes be reconciled) if our domestic corporations could choose between FASB versus IASB standards.

There are hundreds of differences between FASB and IASB standards. Allowing companies domestic companies to cherry pick which system they choose before it is even known if there will ever be official replacement of FASB standards by IASB standards would be very, very confusing. What if there never is a decision to replace FASB standards? Do want to simply allow companies to choose to bypass FASB standards at their own discretion?

Of course, if information were costless it might be ideal to require financial reporting where FASB and IASB outcomes are reconciled. But clients and auditors generally contend that the cost of doing this greatly exceeds benefits. And teaching financial accounting would become exceedingly complicated if we had to teach two sets of standards on an equal basis.

I would certainly hate to face a CPA examination that had nearly equal coverage of both FASB and IASB standards simultaneously. I say this especially after viewing the hundreds of pages of complicated differences between the two standards systems.

Respectfully,
Bob Jensen

Comparisons of IFRS with Domestic Standards of Many Nations
http://www.iasplus.com/country/compare.htm

More Detailed Differences (Comparisons) between FASB and IASB Accounting Standards

2011 Update

"IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

• Revised introduction reflecting the current status, likely next steps, and what companies should be doing now
  (see page 2);
• Updated convergence timeline, including current proposed timing of exposure drafts, deliberations, comment periods, and final standards
  (see page 7);
• More current analysis of the differences between IFRS and US GAAP -- including an assessment of the impact embodied within the differences
  (starting on page 17); and
• Details incorporating authoritative standards and interpretive guidance issued through July 31, 2011
  (throughout).

This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

To request a hard copy of this publication, please contact your PwC engagement team or contact us.

Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

Bob Jensen's threads on accounting standards setting controversies ---
http://faculty.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

 

"Canadian regulator decides against allowing early adoption of recent IFRSs by certain entities," IAS Plus, November 1, 2011 ---
http://www.iasplus.com/index.htm

. . .

In making its decision, the OSFI considered a number of factors such as industry consistency, OSFI policy positions on accounting and capital, operational capacity and resource constraints of Federally Regulated Entities (FREs), the ability to benefit from improved standards arising from the financial crisis and the notion of a level playing field with other Canadian and international financial institutions. OSFI concluded that FREs should not early adopt the following new or amended IFRSs, but instead should adhere to their mandatory effective dates:

Continued

 

Jensen Comment
The clients, auditors, and the AICPA clamoring that U.S. firms should be able to voluntarily choose IFRS instead of U.S. GAAP even before it has not been decided that IFRS will ever replace FASB standards seem to ignore the problems that voluntary choice of IFRS might cause for investors and analysts. The above reasoning by the OSFI makes sense to me.

But then outfits like the AICPA have a self-serving interest in earning millions of dollars selling IFRS training courses and materials.
 

November 2, 2011 reply from Patricia Walters

Does that mean you oppose options to early adopt standards in general, not just IFRSs?

Pat

 

November 2, 2011 reply from Bob Jensen

Hi Pat,

It's hard to say regarding early adoption of a particular national or international standard, because there can be unique circumstances. For example, FAS 123R simply altered how to make disclosures rather than alter the disclosures themselves since employee option expenses had to be disclosed before the FAS 123R adoption date. But even here early adoption of FAS 123R by Company A versus late adoption by Company B made simple comparisons of eps and P/E ratios between these companies less easy.

There's a huge difference between early adoption of a particular standard and early adoption of an entire system of standards like switching from FASB accounting standards to IFRS.

I think the Canadian position of early adoption of IFRS is probably correct because of the mess early adoption of IFRS makes with comparisons of companies using different accounting standards and the added costs of regulation of more than one set of standards. Also think of the added burden placed upon the courts to adjudicate disputes when differing sets of standards are being used.

Even though we allow IFRS for SEC registered foreign companies, I think it would be a total mess for the SEC, the PCAOB, investors, analysts, educators, trainers, auditing, and even the IRS (where tax and reporting treatments must sometimes be reconciled) if our domestic corporations could choose between FASB versus IASB standards.

There are hundreds of differences between FASB and IASB standards. Allowing companies domestic companies to cherry pick which system they choose before it is even known if there will ever be official replacement of FASB standards by IASB standards would be very, very confusing. What if there never is a decision to replace FASB standards? Do want to simply allow companies to choose to bypass FASB standards at their own discretion?

Of course, if information were costless it might be ideal to require financial reporting where FASB and IASB outcomes are reconciled. But clients and auditors generally contend that the cost of doing this greatly exceeds benefits. And teaching financial accounting would become exceedingly complicated if we had to teach two sets of standards on an equal basis.

I would certainly hate to face a CPA examination that had nearly equal coverage of both FASB and IASB standards simultaneously. I say this especially after viewing the hundreds of pages of complicated differences between the two standards systems.

Respectfully,
Bob Jensen

Bob Jensen's threads on accounting standard setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Before you read the article below you may want to scan the classic Baruch Lecture by Bob Elliott at
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.htm

"Corporate Reporting Needs a Reboot," by Paul Druckman, Harvard Business Review Blog, April 17, 2013 --- Click Here
http://blogs.hbr.org/cs/2013/04/corporate_reporting_needs_a_re.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

There is a clamor of voices demanding the rebooting of capitalism, from academics (such as Michael Porter) and politicians (like Al Gore) to investors (such as CalPERS) and Occupy's street activists.

The common thread is that today's model of capitalism overemphasizes short-term financial data and neglects information that gets at the true sources of sustainable value creation — things like innovation, brand equity, customer loyalty, and key stakeholder relationships. Corporate reporting today emphasizes compliance, boilerplate and legalese. As a result, we have a massive glut of filings, press releases, analyst reports and articles focused on financial data. The system has lost sight of the point of reporting: to give companies access to financial capital by communicating their value to investors.

The consequence of the systemic failure of this lopsided model is that companies focus on short-term financial performance — because that is what they believe investors are interested in — to the detriment of long-term value creation. Investors, meanwhile, compensate for the lack of knowledge about issues central to longer term value by pricing in a risk premium. This can result in market valuations that do not reflect the fundamental performance or prospects of the business, leading to a misallocation of capital and reduced visibility for investors, reinforcing short-term decision-making. And it is business that pays the price through more expensive capital, while furthering a flawed model of capitalism.

Fortunately, there is a better way to communicate about the sources of value creation: integrated reporting. Such reporting integrates material information about a firm's financial performance with information on sustainability performance and intangibles such as intellectual and human capital.

From the investor standpoint, integrated reporting provides insights about a firm's business model, strategy, risk, performance and prospects that are simply not available under the current reporting model. It therefore supports investor decision-making by providing a more complete basis for dialogue with the company's board and an assessment of present and future value. This benefits not only the investor, but also investors' beneficiaries and the broader economy by providing a platform that encourages financial stability. Companies such as Danone, SAP, AkzoNobel and Unilever are already pushing the boundaries on their corporate reporting in this direction.

This week, the International Integrated Reporting Council (of which I am the chief executive) launched the consulting draft of integrated reporting framework. Over the next ninety days, the IIRC is seeking feedback on the draft from companies, investor groups, reporting standards organizations, accounting bodies and regulators — anybody who has a stake in seeing the transformation of corporate reporting.

The framework differs from standard financial reporting in a number of ways:

• It provides guidance on reporting that goes beyond simply conveying past performance in order to help investors understand how value is created (or destroyed) in the company, given its business model and its strategies, risks and opportunities.
• It acknowledges that financial capital is not the only asset in a business that drives value creation; instead, a business must report on the interaction of six different types of capital: financial, manufactured, intellectual, human, social and relationship, and natural.
• It demands that reporting go beyond being simply a mash-up of a firm's existing reports, or a forced combination of the financial and sustainability reports. Instead, it is a concise report that concentrates on material issues — those relevant to investors — that affect the firm's strategy and future orientation.

Despite the evidence of green shoots representing a new pathway for corporate reporting, I don't believe that true integrated reporting exists anywhere just yet. However, the new framework gets us closer to that goal.

While all this makes me hopeful for the future of corporate reporting, one dark cloud hangs over my outlook: US companies are lagging their European, Asian and Latin American counterparts in moving towards an integrated reporting model. Of course, we have great examples of US companies, such as Coca Cola, Prudential Finance and Clorox, joining around ninety global companies in IIRC's pilot program right now, alongside dozens of investors. But my concern is that there are deep-rooted reasons why the US environment may stifle innovation in corporate reporting.

One is that companies hesitate to make statements about anticipated future performance because they fear litigation. But there are other reasons too. Many see reporting as a compliance issue — if it's not legislated, then don't bother. And some will only move on this when they believe the majority of investors want this sort of information.

The danger for US firms who lag in adopting integrated reporting is twofold: not only will their investors lack complete information about their performance, but they also will lose out on the integrated thinking that integrated reporting drives: it reduces barriers between functional silos, aligns data systems and processes, and encourages a culture that focuses on the full spectrum of value drivers. This is all about innovation, and I am saddened to think that US companies, some of the world's most innovative businesses in their own right, might be held back because they are stuck in an out-of-date reporting model.

If integrated reporting can play its role in better corporate performance, holistic investor engagement and the proliferation of a longer-term model of capitalism, it will not have come a moment too soon.

Jensen Comment
I really hate being a luddite, but if corporate reporting is to be expanded to cover the entire ballpark as suggested in the above article, then don't look for the accounting profession to carry the ball into the new territories of corporate reporting.

In fairness, Paul Druckman did not propose that the accounting profession expand to cover these new corporate reporting territories. But in this era of rebranding of PwC and other multinational CPA firms to offer expertise in non-accounting areas it's tempting to think CPA firms can rebrand in corporate reporting of "brand equity, customer loyalty, and key stakeholder relationships."

In the accounting profession we've been through this before. The AICPA even proposed a new professional designation that became the joke of the 20th Century ---- the professional certification of a Cognitor (later changed to XYZ).
http://www.journalofaccountancy.com/Issues/2001/Oct/TheXyzCredential
Also see http://www.journalofaccountancy.com/Issues/2001/May/CpasSpeakUpOnNewGlobalCredential
Accountants are educated and trained to do what they learn in accounting education programs. They are generally not trained to become experts in "innovation, brand equity, customer loyalty, and key stakeholder relationships." Unless they have a lot more education and training outside accountancy they are not IT experts or valuation experts.

This takes me back to the days when Bob Elliott, eventually as President of the AICPA, was proposing great changes in the profession, including SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG videos as starting points for discussion in my accounting theory course. Bob relied heavily on the analogy of why the railroads that did not adapt to innovations in transportation such as Interstate Highways and Jet Airliners went downhill and not uphill. The railroads simply gave up new opportunities to startup professions rather than adapt from railroading to transportation.

Bob’s underlying assumption was that CPA firms could extend assurance services to non-traditional areas (where they were not experts but could hire new kinds of experts) by leveraging the public image of accountants as having high integrity and professional responsibility. That public image was destroyed by the many auditing scandals, notably Enron and the implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://faculty.trinity.edu/rjensen/Fraud001.htm

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

The AICPA commenced initiatives on such things as Systrust. To my knowledge most of these initiatives bit the dust, although some CPA firms might be making money by assuring Eldercare services.

The counter argument to Bob Elliot’s initiatives is that CPA firms had no comparative advantages in expertise in their new ventures just as railroads had few comparative advantages in trucking and airline transportation industries, although the concept of piggy backing of truck trailers eventually caught on.

I still have copies of Bob’s great VCR tapes, but I doubt that these have ever been digitized. Bob could sell refrigerators to Eskimos.

Should Double Entry Accounting be Abandoned?

History of Women in Accounting and Other Women in the World

Judith Drake (scholar on barriers to women in physical and mental work, including accounting) --- http://en.wikipedia.org/wiki/Judith_Drake

Eight Special Women of Accounting --- http://www.journalofaccountancy.com/Issues/2007/Aug/EightSpecialWomenInAccounting.htm

Among the AICPA-donated volumes at Ole Miss are two binders containing photographs of individuals appearing in the JofA or at accounting conventions from 1887 to 1979. Of the 446 individuals featured, eight are women—Christine Ross, Ellen Libby Eastman, Miriam Donnelly, Mary E. Murphy, Helen Lord, Helen H. Fortune, Mary E. Lewis and Beth M. Thompson. In a time when the profession was the all-but-exclusive domain of men, they stood out not only because of their gender but in many cases because of their accomplishments and contributions to accounting. Consider that in 1933, slightly more than 100 CPA certificates had been issued to women. By 1946, World War II had changed traditional notions of gender in the workplace, and female CPAs had more than tripled to 360—still a small contingent but, as information gleaned from the AICPA Library indicates, one capable of exerting a strong and beneficial influence on the profession.

Christine Ross
Born about 1873 in Nova Scotia, Ross took New York by storm in the late 1890s. New York state enacted licensure legislation in 1896 and gave its inaugural CPA exam in December 1896. Ross sat for the exam in June 1898, scoring second or third in her group. Six to 18 months elapsed while her certificate was delayed by state regents because of her gender. But she had completed the requirements and became the first woman CPA in the United States, receiving certificate no. 143 on Dec. 21, 1899.

Ross began practicing accounting around 1889. For several years, she worked for Manning’s Yacht Agency in New York. Her clients included women’s organizations, wealthy women and those in fashion and business.

Helen Lord
Lord received her CPA certificate from New York in 1934 and in 1935 joined the American Society of Certified Public Accountants, which merged with the American Institute of Accountants (later AICPA) the following year. In 1937, she was a partner with her father in the New York firm of Lord & Lord and a member of the AIA. She served in the late 1940s as business manager of The Woman CPA, published by the American Woman’s Society of Certified Public Accountants–American Society of Women Accountants. Lord reported the journal then had a circulation of more than 2,200.

Helen Hifner Fortune
Fortune, one of the first women CPAs in Kentucky, received certificate no. 174 in 1935 and was admitted to the AIA the following year. She became a member of an AIA committee in 1942 and by 1947 was a partner in the Lexington, Ky., firm of Hifner and Fortune.

Ellen Libby Eastman
Eastman began her career as a clerk in a Maine lumber company, eventually becoming chief accountant. She studied for the CPA exam at night and became the first woman CPA in Maine, receiving certificate no. 37 dated 1918. She was also the first woman to establish a public accounting practice in New England. Arriving in New York in 1920, Eastman focused on tax work and audited the accounts of the American Women’s Hospital in Greece. In 1925, she was a member of the ASCPA. In 1940, Eastman began working with the law firm of Hawkins, Delafield & Longfellow in New York.

She was outspoken and eloquent regarding a woman’s ability to succeed in accounting. In a 1929 article in The Certified Public Accountant, Eastman recounted her adventures:

One must be willing and able to endure long and irregular hours, unusual working arrangements and difficult travel conditions. I have worked eighteen out of the twenty-four hours of a day with time for but one meal; I have worked in the office of a bank president with its mahogany furnishings and oriental rugs and I have worked in the corner of a grain mill with a grain bin for a desk and a salt box for a chair; I have been accorded the courtesy of the private car and chauffeur of my client and have also walked two miles over the top of a mountain to a lumber camp inaccessible even with a Ford car. I have ridden from ten to fifteen miles into the country after leaving the railroad, the only conveyance being a horse and traverse runners—and this in the severity of a New England winter. I have done it with a thermometer registering fourteen degrees below zero and a twenty-five mile per hour gale blowing. I have chilled my feet and frozen my nose for the sake of success in a job which I love. I have been snowbound in railroad stations and have been stranded five miles from a garage with both rear tires of my car flat. I have ridden into and out of open culvert ditches with the workmen shouting warnings to me. And always one must keep the appointment; “how” is not the client’s concern.
 

Mary E. Murphy
A long-lived pioneer, Murphy (1905–1985) lectured, researched and taught in the United States and abroad, retiring in 1973. The Iowa native earned her bachelor of commerce degree with a major in accounting from the University of Iowa in 1927, then obtained a master’s in accountancy in 1928 from Columbia University Business School. In 1938, she received a doctorate in accountancy—only the second woman in the United States to do so—from the London School of Economics.

In 1928, Murphy began working in the New York office of Lybrand, Ross Bros. & Montgomery. Two years later, she took the CPA exam in Iowa and received certificate no. 67, to become the first woman CPA in Iowa. She joined the AIA in 1937.

Following her public accounting stint, she served for three years as the chair of the Department of Commerce at St. Mary’s College in Notre Dame, Ind. Murphy also was an assistant professor of economics at Hunter College of the City University of New York until 1951. In 1952, she received the first Fulbright professorship of accounting, with assignments in Australia and New Zealand. In 1957, she was appointed as the first director of research of the Institute of Chartered Accountants in Australia. Murphy retired in 1973 from the accounting faculty at California State University.

She published or collaborated on more than 20 books and 100 journal articles and many book reviews and scholarly papers. From 1946 to 1965 she was the most frequently published author in The Accounting Review. Murphy investigated the role of accounting in the economy, made the case for accounting education improvements and paved the way for other aspiring women accountants to prosper. More than half her publications explored international accounting, often advocating standardization. She also emphasized accounting history and biographies.

Mary E. Lewis
Lewis received California CPA certificate no. 1404 in 1939. She was admitted to the AIA that year and by 1947 had her own firm in Los Angeles.
 

