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The Accounting Cycle 
by J. Edward Ketz
edketz@psu.edu  • 814.865.1361

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. Dr. Ketz is a frequent guest on CNNfn and has appeared on National Public Radio and Bloomberg Radio. See his Books and Publications.


Articles
As stated in the previous essay, the Attorney General of New York filed a complaint against E&Y in the Lehman Brothers case.  In particular, the plaintiff alleges that "E&Y substantially assisted Lehman Brothers ... to engage in a massive accounting fraud" and that E&Y helped the firm to "take advantage of a technical accounting rule, known as FAS 140, to treat these Repo 105 transactions, which in reality were short-term financings, as 'sales'".
 
On December 21, 2010, Andrew Cuomo as the Attorney General of New York filed a complaint against E&Y in the Lehman Brothers case.  In particular, the plaintiff alleges that "E&Y substantially assisted Lehman Brothers ... to engage in a massive accounting fraud." If that is so why did the state not bring charges against Lehman Brothers' CEO and CFO and perhaps others?
 
My, how the year 2010 ended with a bang!  First, Attorney General Andrew Cuomo initiated a fraud suit against Ernst & Young, and then the Financial Accounting Foundation named Leslie Seidman as the chair of the FASB.  These events culminate a return to power and prestige for the investment banking industry, and  we should salute the triumph of banking.
 
Student Cheating
Professor Richard Quinn caught some business students cheating in his Strategic Management class at the University of Central Florida.  Approximately 200 students had an advanced copy of the exam and so the scores were much higher than normal. 
 
The ballyhooed IPO by GM has or soon will take place.  This is amazing inasmuch as General Motors transformed itself from a solid, steady manufacturer with a clean reputation into a troubled U.S. automaker and then into another twenty-first century accounting fraudster before almost becoming another bankrupt has-been.
 
A few weeks ago the FASB issued its Concept Statement No. 8 on objectives and qualitative characteristics.  I wonder why it bothered.  The GASB also has a conceptual framework, but it serves no particular purpose.  Why are these boards engaging in these academic applications with little or no intent on actually using them?
In April 2009 I wrote a column that suggested that Robert Herz should resign as chairman of the FASB.  Now, sixteen months later, he does in fact resign.  I am not vain enough to attribute a cause-and-effect relationship, but I want to review my criticisms of Herz and suggest to the FAF who they should appoint to the board.
 
Operating Lease Obligations to be Capitalized
Wow!  I have wondered for a few decades whether the accounting profession ever would account for operating leases correctly.  Long-term operating leases, as opposed to rentals no longer than one year, clearly convey property rights and encumber the business entity with debt obligations.  Not to require this accounting has served as a badge of hypocrisy long enough.
 
CalPERS Attacks Pension Truth in Orange County
The mission of the California Public Employees’ Retirement System (CalPERS) includes representing the interests of California’s public employees.  Its specific objective is to provide pension benefits to public workers in the state.  As such, it brooks no challenges to future receipts of taxpayer largesse.
 
Thoughts about Accounting Theory and David Mosso
In recent decades there has been a dearth of accounting theory, whereas during the 1960s and 1970s there were many books and articles by which authors advocated this or that set of propositions. The reduction in texts about accounting theory is likely the realization that no logical system about accounting theory will ever be taken as gospel. That is unfortunate, because the success of accounting standards setting depends on the creation of accounting theories that stimulate debate about the purposes and functions and processes of financial reporting.
 
Pension Reality in Orange County
An interesting court case concerns the nature of enhancements to retirement benefits.  If we remove the legal jargon, the essence of the case is whether an amendment to a pension plan that increases employee benefits constitutes a liability.  At first this case may appear boring to accountants because the answer is yes - like, duh! - it becomes titillating when one realizes the balkanization of economic thought by some governmental entities. (
See related amicus curiae by Dr. Ketz.)
 
Rules Should Not Hurt Investors
Accounting rules should not hurt long-term investors.  So says French Treasury official Jacques de Laroisiere, and who can disagree with him?
 
Grade Inflation
I was interviewed recently about grade inflation, which motivated me to return to this familiar topic. While I have little new to offer, that does not mean that nothing can be done about the problem. If accounting faculty members have the will, they can reduce the amount of grade inflation in the system.

CPA Firms and Credit Rating Agencies
My father-in-law tells the story about when he was a young lad the cows wandered into the garlic patch; he drank the milk and gagged.  While milk and garlic are great, they weren’t meant to be combined.  In the same way, I wonder why some are thinking about combining accounting firms and credit rating agencies.

There aren't enough jokes in Accounting Land, but thanks to Joel Jameson, founder of Silicon Economics, Inc., that has been remedied. You see, Joel believes the FASB has a monopoly in accounting standards-setting and thinks that violates the Sherman Anti-Trust Act.
 
Board Restructuring: An Attempt to Deflect Criticism
We have perverse incentives for directors to close their eyes and permit managers to do what they will.  Improve the incentives and one improves the behaviors of board directors.  Improve only the structure of the board, and the directors will continue to sleep through the corporate misdeeds.
 
