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Archive for December, 2011

Miscellany — interesting items that caught my eye during the week.


From Bloomberg Businessweek, “Top B-School Stories of 2011.”


Real Life Adventures, a nationally syndicated daily cartoon strip by Gary Wise and Lance Aldrich, perfectly catches the fundamental flaw of the audit model on December 8, 2011.


I like “The Promise and Perils of Academic Blogging,” a think-piece by W. Bradford Littlejohn at The Sword and the Ploughshare.


Ed Ketz and Tony Catanach share their “A Christmas List for Grumpy Old Accountants.”  I hope they get everything they ask for.


Tom Selling shares his dreams if he were the SEC’s Chief Accountant in “IFRS Convergence: Let’s Play ‘Chief Accountant for a Day’!


The Institute of Management Accountants, caretaker for the Certificate of Management Accounting, has its complaints aired about the AICPA’s plan for a competing credential in the AccountingWeb article “IMA Ready to Compete with AICPA/CIMA Management Accounting Designation.”


Debit and credit – - David Albrecht

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Best of The Summa 2011

An annual tradition at The Summa is to provide links to my favorite posts of the year.  The purpose for doing so is to milk a few more reads without having to write new content. I’ve reviewed the posts from the fourth year of The Summa, and have selected my favorites.

In January, I had two interesting posts.  In the first, “Audit Credibility,” I argue that current audit model is flawed, and the flaws remove any potential benefit.  I talk about the entity theory approach to the accounting for executive stock options in, “Floyd Norris on Joe Lieberman’s Views on Accounting.”  It should be noted that Floyd posted a response to my blog post because he didn’t like what I wrote.

In February, there are two posts worth mentioning.  The first is “An Accountant’s Valentine,” written for my special someone. The second is “An Example of Corporate Honesty.”

In March, I wrote two posts about data visualization, and one on the problem posed by the hard drives on photocopy machines.

I still like my post for April first, “SEC to Promote Cash Basis Accounting?

In May, I wrote, “IFRS, Whither Art Thou?

In June, my favorite is, “SEC Morale Bad and Getting Worse.”

In July, I posted an advice piece, “LinkedIn for Accounting and Business Students.”

In August, I wrote, “The PCAOB and Its Quixotic Quest.”

In September, I wrote, “Is Inflation a Problem for Accounting.”

In October, I wrote, “If U.S. Declaration of Independence Had Been Signed by Audit Firms.”  This post was selected a wordpress.com favorite.

In November, I wrote, “ProfAlbrecht’s Use of Social Media.”

In December, I wrote about an aspect of auditor quality called, “The Wrong Quality.”

Debit and credit – - David Albrecht

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Good Writing

Writing and speaking properly are important for financial professionals, professors and students.  Although there are no grammar police walking a beat, a poorly worded communication has the potential to offend the receiver.  Giving offense is bad because it distracts from the message.  Here is an example.

Two people meet, and one says to the other, “How are you today?”

The other responds, “I am good.”

The proper response is, “I am well.”

I have heard many anecdotes of the heavy cost incurred by financial professionals who write or speak poorly, for it is not unusual to lose business as a result of unpolished prose.  Moreover, there are significant benefits to writing and speaking properly.

Why do I blog about this today?  A recent discussion on AECM (e-mail listserv for accounting professors) focused on the proper use of active and passive voice.  Although some say that it is bad to use passive voice, it really isn’t.  It depends upon meaning and style.

In my opinion, a balanced program of continuing professional education (CPAs must take at least 40 hours per year) should include instruction in writing and speaking properly.  I would be happy to offer these CPE sessions, should any state society wish to hire me.

It takes a tremendous effort to learn proper English.  Like most, I learned proper English from reading.  After teaching myself to read, I read hundreds of magazine short stories, thousands of science fiction novels, countless newspaper sports pages and many encyclopedia articles.  If you don’t like to read, realize that you are limiting yourself in much the same way as not regularly bathing, or even not brushing your teeth.

Then there are the K-12 courses in English, endured but not enjoyed.  I took English literature courses in college, which not only provided instruction in writing, but also provided many opportunities to practice.

Being able to practice writing is the final building block.  Written communications, papers in school and perhaps even short stories give writers the necessary exercise to build their Enlgish muscles.  Always there is the goal of doing a better job of expressing thoughts, emotions and depictions of events.

Web sites can supplement the learning process, but they do not substitute for the reading and practice.  For the AECM issue of active or passive voice, a visit to the Grammar Girl blog provides guidance.