Beth M. Thompson
Thompson worked as the office manager in the Kentucky Automobile Agency she and her husband, Charles R. Thompson, owned. After closing the car business, they moved to Florida, where she worked for an accounting firm. She passed the CPA exam in 1951 with the encouragement of her husband and opened her own accounting business in Miami. In 1955, Thompson was one of only 900 women CPAs and the only female president of a state association chapter—the Dade County chapter of the Florida Institute of CPAs.

Miriam Donnelly
From 1949 to 1955, Donnelly was head librarian of the AIA library. (In 1957, the AIA was renamed the AICPA.) She began her career with the library as assistant librarian and cataloger in 1927, after working for two governmental libraries and the New York Public Library.

 

History of women accountants in the 1880. US Federal Census ---
http://repository.usfca.edu/cgi/viewcontent.cgi?article=1001&context=acct

Christine Ross (The First Woman CPA) --- Click Here
http://books.google.com/books?id=W8Z2a53DJ2cC&pg=PA151&lpg=PA151&dq=%22First+Woman+CPA%22&source=bl&ots=irXssMWzFN&sig=0AneWv1qO-MB6_ixatHq-mMerRQ&hl=en&sa=X&ei=N8o8UY3XBYrK0AHngoCYBw&ved=0CDgQ6AEwAQ#v=onepage&q=%22First%20Woman%20CPA%22&f=false

Mary Jo McCann (First Woman CPA in Kansas) ---
http://www.kscpa.org/about/news/119-mary_jo_mccann_first_woman_cpa_in_kansas_passes

Bertha Aldrich (First Woman CPA in California) --- http://boards.ancestry.com/surnames.aldrich/600/mb.ashx

Accounting Reform (search for women) --- http://en.wikipedia.org/wiki/Accounting_reform

American Society of Women Accountants --- http://en.wikipedia.org/wiki/University_of_Cambridge#Women.27s_education

Accounting and Financial Women's Alliance --- http://www.afwa.org/

Accounting History Libraries at the University of Mississippi (Ole Miss) --- http://www.olemiss.edu/depts/accountancy/libraries.html
There are many items pertaining to accounting women in history, especially in the Accounting Historians Journal

Ruth Andersen, First Woman on the Board of a Big Four Accounting Firm --- http://en.wikipedia.org/wiki/Ruth_Anderson_%28accountant%29

Erma Bombeck (a termite control accountant at an advertising agency) --- http://en.wikipedia.org/wiki/Erma_Bombeck

Cynthia Cooper (Internal auditor who blew the whistle at WorldCom) --- http://en.wikipedia.org/wiki/Cynthia_Cooper_%28accountant%29

Lynn Brewer was never enough of a player to even mention in my threads on the Enron scandal
The foul-mouthed Sherron Watkins was the significant whistleblower at Enron
http://faculty.trinity.edu/rjensen/FraudEnronQuiz.htm#10

Grace Andrews (early mathematician and accountant in Barnard College) --- http://en.wikipedia.org/wiki/Grace_Andrews_%28mathematician%29

Patricia Courtney (IRS agent and professional baseball star) --- http://en.wikipedia.org/wiki/Patricia_Courtney

Patrecia Barringer (Tax accountant, auditor, and professional baseball star) ---http://en.wikipedia.org/wiki/Patricia_Barringer

Helen Nordquist (Telephone operator, accountant, and professional baseball star) --- http://en.wikipedia.org/wiki/Helen_Nordquist

Rita Lee (Accounting Student Tennis Star) --- http://en.wikipedia.org/wiki/Janet_Lee

Diane Cummins (Canadian Accountant Track Star) --- http://en.wikipedia.org/wiki/Diane_Cummins

Sue Hearnshaw (British Chartered Accountant and Long Jump Star) --- http://en.wikipedia.org/wiki/Sue_Hearnshaw

Betty Wagner Spandikow (Accountant Who Became an Advocate of Breast Feeding) --- http://en.wikipedia.org/wiki/Betty_Wagner_Spandikow

Jennifer Archer (Oil and Gas Accountant Turned Fiction Writer) --- http://en.wikipedia.org/wiki/Jennifer_Archer

Women in Business --- http://en.wikipedia.org/wiki/Women_in_business

American Business Women Association --- http://en.wikipedia.org/wiki/American_Business_Women%27s_Association

9 to 5 Film --- http://en.wikipedia.org/wiki/9_to_5_%28musical%29

Career Women --- http://en.wikipedia.org/wiki/Career_woman

A History of Entrereneurship
"Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship," by Heather A. Haveman, Jacob Habinek, and Leo A Googman, UC Berkeley,  2011 ---
http://www.escholarship.org/uc/item/392635v2;jsessionid=00ECE18AD2472F4956AAF2D00CC2132E#page-2
 Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship

China's Tiger Women Billionaires ---
http://www.thedailybeast.com/newsweek/2012/03/04/amy-chua-profiles-four-female-tycoons-in-china.html

"Liz Claiborne Must Say Adieu to Liz," by: Dana Mattioli, The Wall Street Journal, October 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203914304576626711202553884.html?mod=djem_jiewr_AC_domainid

"New Questions on Women, Academe and Careers," by Scott Jaschik, Inside Higher Ed, September 22, 2008 --- http://www.insidehighered.com/news/2008/09/22/women

Barbara Franklin (one of the first graduates of the Harvard Business School) --- http://en.wikipedia.org/wiki/Barbara_Franklin

History of Feminism --- http://en.wikipedia.org/wiki/History_of_feminism
Also see http://en.wikipedia.org/wiki/Mich%C3%A8le_Pujol

National Organization for Women (NOW) --- http://www.now.org/
For example, search for "Accounting" in the search box

Women's Work --- http://en.wikipedia.org/wiki/Women%27s_work 

Teachers, Accountants, and Physician Women as Slaves in Ancient Rome ---
http://en.wikipedia.org/wiki/Slavery_in_ancient_Rome

Conduct Literature for Women, 1500-1640, eds. William St Clair & Irmgard Maassen (6 Volumes) (London: Pickering and Chatto, 2000).

Conduct Literature for Women, 1640-1710, eds. William St Clair & Irmgard Maassen (6 Volumes) (London: Pickering and Chatto, 2002).

History of Women in the United States --- http://en.wikipedia.org/wiki/History_of_women_in_the_United_States

The Arthur and Elizabeth Schlesinger Library on the History of Women in America ---  http://www.radcliffe.harvard.edu/schlesinger-library

Women's suffrage in the United Kingdom --- http://en.wikipedia.org/wiki/Women%27s_suffrage_in_the_United_Kingdom 

By Popular Demand: "Votes for Women" Suffrage Pictures, 1850-1920 --- http://memory.loc.gov/ammem/vfwhtml/vfwhome.html

Women's Rights --- http://en.wikipedia.org/wiki/Women%27s_rights
Title 15 of the United States Code ---  http://en.wikipedia.org/wiki/Title_15_of_the_United_States_Code
Title 9 of the United States Code --- http://en.wikipedia.org/wiki/Title_9_of_the_United_States_Code
Women's Sports --- http://en.wikipedia.org/wiki/Women%27s_sports

Famous Women in History --- http://www.historynet.com/famous-women-in-history

National Women's Hall of Fame --- http://www.greatwomen.org/
Note that some states also have hall of fame sites for women inductees

Women in Islam ---
http://en.wikipedia.org/w/index.php?title=Special:Search&limit=20&offset=120&redirs=1&profile=default&search=Women+in+Accounting

Sharia (search for the sections pertaining to women) --- http://en.wikipedia.org/wiki/Sharia

Women's Rights Movement in Iran --- http://en.wikipedia.org/wiki/Women%27s_rights_movement_in_Iran

Women in Saudi Arabia --- http://en.wikipedia.org/wiki/Saudi_Arabia

Women in Libya --- http://en.wikipedia.org/wiki/Women_in_Libya

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

Women of Singapore --- http://en.wikipedia.org/wiki/Women_in_Singapore

Women's Roles in World Wars --- http://en.wikipedia.org/wiki/Women%27s_roles_in_the_World_Wars
Women in the Military --- http://en.wikipedia.org/wiki/Women_in_the_military
Yugoslav Partisans --- http://en.wikipedia.org/wiki/Yugoslav_Partisans
The story of women bomber pilots from the Women's Auxiliary Ferrying Squadron --- http://en.wikipedia.org/wiki/Ladies_Courageous

Rosie the Riveter --- http://en.wikipedia.org/wiki/Rosie_the_Riveter

Victorian Dress Reform --- http://en.wikipedia.org/wiki/Victorian_dress_reform

Women's Educational and Industrial Union --- http://en.wikipedia.org/wiki/Women%27s_Educational_and_Industrial_Union H

Women in Science --- http://womeninscience.history.msu.edu/

Discovering American Women's History Online --- http://digital.mtsu.edu/cdm/landingpage/collection/women

International Museum of Women http://www.imow.org/home/

Women in Scotland --- http://en.wikipedia.org/wiki/History_of_Dundee
Also see http://en.wikipedia.org/wiki/Women_in_early_modern_Scotland

 Helena Marfell, First President of the Country Women's Association of Australia ---
http://en.wikipedia.org/wiki/Helena_Marfell

Women and Mormanism --- http://en.wikipedia.org/wiki/Women_and_Mormonism

WomenWatch: UN Information and Resources on Gender Equality and Empowerment --- http://www.un.org/womenwatch/

Sophia Smith Collection: Women's History Archives at Smith College --- http://www.smith.edu/libraries/libs/ssc/digitalcoll.html

Wisconsin Women's History --- http://womenst.library.wisc.edu/bibliogs/wis-women-history.html

Women in Prison --- http://en.wikipedia.org/wiki/Nicole_Hahn_Rafter

Women in Prison Film --- http://en.wikipedia.org/wiki/WIP

Women in the Ku Klux Klan --- http://en.wikipedia.org/wiki/Ku_Klux_Klan

Women on Death Row --- http://en.wikipedia.org/wiki/Capital_punishment_debate_in_the_United_States

Gifts of Speech: Women's Speeches from Around the World --- http://gos.sbc.edu/

Women's Legal History --- http://wlh.law.stanford.edu/

The Frances Perkins Center --- http://francesperkinscenter.org/

Chicago Women's Liberation Union Herstory Project --- http://www.cwluherstory.org/

David Foster Wallace’s 1994 Syllabus: How to Teach Serious Literature with Lightweight Books --- Click Here
http://www.openculture.com/2013/02/david_foster_wallaces_1994_syllabus.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

National Women's History Project http://www.nwhp.org/

African-American Women: Online Archival Collections --- http://library.duke.edu/rubenstein/collections/digitized/african-american-women/

Women Artists of the American West --- http://www.cla.purdue.edu/WAAW/MainIndex.html

Women's Colleges --- http://en.wikipedia.org/wiki/Women%27s_colleges

Women at Harvard --- http://en.wikipedia.org/wiki/Harvard_University#Women
Radcliff  College--- http://en.wikipedia.org/wiki/Radcliffe_College

Cambridge University --- http://en.wikipedia.org/wiki/University_of_Cambridge#Women.27s_education

Society of Women's Health Research --- http://en.wikipedia.org/wiki/Society_for_Women%27s_Health_Research

Films Made by Women --- http://en.wikipedia.org/wiki/Women%27s_cinema

Lesbian Pulp Fiction --- http://en.wikipedia.org/wiki/Lesbian_pulp_fiction

Smithsonian Education: Women's History Teaching Resources
http://www.smithsonianeducation.org/educators/resource_library/women_resources.html

Teaching with Historic Places: Women's History Lesson Plans --- http://www.nps.gov/nr/twhp/mar99.htm

Algerian Women in France --- http://en.wikipedia.org/wiki/Algerian_women_in_France

Barack Obama Supreme Court Candidates --- http://en.wikipedia.org/wiki/Barack_Obama_Supreme_Court_candidates

Women in India --- http://en.wikipedia.org/wiki/Women_in_India

Women in Saudi Arabia --- http://en.wikipedia.org/wiki/Saudi_Arabia

Women in Libya --- http://en.wikipedia.org/wiki/Women_in_Libya

Feminism in Thailand --- http://en.wikipedia.org/wiki/Feminism_in_Thailand

Women in Taiwan --- http://en.wikipedia.org/wiki/Women_in_Taiwan

Gender Inequality in China --- http://en.wikipedia.org/wiki/Gender_inequality_in_China

China's Tiger Woman Billionaires ---
http://www.thedailybeast.com/newsweek/2012/03/04/amy-chua-profiles-four-female-tycoons-in-china.html

Gender Pay Gap in Russia --- http://en.wikipedia.org/wiki/Gender_pay_gap_in_Russia

Economic Inequality --- http://en.wikipedia.org/wiki/Economic_inequality

Gender Pay Gap --- http://en.wikipedia.org/wiki/Gender_pay_gap

From the Scout Report on March 1, 2013

The movement for equal pay for women continues to gain steam across the
United States

Equal pay for women battle gains traction in New York
http://www.metro.us/newyork/news/local/2013/02/21/equal-pay-for-women-battle-gains-traction-in-new-york/

Getting equal pay could become easier for women
http://www.abqjournal.com/main/2013/02/26/politics/legislature/getting-equal-pay-could-become-easier-for-women.html

State Senator Wendy Davis Wants to Bring Federal Fair Pay Laws for Women to
Texas
http://blogs.dallasobserver.com/unfairpark/2013/02/state_sen_wendy_davis_wants_to.php

Wage gaps destroy employee morale, productivity
http://www.leaderpost.com/business/productiveconversations/Wage+gaps+destroy+employee+morale+productivity/8018636/story.html?__lsa=d85d-e6d9

Here We Go Again: The Long (and Frustrating) Journey of Equal Pay for Women
http://www.huffingtonpost.com/marlo-thomas/equal-pay-for-women_b_2678611.html

Lilly Ledbetter Fair Pay Act of 2009
http://www.gpo.gov/fdsys/pkg/PLAW-111publ2/html/PLAW-111publ2.htm

I hope Jim K will comment on how "research in business schools is becoming increasingly distanced from the reality of business"
"In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW Blog, June 26, 2013 ---
http://maaw.blogspot.com/2013/06/in-2008-hopwood-commented-on-number-of.html

The first issue below is related to the one addressed by Bennis and O'Toole. According to Hopwood, research in business schools is becoming increasingly distanced from the reality of business. The worlds of practice and research have become ever more separated. More and more accounting and finance researchers know less and less about accounting and finance practice. Other professions such as medicine have avoided this problem so it is not an inevitable development.

Another issue has to do with the status of management accounting. Hopwood tells us that the term management accountant is no longer popular and virtually no one in the U.S. refers to themselves as a management accountant. The body of knowledge formally associated with the term is now linked to a variety of other concepts and job titles. In addition, management accounting is no longer an attractive subject to students in business schools. This is in spite of the fact that many students will be working in positions where a knowledge of management control and systems design issues will be needed. Unfortunately, the present positioning and image of management accounting does not make this known.

Continued in article

June 29, 2013 reply from Zane Swanson

Hi Bob,

A key word of incentive comes up as it relates to the practitioner motivator of the nature of accounting and financing research. The AICPA does give an educator award at the AAA convention and so it isn't as though the practitioners don't care about accounting professorship activity.

Maybe, the "right"' type of incentive needs to be designed. For example, it was not so many years ago that firms developed stock options to align interests of management and investors. Perhaps, a similar option oriented award could be designed to align the interests of research professors and practitioners. Theoretically, practitioners could vest a set of professors for research publications in a pool for a particular year and then grant the exercise of the option several years later with the attainment of a practitioner selected goal level (like HR performance share awards). This approach could meet your calls to get researchers to write "real world" papers and to have follow up replications to prove the point.

However, there are 2 road blocks to this approach. 1 is money for the awards. 2 is determining what the practitioner performance features would be.

You probably would have to determine what practitioners want in terms of research or this whole line of discussion is moot.

The point of this post is: Determining research demand solely by professors choices does not look like it is addressing your "real world" complaints.

Respectfully,
Zane

June 29, 2013 reply from Bob Jensen

Hi Zane,

I had a very close friend (now dead) in the Engineering Sciences Department at Trinity University. I asked him why engineering professors seemed to be much closer to their profession than many other departments in the University. He said he thought it was primarily that doctoral students chose engineering because they perhaps were more interested in being problem solvers --- and their profession provided them with an unlimited number of professional problems to be solved. Indeed the majority of Ph.D. graduates in engineering do not even join our Academy. The ones that do are not a whole lot different from the Ph.D. engineers who chose to go into industry except that engineering professors do more teaching.

When they take up research projects, engineering professors tend to be working with government (e.g., the EPA) and and industry (e.g., Boeing) to help solve problems. In many instances they work on grants, but many engineering professors are working on industry problems without grants.

In contrast, accounting faculty don't like to work with practitioners to solve problems. In fact accounting faculty don't like to leave the campus to explore new problems and collect data. The capital markets accounting researchers purchase their databases and them mine the data. The behavioral accounting researchers study their students as surrogates for real world decision makers knowing full well that students are almost always poor surrogates. The analytical accounting researchers simply assume the world away. They don't set foot off campus except to go home at night. I know because I was one of them for nearly all of my career.

