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Archive for September, 2011

Miscellany

Francine McKenna, the Accounting Watchdog at Forbes, is famous for metaphorically thrusting her stiletto heels through the public facade of the largest audit firms.  In “Don’t Count On Europe To Reform Auditors And Accounting,” she stabs Michael Barnier’s idea for controlling said large audit firms in Europe. I agree with her.


I thought being a government regulator (or a large audit firm spokesperson) came with the perk of never having to say, “I’m sorry.”  The Street reports on a “sort of, you know what I mean” apology by Mary Schapiro in “Bucket List of Apologies — SEC Edition.”   If she wants to apologize, I suggest she start with one for forcing us to consider IFRS adoption in the U.S.


Look for Facebook to benefit from a huge influx of talent.  In  “Facebook is stealing employees from everyone,” Emil Protalinksi of ZDNet reports that Facebook has a net inflow of employees from each of five large competitors (Microsoft, Apple, LinkedIn, Twitter, and Yahoo!).  Also, Yahoo! has a net outflow to each of the others.  It’s been years since I Yahoo-ed.


Jim Schaefer, my favorite social media marketing professor, reveals his travel bag of electronics in, “The blogger’s electronic arsenal.”  Maybe I can get a few of them as hand me downs.


There are some hilarious ideas for Facebook products in “15 Ridiculous Facebook Items You Can Buy On Etsy.”  Especially the brassiere.


Best Twitter line of the week is “Does Your Personal Brand Look More Like a 19th Century Dial Phone Then a 21st Century Smart IPhone?” by @sarilawson as she passed along link to this video by Kristi Daeda.


Did you see this cute article in the Wall Street Journal?  “Technology:  My Marriage’s Secret Glue,” by Katherine Rosman is about a busy yet disorganized WSJ reporter married to an uber organized professional.  They frequently must attend together evening events related to work.  She relies upon a combination of software and social media sites.


Debit and credit – – David Albrecht

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Kelly Phillips Erb, the Taxgirl, has a blogging column about taxes at Forbes.  She is the consummate blogger.  Regular readers tune in because they’ve come to know, appreciate and love Kelly for the way she thinks about the world of taxes.  Sometimes, she writes about her love for Philadelphia sports teams.

On the other hand, I’m an Atlanta Braves fan.  I switched from the Cubs when their ace pitcher, Greg Maddox, signed with Ted Turner.  I’ve stayed a Braves fan for nearly two decades for two reasons.  They emphasize good pitching (and so do I) and win more than they lose.

Last night in the final game of the regular season the Braves lost to the Philadelphia Phillies, thereby losing the race for the National League wild card.  From a New York Times news alert:

The Braves completed one of the most historic September collapses in baseball, losing 4-3 to Philadelphia in 13 innings as the St. Louis Cardinals won the National League wild card  …  The Braves led the Cardinals by 10-1/2 games at the start of play Aug. 26. Since then, the Cardinals are 22-9, the Braves 10-20.

Kelly will be happy today, but I’m crying.  I’m also frustrated.

ProfAlbrecht's reaction to loss by Braves.

I’ll just have to keep reminding myself that there’s no crying in baseball.  I leave you with a clip of the best scene from a great movie, A League of Their Own:

Is there crying in accounting?

Debit and credit – – David Albrecht

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I surf a lot in my eternal quest to learn as much as possible about the worlds of accounting and business.  I like videos.  Short videos, that is.  Two of the world’s leading universities have been filming short videos of professors discussing a current business topic.

The two best examples of this are the Harvard Business School (US), and the Cranfield School of Management (UK).  I have searched and searched, and can’t really find any others.  However, the idea is so good, other business schools should pick it up.

The basic idea is to have an interviewer, such as a professor or grad student or newscaster, query a faculty member on a relatively narrow topic.  The interview is filmed with two cameras so as to show different angles.  The videos last from four to ten minutes, which is just about right for the contemporary attention span.  I imagine the schools have invested in a set with sufficient technical equipment to create the videos.  The videos are then uploaded to both the B-school web page and Youtube.  Interested parties come to view the clips.  So far, none have gone viral.

This is a great idea, and I would love to be a part of something like this.  I suggested such a set for the new business building at Concordia College, but got rebuffed.