For an entertaining look at proper wording, visit the Terribly Write blog.

Bob Jensen (emeritus professor from Trinity University) has some links to writing helpers (wait 10 seconds for page to load).

[Editing is very important.  Failure to spot an error can lead to embarrassing errors.  Thanks to Gary Zeune for spotting one that was in the first sentence.]

Debit and credit – - David Albrecht

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No Procrastination Allowed

I am in the classroom only 12 hours per week (and not at all during the three week holiday break), yet no one ever asks what I do with the rest of my time.  Everyone, it seems, possesses sufficient manners and good sense to be polite.

Some academics (grad students and professors alike) work all the time.  There is no on-off switch for the brain.  If I am awake, I’m thinking about grand issues in accounting, and a few not so grand such as the U.S. fixation on IFRS.

Reading PhDComics is my guilty pleasure, secret no more.  Today’s comic is hilarious.

"Piled Higher and Deeper" by Jorge Cham http://www.phdcomics.com

I agree, it is time for all academics to get back to work.

To my co-author:  Expect an e-mail, tomorrow.

To my Dean:  I’m really working on research during this break.  Honest.  You can believe me this time.

To my undergrad students:  Read the first three chapters of the textbook, and be ready for a quiz on the first day of class.

Debit and credit – - David Albrecht

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The AICPA on December 17, 2011, released the winners for the 2011 student case competition. A team from North Carolina State University has won.  A team from Iowa State University claimed second place, and a team from University of Texas at Dallas finished third.

The North Carolina State team, named Wolfpack in the Black, is comprised of members Alan Perry, Seanna Robey, Brian Jones and Amanda Dew.

The Iowa State team, named Internal Control Freaks, is comprised of members Matt Allbee, Courtney Ekeler, Leesa Tjernagel and Adria Staky.

The University of Texas at Dallas team, named Highly Debticated, is comprised of members Amanda Billingsley, Ben Harwood, Thomas Matter and Teresa Tran.

Congratulations to all.

Debit and credit – - David Albrecht

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Book cookers should get coal from Santa.

Don’t know about you, but I like listening to Christmas music.  Religious, traditional classics, or even Mariah Carey, it doesn’t matter.

Sometimes it seems as if some of the songs were written for accountants and auditors.  Yes, buried deep in the lyrics are accounting and auditing standards.

Here’s an example.  For all those corporate execs who have been manipulating financial statements, here’s a warning from Santa Claus is Coming to Town:

He’s making a list
And checking it twice;
Gonna find out Who’s naughty and nice
Santa Claus is coming to town
He sees you when you’re sleeping
He knows when you’re awake
He knows if you’ve been bad or good
So be good for goodness sake!

I’m sure that if a large firm audit partner has let a client skate away from honest financial statements, there will be a lump of coal in his stocking this year. Santa is the accounting cop that the Securities and Exchange Commission (SEC) should be.  I nominate Santa for the head of the SEC Enforcement Division.

The purpose of this post is to write about Generally Accepted Accounting Principles (GAAP) for Christmas accounting.  These are rules for preparing financial statements based on the principle that it is better to give than receive.

In North America, a common question at this time of year is when to open gifts, Christmas eve or day.  We’ve done it both ways in my family, but this year we’re waiting for some time during the day.

How will you account for the gifts?  I expose the following standards:

1. Revenue is a function of what you give away.
2. Expense is a function of what is received.
3. You are in the the black of you give more than you receive.

A North American tradition is to exchange gifts.  Exchanging gifts doesn’t really count under this proposed standard.  You get points only for giving gifts that aren’t expected.  You lose points if you outsource.

On the balance sheet, assets and liabilities are reversed.

4. Assets are the gifts given that remain to be consumed.
5. Liabilities are the gifts received, whether consumed or not.
6. It is good if equity is positive.

Assets are to be valued at fair value, naturally.

If your P/L statement shows red this year (excess of expense over revenue), then now is the time to start planning for next year.

Debit and credit – - David Albrecht

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I’m late to the holiday season.  For many professors, December is a whirlwind of activity.  There are topics to be covered in the final class periods, questions to answer for students, exams to create, and then test papers to grade. After turning in grades, it is customary to sleep for at least 24 hours.  Upon waking, there are only a couple of days left until Christmas, a holiday that my family and I observe. This doesn’t leave much time to get ready for Christmas.

I am an academic commuter.  Professing this year at Concordia College in Moorhead, Minnesota (part of Fargo metropolitan area), I have quite a drive to get back to the family in northwest Ohio.  My sons have returned home.  The elder recently took a new job two hours away.  The younger is pursuing a graduate degree two time zones away.