Academic accounting researchers submit very little original research work to journals that practitioners read. Even worse a hit in an accounting practitioner journal counts very little for promotion and tenure especially when the submission itself may be too technical to interest any of our AAA journal editors, e.g., an editor told me that the AAA membership was just not interested in technical articles on valuing interest rate swaps, I had to get two very technical papers on accounting for derivative financial instruments published in a practitioner journal (Derivatives Reports) because I was told that these papers were just too technical for AAA journal readers.

Our leading accountics science researchers have one goal in mind --- getting a hit in TAR, JAR, or JAE or one of the secondary academic accounting research journals that will publish accountics research. They give little or no priority to finding and helping to solve problems that practitioners want solved. They have little interest in leaving the ivory tower to collect their own messy real-world data.

Awards and even research grants aren't the answer to making accounting professors more like engineering, medical, and law professors. We need to change the priorities of TAR, JAR, JAE, and other top academic accounting research journals where referees ask hard questions about how the practice of the profession is really helped by the research findings of virtually all submitted articles.

In short, we need to become better problem solvers in a way like engineering, medical, and law professors are problem solvers on the major problems of their professions. A great start would be to change the admissions criteria of our top accounting research journals.

Respectfully,
Bob Jensen

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://faculty.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

Essays on the (mostly sad) State of Accounting Scholarship ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays

Sue Haka, former AAA President, commenced a thread on the AAA Commons entitled
"Saving Management Accounting in the Academy,"
--- http://commons.aaahq.org/posts/98949b972d
A succession of comments followed.

The latest comment (from James Gong) may be of special interest to some of you.
Ken Merchant is a former faculty member from Harvard University who form many years now has been on the faculty at the University of Southern California.

Here are my two cents. First, on the teaching side, the management accounting textbooks fail to cover new topics or issues. For instance, few textbooks cover real options based capital budgeting, product life cycle management, risk management, and revenue driver analysis. While other disciplines invade management accounting, we need to invade their domains too. About five or six years ago, Ken Merchant had written a few critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's comments are still valid. Second, on the research and publication side, management accounting researchers have disadvantage in getting data and publishing papers compared with financial peers. Again, Ken Merchant has an excellent discussion on this topic at an AAA annual conference.

Bob Jensen's threads on what went wrong in the Accounting Academy
How did academic accounting research become a pseudo science?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong ---
 

June 30, 2013 reply from Zane Swanson

Hi Bob,
  You have expressed your concerns articulately and passionately.  However, in terms of creating value to society in general, your "action plan" of getting the "top" of the profession (editors) to take steps appears unlikely.  As you pointed out, the professors who create articles do it with resources immediately under their control in the most expeditious fashion in order to get tenure, promotion and annual raises.  The editors take what submissions are given.  Thus, it is an endless cycle (a closed loop, a complete circle).  As you noted the engineering profession has different culture with a "make it happen" objective real world.  In comparison with accounting, the prospect of "only" accounting editors from the top dictating research seems questionable.  Your critique suggests that the "entire" accounting research culture needs a paradigm shift of real world action consequences  in order to do what you want.  The required big data shift is probably huge and is a reason that I suggested starting an options alignment mechanism of interests of practitioners and researchers.
 

Respectfully,
Zane

June 30, 2013 reply from Bob Jensen

Hi Zane,

 

You may be correct that a paradigm shift in accountics research is just not feasible given the generations of econometrics, psychometrics. and mathematical accountics researchers that virtually all of the North American doctoral programs have produced.
 

I think Anthony Hopwood, Paul Williams, and others agree with you that it will take a paradigm shift that just is not going to happen in our leading journals like TAR, JAR, JAE, CAR, etc. Paul, however, thinks we are making some traction, especially since virtually all AAA presidents since Judy Rayburn have made appeals fro a paradigm shift plus the strong conclusions of the Pathways Commission Report. However, that report seems to have fallen on deaf ears as far as accountics scientists are concerned.
 

Other historical scholars like Steve Zeff, Mike Granfof, Bob Kaplan, Judy Rayburn, Sudipta Basu, and think that we can wedge these top journals to just be a bit more open to alternative research methods like were used in the past when practitioners took a keen interest in TAR and even submitted papers to be published in TAR --- alternative methods like case studies, field studies, and normative studies without equations.
 

"We fervently hope that the research pendulum will soon swing back from the narrow lines of inquiry that dominate today's leading journals to a rediscovery of the richness of what accounting research can be. For that to occur, deans and the current generation of academic accountants must give it a push."
Granof and Zeff --- http://www.trinity.edu/rjensen/TheoryTAR.htm#Appendix01
Michael H. Granof is a professor of accounting at the McCombs School of Business at the University of Texas at Austin. Stephen A. Zeff is a professor of accounting at the Jesse H. Jones Graduate School of Management at Rice University.

Accounting Scholarship that Advances Professional Knowledge and Practice
Robert S. Kaplan
The Accounting Review, March 2011, Volume 86, Issue 2, 

Recent accounting scholarship has used statistical analysis on asset prices, financial reports and disclosures, laboratory experiments, and surveys of practice. The research has studied the interface among accounting information, capital markets, standard setters, and financial analysts and how managers make accounting choices. But as accounting scholars have focused on understanding how markets and users process accounting data, they have distanced themselves from the accounting process itself. Accounting scholarship has failed to address important measurement and valuation issues that have arisen in the past 40 years of practice. This gap is illustrated with missed opportunities in risk measurement and management and the estimation of the fair value of complex financial securities. This commentary encourages accounting scholars to devote more resources to obtaining a fundamental understanding of contemporary and future practice and how analytic tools and contemporary advances in accounting and related disciplines can be deployed to improve the professional practice of accounting. ©2010 AAA

The videos of the three plenary speakers at the 2010 Annual Meetings in San Francisco are now linked at
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.

FASB Conceptual Framework --- http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011090

The objective of the conceptual framework project is to develop an improved conceptual framework that provides a sound foundation for developing future accounting standards. Such a framework is essential to fulfilling the Board’s goal of developing standards that are principles based, internally consistent, and that lead to financial reporting that provides the information capital providers need to make decisions in their capacity as capital providers. The new FASB framework will build on the existing framework.

"FASB’s proposed 2015 GAAP taxonomy available for comment," by Ken Tysiac, Journal of Accountancy, August 29, 2014 ---
http://www.journalofaccountancy.com/News/201410855.htm
To access the proposed taxonomy go to (requires login permission and password)
http://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1176164131053
Note the FAQs link

IASB Conceptual Framework --- http://www.ifrs.org/current-projects/iasb-projects/conceptual-framework/Pages/Conceptual-Framework-Summary.aspx

The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It is a practical tool that assists the IASB when developing and revising IFRSs. The objective of the Conceptual Framework project is to improve financial reporting by providing the IASB with a complete and updated set of concepts to use when it develops or revises standards.

ASBJ Conceptual Framework --- http://www.ifrs.org/Meetings/MeetingDocs/ASAF/2015/March/ASAF 1503 02C CF Questions.pdf

This I've got to see
The standard setters' (IASB and FASB) balance sheet priority over the income statement totally destroyed the concepts of "income" and "earnings."
I'm anxiously awaiting to see the IASB's operational definition of "earnings" underlying the forthcoming definition of EBIT, etc.
One of my main concerns in this definition is the jumbling of legally earned revenues with unrealized value changes.

From the CFO Journal's Morning Ledger on May 8, 201

The largest U.S. companies are booking their strongest quarterly profits in five years, as firms reap the benefits of years of belt tightening and finally see a pickup in demand. But part of the improvement has come from keeping a lid on spending, and many CEOs remain reluctant to change and open their wallets for new projects, plants and people, Thomas Gryta and Theo Francis write.

Profits at S&P 500 companies jumped an estimated 13.9% in the first quarter, growing nearly twice as fast as revenue. The gains stretched across industries, from Wall Street’s banks to Silicon Valley’s web giants, and were helped by a rebound in the battered energy sector. The picture was a marked improvement from a year ago, when profits fell 5%, and was the best performance since the third quarter of 2011.

ensen Comment
Accounting standard setters cannot even operationally define the calculation of earnings other than to make it a plug that makes the balance sheet balance. And yet this plug remains as an exceedingly important driver of share prices in the stock markets.

From the CFO Journal's Morning Ledger on May 5, 2017

Avon under pressure
Avon Products Inc. Chief Executive Sheri McCoy faces new pressure following a surprise loss that sent the cosmetics seller’s stock tumbling Thursday.

Jensen Comment
Accounting standard setters cannot even operationally define the calculation of earnings other than to make it a plug that makes the balance sheet balance. And yet this plug remains as an exceedingly important driver of share prices in the stock markets.

May 9, 2017 Question from Tom Selling

I’d like to brush up on the shortcomings of Hicksian “income” for measuring the earnings of a business entity.  Do you (or anyone else on AECM, of course) have a reference (e.g., an article or book chapter) to help me out?

May 9, 2017 Reply from Bob Jensen

John Hicks --- https://en.wikipedia.org/wiki/John_Hicks#Contributions_to_interpretation_of_income_for_accounting_purposes

There are numerous references given at
https://en.wikipedia.org/wiki/John_Hicks#Contributions_to_interpretation_of_income_for_accounting_purposes

Here is one of references that I recommend that are in the accounting literature. The main take away here is that fair value accounting takes us closer to the Hicksian concept of income at the expense of reliability. I might note that Professor Schipper over the years is a proponent of falr value accounting. This is not a defense of historical cost accounting as might have been written by AC Littleton or Yuji Ijiri.

"Earnings Quality," by Katherine Schipper and Linda Vincent, ACCOUNTING HORIZONS Supplement 2003 pp. 97-110 ---
http://s3.amazonaws.com/academia.edu.documents/35504067/Schipper_image.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1494285864&Signature=BaLCa00HRPvplwgY2ee8Dmr7gzU%3D&response-content-disposition=inline%3B%20filename%3DEarnings_Quality.pdf

Especially note the references at the end of the commentary.

The main problem is that Hicksian Income in theory assumes all changes is "wealth" or "well offness" where wealth includes much more than accountants put on balance sheets. Examples include the many intangibles and contingent liabilities that are left off balance sheets due to inability to measure reliably such as the value of human resources and changes thereof. Also accountants have never figured out how to measure the requisite "value in use: as opposed to disposal value in a yard sale.

Bob  Jensen

From the CFO Journal's Morning Ledger on November 3, 2016

IASB evaluating EBIT
The International Accounting Standards Board said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit. The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants, Nina Trentmann reports.

IASB Plans Overhaul of Financial Definitions
http://blogs.wsj.com/cfo/2016/11/02/iasb-plans-overhaul-of-financial-definitions/?mod=djemCFO_h 

The International Accounting Standards Board, or IASB, which sets reporting standards in more than 120 countries, said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit.

The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants.

The changes will not result in new standards but will require the board to overhaul existing ones.

At the moment, terms like operating profit are not defined by the IASB. The aim is to help market participants judge the suitability of a particular investment.

“We want to give investors the right handles to look at a balance sheet,” said IASB chairman Hans Hoogervorst.

Up until now, International Financial Reporting Standards, known as IFRS, leave companies too much flexibility in defining such terms, which often makes it difficult to compare financials, Mr. Hoogervorst said.

“Even within sectors, there is a lack of comparability,” Mr. Hoogervorst said. This affects both investors and companies, he added.

It is too early to tell what the changes will mean for companies reporting under IFRS, according to Mr. Hoogervorst. “They should be less revolutionary than the introduction of new standards but every change results in work”, he said.

Some firms might find that they have less latitude when reporting financial results, he said. That could mean more work.

Firms that decide against adopting the new IASB definition for ebit, for example, could be required to reconcile their own ebit calculation into one based on the IASB’s definition.

The IASB in 2017 also plans to finalize a single accounting model that would be applied to all forms of insurance contracts.

Besides that, the board will work on updating the system through which filers add disclosures to the electronic versions of their financial statements. The system is updated on a regular basis and the IASB produces an annual compilation of all changes each year.

"The IASB and ASBJ Conceptual Frameworks: Same Objective, Different Financial Performance Concepts," by Carien van Mourik and Yuko Katsuo, Accounting Horizons, Volume 29, Issue 1 (March 2015) ---
http://aaajournals.org/doi/full/10.2308/acch-50902

 

This paper illustrates that, despite their general agreement on the decision-usefulness objective of general purpose financial reporting, the Accounting Standard Board of Japan (ASBJ) and the International Accounting Standards Board (IASB)'s conceptual frameworks are based on two different concepts of financial performance. By identifying and contrasting the two financial performance concepts and their impact on the rest of the frameworks and by explaining the thinking that underpins the ASBJ's chosen financial performance concept, it contributes to a debate about the role of financial performance concepts in fulfilling the decision-usefulness objective. Such a debate is pertinent to the revision of the IASB's Conceptual Framework, which is scheduled for completion in 2015.

 

. . .

The revision of the International Accounting Standards Board (IASB)'s Conceptual Framework is scheduled for completion in 2015. This commentary is motivated by the fact that neither the 2010 IASB Conceptual Framework nor the IASB's 2013 Discussion Paper explains in detail how the particular concept of financial performance underpinning the IASB Conceptual Framework leads to financial reporting standards and financial accounting information that best fulfill the objective of general purpose financial reporting.

 

This commentary contrasts the 2010 IASB Conceptual Framework with the Accounting Standard Board of Japan (ASBJ)'s 2006 Conceptual Framework Discussion Paper (DP). Both conceptual frameworks are developed from the Financial Accounting Standards Board (FASB) Framework, but despite their agreement on the decision-usefulness objective of general purpose financial reporting, the IASB and the ASBJ arrive at different concepts of financial performance. After identifying and contrasting the IASB's and the ASBJ's financial performance concepts and their impact on the rest of the two frameworks, this commentary explains the ASBJ's arguments for its choice of financial performance concept. The aim is to stimulate and contribute to an international academic debate about how different concepts of financial performance are thought to best fulfill the same decision-usefulness objective.

 

In this commentary, the term “financial performance concept” refers to the logic and principles underlying the definition, recognition, measurement, presentation, and disclosure of the elements of the statement of financial performance. A system of articulated financial statements (where the flow statements reconcile with items in the stock statement at two points in time) requires that the logic and principles be the same as that underlying the definition, recognition, measurement, presentation, and disclosure of the elements of the statement of financial position, the cash flow statement, and the statement of changes in equity. In contrast, under the non-articulated view, the logic and principles for the stock statement and the flow statements may be different and therefore the financial statements cannot directly be reconciled, either within a period or across time.1 Both the 2010 IASB Framework and the 2006 ASBJ Framework (which, as will be explained later, is still a discussion paper [DP]) adhere to the articulated view.2

 

The 2010 IASB Framework adopts an “all-inclusive realisable changes in net assets” concept of financial performance. This means that it recognizes changes in assets and liabilities as income or expenses when they are realizable (i.e., measurable and reasonably certain to be realized). On the other hand, the 2006 ASBJ Framework DP adopts a “released-from-risk net income” concept of financial performance. It recognizes changes in assets and liabilities as revenues/gains and expenses/losses in the profit or loss section of the statement of financial performance when they have either been realized through the receipt or payment of cash or assets convertible into cash, or released from risk by virtue of deriving from a financial investment in an asset for which the exit price equals the entry price.

 

This commentary consists of four further sections. First, we present a brief comparative overview of the contexts in which the 2010 IASB Framework and 2006 ASBJ Framework DP were developed, and discuss their objectives, statuses, and structures. Second, we contrast the objective of general purpose financial reporting, the qualitative characteristics, and the financial performance concepts in both frameworks. Third, we describe how the ASBJ decided on the released-from-risk net income concept of financial performance and discuss the accounting thought underpinning this financial performance concept. The fourth and final section summarizes and concludes.

 

CONTEXTS, STATUSES, AND STRUCTURES Context and Status of the 2010 IASB Framework

The International Accounting Standards Committee (IASC) was established in 1973 by 14 accountancy bodies in seven countries (Camfferman and Zeff 2007, 48–49). In the early years, the IASC took decisions on a pragmatic rather than a conceptual basis with the result that its early standards included numerous, not necessarily theoretically consistent, options (Camfferman and Zeff 2007, 253). After the FASB completed its conceptual framework, the IASC established its own conceptual framework in 1989. Framework for the Preparation and Presentation of Financial Statements “was strongly reminiscent of the FASB's Statements of Financial Accounting Concepts No. 1, 2, 3, and 5 (1978–1984)” (Camfferman and Zeff 2007, 260).

