Archive for December, 2010

Bloggers love the final post of any year, because it is time for “The Best Blog Posts of the Year.”  Although it might seem as if bloggers are back patting themselves, there is a higher purpose for these posts:  milking just a few more reads without having to write new content. I’ve reviewed the posts from the third year of The Summa, and have selected my favorites.  The posts at the start of the year are dominated by accounting standard setting issues, convergence and IFRS.

Debit and credit

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I am able to write a different style of post at my other blog, Pondering the Classroom.  I just put up the year-end summary.  I hope you are able to read and enjoy these blog posts on college life.

Best of Pondering the Classroom – 2010

Debit and credit – – David Albrecht


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The audit model is broken, it never had a chance.  The large audit firms partner with corporate management to produce financial statements that are misleading.  Accounting standard setters, under the influence of politicians, large audit firms and corporate management are gung-ho for adopting IFRS and accounting standards that are corporate friendly.  Night has descended on the accounting world.

Don’t you wish we could take back the accounting world?  I do.  Some BGSU students have an interesting take on taking it back.  For proper viewing, imagine that E&Y and/or Lehman Brothers Holdings, Inc. is the Christmas thief, and Santa is, well, Santa.

If only we accountants could take back the night.  Where is Santa when we need him?

Debit and credit – – David Albrecht

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At this time of holidays and family, we at Profalbrecht (meaning me with all my hats:  professor, teacher, advisor, mentor, writer, accounting theorist, commentator, accountant, auditor), send you well wishes and season’s greetings.

Auditor’s Opinion
December 24, 2010

We have audited the accompanying greeting card of The Summa (the Blog) as of December 24, 2010.  The greeting card is the responsibility of the Blog’s management.  Our responsibility is to express an opinion on the greeting card based on our audit.

We conducted our audit in accordance with greeting standards of the Public Company Greeting Cards for Accountants Oversight Board (PCGCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the greeting card is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and sincerity underlying the sentiments expressed in the greeting card.  An audit also includes assessing the holiday greetings used and significant expressions made by management, as well as evaluating the overall greeting card presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the greeting card referred to above presents fairly, in all material respects, the holiday sentiments position of The Summa at December 24, 2010, in conformity with U.S. generally accepted greeting accountability principles (GAGAP).

We also have audited, in accordance with the standards of the Public Company Greeting Cards for Accountants Oversight Board (PCGCAOB), the Blog’s internal control over holiday sentiments as of December 24, 2010. Our report dated December 24, 2010, expressed an unqualified opinion thereon.


For an example of what a holiday greeting card for a law firm looks like, in all its legalese, click here.

Debit and credit – – David Albrecht

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For the record, I am not advocating that Ernst & Young should bite the dust.  My interest is academic.  If Ernst & Young bites the dust, then I want to know about it and talk about it.

What I am advocating is that the system should be changed.  Many audit firms consider themselves to be a partner with corporate management as they report financial statements.  Consequently, these audit firms allegedly fail to qualify their audit opinions for many observed irregularities.  By doing so, they put investors at risk, they put the market at risk, they put citizens at risk,  they put the country at risk.

I would be happiest if the firms would simply stop this dysfunctional behavior and partner no more.  Although the firms are paid by the corporations, they should be working on behalf of investors and the market and citizens and the country.

Now, if that doesn’t happen, then maybe we need a new system.

Debit and credit – – David Albrecht

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Today, December 21, 2010, the Attorney General of the State of New York filed civil suit against Ernst & Young for fraud in connection with financial reporting by Lehman Brothers.

Does this mean that we have entered the era of the Big 3?

The charges (Ernst-Young-Complaint) were filed by New York Attorney General Andrew M. Cuomo on behalf of the citizens of New York.  Here are a few key excerpt (with my highlights on key wording):

E&Y substantially assisted Lehman Brothers Holdings Inc. (“Lehman,” or the “Company”), now bankrupt, to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public.

The allegations conclude with:

E&Y knew every significant aspect of Lehman’s Repo 105 transactions, and knew that the Lehman financial statements violated Generally Accepted Accounting Principles (“GAAP”), which require that such statements (a) not be misleading, (b) fairly disclose the Company’s financial position, and (c) not omit material information necessary to fairly present the financial position. As the public auditor for Lehman, E&Y had the absolute obligation to ensure that Lehman’s financial statements complied with GAAP and did not mislead the public.  Instead of fulfilling this obligation, E&Y gave a clean opinion each year, erroneously stating that Lehman’s financial statements complied with GAAP. E&Y sat by silently while Lehman deceived the public by concealing the Repo 105 transactions and misrepresenting the Company’s leverage. By doing so, E&Y directly facilitated a major accounting fraud, and helped Lehman mislead the public as to its true financial condition. E&Y, which reaped over $150 million in fees from Lehman, must be held accountable for its role in this fraud.