The advantage of such a series is that it assists in creating a brand image for the business school.  Some potential students are attracted to these two schools because the professors are experts, the obvious conclusion from a school that has invested in video.  It is also appealing to alumni and big money donors.

Another way to establish and promote a brand is to have a cadre of faculty members who blog.  Of course it helps if the bloggers become stars.  However, B-school blogging is not yet an idea whose time has come.

I show two videos here.  The video from Harvard features Dutch Leonard and Lynn Paine, two professors, who talk about their new book, Capitalism at Risk.  In this six minute clip, they talk about today’s interrelated challenges gleaned from interviewing several corporate executives.

The video from Cranfield features senior finance and accounting lecturer, Ruth Bender.  Although we’ve not met face to face, we are friends who have had many interactions through social media.

The Harvard Business School has a channel on Youtube, as does Cranfield School of Management.

Debit and credit – – David Albrecht

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Today I’m publishing the first guest post in The Summa‘s history.  Written by Robert (Bob) Jensen, Trinity University Emeritus Jesse H. Jones Professor of Accounting, it was originally sent out on the AECM listserv.  Given that the AECM policy is that anything sent out is in the public domain, and given that Bob frequently captures e-mail postings and puts them on his own web site, I’m just going to publish his letter.


by Robert (Bob) Jensen
Trinity University Emeritus Jesse H. Jones Professor of Accounting

Before I begin, I would like to mention an old theory case that I taught years ago that for students concisely explains the difference between financial statements prepared under historical costs, price-level adjustments, replacement costs, and exit values —  www.cs.trinity.edu/~rjensen/temp/wtdcase2a.xls.  It was almost always considered one of the best take aways from my theory course even though students worked on it the first day of the course.

Now on to:  “Is Inflation a Problem for Accounting?” by David Albrecht, The Summa, September 25, 2011.

Firstly, I would like to thank David for making both a timely and scholarly blog posting. I agree with David’s criticisms of the FASB and IASB for not requiring price-level adjusted (PLA) statements at lower trigger points for inflation.

One article that I really like concerning inflation is “Inflation and Delusion,” by Edward Jaffe, dshort.com, May 26, 2010.  This ties directly into David’s blog post.

I don’t think David’s reference to the defunct FAS 33 has much bearing other than to point out that price level adjustments (general or current cost) are not worth much if they are poorly done to save the cost of generating more accurate numbers. So much leeway for error was allowed in FAS 33 that I’m in sympathy with analysts who purportedly ignored the supplementary FAS 133 statements in annual reports (see my discussion at http://www.trinity.edu/rjensen/Theory02.htm#FairValue).

Consideration must also be given to the fact that in nations having higher inflation contracts are generally written/indexed to make inflation no longer such a big risk in terms of the contracts themselves. Of course changes in inflation rates might indirectly affect business revenues and costs apart from the inflation adjustments in contracts. For example, inflation rates can affect export and imports even if they do not affect demand deposits in banks.

And students should definitely keep in mind that neither general PLA adjustments nor replacement cost adjustments are surrogates for “value” accounting. Both are simply adjustments to historical costs to allow for changes in either general purchasing power or relative price changes in different economic sectors.

The real economic problem becomes when longer-term contracts are not indexed to inflation as often happens when inflation is considered relatively modest (as in the U.S.) rather than extreme (as in Israel). Present FASB accounting standards are not doing a good job in isolating monetary-item gains and losses.

Don’t forget to take a look at www.cs.trinity.edu/~rjensen/temp/wtdcase2a.xls.


Thanks very much, Bob.

Debit and credit – – David Albrecht

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Rose Orlik of London-based Accountancy Age, reports today that “EU to propose audit-only firms and mandatory rotation.”  More than a rumor, her report is an authorized leak, designed to test the waters.

Orlik also reports on the possibility of opposition to this proposed plan.  Large auditing firms are multi-billion dollar businesses, with substantial resources.  Look for them to work towards a compromise that permits business as usual.

You should read the entire article.  Excerpted here is the introduction.

NEW EUROPEAN REGULATION looks set to turn auditing upside down, potentially forcing the biggest firms to choose between audit and non-audit services and ushering in mandatory rotation.