 

The 1989 IASC Framework had been established following a due process that was in essence the same as that set out in the 1973 IASC Constitution (Camfferman and Zeff 2007, 352). In 2001 the IASB adopted the 1989 Framework without any critical review of its philosophical and theoretical foundations. In October 2004, the IASB and the FASB decided to start a joint project to work on a common conceptual framework, which resulted in Chapters 1 and 3 of the 2010 IASB Framework. The objective of the project was not to fundamentally review the old 1989 IASC Framework or the existing FASB Framework, but rather to iron out differences between the two frameworks. In 2012 the IASB announced that it would recommence its work on revising Chapter 4 (the remainder of the 1989 IASC Framework) on its own and in July 2013 issued a DP (IASB 2013). An exposure draft is expected in early 2015. Context and Status of the 2006 ASBJ Framework DP

 

Until 2001, the Business Accounting Deliberation Council (BADC) was the public accounting standard setter in Japan.3 The Japanese “Accounting Big Bang” started with the establishment of the Financial Supervisory Agency in 1998, renamed the Financial Services Agency (FSA) in 2000, with responsibility for ensuring the stability of the Japanese financial system and the regulation and transparency of the Japanese financial and securities markets.4 On July 26, 2001 the Financial Accounting Standards Foundation was established consisting of a board of directors, trustees, the ASBJ, and an advisory council. Since then, the ASBJ has been Japan's private sector accounting standard setter.

 

In January 2003, a Concepts Working Group, organized by the ASBJ and consisting of nine accounting academics5 and the seven ASBJ members, started the task of drafting a conceptual framework for the ASBJ. The Concepts Working Group issued its first full draft of a DP on June 22, 2004, which was revised in September 2004. By 2005 however, the IASB and FASB had started their joint convergence project that included convergence of their conceptual frameworks. Furthermore, in 2005 the IASB and ASBJ had started meetings on the convergence of financial accounting standards, and in 2006 the FASB and ASBJ did the same. Around the same time, Japan was being considered in the equivalence assessment by the EU (Nishikawa 2011, 4). For these reasons, the ASBJ chose to issue the Conceptual Framework again as a DP rather than as an exposure draft, which it did in December 2006 (Saito 2007, 3). The ASBJ believed that the DP would further evolve through participation in international discussions, particularly with the IASB and the FASB (ASBJ 2006, Preface). In spite of its unofficial status, the 2006 ASBJ Framework DP did have an impact on Japanese accounting standards, for example in the area of accounting for pensions.6 Structures of the Frameworks

 

The 2006 ASBJ Conceptual Framework follows the structure of the 1989 IASC/2001 IASB Conceptual Framework as the ASBJ thought that this would facilitate communication and mutual understanding (ASBJ 2006, Preface). The 2010 IASB Conceptual Framework has a slightly different structure, but it also consists of an introduction and four chapters. As yet, Chapter 2 on the reporting entity has no content, while Chapter 4 is the remainder of the 1989 IASC/2001 IASB Conceptual Framework. Table 1 shows the comparative structures of the two frameworks.

Continued in article

"Developing a Conceptual Framework to Appraise the Corporate Social Responsibility Performance of Islamic Banking and Finance Institutions," by M. Mansoor Khan, Accounting and the Public Interest, American Accounting Association, Volume 13, Issue 1 (December 2013) ---
http://aaajournals.org/doi/abs/10.2308/apin-10375

Abstract
This paper fills some of theoretical and empirical deficiencies regarding Corporate Social Responsibility (CSR) dimensions in Islamic Banking and Financial Institutions (IBFIs). The firms' CSR initiatives are the key to secure success in modern business and society, and there is a scope to develop a broader understanding of CSR in globally integrated business and financial markets. This paper provides the Islamic perspective of CSR, which is etho-religious based and, thus, more meaningful and intensified. It proposes a CSR framework for IBFIs based on principles of Islamic economics and society. The proposed framework urges IBFIs to engage in community-based banking, work toward the betterment of the poor, ensure the most efficient and socially desirable utilization of financial resources, develop their institutional frameworks, infrastructures, and innovative products to facilitate the wider circulation of wealth and sustainable development in the world. This paper observes that IBFIs have failed to deal with underlying CSR challenges due to lack of commitment and expertise in the field. The CSR-based outlook of IBFIs can only ensure their legitimacy, sustainability, and long-term success.

Jensen Comment
All accounting standard setters destroyed the concept of net income by giving priority to balance sheet concepts and fair value accounting where unrealized changes in transitory fair value are combined with realized net income. As a result there is no longer a concept of net income since the days of historical cost accounting standards ala Paton and Littleton ---
http://faculty.trinity.edu/rjensen/Theory01.htm#Paton

Net earnings and EBITDA cannot be defined since the FASB and IASB elected to give the balance sheet priority over the income statement in financial reporting ---
"The Asset-Liability Approach: Primacy does not mean Priority," by Robert Bloomfield, FASRI Financial Accounting Standards Research Initiative, October 6, 2009 ---
http://www.fasri.net/index.php/2009/10/the-asset-liability-approach-primacy-does-not-mean-priority/

This I've got to see
The standard setters' (IASB and FASB) balance sheet priority over the income statement totally destroyed the concepts of "income" and "earnings."
I'm anxiously awaiting to see the IASB's operational definition of "earnings" underlying the forthcoming definition of EBIT, etc.
One of my main concerns in this definition is the jumbling of legally earned revenues with unrealized value changes.

From the CFO Journal's Morning Ledger on November 3, 2016

IASB evaluating EBIT
The International Accounting Standards Board said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit. The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants, Nina Trentmann reports.

IASB Plans Overhaul of Financial Definitions
http://blogs.wsj.com/cfo/2016/11/02/iasb-plans-overhaul-of-financial-definitions/?mod=djemCFO_h 

The International Accounting Standards Board, or IASB, which sets reporting standards in more than 120 countries, said Wednesday it would look at providing new definitions of common financial terms such as earnings before interest and taxes, or ebit.

The new definitions will be introduced over the next five years, in order to provide sufficient time for suggestions and comment from market participants.

The changes will not result in new standards but will require the board to overhaul existing ones.

At the moment, terms like operating profit are not defined by the IASB. The aim is to help market participants judge the suitability of a particular investment.

“We want to give investors the right handles to look at a balance sheet,” said IASB chairman Hans Hoogervorst.

Up until now, International Financial Reporting Standards, known as IFRS, leave companies too much flexibility in defining such terms, which often makes it difficult to compare financials, Mr. Hoogervorst said.

“Even within sectors, there is a lack of comparability,” Mr. Hoogervorst said. This affects both investors and companies, he added.

It is too early to tell what the changes will mean for companies reporting under IFRS, according to Mr. Hoogervorst. “They should be less revolutionary than the introduction of new standards but every change results in work”, he said.

Some firms might find that they have less latitude when reporting financial results, he said. That could mean more work.

Firms that decide against adopting the new IASB definition for ebit, for example, could be required to reconcile their own ebit calculation into one based on the IASB’s definition.

The IASB in 2017 also plans to finalize a single accounting model that would be applied to all forms of insurance contracts.

Besides that, the board will work on updating the system through which filers add disclosures to the electronic versions of their financial statements. The system is updated on a regular basis and the IASB produces an annual compilation of all changes each year.

"Whither the Concept of Income?" by Shizuki Saito University of Tokyo and Yoshitaka Fukui Aoyama Gakuin University, SSRN, May 17, 2015 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607234

Abstract:
Since the 1970s, the decision-usefulness has taken center stage and our attention has been concentrated on valuation of assets and liabilities instead of income measurement. The concept of income, once considered the gravitational center of accounting has lost its primacy and become a byproduct of the balance sheet derived from the measurement of assets and liabilities.

However, we have not been equipped with robust conceptual foundation supporting theoretically reasoned accounting measurement. It is not only theoretically but also practically important to renew our seemingly waned interest in the concept of income because ongoing reforms of accounting standards cannot be successfully implemented without a sound understanding of the concept of income.

It's a bit like requiring calculus for undergraduate accounting courses. Calculus probably is not essential in any undergraduate accounting course in the curriculum, but faculty are fixated that the best accounting majors are the ones do well in calculus. Similarly, investors change their portfolios based on earnings, eps, EBITDA, and P/E ratios when in fact those metrics are not defined and may have a lot of misleading noise and secret manipulation

Bob Jensen's threads on the differences between IASB versus FASB standards ---
http://faculty.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Bob Jensen's threads on accounting theory ---
http://faculty.trinity.edu/rjensen/Theory01.htm

Future of the Accounting Profession

Discover Accounting ---
https://discoveraccounting.org/resources/

'Leaders of the accounting profession discuss its biggest nightmares," Accounting Today, September 28, 2015 ---
http://www.accountingtoday.com/news/firm-profession/losing-sleep-75927-1.html

That’s the question facing the accounting profession, as it advances through a period of unprecedented change: Which of the many issues that cry out for attention should the profession address first?

The short answer is: All of them.

In trying to solve this riddle, we reached out to the leaders in accounting — the regulators, association chiefs, thought leaders, trailblazing firm owners, software developers, consultants and so on — and asked them what they thought were the most important issues facing the field. Their answers covered the wide range that you would expect, but as we dug through them, three broad categories of concern emerged, each of which subsumed a number of individual issues. What’s more, all three broad categories were related in ways that both multiplied their difficulty, and also pointed toward possible solutions.

Call them the Three Nightmares of the Accounting Profession, and read on to see what the field’s leaders think can be done to wake up from them.

THE NIGHTMARE OF IRRELEVANCE

The most-cited concern was the worry that the profession is dropping behind not just its clients, but the world as a whole, seeing its core services rendered obsolete by technology, their value to clients plummeting.

Technology thought leader and educator Doug Sleeter described it very simply: “The profession is struggling to maintain its relevance in the eyes of clients. As a whole, the focus is still too much on compliance services and not enough on going deeper with client engagements.”

ACCA AND IMA EXPLORE FUTURE CHALLENGES FACING THE ACCOUNTING PROFESSION ---
by Bob Schneider
AccountingEducation.com, September 18, 2015
http://www.accountingeducation.com/index.cfm?page=newsdetails&id=153571

September 4, 2015 Message from Gerald Trites in Canada

Hi Bob,

Is there any material in our website on the Future of the Profession? In particular I am researching possible initiatives that could be taken that are new and not presently being done that will be needed to adapt to our changing world. I have found numerous articles on the future of the profession but there is not much real innovation out there.

Jerry

Jensen Comment
There are predictions all over the place, many of which vary with parts of what we call accountancy. For example, technology will increasingly replace bookkeepers in capturing transactions, journalizing, posting, closing the books, and preparing financial statements --- all without human beings. Technology will also increasingly replace human auditors, although this happening is further down the road.

But the "future of accounting" can be viewed even without focusing on human accountants. Even if robots determine what data is captured and eventually put on financial statements those robots will have to be guided by accounting policies, standards, and operational rules. Here futurists are widely divided by traditional and historic differences such as preferences for historical cost (price-level adjusted), entry values, exit values, economic values, etc. Robots are no better than humans in measuring and disclosing intangibles than human accountants. What we really would like is a robot that can measure "value in use," but that robot if it exists at all still resides in other galaxies.

In terms of financial accounting standards most of us thought that it would soon be a done deal to give the IASB a monopoly on setting the standards and principles that guide operational decisions. But it looks like, gratefully in my opinion, that the IASB is going to have to wait decades for monopoly powers.

The future of accounting is conditioned upon the future of world economics. Most advances in accounting have assumed some form of capitalism with heavy financial and managerial accounting advances for business enterprises. The state of accountancy for socialism and governmental accounting in general is still in the dark ages. We only have to compare Soviet accounting advances in the 20th Century with accounting advances in the West to appreciate that as imperfect as accounting is in the West it is well ahead of Soviet accounting that amounted to writing of fiction.

You might take a look at the following article in Forbes.

The Future Of The Accounting Industry In 2015 ---
http://www.forbes.com/sites/russalanprince/2015/01/21/the-future-of-the-accounting-industry-in-2015/
I would download this immediately before Forbes takes it off the Web

Software was a frequently cited villain in the case. “Technology is moving so fast that all the bean-counting that has been the heart and soul of the industry is disappearing fast,” warned 2020 Group chairman Chris Frederiksen, describing how staples of accounting like recording purchases, writing checks, invoicing and others have disappeared in the face of automation. “Some firms have moved swiftly to give clients what they want: accurate, timely information and meaningful advice.”

Continued in article

PwC:  Re-Branding the Accounting Profession ---
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

Accounting in the 21st Century: : Re-Branding the CPA Profession

PwC:  Re-Branding the Accounting Profession ---
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

September 20, 2010 message from Bob Jensen

Hi Denny,

Yes, I could access the PwC re-branding video directly without having to log in:
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

I do have a PwC Direct password, but I really doubt that the Switzerland link is using a cookie.

In any case the home page of PwC does not require any login --- http://www.pwc.com/
The video is now on this home page.

This takes me back to the days when Bob Eliott, eventually as President of the AICPA, was proposing great changes in the profession, including SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG videos as starting points for discussion in my accounting theory course. Bob relied heavily on the analogy of why the railroads that did not adapt to innovations in transportation such as Interstate Highways and Jet Airliners went downhill and not uphill. The railroads simply gave up new opportunities to startup professions rather than adapt from railroading to transportation.

Bob’s underlying assumption was that CPA firms could extend assurance services to non-traditional areas (where they were not experts but could hire new kinds of experts) by leveraging the public image of accountants as having high integrity and professional responsibility. That public image was destroyed by the many auditing scandals, notably Enron and the implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://faculty.trinity.edu/rjensen/Fraud001.htm

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

The AICPA commenced initiatives on such things as Systrust. To my knowledge most of these initiatives bit the dust, although some CPA firms might be making money by assuring Eldercare services.

The counter argument to Bob Elliot’s initiatives is that CPA firms had no comparative advantages in expertise in their new ventures just as railroads had few comparative advantages in trucking and airline transportation industries, although the concept of piggy backing of truck trailers eventually caught on.

I still have copies of Bob’s great VCR tapes, but I doubt that these have ever been digitized. Bob could sell refrigerators to Eskimos.

September 21, 2010 reply from Roger Debreceny [roger@DEBRECENY.COM]

Isn't interesting that the pwc video has nothing at all to say about protection of the investor or maintenance of the public interest. It is all about value for the client. The client gets mentioned at least a dozen times -- investors and the public, zero times.

If these are truly the internalized values of the firm, we're sure to have more audit failures in coming years.

<sigh>

Roger

September 22, 2010 reply from Bob Jensen

Hi Roger,

 In 1998, Bob Elliott argued that financial audits were destined in the 21^st Century to be money losing assurance services ---
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.htm
This is a great lecture that can be debated in various accounting courses, notably AIS, Ethics, and Auditing courses.

Sarbox (Sarbanes, SOX) revived the profitability of financial audits but possibly not for long as worldwide lawsuits commence to take their toll on the auditing firms.
http://faculty.trinity.edu/rjensen/Fraud001.htm

A key point made by Bob Elliott is that expansion of assurance services (e.g., SysTrust and Eldercare) is levered on the public image of CPA firms’ high integrity and professional responsibility. After this shining public image of CPA firms’ integrity and professional responsibility was tarnished since the turn of the Century, the question becomes what comparative advantages do CPA firms have that gives them comparative advantage. If you believe Francine, there’s not much left for the largest auditing firms aside from an existing global network of offices, infrastructures, vast teams of lawyers, and whatever is left of a once-shining public image

Bob Jensen

September 22, 2010 reply from Francine McKenna re: The Auditors Blog [retheauditors@GMAIL.COM]

Bob, it's all about branding. If you look at what Deloitte now says on their new boilerplate legal language- they recently converted from Swiss Verein to UK private firm structure - you'll see that brand is king. "Deloitte is a brand..." It begins.

Deloitte has a consulting firm they never shed, PwC wants one bad and is counting on it to grow to pull the rest if the firm up. KPMG is trying to get back in. They were advertising their presence at Oracle Open World user conf. EY seems the only one laying low, but then again I predicted that. Time and money is being spent on lots of litigation and they have the whopper of the day-Lehman. Yes, we are back pre-2000 and no one is doing anything to stop it. In the UK the regulators and media are rattling sabers but in the US nada but me and a few others like Jim Peterson. The PCAOB has no powers to stop acquisitions like BearingPoint and Diamond by PwC that distract them and waste resources that should be spent on training and quality assurance.

Francine

Bob Jensen's threads on auditor independence and professional responsibility ---
http://faculty.trinity.edu/rjensen/Fraud001.htm#Professionalism

Bob Jensen's threads on auditor independence and professional responsibility ---
http://faculty.trinity.edu/rjensen/Fraud001.htm#Professionalism

History of Accountics

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1][NH1] 
 

Hi Pat,

Interestingly, the term “accountics” was coined by a Civil War veteran (badly wounded) who practiced accounting in the 19^th Century in New York City. He also taught accounting at both Columbia College (now Columbia University) and New York University.

In a 2007 Accounting Historians Journal article, I simply revived the term after nearly 80 years of dormancy ---
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

But accounting history buffs should note that the term “accountics” was a big deal between 1887 and 1925. In particular, heated debates arose regarding whether The Accounting Review should commence in 1925 as an accountics journal for mathematical economists or as a journal for accounting teachers and practitioners.