In the complaint, Cuomo alleges that Lehman Brothers was engaging in Repo 105 transactions from 2001 until 2008 (date of Lehman bankruptcy) with full knowledge and approval of Ernst & Young.  Allegedly, Ernst & Young knew the motivation for the Repo 105 transactions was to distort the financial statements.  Also, allegedly Ernst & Young knew that in practice Lehman’s transactions violated the terms of the Linklaters letter of safe harbor.

Until settled in a court of law, Ernst & Young stands legally innocent.  However, if these charges are true, then I simply can’t imagine that any investor would view any Ernst & Young audit opinion as credible.  Even if Ernst & Young escapes these charges, my faith in the firm has been shaken to the core.

Debit and credit.

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Renewal of the Estate Tax

Sorry to break in with a post on taxes.  Taxation is the practice of law, not of accounting, but accountants do practice it.

The recently passed tax bill contains a provision for reinstating a tax on estates transfers upon death, effective January 1, 2011.  This tax had expired for the 2010 tax year.

If you want escape this new federal tax, you must die by 11:50 p.m., December 31, 2010.

It is rumored that some wealthy individuals who are in failing health, are considering suicide so as to qualify for estate taxation under 2010 rules.  Some hints if you are one of these unlucky citizens.

  1. Don’t ask one of your heirs to assist you in your demise.  They should be prosecutable under a myriad of statutes.
  2. Be aware that suicide might be ruled as attempted tax fraud, and your estate might be taxed anyway.  Bummer, not being able to escape either death or taxes.

Debit and credit – – David Albrecht

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Final exam week is over.  Why am I now publishing my annual post on things to take your mind off final exams?  The answer is simple.  I have stacks and stacks of grading to get through, and I suspect there are many professors in my situation.

My friend Ed Scribner (accounting professor NMSU) is a master humorist.  At least I think so.

He sent me a link to a video in which something fairly basic is described in nonsensical terms so as to try to bamboozle a listener.  He suggested that I create a similar type of video to explain some accounting computation.  Funny guy.  We already have the FASB and the IASB for that.

How did Ed find this?  He undoubtedly was preparing for his State of the Accounting World address.

The related links suggested by Youtube caught my attention.  They all deal with pranks.  I’m embedding links to a few of them.  The first involves bathroom humor, in a ladies loo.

Here’s one promoted as the funniest prank in history.  It isn’t, but it is very funny.

Now get back to grading those finals.

Debit and credit – – David Albrecht

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Accountants need to be competent in data visualization.  Strike that.  Accountants should be expert in data visualization.  Data visualization is when numeric data is displayed graphically so as to help interested people understand and interpret it.  To reuse a tired cliche, a picture is worth about 1,000 words, sometimes more and sometimes less.

Most accountants mentally picture columns of numbers in published financial statements when I mention visualizing data.  We understand numbers, but even we employ data visualization techniques.  For example, I can much more easily understand a company’s two years of balance sheets or three years of income statements if they are common sized (converted to a percentage of either total assets for the balance sheet, or a key revenue for the income statement).

Specialists in corporate public relations have for years been inserting line, bar and pie charts into financial statements to help the reader quickly grasp the essence of key numbers in the accompanying financial statements.

Over on AECM, the e-mail listserv for accounting professors, master tax teacher extraordinaire Amy Dunbar (University of Connecticut) shared a link to a Youtube video that shows just how far data visualization has gone beyond what we accountants provide in annual reports.

You must watch this video of Hans Rosling.

Hans Rosling is Professor of International Health at Karolinska Institute and Director of the Gapminder Foundation, which developed the Trendalyzer software system …  Rosling co-founded the Gapminder Foundation together with his son Ola Rosling and daughter-in-law Anna Rosling Rönnlund. Gapminder developed the Trendalyzer software that converts international statistics into moving, interactive and enjoyable graphics. The aim is to promote a fact-based world view through increased use and understanding of freely accessible public statistics. His lectures using Gapminder graphics to visualise world development have won awards by being humorous yet deadly serious.  [from Wikipedia article accessed December 16, 2010.]

A good professor uses a white-board to help students visualize accounting/finance concepts and information.  Isn’t it time we accountants moved into the 21st century and developed some Hans Rosling showmanship?

Debit and credit – – David Albrecht

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The audit model is broken.  Everybody knows it.  You won’t hear it, though, because the large audit firms won’t admit it in public.

Therefore, financial reporting is broken.

