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Archive for June, 2011

Long live July 2, the day the Continental Congress in 1776 voted to declare independence from Great Britain.

You celebrate July 4 as Independence Day?

All known records report July 2 as the true Independence Day.  It’s in the notes of Congress for July 2.  It was reported on July 2 in a local newspaper, the Pennsylvania Evening Post.  And John Adams (future president of the United States) writing to wife Abigail on the night of July 2, said, “the Second of July, 1776, will be the most memorable Epocha, in the History of America. I am apt to believe it will be celebrated, by succeeding Generations, as the great anniversary Festival.”

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Bob Jensen over at AECM passed this along.  It seems to fit, so I’ll wear it.

Debit or credit – - David Albrecht

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When I teach Managerial Accounting, I emphasize to students that in many areas of business it is necessary to read numbers and understand the patterns that are present.   I have always wondered why some very smart students who study are unable to do either one.   Perhaps it is due to dyscalculia.

Two fundamental skills underlie almost everything I do in the course:

  1. Starting with the average cost for some amount of units and then calculating the resulting total cost, and vice versa.
  2. Identifying the pattern inherent in a sequence of numbers and calculating what would come next, or what came before.

An example of the first skill would be:

If the average cost for 12 units is $2.50, then the total cost for those 12 units is $30.

Another example would be:

If the total cost for 11 units is $33, then the average cost per unit is $3.

The task seems simple.  But there are very smart students at the universities I’ve taught at, and a significant percentage have great difficulty with it.   Students will spend a lot of time in memorization for this type of problem soon to appear on a test, but they never truly get it.

An example of the second skill is found when I lay out the following sequences and ask students to fill in the missing values.  Can you figure out what are the missing values?

The answers are:

The task seems simple.  But there are very smart students at the universities I’ve taught at, and a significant percentage have great difficulty with it.

I know that many accounting professors ridicule students who can’t perform either task, claiming that students deserve bad grades because they never put in the study time to learn what is necessary.  Not me.  I’ve always thought that there is a missing piece to the puzzle of easy problems that are unsolvable for some smart college students.

Yesterday on AECM we started talking about dyscalculia.  Dyscalculia is similar to dyslexia and dysgraphia.  Dyscalculia is the inability to identify numbers, distinguish number patterns, and perform arithmetic operations.  Dyslexia is the inability to identify letters, distinguish letter patterns (i.e., words), and comprehend what is read.  Dysgraphia is the inability to write.  Some people can read very well, but have not learned to write.

Students with a bad case of dyscalculia will have difficulty in identifying the numbers in the following image.

The current thinking is that these are not physical or intellectual incapacities, but rather they are functional or learning difficulties.  All can be overcome.  Dyslexia, which probably affects 5-10% of the American population has received much attention.  But so has dyscalculia, which is thought to afflict a similar percentage of the population.  To see the range of exercises available to combat this learning problem with numbers, visit dyscalculia.org.

Professors, it might be appropriate to refer some students to your campus disabilities office.

To learn more about dyscalculia, please read this wikipedia article or this MSNBC article.

Debit and credit – - David Albrecht.

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Charles D. Niemeier, a member of the PCAOB until a few months ago, has taken a position as partner with Williams & Connolly LLP.  He will practice in the areas of securities, accounting and financial services.   Niemeier was at Williams & Connolly prior to joining the SEC in 2000.

Niemeier is widely respected and admired.  I have fond memories of lunching with him in San Francisco, last summer.

Many might recall the stir made by Niemeier’s speech to the NYSSCPA in September, 2008.  In this speech, Niemeier mounted a spirited defense of U.S. GAAP, and argued against the U.S. moving to IFRS.  Although this position is popular among rank and file accountants in the U.S., as well as many accounting professors, it is squarely against U.S. government policy.  I admire him for having the courage to stand up.

Here is the announcement from Williams & Connolly LLP:

Williams & Connolly is pleased to announce the return of Charles D. Niemeier as a partner practicing in the securities, accounting and financial services areas.

From 2000 to 2002, Mr. Niemeier served as Co-Chair of the Financial Fraud Task Force of the Securities and Exchange Commission and concurrently as the Chief Accountant for the Division of Enforcement. In 2003, he became a member of the Board of the Public Company Accounting Oversight Board, serving as Acting Chairman for the initial six months, and continued to serve on the Board until 2011. He is a graduate of Georgetown Law School and a Certified Public Accountant.

“We are thrilled to welcome Charles back into the Williams & Connolly family,” said senior partner and Executive Committee member Robert B. Barnett. “His extensive government experience in the financial and accounting realms will be an immediate asset to the firm’s clients and to our future clients. We welcome him home.”

Charley, I’m sure I speak for countless accountants and investors as I wish you well in your new endeavor.

Debit and credit – - David Albrecht

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SEC morale is color coded yellow -- bad mood alert.

Biannually (once every two years), the federal government conducts a survey of federal employees with respect to job satisfaction and working conditions.  I always look for the Securities and Exchange Commission (SEC) results, because the SEC is the government agency charged with regulating accounting (establishing accounting standards) and auditing (PCAOB).

The results of the 2010 survey are out (here).  The image at right says it all.  Warning:  morale at the SEC is bad and getting worse.

Does it matter to us?  I think so.  The SEC is in charge of protecting investors.  It’s employee morale is a clear gauge as to how the war is going.

When Mary Schapiro was appointed chair by new president Obama, morale at the SEC was at an all-time low.  The worst chairman in SEC history, Christopher Cox, had done a number on the agency’s effectiveness against big business.  Jobs were not being performed efficiently or well.  A ‘circle the wagons’ mentality had set in.