You can read the following at http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm   

TAR BETWEEN 1926 AND 1955: IGNORING ACCOUNTICS

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1][NH1] 

 

Accounting professor Charles Sprague of Columbia University (then called Columbia College) coined the word "accountics" in 1887. The word is not used today in accounting and has some alternative meanings outside our discipline. However, in the early 20^th century, accountics was the centerpiece of some unpublished lectures by Sprague. McMillan [1998, p. 11] stated the following:

These claims were not a pragmatic strategy to legitimize the development of sophisticated bookkeeping theories. Rather, this development of a science was seen as revealing long-hidden realities within the economic environment and the double-entry bookkeeping system itself. The science of accounts, through systematic mathematical analysis, could discover hidden thrust of the reality of economic value. The term “accountics” captured the imagination of the members of the IA, connoting advances in bookkeeping that all these men were experiencing.

 

By 1900, there was a journal called Accountics [Forrester, 2003]. Both the journal and the term “accountics” had short lives, but the belief that mathematical analysis and empirical research can “discover hidden thrust of the reality of economic value” (see above)  underlies much of what has been published in TAR over the past three decades. Hence, we propose reviving the term “accountics” to describe the research methods and quantitative analysis tools that have become popular in TAR and other leading accounting research journals. We essentially define accountics as equivalent to the scientific study of values in what Zimmerman [2001, p. 414] called “agency problems, corporate governance, capital asset pricing, capital budgeting, decision analysis, risk management, queuing theory, and statistical audit analysis.”

The American Association of University Instructors of Accounting, which in December 1935 became the American Accounting Association, commenced unofficially in 1915 [Zeff, 1966, p. 5]. It was proposed in October of 1919 that the Association publish a Quarterly Journal of Accountics. This proposed accountics journal never got off the ground as leaders in the Association argued heatedly and fruitlessly about whether accountancy was a science. A quarterly journal called The Accounting Review was subsequently born in 1925, with its first issue being published in March of 1926. Its accountics-like attributes did not commence in earnest until the 1960s.

Practitioner involvement, in a large measure, was the reason for changing the name of the Association by removing the words “of University Instructors.” Practitioners interested in accounting education participated actively in AAA meetings. TAR articles in the first several decades were devoted heavily to education issues and accounting issues in particular industries and trade groups. Research methodologies were mainly normative (without mathematics), case study, and archival (history) methods. Anecdotal evidence and hypothetical illustrations ruled the day. The longest serving editor of TAR was a practitioner named Eric Kohler, who determined what was published in TAR between 1929 and 1943. In those years, when the AAA leadership mandated that TAR focus on the development of accounting principles, publications were oriented to both practitioners and educators, Chatfield [1975, p. 4].

Following World War II, practitioners outnumbered educators in the AAA [Chatfield 1975, p. 4]. Leading partners from accounting firms took pride in publishing papers and books intended to inspire scholarship among professors and students. Over the years, some practitioners, particularly those with scholarly publications, were admitted into the Accounting Hall of Fame founded by The Ohio State University. Prior to the 1960s, accounting educators were generally long on practical experience and short on academic credentials such as doctoral degrees.

A major catalyst for change in accounting research occurred when the Ford Foundation poured millions of dollars into the study of collegiate business schools and the funding of doctoral programs and students in business studies. Gordon and Howell [1959] reported that business faculty in colleges lacked research skills and academic esteem when compared to their colleagues in the sciences. The Ford Foundation thereafter provided funding for doctoral programs and for top quality graduate students to pursue doctoral degrees in business and accountancy. The Foundation even funded publication of selected doctoral dissertations to give doctoral studies in business more visibility. Great pressures were also brought to bear on academic associations like the AAA to increase the scientific standards for publications in journals like TAR.

TAR BETWEEN 1956 AND 1985: NURTURING OF ACCOUNTICS

A perfect storm for change in accounting research arose in the late 1950s and early1960s. First came the critical Pierson Carnegie Report [1959] and the Gordon and Howell Ford Foundation Report [1959]. Shortly thereafter, the AACSB introduced a requirement requiring that a certain percentage of faculty possess doctoral degrees for business education programs seeking accreditation [Bricker and Previts, 1990]. Soon afterwards, both a doctorate and publication in top accounting research journals became necessary for tenure [Langenderfer, 1987].

A second component of this perfect storm for change was the proliferation of mainframe computers, the development of analytical software (e.g., early SPSS for mainframes), and the dawning of management and decision “sciences.” The third huge stimulus for changed research is rooted in portfolio theory discovered by Harry Markowitz in1952 that became the core of his dissertation at Princeton University, which  was published in book form in 1959. This theory eventually gave birth to the Nobel Prize winning Capital Asset Pricing Model (CAPM) and a new era of capital market research. A fourth stimulus was when the CRSP stock price tapes became available from the University of Chicago. The availability of CRSP led to a high number of TAR articles on capital market event studies (e.g., earnings announcements on trading prices and volumes) covering a period of nearly 40 years.

This “perfect storm” roared into nearly all accounting and finance research and turned academic accounting research into an accountics-centered science of values and mathematical/statistical analysis. After 1960, there was a shift in TAR, albeit slow at first, toward preferences for quantitative model building --- econometric models in capital market studies, time series models in forecasting, advanced calculus information science, information economics, analytical models, and psychometric behavioral models. Chatfield [1975, p. 6] wrote the following:

Beginning in the 1960s the Review published many more articles by non-accountants, whose contribution involved showing how ideas or methods from their own discipline could be used to solve particular accounting problems. The more successful adaptations included matrix theory, mathematical model building, organization theory, linear programming, and Bayesian analysis.

 

TAR was not alone in moving toward a more quantitative focus. Accountics methodologies accompanied similar quantitative model building preferences in finance, marketing, management science, decision science, operations research, information economics, computer science, and information systems. Early changes along these lines began to appear in other leading research journals between 1956-1965, with some mathematical modeling papers noted by Dyckman and Zeff [1984, p. 229]. Fleming, Graci and Thompson [2000, p. 43] documented additional emphasis on quantitative methodology between 1966 and 1985. In particular, they note how tenure requirements began to change and asserted the following:

The Accounting Review evolved into a journal with demanding acceptance standards whose leading authors were highly educated accounting academics who, to a large degree, brought methods and tools from other disciplines to bear upon accounting issues.

 

A number of new academic accountancy journals were launched in the early 1960s, including the Journal of Accounting Research (1963), Abacus (1965) and The International Journal of Accounting Education and Research (1965). Clinging to its traditional normative roots and trade-article style would have made TAR appear to be a journal for academic luddites. Actually, many of the new mathematical approaches to theory development were fundamentally normative, but they were couched in the formidable language and rigors of mathematics. Publication of papers in traditional normative theory, history, and systems slowly ground to almost zero in the new age of accountics.

These new spearheads in accountics were not without problems. It is both humorous and sad to go back and discover how naïve and misleading some of TAR’s bold and high risk thrusts were in quantitative methods. Statistical models were employed without regard to underlying assumptions of independence, temporal stationarity, multicollinearity, homoscedasticity, missing variables, and departures from the normal distribution. Mathematical applications were proposed for real-world systems that failed to meet continuity and non-convexity assumptions inherent in models such as linear programming and calculus optimizations. Some proposed applications of finite mathematics and discrete (integer) programming failed because the fastest computers in the world, then and now, could not solve most realistic integer programming problems in less than 100 years.

After financial databases provided a beta covariance of each security in a portfolio with the market portfolio, many capital market events studies were published by TAR and other leading accounting journals. In the early years, accounting researchers did not challenge the CAPM’s assumptions and limitations --- limitations that, in retrospect, cast doubt upon many of the findings based upon any single index of market risk [Fama and French, 1992].

Leading accounting professors lamented TAR’s preference for rigor over relevancy [Zeff, 1978; Lee, 1997; and Williams, 1985 and 2003]. Sundem [1987] provides revealing information about the changed perceptions of authors, almost entirely from academe, who submitted manuscripts for review between June 1982 and May 1986. Among the 1,148 submissions, only 39 used archival (history) methods; 34 of those submissions were rejected. Another 34 submissions used survey methods; 33 of those were rejected. And 100 submissions used traditional normative (deductive) methods with 85 of those being rejected. Except for a small set of 28 manuscripts classified as using “other” methods (mainly descriptive empirical according to Sundem), the remaining larger subset of submitted manuscripts used methods that Sundem [1987, p. 199] classified these as follows:

292          General Empirical

172          Behavioral

135          Analytical modeling

119          Capital Market

  97          Economic modeling

  40          Statistical modeling

  29          Simulation

 

It is clear that by 1982, accounting researchers realized that having mathematical or statistical analysis in TAR submissions made accountics virtually a necessary, albeit not sufficient, condition for acceptance for publication. It became increasingly difficult for a single editor to have expertise in all of the above methods. In the late 1960s, editorial decisions on publication shifted from the TAR editor alone to the TAR editor in conjunction with specialized referees and eventually associate editors [Flesher, 1991, p. 167]. Fleming et al. [2000, p. 45] wrote the following:

The big change was in research methods. Modeling and empirical methods became prominent during 1966-1985, with analytical modeling and general empirical methods leading the way. Although used to a surprising extent, deductive-type methods declined in popularity, especially in the second half of the 1966-1985 period.

 

We were surprised that there was no reduction in accountics dominance in TAR since 1986 in spite of changes in the environment such as the explosion of communications networking, interacting relational databases, and sophisticated accounting information systems (AIS).Virtually no AIS papers were published in TAR between 1986 and 2005. This practice was changed in 2006 by the appointment of a new AIS associate editor to encourage publication of some AIS papers that often do not fit neatly into the accountics mold. In an interesting aside, we note that the AAA has become a leading international association of accounting educators. Sundem [1987] reported that about 12 percent of the manuscripts submitted came from outside of North America. The American Accounting Association is an international association that provides publication opportunities to all members, and manuscripts are submitted from many parts of the world. In our opinion, this contributed significantly to the rise in accountics studies worldwide.

A major change at TAR took place in the 1980s with the creation of new AAA journals to relieve TAR of publishing articles that were less accountics-oriented. Prior to 1983, TAR was the leading academic journal for teachers of accounting as well as practitioners. Numerous TAR papers appeared on how to improve accounting education and teaching. In an effort to better serve educators, the AAA created a specialty journal called Issues in Accounting Education, first published in 1983. A journal aimed more at issues facing practitioners was inaugurated in 1987 under the name Accounting Horizons. Around this time, the AAA also granted permission for specialty “sections” to be formed for sub-disciplines of accounting, which resulted in additional new journals. These new journals allowed TAR to focus more heavily on quantitative papers that became increasingly difficult for practitioners and many teachers of accounting to comprehend.

Fleming et al. [2000, p. 48] report that education articles in TAR declined from 21 percent in 1946-1965 to 8 percent in 1966-1985. Issues in Accounting Education began to publish the education articles in 1983. Garcha, Harwood, and Hermanson [1983] reported on the readership of TAR before any new specialty journals commenced in the AAA. They found that among their AAA membership respondents, only 41.7 percent would subscribe to TAR if it became unbundled in terms of dollar savings from AAA membership dues. This suggests that TAR was not meeting the AAA membership’s needs. Based heavily upon the written comments of respondents, the authors’ conclusions were, in part, as follows by Garcha, Harwood, and Hermanson [1983, p. 37]:

The findings of the survey reveal that opinions vary regarding TAR and that emotions run high. At one extreme some respondents seem to believe that TAR is performing its intended function very well. Those sharing this view may believe that its mission is to provide a high-quality outlet for those at the cutting-edge of accounting research. The pay-off for this approach may be recognition by peers, achieving tenure and promotion, and gaining mobility should one care to move. This group may also believe that trying to affect current practice is futile anyway, so why even try?


 

At the other extreme are those who believe that TAR is not serving its intended purpose. This group may believe TAR should serve the readership interests of the audiences identified by the Moonitz Committee. Many in the intended audience cannot write for, cannot read, or are not interested in reading the Main Articles which have been published during approximately the last decade. As a result there is the suggestion that this group believes that a change in editorial policy is needed.

 

After a study by Abdel-khalik [1976] revealed complaints about the difficulties of following the increased quantitative terminology in TAR, editors did introduce abstracts at the beginning of the articles to summarize major findings with less jargon [Flesher, 1991, p. 169]. However, the problem was simultaneously exacerbated when TAR stopped publishing commentaries and rebuttals that sometimes aided comprehension of complicated research. Science journals often are much better about encouraging commentaries, replications, and rebuttals.
 

TAR BETWEEN 1986 AND 2005: MATURATION OF ACCOUNTICS

We pointed out earlier in Table 2 how the numbers of authors having five or more appearances in twenty-year time spans has markedly declined over the entire 80-year life of TAR. Table 4 lists the most recent top authors for the 1986-2005 period. In contrast to Heck and Bremser [1986] findings, the likelihood that any single author will have more than five appearances is greatly reduced in more recent times.

Continued at http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm   

Research at the University of Rochester ---  https://urresearch.rochester.edu/home.action

Jensen Comment
Note that this site includes a long listing of research in accounting, finance, and economics, much of it based on positivism and financial markets.

"How Non-Scientific Granulation Can Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
By Bob Jensen
This essay takes off from the following quotation:

A recent accountics science study suggests that audit firm scandal with respect to someone else's audit may be a reason for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

Our conclusions are subject to two caveats. First, we find that clients switched away from ChuoAoyama in large numbers in Spring 2006, just after Japanese regulators announced the two-month suspension and PwC formed Aarata. While we interpret these events as being a clear and undeniable signal of audit-quality problems at ChuoAoyama, we cannot know for sure what drove these switches (emphasis added). It is possible that the suspension caused firms to switch auditors for reasons unrelated to audit quality. Second, our analysis presumes that audit quality is important to Japanese companies. While we believe this to be the case, especially over the past two decades as Japanese capital markets have evolved to be more like their Western counterparts, it is possible that audit quality is, in general, less important in Japan (emphasis added) .

 

Replication Paranoia:  Can you imagine anything like this happening in accountics science?

"Is Psychology About to Come Undone?" by Tom Bartlett, Chronicle of Higher Education, April 17, 2012 --- Click Here
http://chronicle.com/blogs/percolator/is-psychology-about-to-come-undone/29045?sid=at&utm_source=at&utm_medium=en

If you’re a psychologist, the news has to make you a little nervous—particularly if you’re a psychologist who published an article in 2008 in any of these three journals: Psychological Science, the Journal of Personality and Social Psychology, or the Journal of Experimental Psychology: Learning, Memory, and Cognition.

Because, if you did, someone is going to check your work. A group of researchers have already begun what they’ve dubbed the Reproducibility Project, which aims to replicate every study from those three journals for that one year. The project is part of Open Science Framework, a group interested in scientific values, and its stated mission is to “estimate the reproducibility of a sample of studies from the scientific literature.” This is a more polite way of saying “We want to see how much of what gets published turns out to be bunk.”

For decades, literally, there has been talk about whether what makes it into the pages of psychology journals—or the journals of other disciplines, for that matter—is actually, you know, true. Researchers anxious for novel, significant, career-making findings have an incentive to publish their successes while neglecting to mention their failures. It’s what the psychologist Robert Rosenthal named “the file drawer effect.” So if an experiment is run ten times but pans out only once you trumpet the exception rather than the rule. Or perhaps a researcher is unconsciously biasing a study somehow. Or maybe he or she is flat-out faking results, which is not unheard of. Diederik Stapel, we’re looking at you.

So why not check? Well, for a lot of reasons. It’s time-consuming and doesn’t do much for your career to replicate other researchers’ findings. Journal editors aren’t exactly jazzed about publishing replications. And potentially undermining someone else’s research is not a good way to make friends.

Brian Nosek knows all that and he’s doing it anyway. Nosek, a professor of psychology at the University of Virginia, is one of the coordinators of the project. He’s careful not to make it sound as if he’s attacking his own field. “The project does not aim to single out anybody,” he says. He notes that being unable to replicate a finding is not the same as discovering that the finding is false. It’s not always possible to match research methods precisely, and researchers performing replications can make mistakes, too.

But still. If it turns out that a sizable percentage (a quarter? half?) of the results published in these three top psychology journals can’t be replicated, it’s not going to reflect well on the field or on the researchers whose papers didn’t pass the test. In the long run, coming to grips with the scope of the problem is almost certainly beneficial for everyone. In the short run, it might get ugly.

Nosek told Science that a senior colleague warned him not to take this on “because psychology is under threat and this could make us look bad.” In a Google discussion group, one of the researchers involved in the project wrote that it was important to stay “on message” and portray the effort to the news media as “protecting our science, not tearing it down.”

The researchers point out, fairly, that it’s not just social psychology that has to deal with this issue. Recently, a scientist named C. Glenn Begley attempted to replicate 53 cancer studies he deemed landmark publications. He could only replicate six. Six! Last December I interviewed Christopher Chabris about his paper titled “Most Reported Genetic Associations with General Intelligence Are Probably False Positives.” Most!

A related new endeavour called Psych File Drawer allows psychologists to upload their attempts to replicate studies. So far nine studies have been uploaded and only three of them were successes.

Both Psych File Drawer and the Reproducibility Project were started in part because it’s hard to get a replication published even when a study cries out for one. For instance, Daryl J. Bem’s 2011 study that seemed to prove that extra-sensory perception is real — that subjects could, in a limited sense, predict the future — got no shortage of attention and seemed to turn everything we know about the world upside-down.