A draft of the European Commission’s green paper on audit seen by Accountancy Age indicates a tough line is being pursued by internal markets commissioner Michel Barnier.

At its most radical, the paper could force firms to specialise in either audit or non-audit services by outlawing the provision of consultancy and advisory services even to non-audit clients.

In the draft’s current form, the embargo covers tax advisory and consulting services, actuary, risk management, legal and valuation services, book-keeping and preparing accounting records, among others.

This measure is likely to meet with the greatest objection, as it would threaten the business model upon which the vast majority of firms operate.

Mandatory firm rotation would boost the quality of audit, the paper suggests, shattering the “perverse pressure” on partners not to lose long-standing clients.

The rest of the article is continued at:  http://www.accountancyage.com/aa/news/2111953/eu-paper-proposes-audit-firms-mandatory-rotation.

Does this proposal have a snowball’s chance?  When politics gets involved, anything goes.  However, there are many big money interests here.  Corporate interests in Europe have been effective in getting watered down or permissive accounting rules in IFRS.  My guess is that when the big auditing firms bring their corporate cronies into the fight, Barnier will need to table this proposal.

Debit and credit – – David Albrecht

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According to my naked eye, the U.S. is afflicted with significant inflation.  Food prices are up.  Gasoline and transportation prices are up.  Healthcare prices are up.  Clothing prices are up.  Entertainment prices are up.  Higher education tuition is up.  Everything is up, except my mortgage payments.  These are increasingly difficult to pay given that higher education wages have remained constant for the past ten years and I have less left over at the end of the month.

But is inflation large enough to impact the interpretation of financial statements?  As I discuss in this essay, the answer is YES!

To address the issue of the impact of inflation on financial statements, we need a not too biased estimator of the rate of inflation.

According to information released by the Bureau of Labor, inflation (as measured by the CPI) has been relatively low over the past ten years, usually averaging 2-3% per year.  I have always been skeptical of these reports, for three reasons.  First, the reported government figures don’t agree with my perception of the change in prices.  I think that inflation has been higher.  Second, the U.S. government has significant incentives to under report inflation.  A low reported inflation rate means that government transfer payments (such as social security) are minimized.  Also, a high reported inflation rate has adverse impacts on the ruling party’s (Republican or Democrat) to remain in power.  Third, I’m aware that the methods used to calculate the CPI have changed during the past 30 years.  For example, volatile changes in prices are minimized in the weighted average index.

So, how high has been inflation using non-government supplied computations?  Such a computation would remove the government bias, but possibly introduce new biases.

I use Shadow Government Statistics, which is owned by American Business Analytics & Research LLC, a company founded by John Williams.  It uses his methods to recompute the rate of inflation using the same government methodologies in place in 1980.  According to his data, inflation has been averaging about 10% per year for at least a decade.

credit: Shadow Government Statistics.

Inflation data provided by SGS feels about right to me, and I view it as credible.  If inflation is this high (≥ 10%), then analysis of financial statements should be based on inflation adjusted numbers.  For example, if a company has been reporting an upward trend in revenues, adjusting the numbers for constant dollars might reveal a real decreasing trend in revenues.

Moreover, we need guidance from accounting standard setters as to the principles to use in financial statement preparation so that inflation adjusted numbers can be used for comparisons.  Unfortunately, this is not about to happen anytime soon under the leadership of Hoogervorst (IASB) and Seidman (FASB), because something this useful would run counter to government policy.

Never-the-less, if you are a financial statement analyst, you should be performing some inflation adjustments.

For guidance, you might refer to a copy of the obsolete Statement of Financial Accounting Standards #33 or the outdated IAS #29 (which predates IFRS).   Be aware that the IAS standard doesn’t require inflation adjusted information until inflation hits 100% over a three year period (about 26% per year).

Debit and credit – – David Albrecht

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I can’t believe it’s Friday, already.  My to-do list is 53 miles long.  I would be very happy to have an extra few dozen hours of supplemental time before the day ends.  Maybe then I could get something completed.

Responding to my whining about it on Twitter, @nealhannon sent a link to an informative video:

Thanks, Neal.

Debit and credit – – David Albrecht

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