FASB and Repo Accounting
The facts of life continue to give discomfort to the FASB. When Anton Valukas criticized Lehman Brothers, there was plenty of disparagement left over for the FASB and the SEC. After all, when ambiguity exists in financial accounting rules, we shouldn't be surprised when managers take advantage of these ambiguities.
 
The bankruptcy report by Anton Valukas has created quite a stir.  Given that we all knew about the demise of Lehman Brothers, what was the surprise?  Ok, he wrote about some fast and loose accounting tricks, which are dubbed Repo 105 transactions.  So what?
 
Does Gary Locke Support Accounting Lies?
I just don’t understand the current administration.  You would think that after the last decade of financial thievery and accounting mischief, the Obama administration would not tolerate a return to such prevarications.  But if one listens to his Secretary of Commerce Gary Locke, that might not be the case.
 
A Congressional Bill Worth Passing
I don’t know enough history to know whether Congress has always been filled with fools having low integrity, but such a description is fitting for recent Congresses. 
 
Iffiness of IFRS
On February 24, the SEC issued its "Statement in Support of Convergence and Global Accounting Standards." Curiously, while the SEC did indeed affirm its "strong commitment" to IFRS, it may have unwittingly given voice to the concerns of dissidents. Finally!
 
Deferred Income Taxes Should be Put to Rest
One of the silliest constructs in the world of accounting happens to be deferred income taxes. I don't understand why we bother with deferred tax liabilities and deferred tax assets because they are neither liabilities nor assets.
 
Regulating the Avarice of Bankers
Alan Blinder begins his op-ed in the Wall Street Journal ("When Greed Is Not Good," January 11, 2010) with these words, "I hear Gordon Gecko is making a comeback. So is greed." Funny, I never knew they had gone. While he may have said this in an attempt to be cute, it doesn't bode well for one's argument when the initial premise is false.

Hertz Converts While the SEC Inverts
Hertz Global Holdings did a 180 recently by righting a dumb mistake it made earlier. Before getting swallowed up by a legal vortex it created, Hertz just walked away before it wasted a lot of shareholder money.
 
200th Column: Retrospection
I started writing this column in December 2000, and this composition marks the 200th essay, so it is time for some retrospection. This has been an exciting period for financial reporting and future historians will have much to ponder and sort out. My task is simpler - I would like to review the topics and themes explored in this column over this nine-year period.
 
When people ignore economic realities and are foolish enough to make and adhere to ill-conceived and faulty budgets, well, they get what they deserve. Take California, for example.
 
Capping Exec. Comp: Good and Bad Concerns
President Barack Obama recently established a cap on executive pay at those firms which received taxpayer bailout funds -- a cap on one's annual salary of $500,000. It also proposes to curb bonuses to managers. Various individuals have raised concerns about this governmental intervention. As it turns out, some of these concerns are legitimate and need to be addressed, but others seem more self-serving.

Hertz Diverts and Subverts (Where Are You, Mary?)
In a recent perversion, Hertz Global Holdings (HTZ) sued Audit Integrity because it had the audacity to predict that Hertz was in danger of bankruptcy. This is another example of issuer retaliation and it must stop. The Congress and the SEC need to rein in corporate America when it attempts to enforce censorship against anybody that criticizes them.

The Myth of Regulation
Mark Twain remarked that “There is no distinctively native American criminal class except Congress.”  He was wrong.  He should have included presidents and the SEC.

Trina Thompson recently sued Monroe College (New York) because she cannot get a job.
 
The FASB is slowly—very slowly—looking at the accounting for leases.  It is working with the IASB to improve accounting standards in this area.  I am thankful for the action, because the off-balance sheet accounting has undermined good accounting for a long time.
 
Richard Hamill, Sr. is President of a new center called Foundation for Audit Excellence. The mission of this Foundation will be to identify, promote, celebrate, and emphasize the ideals, ideas, standards, operations and techniques that represent audit excellence. However good one may view U.S. audits, any ideas for improvement are welcome.

GE's Accounting Tricks and the SEC's Injustice
GE has agreed to pay a $50 million dollar fine.  And, as these things go, GE admits to nothing but promises never to do it again.  Who among us is so naïve that they think that the managers of GE will never violate accounting principles again and that its directors will not approve?
 
Speaking before the National Press Club, FASB chairman Robert Herz recently denounced the politicization of accounting. He correctly stated, "The investing public expects and deserves unbiased and transparent financial information."
 
It has been amazing to listen to the discourse over executive compensation during the past year or so.  On one side we have the pure capitalists who tell us that government ruins everything, neatly forgetting that unbridled capitalism exploits those with little power and ignoring the fact that many CEOs do not provide enough value to shareholders to justify their compensation. 
 