Yet when Stuart Ritchie, a doctoral student in psychology at the University of Edinburgh, and two colleagues failed to replicate his findings, they had a heck of a time getting the results into print (they finally did, just recently, after months of trying). It may not be a coincidence that the journal that published Bem’s findings, the Journal of Personality and Social Psychology, is one of the three selected for scrutiny.

Continued in article

Jensen Comment

Scale Risk
In accountics science such a "Reproducibility Project" would be much more problematic except in behavioral accounting research. This is because accountics scientists generally buy rather than generate their own data (Zoe-Vonna Palmrose is an exception). The problem with purchased data from such as CRSP data, Compustat data, and AuditAnalytics data is that it's virtually impossible to generate alternate data sets, and if there are hidden serious errors in the data it can unknowingly wipe out thousands of accountics science publications all at one --- what we might call a "scale risk."

Assumptions Risk
A second problem in accounting and finance research is that researchers tend to rely upon the same models over and over again. And when serious  flaws were discovered in a model like CAPM it not only raised doubts about thousands of past studies, it made accountics and finance researchers make choices about whether or not to change their CAPM habits in the future. Accountics researchers that generally look for an easy way out blindly continued to use CAPM in conspiracy with journal referees and editors who silently agreed to ignore CAPM problems and limitations of assumptions about efficiency in capital markets---
http://faculty.trinity.edu/rjensen/Theory01.htm#EMH
We might call this an "assumptions risk."

Hence I do not anticipate that there will ever be a Reproducibility Project in accountics science. Horrors. Accountics scientists might not continue to be the highest paid faculty on their respected campuses and accounting doctoral programs would not know how to proceed if they had to start focusing on accounting rather than econometrics.

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

Ockham’s (or Occam's) Razor (Law of Parsimony and Succinctness) --- http://en.wikipedia.org/wiki/Ockham's_razor

"Razoring Ockham’s razor," by Massimo Pigliucci, Rationally Speaking, May 6, 2011 ---
http://rationallyspeaking.blogspot.com/2011/05/razoring-ockhams-razor.html

Scientists, philosophers and skeptics alike are familiar with the idea of Ockham’s razor, an epistemological principle formulated in a number of ways by the English Franciscan friar and scholastic philosopher William of Ockham (1288-1348). Here is one version of it, from the pen of its originator:

 

Frustra fit per plura quod potest fieri per pauciora. [It is futile to do with more things that which can be done with fewer] (Summa Totius Logicae)

 

Philosophers often refer to this as the principle of economy, while scientists tend to call it parsimony. Skeptics invoke it every time they wish to dismiss out of hand claims of unusual phenomena (after all, to invoke the “unusual” is by definition unparsimonious, so there).

 

There is a problem with all of this, however, of which I was reminded recently while reading an old paper by my colleague Elliot Sober, one of the most prominent contemporary philosophers of biology. Sober’s article is provocatively entitled “Let’s razor Ockham’s razor” and it is available for download from his web site.

 

Let me begin by reassuring you that Sober didn’t throw the razor in the trash. However, he cut it down to size, so to speak. The obvious question to ask about Ockham’s razor is: why? On what basis are we justified to think that, as a matter of general practice, the simplest hypothesis is the most likely one to be true? Setting aside the surprisingly difficult task of operationally defining “simpler” in the context of scientific hypotheses (it can be done, but only in certain domains, and it ain’t straightforward), there doesn’t seem to be any particular logical or metaphysical reason to believe that the universe is a simple as it could be.

 

Indeed, we know it’s not. The history of science is replete with examples of simpler (“more elegant,” if you are aesthetically inclined) hypotheses that had to yield to more clumsy and complicated ones. The Keplerian idea of elliptical planetary orbits is demonstrably more complicated than the Copernican one of circular orbits (because it takes more parameters to define an ellipse than a circle), and yet, planets do in fact run around the gravitational center of the solar system in ellipses, not circles.

 

Lee Smolin (in his delightful The Trouble with Physics) gives us a good history of 20th century physics, replete with a veritable cemetery of hypotheses that people thought “must” have been right because they were so simple and beautiful, and yet turned out to be wrong because the data stubbornly contradicted them.

 

In Sober’s paper you will find a discussion of two uses of Ockham’s razor in biology, George Williams’ famous critique of group selection, and “cladistic” phylogenetic analyses. In the first case, Williams argued that individual- or gene-level selective explanations are preferable to group-selective explanations because they are more parsimonious. In the second case, modern systematists use parsimony to reconstruct the most likely phylogenetic relationships among species, assuming that a smaller number of independent evolutionary changes is more likely than a larger number.

 

Part of the problem is that we do have examples of both group selection (not many, but they are there), and of non-parsimonious evolutionary paths, which means that at best Ockham’s razor can be used as a first approximation heuristic, not as a sound principle of scientific inference.

 

And it gets worse before it gets better. Sober cites Aristotle, who chided Plato for hypostatizing The Good. You see, Plato was always running around asking what makes for a Good Musician, or a Good General. By using the word Good in all these inquiries, he came to believe that all these activities have something fundamental in common, that there is a general concept of Good that gets instantiated in being a good musician, general, etc. But that, of course, is nonsense on stilts, since what makes for a good musician has nothing whatsoever to do with what makes for a good general.

 

Analogously, suggests Sober, the various uses of Ockham’s razor have no metaphysical or logical universal principle in common — despite what many scientists, skeptics and even philosophers seem to think. Williams was correct, group selection is less likely than individual selection (though not impossible), and the cladists are correct too that parsimony is usually a good way to evaluate competitive phylogenetic hypotheses. But the two cases (and many others) do not share any universal property in common.

 

What’s going on, then? Sober’s solution is to invoke the famous Duhem thesis.** Pierre Duhem suggested in 1908 that, as Sober puts it: “it is wrong to think that hypothesis H makes predictions about observation O; it is the conjunction of H&A [where A is a set of auxiliary hypotheses] that issues in testable consequences.”

 

This means that, for instance, when astronomer Arthur Eddington “tested” Einstein’s General Theory of Relativity during a famous 1919 total eclipse of the Sun — by showing that the Sun’s gravitational mass was indeed deflecting starlight by exactly the amount predicted by Einstein — he was not, strictly speaking doing any such thing. Eddington was testing Einstein’s theory given a set of auxiliary hypotheses, a set that included independent estimates of the mass of the sun, the laws of optics that allowed the telescopes to work, the precision of measurement of stellar positions, and even the technical processing of the resulting photographs. Had Eddington failed to confirm the hypotheses this would not (necessarily) have spelled the death of Einstein’s theory (since confirmed in many other ways). The failure could have resulted from the failure of any of the auxiliary hypotheses instead.

 

This is both why there is no such thing as a “crucial” experiment in science (you always need to repeat them under a variety of conditions), and why naive Popperian falsificationism is wrong (you can never falsify a hypothesis directly, only the H&A complex can be falsified).

 

What does this have to do with Ockham’s razor? The Duhem thesis explains why Sober is right, I think, in maintaining that the razor works (when it does) given certain background assumptions that are bound to be discipline- and problem-specific. So, for instance, Williams’ reasoning about group selection isn’t correct because of some generic logical property of parsimony (as Williams himself apparently thought), but because — given the sorts of things that living organisms and populations are, how natural selection works, and a host of other biological details — it is indeed much more likely than not that individual and not group selective explanations will do the work in most specific instances. But that set of biological reasons is quite different from the set that cladists use in justifying their use of parsimony to reconstruct organismal phylogenies. And needless to say, neither of these two sets of auxiliary assumptions has anything to do with the instances of successful deployment of the razor by physicists, for example.

Continued in article
Note the comments that follow

August 21, 2012 message from Amy Dunbar

Jensen Quotation
"Of course you, Amy, know this since you prepare technical tax learning Camtasia videos for your tax students. I suspect you also prepare technical software learning videos (such as how to run a GLM model in SAS)."

Actually I record Stata videos. I much prefer Stata to SAS. ;-)
Amy

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

SAS --- http://en.wikipedia.org/wiki/SAS_%28software%29

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

• With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier
• With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams
• With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR
• With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

Gaming for Tenure as an Accounting Professor ---
http://faculty.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F

Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html

Jensen Comment
Here are some added positives and negatives to consider, especially if you are currently a practicing accountant considering becoming a professor.

Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html 

Why must all accounting doctoral programs be social science (particularly econometrics) "accountics" doctoral programs?
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

What went wrong in accounting/accountics research?
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#BadNews

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#BadNews

"The Accounting Doctoral Shortage: Time for a New Model,"
by Neal Mero, Jan R. Williams and George W. Krull, Jr. .
Issues in Accounting Education 24 (4)
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=IAEXXX000024000004000427000001&idtype=cvips&gifs=Yes&ref=no

ABSTRACT:
The crisis in supply versus demand for doctorally qualified faculty members in accounting is well documented (Association to Advance Collegiate Schools of Business [AACSB] 2003a, 2003b; Plumlee et al. 2005; Leslie 2008). Little progress has been made in addressing this serious challenge facing the accounting academic community and the accounting profession. Faculty time, institutional incentives, the doctoral model itself, and research diversity are noted as major challenges to making progress on this issue. The authors propose six recommendations, including a new, extramurally funded research program aimed at supporting doctoral students that functions similar to research programs supported by such organizations as the National Science Foundation and other science-based funding sources. The goal is to create capacity, improve structures for doctoral programs, and provide incentives to enhance doctoral enrollments. This should lead to an increased supply of graduates while also enhancing and supporting broad-based research outcomes across the accounting landscape, including auditing and tax. ©2009 American Accounting Association

Bob Jensen's threads on accountancy doctoral programs are at
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

Steven J. Kachelmeier's July 2011 Editorial as Departing Senior Editor of The Accounting Review (TAR)

"Introduction to a Forum on Internal Control Reporting and Corporate Debt," by Steven J. Kachelmeier, The Accounting Review, Vol. 86, No. 4, July 2011 pp. 1129–113 (not free online) ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=ACRVAS000086000004001129000001&idtype=cvips&prog=normal

One of the more surprising things I have learned from my experience as Senior Editor of The Accounting Review is just how often a ‘‘hot topic’’ generates multiple submissions that pursue similar research objectives. Though one might view such situations as enhancing the credibility of research findings through the independent efforts of multiple research teams, they often result in unfavorable reactions from reviewers who question the incremental contribution of a subsequent study that does not materially advance the findings already documented in a previous study, even if the two (or more) efforts were initiated independently and pursued more or less concurrently. I understand the reason for a high incremental contribution standard in a top-tier journal that faces capacity constraints and deals with about 500 new submissions per year. Nevertheless, I must admit that I sometimes feel bad writing a rejection letter on a good study, just because some other research team beat the authors to press with similar conclusions documented a few months earlier. Research, it seems, operates in a highly competitive arena.

Fortunately, from time to time, we receive related but still distinct submissions that, in combination, capture synergies (and reviewer support) by viewing a broad research question from different perspectives. The two articles comprising this issue’s forum are a classic case in point. Though both studies reach the same basic conclusion that material weaknesses in internal controls over financial reporting result in negative repercussions for the cost of debt financing, Dhaliwal et al. (2011) do so by examining the public market for corporate debt instruments, whereas Kim et al. (2011) examine private debt contracting with financial institutions. These different perspectives enable the two research teams to pursue different secondary analyses, such as Dhaliwal et al.’s examination of the sensitivity of the reported findings to bank monitoring and Kim et al.’s examination of debt covenants.

Both studies also overlap with yet a third recent effort in this arena, recently published in the Journal of Accounting Research by Costello and Wittenberg-Moerman (2011). Although the overall ‘‘punch line’’ is similar in all three studies (material internal control weaknesses result in a higher cost of debt), I am intrigued by a ‘‘mini-debate’’ of sorts on the different conclusions reache  by Costello and Wittenberg-Moerman (2011) and by Kim et al. (2011) for the effect of material weaknesses on debt covenants. Specifically, Costello and Wittenberg-Moerman (2011, 116) find that ‘‘serious, fraud-related weaknesses result in a significant decrease in financial covenants,’’ presumably because banks substitute more direct protections in such instances, whereas Kim et al. Published Online: July 2011 (2011) assert from their cross-sectional design that company-level material weaknesses are associated with more financial covenants in debt contracting.

In reconciling these conflicting findings, Costello and Wittenberg-Moerman (2011, 116) attribute the Kim et al. (2011) result to underlying ‘‘differences in more fundamental firm characteristics, such as riskiness and information opacity,’’ given that, cross-sectionally, material weakness firms have a greater number of financial covenants than do non-material weakness firms even before the disclosure of the material weakness in internal controls. Kim et al. (2011) counter that they control for risk and opacity characteristics, and that advance leakage of internal control problems could still result in a debt covenant effect due to internal controls rather than underlying firm characteristics. Kim et al. (2011) also report from a supplemental change analysis that, comparing the pre- and post-SOX 404 periods, the number of debt covenants falls for companies both with and without material weaknesses in internal controls, raising the question of whether the

Costello and Wittenberg-Moerman (2011) finding reflects a reaction to the disclosures or simply a more general trend of a declining number of debt covenants affecting all firms around that time period. I urge readers to take a look at both articles, along with Dhaliwal et al. (2011), and draw their own conclusions. Indeed, I believe that these sorts . . .

Continued in article

Jensen Comment
Without admitting to it, I think Steve has been embarrassed, along with many other accountics researchers, about the virtual absence of validation and replication of accounting science (accountics) research studies over the past five decades. For the most part, accountics articles are either ignored or accepted as truth without validation. Behavioral and capital markets empirical studies are rarely (ever?) replicated. Analytical studies make tremendous leaps of faith in terms of underlying assumptions that are rarely challenged (such as the assumption of equations depicting utility functions of corporations).

Accounting science thereby has become a pseudo science where highly paid accountics professor referees are protecting each others' butts ---
"574 Shields Against Validity Challenges in Plato's Cave" --- http://faculty.trinity.edu/rjensen/TheoryTAR.htm
The above link contains Steve's rejoinders on the replication debate.

In the above editorial he's telling us that there is a middle ground for validation of accountics studies. When researchers independently come to similar conclusions using different data sets and different quantitative analyses they are in a sense validating each others' work without truly replicating each others' work.

I agree with Steve on this, but I would also argue that these types of "validation" is too little to late relative to genuine science where replication and true validation are essential to the very definition of science. The types independent but related research that Steve is discussing above is too infrequent and haphazard to fall into the realm of validation and replication.

When's the last time you witnesses a TAR author criticizing the research of another TAR author (TAR does not publish critical commentaries)?
Are TAR articles really all that above criticism?
Even though I admire Steve's scholarship, dedication, and sacrifice, I hope future TAR editors will work harder at turning accountics research into real science!

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

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

"History, Not Politics," by Serena Golden, Inside Higher Ed, May 21, 2010 ---
http://www.insidehighered.com/news/2010/05/21/spence

Jonathan Spence came here to deliver a speech, but don't let that fool you: his address -- the 39th Annual Jefferson Lecture in the Humanities, which took place Thursday -- in no way resembled the sort typically associated with D.C.

The Jefferson Lecture is sponsored by the National Endowment for the Humanities, which describes the lecture as "the most prestigious honor the federal government bestows for distinguished intellectual achievement in the humanities." Those chosen for the distinction are typically academics or creative types (or both) -- but, given the setting, the sponsor, and the nature of the award (which "recognizes an individual... who has the ability to communicate the knowledge and wisdom of the humanities in a broad, appealing way"), Jefferson Lecturers have historically taken the opportunity to make a larger (and sometimes tacitly political) point related to the humanities. Last year, controversial bioethicist Leon Kass used his lecture to criticize the way the humanities are taught and researched at American universities; in 2007, Harvey Mansfield argued, with many subtle political allusions, that the social sciences are in dire need of "the help of literature and history"; Tom Wolfe's 2006 lecture discussed how the humanities shed light on modern culture (and lamented the current state of that culture on campuses); 2005 lecturer Donald Kagan and 2004 lecturer Helen Vendler offered opposing views on which disciplines of the humanities are most crucial, and why.

If any of those in the crowd (noticeably larger than last year's) at the Warner Theater last night were familiar with the Jefferson Lectures of years prior, they were in for a surprise.

Spence is Sterling Professor of History Emeritus at Yale University, whose faculty he joined in 1966. His specialty has always been China -- his 14 books on Chinese history include 1990's The Search for Modern China, upon whose publication the New York Times accurately predicted that it would "undoubtedly become a standard text on the subject" -- and his lecture was entitled "When Minds Met: China and the West in the Seventeenth Century." Even this relatively specific appellation, however, conveys a misleading breadth, for Spence's lecture focused almost exclusively on three men -- Shen Fuzong, an exceptionally learned Chinese traveler; Thomas Hyde, an English scholar of history and language; and Robert Boyle, also English, a scientist and philosopher of considerable renown -- and one year: 1687.

In his lecture, Spence gave what may (or may not) have been one brief acknowledgment that he'd chosen an unusually narrow topic of discourse: "It is a commonplace, I think, that the sources that underpin our concept of the humanities, as a focus for our thinking, are expected to be broadly inclusive." But, for himself, Spence dismissed that notion in one more sentence: "...as a historian I have always been drawn to the apparently small-scale happenings in circumscribed settings, out of which we can tease a more expansive story."