Both seem to be well along in the holiday spirit.  How do I catch up and get the Christmas spirit?  The following videos remind me of Christmas.

I really like the Irving Berlin classic, White Christmas, sung by Bing Crosby and Marjorie Reynolds in the 1942 film, Holiday Inn.  It won an academy award for best original song.

Music has always made a meaningful addition to my life.  Although Carol of the Bells is not a traditional religious carol, I like it.  Jake Justice (piano) and Jaxon Williams (classical guitar) do a good job with their arrangement and performance.

Staying with a classical guitar theme, here is Richard Johnson playing some Bach.

Freshly posted to Youtube is this medley performed competently by chambwp.

Seasons greetings to all.

Debit and credit – - David Albrecht

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Meh, No

It was a simple question, I thought.  Worth 30 points on an Intermediate Accounting final exam, I was expecting a yes or no answer with appropriate reasoning.  Knock my socks off, I asked them.

The rest of the world uses FIFO, but does not permit LIFO.
Should the U.S. continue to use LIFO?

Little was I prepared for one student’s response, “Meh, no.”

I could have handled mais oui (yes, with emphasis) or mais non (no) because I took French in ninth grade.  I still remember, “Je ne parle pas Français,” but prefer to say, “Mais, non,” when asked if I speak French.

It might have been better for the student to answer a yes or no type of question with either oui or non, but he didn’t.  He responded meh.

Dare I admit I didn’t know what it means?  Refusing to admit guilt (hey, the SEC doesn’t require it from crooks paying fines and damages for committing fraud), I asked my colleagues on AECM if they knew what it meant.

No one did, but two looked it up:

Indifference; to be used when one simply does not care.

The folks on AECM went on for a while about the need to use proper English in school (and later on in professional life), but I think they missed the point.  It’s a word that is commonly used to communicate a specific meaning.  And when used in a formal setting, adds emphasis!!!!!!!  At least no one gave me a series of exclamation points.

The student could have mounted a spirited defense of meh, arguing that in an era of convergence (or lack there of), it simply doesn’t matter.  Or perhaps LIFO is insignificant in the grand scheme of things.  Unfortunately, the student wandered around for a couple hundred words, then turned to other questions on the exam.

If the SEC ever polls us on whether we should keep GAAP, the survey instrument better have four boxes to check:

Debit and credit – - David Albrecht

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James Kroeker, the SEC’s chief accountant, spoke to the AICPA on Monday.  He said,

We remain committed to completion of a final comprehensive report on [IFRS] … the staff will need … a few additional months time to produce a final report. At the same time, the staff is in the process of developing an approach for Commission consideration.

I’m shocked.  What is the SEC waiting for?  President Obama has already promised the G-20 to move the U.S. to complete IFRS adoption.  The SEC is on record as committed to moving the U.S. to global accounting standards.  And Kroeker probably dreams of getting an IFRS tattoo.

Message consistently delivered by current and former IASB chairs.

I know Tom Selling at Accounting Onion keeps writing that there is still hope for derailing the IFRS Express, but I doubt it.  The reason for doubt is SUMMArized in the image to the right —->

Kroeker also said the SEC should, “Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards.”

Yeah, right.  I know what Hans, Ian, and the IASB have to say about that.  Can’t print it here, though.

Did you notice that the FASB and the FAF escaped mention?  They are already an afterthought.  In the new world of accounting standard setting, it will be the SEC calling the American shots.

I sense a power struggle going on between the SEC and the IASB, and I suspect it is the only reason why the SEC is asking us for “just a little more time.”

Meanwhile, I remain committed to defeating the movement to adopt IFRS in the USA.  IFRS has the worst set of rules imaginable for the US.  I hope we never have to use them.

Debit and credit – - David Albrecht

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Do you remember where you were when you saw the famous cartoon that killed Arthur Andersen?  I received a copy via e-mail, and soon had a print up on my office door.

How could it be that a cartoon killed Arther Anderson (once of the mighty Big 8,7, 6, and 5, but not the Big 4)?

First, a bit of history for those of you too young to have been there.  Arthur Andersen was declared dead officially June 15, 2002, when it was convicted of criminal obstruction of justice.  Arthur Andersen entered a vegetative state in March, 2002, when criminal charges were filed against it.  Arthur Andersen was seriously wounded in October, 2001, when it began shredding documents.  Reports Unmesh Kher of Time,

… Nancy Temple, a lawyer with the company, sent a memo reminding employees of Andersen’s document-retention policies on Oct. 12. The memo, observers suspect, was a tacit order to start the shredding.

