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The Accounting Cycle
Articles
Objective of Financial Reporting and Qualitative Characteristics: Some Comments
In May the Financial Accounting Standards Board issued an exposure draft, "The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information." Once adopted, it will supersede SFAC Nos. 1 and 2. Ed Ketz gives his opinion on the content of the new conceptual framework. Nortel's Accounting Scheme
Nortel Networks Corporation, a Canadian enterprise, engaged in some accounting antics a few years ago, and the SEC recently has settled with some of the participants. This is another example of earnings management, and we review this accounting scandal, lest we forget the misadventures of recent accounting scandals. Let's Scrap the Comprehensive Income Statement
The statement of comprehensive income, whether displayed as a separate financial statement or in conjunction with the income statement or as part of the statement of changes in shareholders' equity, has served its purpose. It is time to scrap the concept and incorporate these items where they actually belong—in the income statement. Issuer Retaliation: An Open Letter to Sen. Wyden and Chairman Cox
Senator Wyden, you expressed concerns about corporate managers who attempt to intimidate those who issue research reports critical of them and their operations. In your letter to SEC Chairman Christopher Cox, dated August 4, 2005, you correctly stated that the impact of such retaliation could have an adverse reaction on the publication of objective research. This in turn could have a negative impact on the quality of information that is employed by the investment community and could lead to an inefficient allocation of resources. Say for CEO Pay
Current bills in the Senate and House that aim to give shareholders greater say on corproate chiefs' compensation packages. However, Ketz sees gaps in the pending legislation and offers two solutions of his own: separate the role of CEO and board chairman, and empower the shareholders to vote. My Social Security Statement
I recently received my "Social Security Statement" from the Social Security Administration (SSA). As usual, it is filled with half truths and silly assertions to disguise the true state of affairs. Social security, as we know it today, will not exist in another decade or so. Politics of CEO Pay
Many corporate executives make more in an hour or two than the average American earns in a year. Citizens used to accept some disproportion and imbalance as a fact of life. But as the disparity grows and grows, and as the middle class faces the risk of disappearing from the scene, people are grumbling about this inequality. Taxes and Character
Why do we lie and cheat when we report our income taxes? Maybe we think the system unfair and this is our way to rebel. Maybe we think Congress wastes our money and this is how we fight back. Maybe. But the most unsavory possibility is that, deep down, we are not as honest as we want others to think or as we wish to portray ourselves to others. The Fair Value Problem
Given the problems in the financial sector, one was bound to hear the excuses that the accounting is at fault. The quickness of the rationalizations must have set a speed record! Many critics claim that Statement No. 157 created this boondoggle by requiring firms to apply fair value accounting to their accounts. Biovail Exposed, Part I
I don't think society or the accounting profession has done much to alter the incentives for managers with respect to accounting fraud, so accounting frauds are going to be with us for a long time to come. Biovail Exposed, Part II
Eliminate the critical research analysts, the pesky financial journalists, the capitalistic short sellers and hedge funds, and you will eliminate the search for accounting lies and securities fraud. Grade Entitlement
Unfortunately, the value of grades as an indicator of competency has declined over time. Students feel that they should get good grades for nothing; teachers capitulate so they can spend time on their research; and administrators add pressure to pass unqualified students to avoid confrontations and lawsuits. Are Derivatives Too Complex? Is It Time to Regulate Their Usage?
Managers have talked for some time about the complexity of accounting rules such as Statement 133 on the accounting for derivatives. The idea is to revolt against the onerous American rules on derivatives accounting and embrace the principles of European accounting. Arbitrary and Capricious Rules: Lease Accounting -- FAS 13 v. IAS 17 Lease accounting is often presented as an exemplar of this point. Since the IASB standards are purportedly principles-based, let's compare the FASB rule against the international accounting rule -- er, principle --and look at the differences. In recent years there has been a growing call for the standards-setting process in the United States to become more principles-based. CEOs, managers, financial executives, directors, auditors, investment bankers, investors, creditors, lawyers, members of Congress, the SEC staff, labor unions, and others have joined this chorus.