Thus he dedicated the rest of his lecture to the story of those three historical figures in the year 1687. Shen had traveled to Europe in the company of one of his teachers, a Flemish Jesuit priest who was co-editing a book of the sayings of Confucius from Chinese into Latin. Hyde, librarian at the University of Oxford's Bodleian Library, invited Shen there to assist him with the cataloging of some Chinese books -- and also because Hyde, who in that era would have been called an Orientalist, wanted to learn Chinese himself. After a brief stay at Oxford, Shen returned to London, bearing a letter of introduction from Hyde to his friend Boyle; the letter recommended that Boyle meet and converse with the Chinese scholar. The letter had to be convincing, Spence explained, because Boyle's reputation was by then widespread, and "he was so inundated with curious visitors that at times he had to withdraw into self-enforced seclusion...."

Shen did meet Boyle at least once; Boyle's work diary mentions their discussion of the Chinese language and its scholars (a conversation that, like all of those between Shen and Hyde, must have taken place in Latin: Shen's Latin was excellent, but he did not, evidently, know English). And Hyde maintained correspondence not only with his old friend Boyle -- over the years, the two had "discussed Arabic and Persian texts, Malay grammars... and how to access books from Tangier, Constantinople and Bombay" as well as "the chemical constituents of sal ammoniac and amber, the effectiveness of certain Mexican herbs... current studies of human blood and air, the nature of papyrus, the writings of Ramon Llull and the use of elixirs and alchemy in the treatment of illnesses" -- but also with Shen, until around the time of the latter's departure from England for Portugal in the spring of 1688.The letters between Shen and Hyde covered such topics as "Chinese vocabulary... China's units of weights and measurements... the workings of the Chinese examination system and bureaucracy... [and] the Chinese Buddhist belief in the transmigration of souls."

"All three men," Spence ultimately concluded, "though so different, shared certain basic ideas about human knowledge: these included... the importance of linguistic precision, the need for broad-based comparative studies, the role of clarity in argument, the need for thorough scrutiny of philosophical and theological principles.... Theirs, though brief, had been a real meeting of the minds. And the values they shared remain, well over three hundred years later, the kind that we can seek to practice even in our own hurried lives."

That final point was the closest Spence came to suggesting a particular take-home message for his audience; however, in an interview with Inside Higher Ed, held that morning in the lobby of the Willard Hotel, he did mention a few ideas that he was hoping to convey. For one thing, Spence said, given the current importance of U.S.-China relations, he hopes this much older, smaller-scale example of dialogue between the East and West will "give some perspective to that."

"Historians," he said, "try to get people away from just focusing on the present; they try to give them some sort of stronger sense of continuity, human continuity. And I just like the range of things, these three people that draw together, and they're writing their letters to each other, and their few meetings... and in that short time they talk about examination systems, they talk about language, competition, they talk about medicine, they talk about -- I was fascinated, they talk about chess..... All these things seemed to me to flow together, and I think they'd make an interesting -- I hope they'd make an interesting -- package about cultural contact."

There's a message in that, Spence said: "to make our range of contact as wide as possible, and to use our intelligence about how to do this."

Another issue raised in the lecture, Spence said -- "maybe a small point, but perhaps worth making" -- has to do with the teaching and learning of languages; Hyde dreamed of bringing native speakers of various Eastern languages to Oxford, to establish a college of languages. "Why should everybody else on the planet speak English?" Spence asked. "I mean, why should they?"

But on the larger importance of the humanities, and their current status in higher education and society at large, Spence was reluctant to make a strong argument. "It's not just a case of encouraging humanities in the abstract; it's having something to say.... The main search should be for what is the most meaningful thing you can achieve with the humanities, how can you share some kind of broader cultural values, or how can you learn things about yourself or other societies. The challenge is to use the humane intelligence and see what can be built on that."

And when it comes to funding, "any government has to put its priorities somewhere, and this does usually mean cutting something."

His lecture, Spence said, isn't "meant to be exactly a political speech, you know, I hope people understand that."

For the most part, those in attendance seemed more than satisfied. Spence's talk was punctuated frequently by warm laughter from the audience -- whom he indulged shamelessly, often departing from his prepared remarks to expound upon details that interested him, or to make additional jokes whenever the crowd found one of his remarks especially humorous. When he finished, the applause was long and loud, and one woman remarked audibly, "That was amazing!"; her companion replied, "Nice, really nice!"

But at least a few people reacted with more ambivalence. One group of young attendees, who identified themselves as fans of Spence, having been students of his as undergraduates at Yale, said that while they'd enjoyed the lecture, they had been hoping that Spence would make a more explicit connection between his topic and issues of current cultural or political relevance. One noted that, in his introductory remarks that evening, NEH Chairman James Leach had described the purpose of the Jefferson Lecture as being "to narrow the gap between the world of academia and public affairs," and had emphasized the Endowment's goal of "bridging cultures."

There was an "irony," this young man said, in the fact that Spence's lecture precisely addressed the bridging of two cultures, but Spence hadn't made a bridge between his own remarks -- which the audience member interpreted as "a clarion call for better scholarship" -- and any other realm. "Listeners," he said (possibly referring to himself), "want something that's cut and dry, that's tweetable."

The possibility of such complaints about his speech had arisen during Inside Higher Ed's interview with Spence that morning; he hadn't seemed concerned. "I'm not going to sort of over-apologize to the audience... they've chosen to come to hear about the seventeenth century" -- he chuckled -- "I think we announced that!"

Robert Walker in New Zealand and I have been corresponding about how much of the core of an accounting theory course should be devoted to the main works of Professor Ijiri, especially his AAA Monographs --- http://aaahq.org/market/display.cfm?catID=5

Professor Ijiri was one on my doctoral studies professors, and I greatly admire his research and scholarship and devotion to mathematics ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/yuji-ijiri/

However, given the tradeoffs of the many topics that are important to accounting theory education, I think I would devote less time to Yuji’s works than would Robert Walker since I don’t think Yuji addressed many of our current theoretical problems. Robert Walker would pretty much begin and end an accounting theory course with the Ijiri monographs.

Robert Walker is a fine accounting historian and theorist who asked me to share the following with you.

I admit that my own interest in theory are probably wider. I’m also inclined with respect to accounting theory to also focus on issues of operations and implementation. We can always assume non-existent worlds filled with idealized inhabitants that we program. Andy way we like But that’s probably theory best left to economists.

I am not trying to operationalise ‘triple entry’ bookkeeping.  This is ijiri’s ‘bridge too far’ (even a genius, for that is what he is, can be mistaken).  Knowing the flaws of historical cost, he attempted to introduce a third element which accommodated the future (‘momentum’).  In doing so he violated the beauty of the algebraic formulation that double entry is

I have attempted to express ‘momentum’ in double entry form – that is, I don’t look to the AAA study on ‘triple entry bookkeeping’ (which, frankly, is nonsense and an abject failure) but to the alternative valuation analysis in Theory of Accounting Measurement.  The idea of ‘momentum’ is to try to predict the future from the past.  That is not possible because it pre-supposes that there is an essential continuity.  It cannot take account of what is now referred to as the ‘black swan’ phenomenon – the wholly unpredictable and unexpected event.  At best the accountant can only lay out the value propositions that are an attempt to predict the future and adjust them for discontinuities.  The arrival of the black swan is, hopefully, not so momentous an event as to over-whelm the entity whose accounting is being carried out.  The equity buffer is there for that purpose – to accommodate the unexpected.

For instance, even in the example of life insurance where actuarial practice is (a) most precise and (b) most certain (everybody dies) the actuary cannot take account of events that have not arisen before.  They cannot predict a plague which would fundamentally alter the stochastic data.  All they can do is introduce a prudential margin (see IAS36.30).  Even then it may not be enough and even then a dangerous thing to do as it under-states equity.

I would go so far as to say that concepts such as irrationality are not amenable to any real or sensible mathematical formulation.  If it cannot be expressed in that form it cannot be expressed in accounting notation.  It is therefore not the business of accounting.  Perhaps my theory of accounting, if it is a theory at all, ultimately teaches this – accounting needs to be much more modest in its ambition.  It deals only in money and money’s worth.  If it cannot, it is not practical to express it in money then it shouldn’t be expressed. 

Take your concern with contingent liability (or better provisional liability) it is simply absurd to predict the outcome of the judicial process when dealing in matters of tort (as you know these days that is how I make my living and I wouldn’t even attempt to quantify my future ‘winnings’).  A written narrative is all that you can hope to achieve in such matters.  If that understates liabilities, so be it.  As I say that is what equity (ownership interest) is for.

It might not surprise for me to claim that my theories are based in Friedrich Nietzsche.  Consider this:

I walk among men as among fragments of the future; of that future which I scan.

And it is all my art and aim, to compose into one and bring together that which is fragment, and riddle and dreadful chance.

 

You wish to read the ‘fragments of the future’.  A Promethean task I think.  You cannot ever deal with ‘dreadful chance’ until it is upon you.  Then all you can do is redeem it.  It is foolhardy even an act of hubris to think otherwise.  Accounting can never do what you want it to do.  In the end it is about limits, limits to ambition.

Robert (jensen)

PS I hope your wife is OK.  It is illness, on a human scale, that is ‘dreadful chance’.

PSS Your colleagues might consider, along with Ijiri, Nietzsche as the foundation to a course of theory. His book Beyond Good and Evil has a sub-title ‘Towards a Philosophy of the Future’.

Hi Robert (Walker),

I think I understand the swap, but I cannot connect to Ijiri with this illustration. The revaluations are given, but they do not relate to force or momentum. That would take a mathematical model of the future valuations, but this cannot be predicted. If it could there would be no swap. The party and the counterparty have different predictions of the future

I have begun to go back over all my many writings on the matter of accounting. I have decided to start publishing this material on my website and I will do so progressively over the next few weeks and months.

The first offering is an essay I wrote as a submission to what is now NZICA on the occasion of a restructure in about 1992.

For those of you who have read my messages over the last decade or so you will see that I am a musician with a single score in my repertoire. Or less self deprecatingly I have had a consistent message for what is now becoming decades rather than years.

Was I listened to back then? I doubt it. Was I right in what I said? My answer to that may surprise.

Please read it and circulate it. I am slightly uneasy about pushing people to read what I write. It seems so egotistical. But then that would be true of all writers or would-be writers.

http://www.robertbwalker.co.nz/documents/archives 

Yuji is one of the best-known defenders of historical cost accounting.

Here’s an expanded view of questions raised about which constituencies credit rating agencies (and by analogy auditing firms) really serve.

A message forwarded by my anonymous friend Larry on October 18, 2009

How Moody's sold its ratings -- and sold out investors | McClatchy ---
http://www.mcclatchydc.com/politics/story/77244.html
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

"In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities," said Lawrence McDonald in his recent book, "A Colossal Failure of Common Sense."

Nobody cared about due diligence so long as the money kept pouring in during the housing boom. Moody's stock peaked in February 2007 at more than $72 a share.

Billionaire investor Warren Buffett's firm Berkshire Hathaway owned 15 percent of Moody's stock by the end of 2001, company reports show. That stake, largely still intact, meant that the Oracle from Omaha reaped huge financial rewards while Moody's overlooked the glaring problems in pools of subprime mortgages.

A Berkshire spokeswoman had no comment.

Moody's wasn't alone in ignoring the mounting problems. It wasn't even first among competitors. The financial industry newsletter Asset-Backed Alert found that Standard & Poor's participated in 1,962 deals in 2006 involving pools of loans, while Moody's did 1,697. In 2005, Standard & Poor's did 1,754 deals to Moody's 1,120. Fitch was well behind both.

http://www.mcclatchydc.com/politics/story/77244.html

Jensen Comment
I’m frantically searching the writings of my very technical hero, Janet Tavakoli, to discover that all this is not true about my other hero, Warren Buffett. Of course there are huge unknowns, at this point in time, and varying degrees of culpability.

Janet is pretty rough on the ratings agencies in her writings. However, she’s always kind to Warren. One of my all-time favorite books is her Dear Mr. Buffet book. On Page 107, Janet writes as follows:

At the end of 2007, Berkshire Hathaway owned 78 million shares of Moody’s Corporation, one of the top three rating agencies (the same shares owned when I first met Warren Buffett in 2005), representing just over 19 percent of the capital stock. The cot basis of the shares is $499 million. At the end of 200, the value was just under $1 billion. By the end of 2006, the value was around $3.3 billion, but it dropped to $1.7 billion at the end of 2007. The sharp increase in revenues is due chiefly to revenues generated from rating structured financial products, and the sharp decrease was due to the disillusionment of the market with the integrity of the ratings.

On Page 109, Janet continues to berate the rating agency cartel (where I think it might be possible to substitute auditors for rating agencies interchangeably):

The rating agencies seem to not care about the market’s forgiveness since not only have they not apologized ---  a necessary but not sufficient condition --- they seem to feel the market should change. Specifically, the market should change its point of view about what it expects from the rating agencies. Yet it seems that the market has the right to expect rating agencies to follow the basic principles of statistics.

The tactic has mainly been successful because the rating agencies act as a cartel, leveraging their joint power to have fees magically converge and have ratings so similar that they have participated overrating AAA structured products backed by dodgy loans in 2007 that took substantial principal losses. Meanwhile, many market professionals, including me, pointed out in print that the AAA ratings were maeaningless. The rating agencies presented a farily united front in defending their methods (except for Fitch, which also participated on overrated CDOs and later seemed more responsive to downgrading structured products.

. . .

“Ma and pa” retail investors found that AAA product ended up in their pension funds and mutual funds because their money managers gave too much credence to an AAA rating.

But nowhere have I yet found where Janet alludes to any insider profiteering on the part of Warren Buffett who also lost billions of dollars in the crash The difference between “ma and pa” and Mr. Buffet is that a billion dollars is pocket change to Warren Buffet. He can easily recoup his losses legitimately in trades with stupid hedge fund managers and bankers that rely too much on fallible models (at least that’s what mathematician Janet Tavakoli tells us in a very enlightening way).

Expert Financial Predictions (Jon Stewart's hindsight video scrapbook) --- http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=23077&nlid=1840
You have to watch the first third of this video before it gets into the scrapbook itself
The problem unmentioned here is one faced by auditors and credit rating agencies of risky clients every day:  Predictions are often self fulfilling
If an auditor issues going concern exceptions in audit reports, the exceptions themselves will probably contribute to the downfall of the clients
The same can be said by financial analysts who elect to trash a company's financial outlook
Hence we have the age-old conflict between holding back on what you really secretly predict versus pulling the fire alarm on a troubled company
There are no easy answers here except to conclude that it auditors and credit rating agencies appeared to not reveal many of their inner secret predictions in 2008
Auditing firms and credit rating agencies lost a lot of credibility in this economic crisis, but they've survived many such stains on their reputations in the past
By now we're used to the fact that the public is generally aware of the fire before the auditors and credit rating agencies pull the alarm lever
On the other hand, financial wizards who pull the alarm lever on nearly every company all the time lose their credibility in a hurry

Video:  Warren Buffett's Secrets To Success --- http://www.businessinsider.com/business-news/nov-24-alice1-2009-11 '

Bob Jensen's threads on credit rating agencies are at
http://faculty.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's threads on auditor professionalism are at
http://faculty.trinity.edu/rjensen/fraud001.htm#Professionalism

FASB Codification Database Supersedes All FASB Standards

Countdown to Codification Alert:  FASB Alert #4, 5-22-09

What happens to U.S. GAAP literature when the Codification went live on July 1, 2009?
All existing standards that were used to create the Codification will become superseded upon the adoption of the Codification.  The FASB will no longer update and maintain the superseded standards. Also, upon adoption of the Codification, the U.S. GAAP hierarchy will flatten from five levels to two­authoritative and non-authoritative.  The following table illustrates the result:

 
DON’T BE CAUGHT OFF GUARD!  GET READY FOR THE CODIFICATION!
 
The FASB instituted a major change in the way accounting standards are organized. The FASB Accounting Standards Codification^TM is expected to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP).   After final approval by the FASB only one level of authoritative GAAP will exist, other than guidance issued by the Securities and Exchange Commission (SEC). All other literature will be non-authoritative.
 
While the FASB Codification is designed to make it much easier to research accounting issues, the transition to use of the Codification will require some advance training.  These weekly “Countdown to Codification” alerts are designed to provide tips to make that transition easier.
 
The FASB offers a free online tutorial at http://asc.fasb.org.  A recorded instructional webcast­The Move to Codification of US GAAP, first presented live on March 13, 2008­also is available at http://www.fasb.org/fasb_webcast_series/index.shtml. In addition, Codification training opportunities are offered through professional accounting organizations such as the American Institute of Certified Public Accountants (AICPA).

For the PwC Codification Guide I snipped the URL to
http://snipurl.com/ifrs-litevsheavy

The original link is at
http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf

Deloitte’s Codification helpers are linked at
http://www.iasplus.com/usa/fasb/0906codification.pdf

The following message was forwarded by David Albrecht on June 16, 2009

From: "Tracey E. Sutherland" <traceysutherland@aaahq.org>
Organization: American Accounting Association
Date: Tue, 16 Jun 2009 17:25:23 -0400

FAF and AAA to Provide FASB Codification to Faculty and Students

On July 1, 2009, the Financial Accounting Standards Board (FASB) is instituting a major change in the way accounting standards are organized. On that date, the FASB Accounting Standards Codification™ (FASB Codification) will become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (U.S. GAAP).  After that date, only one level of authoritative U.S. GAAP will exist, other than guidance issued by the Securities and Exchange Commission (SEC).  All other literature will be non-authoritative.