At one time, corporate financial reporting to current and potential investors was voluntary.  Most companies did it, as investors needed a bit of info before parting with their cash.  Financial statements were not uniform, but companies got rewarded over time if they did it well.  Some even voluntarily hired audit firms to certify their financial statements.  And audit firms had a reputation for integrity and honesty.

Then in the US, the Securities Act of 1933 and the Securities and Exchange Act of 1934 altered everything, and not for the better.  The federal government mandated financial reporting and audits, for all corporations.  Overnight, everything went to pot.  Corporations were motivated to report because the government ordered them to. Whenever behavior is mandated, a standard response is to only partially comply.   Playing games with the rules was considered smart business.  The earlier rewards attached to voluntary reporting disappeared in the context of legal prescriptions.  Fudging the numbers on financial statements became de rigueur.  [Note: the probability of a corporation following GAAP in all respects is as likely as a driver following posted speed limits in all respects.]

Forced by the government, corporations had to hire public auditors to verify their financial statements.  Now motivated by law instead of by potential return, corporations shopped for favorable auditors and opinions.  Because auditors were hired on the basis of going along with corporate management, auditors correctly perceived that quality was no longer important as it had been before.  Audit firms changed.  They competed for clients by partnering with corporations (see Sleeping with the Auditor) because there was no longer a market for their integrity.  Corporations were only willing to pay for clean audit opinions, and that’s what auditor firms became eager to provide.

European proposals to create audit-only audit  firms (providing no tax or other consulting) won’t fix the problem, it will only make audit firms more desperate to go along with corporate management.  There are only three ways to deal with the problem of ineffective auditing:

  1. Have the government pay a bonus for every financial reporting problem identified in the audit opinion.  Auditors and audit firms are motivated by money.  If the government pays them to spot problems (instead of corporations paying them to overlook problems), audit effectiveness can only improve.  While we’re at it, might as well have the government appoint and pay all auditors.
  2. Regulators and government attorneys general should end their policy of limiting auditor liability.  Auditor liability should be increased by a lot.  If the penalties for partnering with corporate clients is made draconian, then perhaps auditors will start doing the job everybody hopes they do.  Oh, this auditor liability should be applied at the firm level, not the individual auditor level.  Make it possible for an audit firm to go out of business, and all of a sudden they will be motivated to catch every financial reporting misdeed perpetrated by corporations.
  3. Ban audit firms from providing attest services to corporations, and instead have government employed auditors provide audit opinions.  Government supplied auditors can’t possibly be worse than the current audit firms.

Debit and credit – – David Albrecht

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The Summa is an accounting blog.  You know, debits, credits, accounting rules and auditor problems.

Sometimes, though, economic issues seep through.  Thanks to an alert contributor at AECM (the e-mail listserv for accounting professors), I have been watching a really good animated video explaining Quantitative Easing.  The video, uploaded by Youtube contributor MALEKANOMS.


It seems as if the Fed and its QE programs is more fouled up than the audit model, the Big-4 lock on the audit industry, the SEC and its management of American accounting standards, and the International Accounting Standards Board.  Of course, we all know that these are fouled up beyond are imaginable recognition.

Debit and credit – – David Albrecht

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The following story is being carried by the  ABC NewsAtlanta Journal Constitution, Chronicle of Higher EducationFox News, and Washington Post.  So the story must be legit.

Raymond Taylor, a part-time accounting instructor at Kennesaw State University in Kennesaw, Georgia, was arrested on December 6 for allegedly taking off all of his clothes during an accounting class on November 30.  A student in the class complained to a university official about the incident, leading to his arrest on a charge of public indecency.  He was arrested while on campus.  After spending a night in the Cobb County jail, he was released on $5,000 bond.  The university has terminated his employment.

Mr. Taylor has not yet been proven guilty in a court of law.  However, he is guilty in the court of public opinion.

I’ve been teaching accounting classes for over 30 years, and I know of no academic or instructional reason for an accounting instructor to get naked in class.  Nor do I know of any reason why a student would get naked in class.

Mr. Taylor appears to be a slim, soft-spoken man in his sixties.  At this time, it is simply unknown what, if anything, went on in his classroom.

If the charges are anywhere near true, it puts our minds in a tizzy.  Did any of his former students approve of his radical approach?  What point was he trying to make as he exposed himself?   Perhaps he was making a point about IRS (I’m really sexy).  Perhaps he was discussing assets and decided to show his.  Given his age, perhaps he was talking about liabilities.  Perhaps he was discussing accounting pornography  Who knows?

I wonder if he was more or less revealing than the new TSA body scanning and pat down procedures.

I’ve never tried this instructional technique.  I’m quite sure my students would be grossed out and become sickened, thereby lowering my class evaluation scores.  If I looked as good as Bob Jensen, though, I might try it.

Debit and credit – – David Albrecht

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