FASB Needs to Change Accounting for SPEs
The CDO imbroglio that has enveloped the financial sector created quite a stir in 2007. Mortgage foreclosures have led to losses for the banks, and investors in CDOs have been surprised by the degree of their risk exposure. "Super seniors" have not been super or senior. Honor Codes: Not Just for Students
My university is in the midst of creating an honor code for students. This exercise has utility at least to the extent it teaches students what is expected of them. It makes me wonder, however, whether there should be an honor code for the faculty and for the administrators. Leasing and Fair Value Measurements
The current case pertaining to the intersection of Statement No. 157, which focuses on fair value measurements, and Statement No. 13, which is FASB's statement on lease accounting, may say much about FASB’s strength. Poor Performance of Credit Rating Agencies
Soon after Merrill Lynch disclosed its $8.4 billion write-down because of problems with collateralized debt obligations (CDOs) and other financial instruments relating to subprime mortgages, the credit rating agencies started downgrading the securities. But, this is like the proverbial soldier who watches a raging battle from afar; when the war is over, he proceeds to bayonet the wounded. Freddie Mac's Scandal and the SEC's Judgment
The financial reporting lies in the statements of Freddie Mac came to light in 2003. The SEC recently issued a litigation release that attempts to put the affair behind us. Unfortunately, the SEC still cannot meet its goal of meting out punishment against the bad guys and only the bad guys. Suggestions for the SEC Advisory Committee on How to Improve Financial Reporting
Complexity is not the central problem of financial reporting. It is the lack of integrity. As such, an SEC advisory committee that researches today's financial reporting system may be useful, but not if it focuses primarily on complexity. The Merrill Lynch-Enron-Government Conspiracy
If I were a getaway driver for a group of bank thieves, should I go Scot-free if I weren't the primary thief? I doubt that many people would answer yes. Then how come Merrill Lynch is on the verge of escaping the wrath of investors because of its involvement in some of Enron's corporate and accounting frauds? I'm Back ... to Opine on Financial Accounting and Reporting Issues
After writing this column for six years, I took a sabbatical for several months. But, I'm back and ready again to opine on financial accounting and reporting issues. Perhaps a good place to begin is to think about these past six years and reflect on those past columns. Accounting for Stock Options (Part Three): Why CEOs Fight Stock Option Accounting
Why are CEOs making such a fuss over the accounting for stock options? It has nothing to do with their concern about accounting theory, argues J. Edward Ketz. "If they cared about accounting theory, CEOs would be more supportive of the FASB, the SEC, and the IASB in developing and improving accounting practice. They don't want improvements in accounting, else somebody might actually know what they are up to." Accounting for Stock Options (Part Two): Expense, Expense, and Expense Boston University finance professor Zvi Bodie, Harvard accounting professor Robert Kaplan, and Harvard economist Robert C. Merton argue why stock options should be expensed -- contesting a widely publicized paper that says they shouldn't. Accounting for Stock Options (Part One): Reasoning by Authority
A recent paper that argues against expensing stock options lists an impressive number of signatories who agree with the contents of the paper, including a number of Nobel Prize winners. But, while striking, the list is beside the point. The Cheating Culture
David Callahan's The Cheating Culture depicts the United States as a country that has lost its moral compass. His subtitle indicates that he is going to reveal "Why More Americans Are Doing Wrong to Get Ahead." His evidence tantalizes the reader with example after example, but his analysis relies on old and insipid philosophies, so his prescriptions are, at best, inadequate. The Conceptual Framework for Financial Reporting
The Financial Accounting Standards Board and the International Accounting Standards Board have joined forces to flesh out a common conceptual framework. Recently they issued some preliminary views on the "objectives of financial reporting" and the "qualitative characteristics of decision-useful financial reporting information" and have asked for comment. Lease Accounting for CVS
Using retailer CVS's 10-K, Ed Ketz asserts how and why lease accounting must change to better reflect liabilities and assets. Lease Accounting: Separating Myth From Reality
Ed Ketz asserts that a white paper supporting current lease accounting, written by a financial accounting committee member of the Equipment Leasing Association, is "ridiculous, absurd, contorted, and illogical." Exchanges and Regulations
Jim Cramer writes a provocative essay for The Wall Street Journal, in which he chastises Washington for its regulatory zeal. Essentially, Mr. Cramer posits that the rationale behind the deal between the New York Stock Exchange and Euronext is overregulation by the American Congress. While the op-ed contains several nuggets, he overlooks the major rationale for stock regulation, which unfortunately undercuts his arguments. How Valuable Are CEOs?