As part of its educational mission, the Financial Accounting Foundation (FAF), the oversight and administrative body of the FASB, in a joint initiative with the American Accounting Association (AAA), will provide faculty and students in accounting programs at post-secondary academic institutions with the Professional View of the online FASB Codification.

Accounting Program Access—No Cost to Individual Faculty or Students
The Professional View of the FASB Codification will be accessible at no cost to individual faculty and students, through the AAA’s Academic Access program, available to Registered Accounting Programs.  The Professional View will provide advanced search functions with special utilities to assist in the navigation of content, representing the fully functional view of the FASB Codification that will be used by auditors, financial analysts, investors, and preparers of financial statements.  All of the features that have been available with the verification version currently at http://asc.fasb.org are included with the Professional View.
AAA Academic Access

The AAA will provide direct services to accounting departments through its Academic Access program; issuing authentication credentials for faculty and students through Registered Accounting Programs, at a low annual institutional fee of $150.  Information about this program will be forthcoming directly from AAA and on the AAA website at http://aaahq.org/FASB/Access.cfm.

Transitional Access—From July 1 through August 31, 2009
The AAA will provide credentials to individual faculty and students, at no charge, during the transition period before the beginning of the fall semester when faculty and students will receive credentials for access through their Registered Accounting Programs.

The FAF, FASB, and AAA are enthusiastic about this new initiative and understand the value of this program to accounting education and scholarship, in addition to its benefit to faculty and students to have access to the advanced view of U.S. GAAP that will be used by accounting professionals.


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The FASB home page is at http://www.fasb.org/home

June 24, 2009 Update
There was some doubt initially about whether the free or discounted faculty and student access version of the FASB Codification database would be the "Professional" version (that includes searching and cross-referencing at an $850 single user license per year).

The AAA registration site for the discounted ($150 annual discount price) version makes it clear that accounting education departments or schools will get the full "Professional" version at a discount, thereby saving each academic program $700 per year savings per license. What is not yet perfectly clear is whether this is a single-user access license. My reading is that multiple users within a department or school can use the Codification database at the same time. I could be wrong.

The AAA program enrollment site for this discounted version is http://aaahq.org/FASB/Access.cfm 
The form is at https://aaahq.org/AAAforms/FASB/enroll.cfm

Since all future financial statements will no longer reference hard copy sources like FAS 166 or EITF 98-1 or FIN 48, it is vital for students and teachers and researchers to have access to the Codification database for financial statement analysis.

Reasons why registration for the Codification database are important are given at http://www.cfo.com/article.cfm/13854787/c_2984368/?f=archives
Also see http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting

FREE access to ANNUAL REPORTS in XBRL --- http://faculty.trinity.edu/rjensen/XBRLandOLAP.htm#TimelineXBRL
From EDGAR Online --- http://www.tryxbrl.org/

Finance Test Questions --- http://financetestquestions.wikispaces.com/

Watch the Video
"Sometimes we can't see the forest for the trees," by Jim Mahar, FinanceProfessor Blog, May 27, 2009 --- http://financeprofessorblog.blogspot.com/2009/05/sometimes-we-cant-see-forest-for-trees.html

Part Behavioral finance, part cycling, and part a study in how the brain works, the following "Test" is eye opening at least.

We all get so caught up in seeing what we want to see that we sometimes miss the obvious. This effects us in many ways: In finance, if bullish (optimistic), we are more apt to see the good news, if bearish (pessimistic) you see only bad news.

That is one reason why big break throughs happen from those outside the field. It is one reason why sabbaticals and vacations are important. But it can also have important implications in many other ways.

Go ahead, take the test. It takes about a minute --- Click Here

You can order back issues or relevant links management and accounting books and journals from MAAW --- http://maaw.info/

Free Access to Back Issues of The Accounting Review --- http://maaw.info/TheAccountingReview.htm 

Bob Jensen's threads on special purpose (variable interest) entities are at http://faculty.trinity.edu/rjensen//theory/00overview/speOverview.htm

"Visualization of Multidimensional Data" --- http://faculty.trinity.edu/rjensen/352wpVisual/000DataVisualization.htm 

Bob Jensen's threads on XBRL are at http://faculty.trinity.edu/rjensen/XBRLandOLAP.htm#XBRLextended 

Accounting for Electronic Commerce, Including Controversies on Business Valuation, ROI, and Revenue Reporting --- http://faculty.trinity.edu/rjensen/ecommerce.htm 

Comparisons of International IAS Versus FASB Standards --- http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf 

This is a Good Summary of Various Forms of Business Risk  ---
http://en.wikipedia.org/wiki/Risk_management

1. Enterprise Risk Management

2. Credit Risk

3. Market Risk

4. Operational Risk

5. Business Risk

6. Other Types of Risk?

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

"Group Audits, Group-Level Controls, and Component Materiality: How Much Auditing Is Enough?" by Trevor R. Stewart and William R. Kinney, Jr., The Accounting Review, March 2013 ---
http://aaajournals.org/doi/full/10.2308/accr-50314

 

Auditing standards now mandate that group auditors determine and implement appropriate component materiality amounts, which ultimately affect group audit scope, reliability, and value. However, standards are silent about how these amounts should be determined and methods being used in practice vary widely, lack theoretical support, and may either fail to meet the audit objective or do so at excessive cost. We develop a Bayesian group audit model that generalizes and extends the single-component audit risk model to aggregate assurance across multiple components. The model formally incorporates group auditor knowledge of group-level structure, controls, and context as well as component-level constraints imposed by statutory audit or other requirements. Application of the model yields component materiality amounts that achieve the group auditor's overall assurance objective by finding the optimal solution on an efficient materiality frontier. Numerical results suggest group-level controls and structured subgroups of components are central to efficient group audits.

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

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

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

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

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

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

In recent weeks, editors at a respected psychology journal have been taking heat from fellow scientists for deciding to accept a research report that claims to show the existence of extrasensory perception.

The report, to be published this year in The Journal of Personality and Social Psychology, is not likely to change many minds. And the scientific critiques of the research methods and data analysis of its author, Daryl J. Bem (and the peer reviewers who urged that his paper be accepted), are not winning over many hearts.

Yet the episode has inflamed one of the longest-running debates in science. For decades, some statisticians have argued that the standard technique used to analyze data in much of social science and medicine overstates many study findings — often by a lot. As a result, these experts say, the literature is littered with positive findings that do not pan out: “effective” therapies that are no better than a placebo; slight biases that do not affect behavior; brain-imaging correlations that are meaningless.

By incorporating statistical techniques that are now widely used in other sciences — genetics, economic modeling, even wildlife monitoring — social scientists can correct for such problems, saving themselves (and, ahem, science reporters) time, effort and embarrassment.

“I was delighted that this ESP paper was accepted in a mainstream science journal, because it brought this whole subject up again,” said James Berger, a statistician at Duke University. “I was on a mini-crusade about this 20 years ago and realized that I could devote my entire life to it and never make a dent in the problem.”

In recent weeks, editors at a respected psychology journal have been taking heat from fellow scientists for deciding to accept a research report that claims to show the existence of extrasensory perception.

The report, to be published this year in The Journal of Personality and Social Psychology, is not likely to change many minds. And the scientific critiques of the research methods and data analysis of its author, Daryl J. Bem (and the peer reviewers who urged that his paper be accepted), are not winning over many hearts.

Yet the episode has inflamed one of the longest-running debates in science. For decades, some statisticians have argued that the standard technique used to analyze data in much of social science and medicine overstates many study findings — often by a lot. As a result, these experts say, the literature is littered with positive findings that do not pan out: “effective” therapies that are no better than a placebo; slight biases that do not affect behavior; brain-imaging correlations that are meaningless.

By incorporating statistical techniques that are now widely used in other sciences — genetics, economic modeling, even wildlife monitoring — social scientists can correct for such problems, saving themselves (and, ahem, science reporters) time, effort and embarrassment.

“I was delighted that this ESP paper was accepted in a mainstream science journal, because it brought this whole subject up again,” said James Berger, a statistician at Duke University. “I was on a mini-crusade about this 20 years ago and realized that I could devote my entire life to it and never make a dent in the problem.”

The statistical approach that has dominated the social sciences for almost a century is called significance testing. The idea is straightforward. A finding from any well-designed study — say, a correlation between a personality trait and the risk of depression — is considered “significant” if its probability of occurring by chance is less than 5 percent.

This arbitrary cutoff makes sense when the effect being studied is a large one — for example, when measuring the so-called Stroop effect. This effect predicts that naming the color of a word is faster and more accurate when the word and color match (“red” in red letters) than when they do not (“red” in blue letters), and is very strong in almost everyone.

“But if the true effect of what you are measuring is small,” said Andrew Gelman, a professor of statistics and political science at Columbia University, “then by necessity anything you discover is going to be an overestimate” of that effect.

Consider the following experiment. Suppose there was reason to believe that a coin was slightly weighted toward heads. In a test, the coin comes up heads 527 times out of 1,000.

Is this significant evidence that the coin is weighted?

Classical analysis says yes. With a fair coin, the chances of getting 527 or more heads in 1,000 flips is less than 1 in 20, or 5 percent, the conventional cutoff. To put it another way: the experiment finds evidence of a weighted coin “with 95 percent confidence.”

Yet many statisticians do not buy it. One in 20 is the probability of getting any number of heads above 526 in 1,000 throws. That is, it is the sum of the probability of flipping 527, the probability of flipping 528, 529 and so on.

But the experiment did not find all of the numbers in that range; it found just one — 527. It is thus more accurate, these experts say, to calculate the probability of getting that one number — 527 — if the coin is weighted, and compare it with the probability of getting the same number if the coin is fair.

Statisticians can show that this ratio cannot be higher than about 4 to 1, according to Paul Speckman, a statistician, who, with Jeff Rouder, a psychologist, provided the example. Both are at the University of Missouri and said that the simple experiment represented a rough demonstration of how classical analysis differs from an alternative approach, which emphasizes the importance of comparing the odds of a study finding to something that is known.

The point here, said Dr. Rouder, is that 4-to-1 odds “just aren’t that convincing; it’s not strong evidence.”

And yet classical significance testing “has been saying for at least 80 years that this is strong evidence,” Dr. Speckman said in an e-mail.

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

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

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

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

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

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

Continued in article

What went wrong with accountics research ---
http://faculty.trinity.edu/rjensen/Theory01.htm#WhatWentWrong

Skills and knowledge should be required as part of the pre-certification education of CPAs
Prompted by New York’s forthcoming adoption of the 150-hour requirement to sit for the CPA exam, the NYSSCPA’s Quality Enhancement Policy Committee drafted a white paper to encourage discussion on what skills and knowledge should be required as part of the pre-certification education of CPAs. This white paper, which was approved by the Society’s Board of Directors, is presented here, along with additional commentary from the NYSSCPA’s Higher Education Committee.
Quality Enhancement Policy Committee Sharon Sabba Fierstein, Chair, August 2008 --- http://www.nysscpa.org/cpajournal/2008/808/infocus/p26.htm

Mary-Jo Kranacher Editorial, CPA Journal, August 2008 --- http://www.nysscpa.org/cpajournal/2008/808/essentials/p80.htm

Specific requirements for becoming a CPA, and the rights and obligations of a licensed CPA, are set forth in the laws and regulations of 54 United States jurisdictions --- http://www.cpa-exam.org/global/boards.html

NASBA Tools --- http://www.nasbatools.com/display_page
NASBA Resources (Includes documents and audio files on knowledge requirements) --- http://www.nasba.org/nasbaweb/NASBAWeb.nsf/wpmtp?openform

Free and Fee CPA Review Courses --- http://faculty.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

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

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm

"SEC Comments and Trends An analysis of current Reporting Issues," Ernst & Young, October 2012 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/SECCommentsTrends_CC0357_October2012/$FILE/SECCommentsTrends_CC0357_October2012.pdf

Every year, we track the Securities and Exchange Commission (SEC) staff’s comments on public company filings to provide you with insights on the SEC staff’s concerns and areas of focus. Although each registrant’s facts and circumstances are different, the economic conditions in which they operate and their financial reporting challenges are often similar. Understanding the comments and trends discussed in this publication can help as you head into the year-end reporting season.

In its comments, the SEC staff questions disclosures that may conflict with SEC rules or accounting principles, as well as disclosures the SEC staff believes could be enhanced or clarified. The resolutions vary. In some cases, registrants sufficiently support their existing accounting or disclosures, and in others they agree to expand disclosures in future filings or amend previous filings. Appendix C of this publication provides an overview of the SEC staff filing review process, as well as best practices for responding to staff comments. While the SEC staff continues to comment on familiar topics such as significant estimates, revenue recognition, impairment and financial instruments, it has increased its focus in other areas, including:

• Nonperformance covenants contained in lease agreements and how these contractual provisions affect the classification of leases

• Pro forma financial information disclosed in registration statements and Form 8-Ks reporting a significant acquisition, including how the requirements of Article 11 of Regulation S-X have been met for various pro forma adjustments

• The presentation of guarantor condensed consolidating information pursuant to the relief provided in Rule 3-10 of Regulation S-X

Segment reporting continues to be a common area of focus in SEC comment letters. The SEC staff often considers disaggregated information to be better for users of financial statements. As a result, the staff frequently questions registrants’ conclusions about operating segments being economically similar and their aggregation into a reportable segment. The SEC staff also requests that registrants provide more robust analysis of their segments in their MD&A.

The number of SEC staff comments on loss contingency disclosure requirements has stabilized over the past year. While the SEC staff has said that it has seen improvement in the disclosure of loss contingencies, it is expected to continue to focus on evaluating and enforcing compliance with ASC 450 in its filing reviews.

The SEC staff continues to focus on disclosures for registrants with foreign operations. In particular, the SEC staff has been questioning the tax effects of operating in foreign jurisdictions, including the effects on liquidity of indefinitely reinvesting foreign earnings. The SEC staff also has been asking registrants to provide more detailed disclosures about any exposure they may have to European debt. To help companies determine what to disclose about their exposures to countries experiencing significant economic, fiscal or political challenges, the SEC staff issued CF Disclosure Guidance: Topic No. 4: European Sovereign Debt Exposures in January 2012. CF disclosure guidance is a new type of interpretive guidance that the SEC staff has been using to provide observations and views about disclosures required by existing SEC rules and regulations.

Management’s discussion and analysis (MD&A) ....................................... 1

Critical accounting estimates .......................................................................... 1

Liquidity and capital resources ....................................................................... 3

Non-GAAP financial measures ........................................................................ 7

Results of operations ..................................................................................... 9

SEC reporting issues ............................................................................ 11

Board structure and nominee criteria ............................................................ 11

Emerging growth companies ........................................................................ 12

Executive compensation disclosures ............................................................. 14

Guarantor financial information .................................................................... 16

Internal control over financial reporting and disclosure controls and procedures .................................................................................. 19

Materiality ................................................................................................... 21

Pro forma adjustments ............................................................................... 22

Related-party transactions ........................................................................ 24

Risk factors ....................................................................................... .......... 25

State sponsors of terrorism ........................................................................ 27

XBRL exhibits ................................................................................... ........... 28

Other SEC reporting issues ......................................................................... 30

Financial statement presentation..................................................     ........ 31

Accounts receivable ..................................................................        ........... 34

Business combinations ..........................................................       ............... 36

Contingencies ....................................................................          .................. 38

Debt .....................................................................................             ................ 40

Fair value measurements .................................................        .................... 41

Financial instruments ...................................................       ........................ 44

Goodwill .......................................................................           ........................ 48

Impairment of long-lived assets ..............................      .............................. 51

Income taxes ............................................................................           ............ 53

Intangible assets ...................................................................          ............... 57

Investments in debt and equity securities .......................    ...................... 60

Leases ....................................................................................             ............. 64

Pension and other postretirement employee benefit plans .................... 65

Revenue recognition ..................................................................         .......... 68

Segment reporting .................................................................          .............. 73

Share-based payments ......................................................          ................... 77

Appendix A: Industry supplements ............    .................. 82

Automotive supplement ......................................................  ......................... 82    

Banking supplement ..........................................................   ........................... 84

Insurance supplement .................................................   ................................. 93

Life sciences supplement ........................................................  ...................... 95

Media and entertainment supplement ..................................... ................... 106

Mining and metals supplement .................................................................... 108

Oil and gas supplement ........................................................    ...................... 110   

Provider care supplement................................................    ........................... 115

Real estate supplement ...............................................................     ............... 117   

Retail and consumer products supplement .................................................. 120

Technology supplement .............................................................    ................ 123

Telecommunications supplement ..........................................................  ...... 127

Appendix B: Foreign Private Issuers supplement ........... 128

Appendix C: SEC review process and best practices ...... 135

Appendix D: Abbreviations ................................................ 140