After two years of Schapiro’s leadership, we can now see that morale is getting worse.  Employee job satisfaction is 35th out of 37 federal agencies.  Of 46 individual rating items, there were 5% declines in 25 items for SEC employees.  SEC employee responses were significantly below federal average for 39 of the 46 items.

When “circle the wagons” fails to provide protection, employees can only play dead and pray not to get scalped.

Thanks to Broc Romanek for the tip.

Debit and credit – - David Albrecht

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This summer I am working in the area of fraud.  If all goes well, perhaps someday there will be three or four baby articles cooing to be picked up and read.  Why fraud?  It’s more recognizable as accounting than either learning effectiveness or social media.

So I set out to learn as much about fraud as I could.  There are dozens and dozens of articles, both practitioner and academic.  Finally, I came across Tracy Coenen’s most wonderful book, Essentials of Corporate Fraud.

Before settling on a researchable issue, I like to get a handle on the big picture.  So, I put together some ideas from Tracy’s book, my prior knowledge base, and some of the articles, and came up with “The Big Picture of Fraud.”

The big picture of fraud. Each arrow points from who is perpetrating the fraud to who is being defrauded. (c) Albrecht

Although some think insiders are able to wreak the most damage on a corporate business, I disagree.  In one of the largest frauds in history, Bernie Madoff stole $50 billion USD from investors in a classic ponzi scheme.  In the decade from 2001 to 2010, investors typically reacted by lopping an average of 25% from the capitalized value of companies announcing financial restatements.  Many organizations spend much more on IT security to protect the company from outsiders than they spend on fraud prevention activities.

You might ask, do companies intentionally steal from outsiders such as insurance companies, suppliers, customers, and investors?  The answer is that some do.  Jonathan Marks of Crowe Horwath writes,

Sam E. Antar was welcomed into a life of crime at age 14 when he became a stock boy in the family business, Crazy Eddie, Inc. From the beginning, he was involved in cash skimming and overstating insurance loss claims. Antar says he never questioned the business methods of the famous consumer electronics retailer. As the CFO and a crafty CPA, Antar cooked the books of Crazy Eddie for many years – skimming profits, evading taxes, laundering cash, and committing securities fraud – until the company collapsed in 1987.

Antar’s illicit activities were abetted by the Crazy Eddie culture, which promoted fraud from within and made clear that no money should go to the government. Cash sales were routinely skimmed, and frontline employees were paid in cash to avoid taxes.

I’ll write more later this week.

Debit and credit – - David Albercht

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The year was 2002.  Arthur Andersen was charged with, and convicted of, felony obstruction of justice.  Most clients fled it.  States rescinded its license to practice there, and eventually AA turned in its national certificate.  Although never officially dissolved, Arthur Andersen was no more.

To the thumping of a foot, the guttural melody of the Queen classic would come pumping out of many accountants, “Another one bites the dust.”  It was reminiscent of gallows humor, except no AA accountant had a noose slipped down around the neck.

Laventhol and Horwath (LH) was the first.  In 1990, it was number seven nationally, next behind the Big 6.  It was a big deal.  Its Philadelphia office, by itself, would have ranked in the top ten.

Now, BDO Seidman is in the news.  It has been sued for $10.7 BILLION USD.  It is not a laughing matter, although my first thought is to wonder if BDO represents Biting Dust Ok.  A copy of the lawsuit is here.

BDO is number 7 in the US, behind the Big 4, McGladrey, and Grant Thornton.  It is a bid deal.  BDO has long wanted to be one of the big guys (i.e., Big 4).  The magnitude of this lawsuit makes it the Big 1.

All BDO employees must be going through a difficult time.  We know how painful it was for those at LH.  A well written newspaper story,  “1990: The other big accounting firm meltdown,”  describes the last days.  Employees had already taken a 10% cut in pay.  Retirees were hit even harder.  Partners and senior employees received daily calls to donate money to prop up the firm’s cash position.  After the bankruptcy, partners and senior employees had to pay an additional $75,000 on average.  Retired partners had to pay, also.  Those able to keep working were OK, the retirees weren’t.  Many went back to work, some into their 80s.

BDO employees will be in a better position, because it is a limited liability partnership, a form of business not available to Laventhol and Horwath.  Their homes should be safe.

Although the potential for an accounting firm’s death is essential for the audit model to function as intended, it doesn’t make it any less cruel.

BDO, I wish you the best.

Debit and credit – - David Albecht

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In a classic example of the pot calling the kettle black, Rose Orlik of Accountancy Age (UK) reports on a British member of Parliament (MP) accusing the Royal Bank of Scotland of distorting financial position by 50%.  Her story, “MPs attack RBS’s ‘distorted’ IFRS accounting,” appeared earlier today.

Surely Steve Baker MP is incorrect in his assertion.  The primary reasons for the push for IFRS is (1) accounting fraud will disappear under IFRS principles because corporate execs really want to live up to IFRS’s higher expectations, and (2) corporate execs will use their carte blanche to use judgment in reporting numbers will only do so to paint a truer picture of corporate financial position.

Since the Royal Bank of Scotland is using IFRS, it must living up to it’s higher calling.  If this wasn’t so, why would it have clean audit opinions?   But then, who would impugn the honesty of a respected politician.  Honestly, sometimes I just don’t know what to believe.

In the US, we refer to IFRS as “Report Any Numbers You Want.”

Debit and credit – - David Albrecht

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