Some managers are indeed very good and provide great value to their corporations -- but very few corporate executives deliver a billion dollars worth of incremental value. UnitedHealth Group: Exercising the Option to Defraud Stockholders
Ye olde cookie jar faces risk again. This time executives at UnitedHealth Group seem to have not one hand in the cookie jar, but both hands and both feet. Leasing Lattes: To Drink or Not to Drink
Accounting for lessees remains ridiculous, absurd, contorted, distorted, and illogical. By allowing business enterprises to ignore the reality of some leases and not to report the economic effects on the financial statements, the Financial Accounting Standards Board has been an accessory to the accounting games played by corporate managers. Will FASB Ever Issue Good Lease Accounting Principles?
Some rumblings from Norwalk indicate that the Financial Accounting Standards Board might put lease accounting on its agenda. I guess 30 years late is better than nothing. Closing Another Door on Accounting Scandals?
The Enron trial has terminated, but it is too soon to relax. Accounting scandals have afflicted us in the past and have every reason to come calling in the future. As the Enron Trial Turns
The defense has now rested, and Lay and Skilling blew it. While anything is possible in today's courtroom, it appears that the culprits at Enron will eat their desserts. Testimony by Lay and Skilling reveal a lack of connectedness with their so-called peers. Tyco Investors Get Ripped Off Again ... This Time by the SEC
Tyco consented to pay a $50 million penalty. But who is really paying this fine? The real payers are the investors of Tyco. So this raises the question -- why should the investors get ripped off twice? General Motors Revved Up Its Accounting
Professor J. Edward Ketz scrutinizes GM's recent accounting corrections and asks, when will the merry-go-round of accounting restatements end? ASR: How Wall Street Helps Managers Fudge EPS
"Accelerated share repurchase (ASR) programs are the new game in town" used to "stretch the truth" about a company's earnings. Debunking the Supposed Link Between Rules and Accounting Scandals
Some accountants believe the United States should go to a principles-based accounting system like other countries. Unfortunately, this argument ignores large cultural and institutional differences between the U.S. and other countries. Power to the Auditor
As audit fees rise to accommodate the changes associated with Sarbanes-Oxley, Professor J. Edward Ketz, Pennsylvania State University, argues these rates are still low: "Audit fees must cover the risk that corporate executives will commit accounting frauds in the future." With Petrocelli, Skilling Has a Chance!
Accounting Cycle columnist J. Edward Ketz believes the attorney at the helm for the Enron trial of Jeffrey Skilling has a decent shot at getting Skilling off the hook. Ketz discusses the legal team's strategy, one of which is "blame the accountants!" Pension Accounting Hurts Managers -- And They in Turn Hurt Us
The failing U.S. retirement system is the result of poor management decisions, a weak Statement No. 87, and FASB's habit of making "rules with an eye to the political winds of the day," says Professor Ketz in his 2006 debut editorial. Cox Encourages Simpler Accounting: Bah, Humbug!
