First, I hadn’t realized that the Frank-Dodd Act created an Office of Financial Research (OFR) within the Department of the Treasury. Aside from the fact that they are not limited to the typical government pay scale, I was interested to learn that Congress authorized an academic fellowship program as part of the OFR (Sec. 152 (i)). How many other academic fellowships among financial regulators can say they were created by an act of congress?

Second, I found that the GASB now has a support fee assessed against members of the national securities association (Sec. 978). I imagine this will make the GASB feel about as excited as the SOX support fees made the FASB feel–very excited. No longer can constituents threaten to withhold donations or other necessary support when a standard doesn’t suit them.

Third, I discovered that an audit firm that relies on a foreign audit firm’s work to conduct its audit must secure “the agreement of any foreign public accounting firm to [provide its workpapers], as a condition of the reliance by the registered public accounting firm on the work of that foreign public accounting firm” (Sec. 929J). I guess the PCAOB was getting tired of pursuing foreign audit firm workpapers and getting snubbed. This should take care of that little problem.

Fourth, nationally recognized statistical rating organizations (i.e., credit rating agencies) are required by law to include among a rating’s quantitative disclosures that indicate the “5 assumptions made in the ratings process that, without accounting for any other factor, would have the greatest impact on a rating if the assumptions were proven false or inaccurate” (Sec 932). I imagine these disclosures could be pretty useful, if for nothing else than a great discussion on uncertainties in a financial statement analysis class or a finance class.

Last of all (for now), the Financial Stability Oversight Council (Sec. 112) has authority to “monitor domestic and international financial regulatory proposals and developments, including insurance and accounting issues, and to advise Congress and make recommendations in such areas that will enhance the integrity, efficiency, competitiveness, and stability of the US financial markets.” I wonder how the creation of this “advisory” mechanism will influence the already pretty powerful lobbying mechanisms that companies use to defeat unwanted accounting proposals. I guess we’ll have to wait to see.

I must say that I didn’t find this Act nearly as fun to read as the Sarbanes-Oxley Act, but I’m sure there’s just more than I could swallow in one or even fifty readings. But I take comfort in knowing I’m with the majority of congress who probably haven’t had a chance to read it yet either.

The Boards decided that a discontinued operation is a component that has either been disposed, or is classified as held for sale, and has the following characteristics:
1. Represents a separate major line of business or geographical area of operations,
2. Is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or
3. Is a business that meets the criteria to be classified as held for sale on acquisition.

Anybody else think this?

Oh, and per usual, I have a question. I’m confused… in minutes a while back, the definition of a disc-op was to be SFAS 131 operating segment. The proposed definition, above, is not quite the same, right? Could be smaller than a SFAS 131 segment?

I’m writing to bring to your attention a great resource for experimental economics. Time-sharing Experiments for the Social Sciences (TESS) is an NSF-supported infrastructure project that enables scholars (including graduate students, post-docs, and faculty) to conduct original experiments on nationally representative samples at no cost to the investigator.

TESS proposals are peer-reviewed and successful projects that are fielded using a nationally-representative internet survey panel (Knowledge Networks). This platform offers the opportunity for surveys of the general United States population, as well as specific subpopulations that are often challenging for researchers to study.

The application process is simple, and the turn-around time is generally quite fast — and our expanded capabilities mean that scholars can now conduct more complicated experiments than in the past.

Jeremy Freese (Northwestern) and Penny Visser (University of Chicago) Principal Investigators, TESS

So the new standard (my read) indicates that if information comes to the plate regarding an “event” that existed at the balance sheet date .. and that information helps with estimability of the amount booked at the balance sheet date, then one incorporates it into the estimate as of the year end.

Fine and dandy.

(Where’s my opinion, you ask? Keep reading.)

This standard (165, codification something or other)… is not very clear on what happens if estimability remains constant but the probability changes with something new coming to the plate during the period between end of year and the financial statement issuance. What if something changes the probability of occurence of the loss outcome in that time period, changing it from reasonably possible to probable? Or the other way around? From probable to reasonable possible?

The standard is clearer on examples that update the estimate of a contingency already booked. but what if that contingency is not already booked? Does it change recognition?? Could it change recognition .. to derecogntion? Are we in the same black box as in sfas 5 on this issue of derecognition??