And now, to add a new twist to the scandal, plaintiffs’ lawyers involved in the deposition of Duncan’s former assistant Shannon Adlong told TIME last week that the shredding of documents actually began on Oct. 13 — 10 days before Andersen admitted it started and a day after Temple’s memo. Adlong, who was responsible for ordering extra bags for the shredded papers, said so much evidence had to be destroyed that 32 “trunks,” each the size of a football locker, were hauled off by a shredding company.

Word of shredding leaked out quickly, and soon I received an e-mail with the following cartoon attached:

After this cartoon spread around the world, AA had no chance.  It’s fate was sealed.  The cartoon welded Andersen’s crime to an immensely popular TV advertising campaign.  Whenever Sprint aired its ads, at least some viewers would think of Andersen and shredding  Overnight, Andersen was guilty in the court of public opinion.  It would be only a matter of time before a court of law caught up with it.

I remain convinced it was the circulation of this cartoon that prompted the SEC subpoena on December 1, 2001, for Andersen’s remaining documents.  That, and the fact that Andersen really did the crime.

Eventually, Andersen’s shredding made it into a real commercial advertisement.  The following commercial was first aired on November 28, 2002, after Andersen was officially dead.

Thanks to the Grumpy Old Accountants and Going Concern for reminding me of the 10 year Enron anniversary.

Debit and credit – - David Albrecht

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The Wrong Quality

Let's put the focus on the correct quality

The PCAOB is receiving comments on its proposal to require auditor rotation.  Most of the comments are against auditor rotation.  Written by corporate executives, CFOs, audit committees and auditors, the claim is made that a change in auditor will result in lower quality audits for at least three years.

Three years is selected because it is alleged that it will take at least that long for a new audit firm to get up to speed (that’s an insult to the successor audit firm).  And, if the company had previously employed the best auditor, then being forced to change auditor will result in a permanent decrease in audit quality.

As a small investor, I am insulted.  The issue is not about audit quality.  It is about the quality of the audit opinion.  It is almost a certainty that in most cases, a change in auditor will result in a higher quality opinion.  At least, it it won’t produce a lower quality opinion.

How is that?  Currently, the large audit firms that audit the largest public companies have little credibility to produce believable, trustworthy and valuable audit opinions.  A sizable number of investors don’t even read the opinion, passing over it because so many audit scandals have destroyed faith in the auditor.  And many more investors find the audit opinion to have hardly any information content, and hence, hardly any value.

I would expect a large audit firm to produce a high quality audit.  Let’s say that the fee for a large audit totals $40 million USD.  If 80% is spent on labor and related expenses, then I would hope that $32 million USD would be sufficient to test everything that needs to be tested.

However, in today’s world of big audit, there is frequently a disconnect between data from the audit and the opinion that is eventually rendered.

And audit opinion quality has too often sucked.  Big time.  How could it get any worse?

That’s what auditor rotation is all about.  And if big audit and big business are successful in beating down this reform movement in all its symbolic glory, then big audit and big business will have won a battle but lost the war.  It is a significant possibility that defeating investors on this issue will drive them permanently from the market.  Then we all will be losers.

Debit and credit – - David Albrecht

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Miscellany — interesting items that caught my eye during the week.


Tom Selling (The Accounting Onion) writes about folk hero judge Jed Rakoff in, “Is the Judiciary about to Give the SEC a Backbone?” Some day I’m gonna be like Jed.


Jim Peterson of re:Balance talks about how a relatively small judgment could potentially lead to the demise of a Big 4 firm in, “The Big Four Accounting Firms’ Financial Tipping Point — Time for a Fresh Look.”


Francine McKenna (re:TheAuditors) discusses how Deloitte is pretty bad off, in “At Deloitte, More Pain Before Any Quality Gain.” What a mess over there.


Lisa Du of the Embargo Zone blog writes about the information sifting habits of the New York Times’ Andrew Ross Sorkin in, “Andrew Ross Sorkin Reveals What He Reads At The Gym And His Favorite Twitter Account.”

Sorkin and I are a lot alike.  He’s young, famous, rich, smart and good looking.  I’m not.


Search engines give biased results to your queries?  You betcha.  Please watch this video filmed by Mark Schaefer of {Grow}.  Helen Brown talks about Google’s filter bubbles and how to minimize the effect.

Schaefer consistently publishes must read content at {Grow}. Subscribe today.


Debit and credit — David Albrecht

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