SEC Chairman Christopher Cox in a December 5 speech said the accounting scandals "were made possible in part by the sheer complexity of the rules." Columnist J. Edward Ketz disagrees, citing "the relatively simple accounting schemes" of Global Crossing, Adelphia, AOL, Enron, Waste Management ... Herz Encourages Simpler Accounting: Again, Bah, Humbug!
Similar to the speech by SEC Chairman Christopher Cox at the AICPA National Conference on Current SEC and PCAOB Developments, FASB Chairman Robert Herz directed his comments to the proposition "that we need to reduce the complexity of our reporting system." The proposition may be true, but Herz did little to advance the cause in his speech. Investors and Financial Analysts: Shouldn't They Be Liable Too?
How much accounting should fund managers be expected to know? Should investors be so quick to file lawsuits when a company's accused of fraud? And how liable should the auditor be for poor management decisions? Accounting Students Aren't Ready to Fight Fraud
In response to a statement by Joseph Wells, founder of anti-fraud group ACFE, in which he states accountants aren't able to fight fraud, Professor Ketz suggests seven contributing factors to this situation. Earnings Per Share: An Example of Principles-Based Accounting?
Last year the Financial Accounting Standards Board issued a report that essentially agreed with the Securities and Exchange Commission that principles-based accounting is the way to go. Unfortunately, nobody at either organization knows how to get there. Reckless Refco: The Unending Saga of Accounting Frauds
Accounting frauds are here to stay. Managers don't employ accounting; they bend, twist, and distort it to display the set of numbers that helps them look good. But there is hope of fixing this problem. Financial Expertise and Accounting Restatements
Deficiencies in financial expertise lead to accounting problems and eventually to accounting restatements, according to a recent report in an academic journal. But is this truly the source of the problem? Tooting the Horn for Those Who Blow the Whistle
One of the so-called benefits from Sarbanes-Oxley was the protection of whistleblowers. Yet, the whistleblowers I talk with say otherwise. They get as much protection as deer from hunters during hunting season -- they're allowed to run. Who Will Guard the Guardians?
CPAs Reforming Our Profession (CROP) has written various reports that raise questions about the AICPAs books and its financial investment in CPA2Biz. Let's Quit Enabling Accounting Frauds
FASB's fair value measurements proposal invited an interesting letter from GM's former accounting director, Eugene Flegm. Ed Ketz evaluates Mr. Flegm's position that fair value measurements and the decline in professionalism are two enablers of crooked accounting. Christopher Cox Doesn't Reside at Pooh Corner
With Christopher Cox as the new SEC chief, the SEC will turn from a pro-investor agency to one that will oppose meaningful change. Managers will note the alteration and start "managing earnings" as they did in the roaring 90s... FASB's Efforts Toward Simplification
Simplify the standards-setting process? Sure. Simplify the GAAP hierarchy? By all means. But use principles-based accounting? Only if you want more accounting scandals. Whatever Happened to Valuing Independence?
I used to think that independence was the bedrock of the accounting profession, at least that is what I learned in my auditing classes several decades ago. Goodbye, Dan Rather
CBS anchor Dan Rather's scandal parallels the ethical issues that plague the accounting profession. Does Rather's retirement this week signify a new beginning?
When FASB deliberated over the accounting for business combinations, managers yelled and screamed about the critical necessity for maintaining both options. Yet evidence shows that Statement No. 141 had nothing to do with the downturn in mergers and acquisitions.
Is Secretary of Treasury John Snow subject to the same rules that he recently declared essential "to restore confidence to the economic system"?
Justice for Fannie Mae's Executives?
Oh, to plot and scheme a stream of fictitious numbers and retire to earn millions -- what a good life! FASB Exercises Its Stock Option Standard
The Financial Accounting Standards Board issued its revision of Statement No. 123. As expected, the board mandated the expensing of stock options. And, as expected, the foes of the bills are running to Congress overtly and covertly in an effort to derail the standard. Let the games begin! Delphi Pensions and the SEC
The SEC has asked Delphi Corporation to provide the agency some data about Delphi's accounting for its pensions. When all is said and done, fault appears to rest with FASB's Statement No. 87. While an improvement over its predecessor, Statement No. 87 falls short in many ways. Peregrine Systems -- Or the Lack of Them
Peregrine Systems issued a fascinating 8K in October that basically stated that the business enterprise does not have an internal control system, and therefore cannot issue financial
statements.