The standard speaks in terms of “conditions that existed at the balance sheet date..” what is a condition, I ask??

Who has insight? I have an opinion (keeping with the blog)… my opinion is that i’m truly confused.

who has an answer. I’ve asked locally and gotten one strong opinion and one “yeah, i see your point.”

The papers are

Kinney, “The Relation of Accounting Research to Teaching and Practice: A ‘Positive’ View,” Accounting Horizons (March 1989): 119-124;

Demski, J.S., and J.L. Zimmerman, “On ‘Research vs. Teaching’: A Long-Term Perspective,” Accounting Horizons (September 2000): 343-352; and

Friedman, “The Methodology of Positive Economics,” in Essays in Positive Economics, University of Chicago Press, 1953.

I suspect many of the academics who follow this blog have seen these papers, as I borrowed from existing syllabi when developing our course. For the doctoral students or faculty who are unfamiliar with these, I highly recommend them.  For non-academics, I strongly recommend the Kinney article.  The first two papers basically remind me of the importance and inter-relatedness of the research and teaching aspects of my career. The Kinney and Friedman papers remind me that important questions exist as to why the world of accounting is the way it is.  Further, they remind us that knowing more about how the world works is a prerequisite for making informed policy choices.  In my view, this is the underlying raison d’être for FASRI.

Yeah, it was a tough week.  But these papers help get me excited about research and teaching all over again.  I am interested if blog readers have any other similar “pick-me-up” papers that I should consider including next year.

A WSJ article reports that “[FAF President Jack] Brennan said in an interview that the decision to step down was Herz’s and that the foundation hadn’t received any pressure from the government or outside parties to replace him. FASB is an independent standard-setting body, although its activities are overseen by the Securities and Exchange Commission. The board’s activities are also subject to congressional oversight hearings. Herz wasn’t available to comment. ”

In addition, the FAF announced that the board will also grow back to 7 members from its current 5 member board.

The full FAF press release is available here.

This is interesting news, especially in light of the substantial standard setting agenda that the board faces over the next few years.

If someone asks me, “What’s a 10-K?” I’ll tell them it’s a document submitted to the SEC containing the annual financial statements of a company. If pressed, I’ll probably mention the footnotes, MD&A, etc. It’s that “etc.” part that a recent CFO.com article perked my interest about. The article talks about the increasing use of mandatory disclosures as a method not of reporting, but rather of policy making.

Imposing new disclosure requirements on companies is one way lawmakers can indirectly change companies’ policies. “If they’re trying to shape a particular type of behavior when they can’t require a company to do something, they will require disclosures that are potentially embarrassing if the company doesn’t do what’s being asked,” says Gary Brown, a shareholder at law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, who counsels companies on SEC compliance and corporate-governance issues.

Some proposals currently in the works at congress include requiring companies to disclose (in annual and quarterly SEC filings) business dealings with companies in Iran, employee hedge options, and payments made for political activities (e.g. lobbying).

Help me anybody. How much is the one versus the other?

One of The University of Texas psychology faculty members wrote about this event; he’s quite smart. He and I overlapped at the University of Illinois in the 1980’s – he in psychology and me, down the street in “commerce.” We took a few classes together. While I have not yet proven that debits fail to equal credits, he’s made a number of important inroads into human psychology….

In any event, he wrote a beautiful commentary. See below….
——————————————————————————————-
Why science is self-correcting

There’s no point in scientific misconduct; it is always found.

Published on August 10, 2010 ART MARKMAN, THE UNIVERSITY OF TEXAS

According to the August 10, 2010 Boston Globe, Harvard University psychologist Marc Hauser has decided to take a yearlong leave of absence after evidence of scientific misconduct was found in his lab. On the basis of an investigation by Harvard University, at least one scientific paper (from the journal Cognition) has been retracted, and others may be as well. Hauser is a prominent member of the scientific community. Much of his research has looked at non-human primates and has examined complex mental abilities such as communication and reasoning.

I find cases like this both frustrating and reassuring at the same time.

The frustrating part of cases of misconduct is fairly obvious. As a scientist, all I really have is the integrity of my data. Theories are nice, of course. We create theories to help us to explain patterns of data. But, really, theories are most useful because they help use to develop new questions that we can ask that will help use to collect new data. Our understanding of all facets of the universe from the movements of the planets to the behavior of people is rooted in our ability to collect good data.