Madoff Part Two: Ascot Partners Turns Defendant
Ascot Partners sued BDO Seidman in the Madoff mess. But, what goes around comes around. Now the trustee for the liquidation of Bernard L. Madoff Investments Securities (BLMIS) is suing Ascot Partners. Unlike the first dispute, this second lawsuit makes sense and the plaintiff has excellent chances of winning.
 
Citigroup is Still Losing Capital
Just because shortcomings in generally accepted accounting principles permit the exclusion of some real economic losses doesn’t mean the numbers depict reality.  As the losses are real, Citigroup is still hemorrhaging.
 
Citigroup Remains in Critical Condition
The stress tests conducted by the Fed are a farce inasmuch as the stress isn't too strenuous. That the Fed ascertained additional capital requirements for several banks merely points out the obvious - the banking sector remains in serious trouble.

Calming Markets with Stress Tests
Banks are undercapitalized in the U.S. and no amount of propaganda will change that essential truth. That's why capital stock prices are still so much lower than a couple of years' ago.

Herz Should Resign
April 2, 2009 is a day of accounting infamy. It is a day in which the Financial Accounting Standards Board (FASB) bowed to the pressures of the banking community and Congress to allow distortions, massagings, and manipulations of the U.S. financial reports. Because of these cowardly acts, I think it time for Robert Herz to resign from the FASB.
 

David Einhorn documented his case against Allied Capital in his book Fooling Some of the People All of the Time. When I read the book, I felt the evidence compelling against Allied Capital. Today I am less sure. Discovering the role played by one Michigan operator has led me to a different take on this story.

 An Accounting Stimulus Bill
To stimulate the economy, one needs to stimulate the accounting. Bankers have often broadcast this mantra in an effort to end fair value accounting, but these bankers are thinking too small. Let’s really stimulate the economy by really stimulating the accounting. And it won’t cost taxpayers one cent!
 
The SEC Asks for Help in Apprehending the Bad Guys
On March 10, 2009, the SEC issued a request for quotation (request number SECHQ1-09-Q-0149) dealing with “public company accounting intelligence.”  Amazingly, the SEC seems to be asking for help in determining problem areas in today’s financial reports.

On March 6, 2009, U.S. House Representatives Ed Perlmutter and Frank Lucas introduced HR 1349. Its aim is to ease economic downturns by creating a new oversight board named appropriately the Federal Accounting Oversight Board. Its real purpose, however, is to halt accounting truth-telling via fair value accounting.

On the Road to National Bankruptcy
When it comes to the federal budget, both political parties are stubborn and impetuous and foolish and short-sighted. They will bankrupt us all if we let them.
 
Executive Compensation: Public Grumbling and Obama's Meow
I have been hearing political pundits and business correspondents declare that the public is outraged at executive pay and that the Obama administration is going to cap executive compensation.  What are they talking about?

Students Then and Now
Compared with the students in the 1970s, today’s accounting students are uneducated and unfit for a college education.
 
It didn't take much time after the announcement of the world's biggest Ponzi scheme for somebody to sue an accounting firm. 
 
Our Supposed Coxswain
In my judgment, Christopher Cox may be the worst Chairman of the SEC ever.
 
Goodwill Impairment Losses for Fiscal 2008
The credit crisis has had a monstrous impact on capital markets, cutting stock prices some 40 percent or so. Unless a miracle occurs by year end, these depressed market values will in turn have a gruesome effect on corporate earnings statements. The vehicle for this grotesqueness will be impairment losses on goodwill.
 
Hidden Financial Risk
I've been modest too long. When people tell me about how much money they have lost in the stock market, I now reply, "You should have read my book."
 
Crisis of Leadership
Some have labeled the current financial crisis a crisis of greed. Others refer to this predicament as a crisis of fear. What we're really facing now is a crisis of leadership.

"Those who cannot learn from history are doomed to repeat it." And here we are to prove the truth of this aphorism as its deja vu all over again!
 
A Pox on Christopher Cox
I would like to add my voice to those criticizing Christopher Cox and holding him responsible in part for the collapse of the U.S. financial sector. I definitely agree with those calling for his resignation or saying they would fire him if they were president.

With Advisers Like These, Who Needs the SEC?
On June 27, 2007, SEC Chairman Christopher Cox announced the creation of an advisory committee that would explore ways of improving financial reporting. After the torrid events in 2001-2004, we need something to make corporate accounting better!
 
The Current Crisis in Accounting Standards Setting
Financial accounting and reporting seems to face critical challenges almost all of the time. Currently, the Financial Accounting Standards Board faces several tests, the two most important of which deal with fair value accounting and the accounting for special purpose entities. A lesser but still important concern involves comprehensive income. All three matters focus on the integrity of financial statements.
 
SEC Study of Rating Agenices: Same Old Same Old
On July 8, the SEC issued a report concerning its findings about "select credit rating agencies" and provides a number of recommendations. It misses the point. You don't discuss the finer points of pawn promotion or en passant when your opponent is getting ready to checkmate you or win your queen.
 
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.