Fannie Mae -- And She Did I don't know about you, but I am getting bored because accounting frauds plod on. So they lied and cheated at Fannie Mae. Ho hum! Like that's such a big surprise! Educator Exasperation Over Journals
Over a year ago, the executive committee of the American Accounting Association recommended that the association no longer publish two journals due to publication costs. Members cried foul.
"You Can't Legislate the Truth!"
With new regulations now in place, can the Securities and Exchange Commission legislate morality and ethics and deter corporate corruption? Advice to Nonprofessional Investors
With the stock markets moving upward and with thoughts that the accounting scandals may be behind us, Ketz shares his investment strategy. Who's Proud to Be a Business Student?
It's a good time to look at how today's students will apply the recent spate of unethical corporate behavior to tomorrow's business environment. Fitch Hits a Glitch With Its Pitch Fitch Ratings published a report earlier this year that recommends improvements to financial statements -- but fails to acknowledge its own ratings errors. PCAOB Inspects Big Four's Auditing The PCAOB review of the Big Four demonstrates that the board might just be successful in restoring the confidence of the investment community and boosting trust in the accounting profession. FASB Takes Up Contingent Convertibles FASB is examining the effects of contingently convertible bonds on earnings per share, and it appears that the board might require business enterprises to include their dilutive consequences in the computation of earnings per share. FASB, Say It Isn't So
Recently the FASB hinted that it might delay the proposal to expense stock options and might even study several additional models to value them. Unfortunately, the board has revealed that it doesn't understand politics. Non-Compete Agreements: The Case of Ray Edwards
Non-compete agreements commonly exist within the accounting profession to protect the interests of the employer. But the protection of a firm's interests is sometimes at odds with the public interest. The Future of Auditing Firms
Part Four: The American Assembly's report states: "Assembly participants agreed that professionalism within the accounting industry has declined and that many auditors both feel and exhibit less pride in their work." -- but it stops there! Too Many Demands on the Auditing Profession
Part Three: Does the American Assembly's report on the future of accounting admit that some of today's auditors are not qualified for their positions? Are auditors not delivering the goods? The Brittle Illusion of Accounting Exactitude
Part Two: We shall never rid accounting of estimates, so let's quit trying. Instead of searching for alternative explanations, let's face the facts. The Future of the Accounting Profession
Part One: A new report "reads as a defense brief for those involved in recent accounting scandals." Poor Old Lu(cent)!
Lucent Technologies, and several of its officers, was charged with securities fraud by the SEC for squashing GAAP. These yarns by corporate America are becoming so repetitive and so overplayed that they are downright boring! FASB and IASB: Bumps Along the Road to Harmonization
With different social and economic institutions and with different cultures, laws, business practices and business ethics, one wonders whether a single set of accounting rules truly harmonizes anything. Rush to Judgment: Whither Arthur Andersen? Part Two
As broached in the previous column, Mary Morrison recently wrote "Rush to Judgment: The Lynching of Arthur Andersen & Co." In this column, I explain why I believe Morrison correctly characterizes the government's indictment of Arthur Andersen as searching for a scapegoat for the economic meltdown of 2001-2002. Rush to Judgment: Whither Arthur Andersen? Part One
Having started her career at Arthur Andersen, Mary Morrison recently wrote a paper with the engaging title, "Rush to Judgment: The Lynching of Arthur Andersen & Co." I am not swayed by Morrison's manuscript with respect to her claims about the limited extent of Andersen's guilt... Self-Insurance: Creative Accounting?
The term self-insurance connotes the idea that the business enterprise recognizes the risks it faces and has prepared for their possibilities. Unfortunately, this spin might hide some creative accounting. The Hypocrisy of RSA Security
Those who whine about FASB's stock-based compensation standard probably have something to hide In testimony before Congress, Arthur Coviello, CEO at RSA Security, said that option-pricing models "produce inaccurate and misleading information." Of course, he didn't confess that his own declarations were inaccurate and misleading. FASB Exposes Stock Option Truth In response to FASB's stock option proposal issued March 31, columnist J. Edward Ketz reviews the problem of options in corporate governance and why they necessitate expensing. In addition, he proposes an amendment to the FASB's exposure draft for improving the cash flow statement. CoCo for the Morning: Contingent Convertibles
Investment bankers seem always to be dreaming of the next gimmick. The latest snake oil is something called contingent convertibles, affectionately referred to as CoCos. The Amazing World of Derivatives
In the world of finance and derivatives, accountants are faced with a bewildering set of securities and amazing set of accounting rules -- and infectious greed. It's General Mills' Turn to Cry
Another venerable business enterprise has been found with its hand in the proverbial cookie jar (or in this case, feeling for the toy in the cereal box). The Martha Stewart Verdict
"A real cleansing is taking place," writes Ketz in response to Friday's guilty verdict in the Martha Stewart case that surprised some and pleased others. In his column, Ketz wonders why the home-decorating guru just didn't confess to the crime. Cost of Governance
Clearly, the costs of audits have shot up, but perhaps they should grow even more. If anything, the cost of governance needs to rise even further. Topics for Teaching
A Fortune 100 executive manager tells advanced accounting students they are wasting their time studying consolidations. The professor of the class begs to differ -- and has the last laugh. Computer Associates: A Reprise
While the SEC apparently is focusing on Computer Associates' fiscal year 2000, I think it should expand its scope to include a look at the so-called New Accounting that Computer Associates initiated in fiscal year 2001. Baxter's Goodwill Amortization
Sometimes we lapse into thinking that managers understand financial accounting very well. Every now and then, however, it seems that managers only fool themselves. HealthSouth Executives Escape Justice
Recently a judge sent four HealthSouth managers to probation for their role in committing accounting fraud. At most an inconvenience, this sentence provides perverse incentives for future executives to carry out accounting fraud in the future. After all, what's the harm even if they get caught? A Nobel Laureate on Accounting
When a Nobel laureate in economics writes on accounting, I want to read what he has to offer. Fortunately, deep insights into economics often translate into wisdom about accounting; unfortunately, the lack of institutional knowledge about the subject may cause one to make a few mistakes. Misguided Mutual Funds
Ed Ketz's year-end editorial questions the integrity of mutual funds, how the government has handled the scandals, and what's in it for the investor. A Glitch in Cash Flow from Operating Activities
The cash flow statement provides measures about liquidity and solvency. Unfortunately, companies can distort the cash flow from operating activities by acquisitions and mergers. Should a Firm Be Consistent in Its Assumptions?
As connoisseurs of accounting know quite well, the accounting process involves many assumptions and estimates. If they have to presume certain things for two different topics, should these postulations articulate? Does Senator Enzi Support Accounting Lies?
I continue to find amazing some public statements enunciated by members of Congress. It reminds me of the witticism to be sure that your brain is engaged before putting your mouth into gear. Do We Want to Be Ethical?
Most people want fairness, respect, and decency. But what we want isn't always what we give. Arnold and Accounting: Comedy or Tragedy?
If one views the election of California governor-elect Arnold Schwarzenegger with objectivity, three lessons stand out that can shed some light on recent events in the world of accounting. Hidden Financial Risk: Understanding Off-Balance Sheet Accounting (John Wiley & Sons, 2003) "Some Ethical Issues About Financial Reporting and Public Accounting and Some Proposals," Research on Accounting Ethics (1997), pp. 49-77 (with Paul B. W. Miller). |
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