And scientists hold a special place in their hearts for people who collected and analyzed good data. Newton may have come up with the laws of motion, but he recognized the importance of previous scientists like Tycho Brahe and Johannes Kepler whose data was crucial in revising our beliefs about the way planets move around the sun. As Newton said, “If I have seen further, it is only by standing on the shoulders of giants.” So, it is frustrating to hear about misconduct that compromises the integrity of the data in the field.

At the same time, cases of misconduct are reassuring. Science is remarkably self-correcting. When we publish papers in scientific journals, we organize our papers in a way that reflects the ideals laid out by Francis Bacon. We give enough of the details about our methods that someone else could repeat the study we are presenting. We present details about the analysis of our data. After a paper is published, authors often make their data available to others who want to do additional analyses of the work. If a result piques the interest of other scientists, then their first step is usually to try to repeat the experiment, perhaps with a few changes to test alternative explanations for a finding.

Because scientists are always repeating each other’s experiments, it is hard for afictitious result to hang on for very long. When the studies are fairly easy to conduct (as it is for many psychology studies run with university undergraduates), it quickly becomes clear when a finding is hard to obtain again. For studies that are harder to conduct (like the studies that Marc Hauser does with primates), it may take longer for problems to surface. Ultimately, though, the scientific method is self-correcting. The field is able to separate the good results from the bad fairly quickly. And that is reassuring. There is probably a lesson in here for fraud in other sectors of the world like the financial community, business, and politics. There is something to be said for allowing others to have access to your data and your methods. But, we can take up that topic another time.

So, as it pertains to leases, “speak now or forever hold you peace.” Comment letters are due December 15th.

I’ve also recently begun reading a book by Robert Eccles (Harvard University) and Michael Krzus (Grant Thornton), titled One Report, which also contributes to this discussion.  You can find copies of this book here, ISBN 978-0-470-58751-5.  The authors make the case that integrated reporting is an essential feature of future corporate reporting, and they highlight examples of organizations that are already providing such reports to their stakeholders.

Where are the boundaries of financial reporting?  In our courses, in public policy debates, in standard setting, in regulation, should corporate/organizational reporting about aspects of organizations’ interactions with stakeholders be a standard part of reporting?  If so, how?  In what form?  Regulated by whom? 

These are all interesting questions.  And as I said, it seems I’m hearing more about them every day.  Where do we academics fit in?  How can we contribute?

FAF, FASB, and GASB on Twitter.

Follow them here.

“The American Bankers Association (ABA) respectfully requests that the Financial Stability Oversight Council, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, examine the impact of a recent accounting proposal that will have a significant impact on the financial system. “Fair value accounting” (also known as “mark to market accounting”) is being proposed by the FASB for all financial instruments.  For banking institutions, whose primary assets and liabilities are financial instruments, such accounting could dramatically change banking products and services as well as change how banking institutions are viewed by shareholders, depositors, and regulators.”

The letter from Edward Yingling of the ABA to Timothy Geithner of the Treasury goes on to list several perceived shortcomings of the FASB’s proposal.  Interestingly, the letter asserts that the proposed standard hampers international accounting convergence, even though the proposal is generated from the joint IASB/FASB project on financial instruments.  The two Boards are handling this topic in a non-synchronized manner, but I was still surprised that the letter cast it as a step back from convergence.

Under an early version of the financial reform legislation, the Council would have had a more direct effect on FASB standards – all changes in standards would have to be approved by the Council, at least before they were applied to banks.  Fortunately, the final version of the bill limits the Council to writing comment letters.

I am interested to see if the Council will add another straw of dissent on the back of this FASB proposal.  Or will the non-banking members of this Council end up supporting the FASB’s proposal?  Or will they stay out of the fight?

I was somewhat surprised that they reverse the impact of the changes in a company’s (well in the case of the report i’m reading, a BANK’s) own credit risk on current period gains or losses related to the FV of their own debt. (The do a similar adjustment for the B/S.)

I’m sure you’ve all ready Bob Lipe’s article in Horizons on how there are probably also corresponding losses on assets that are occurring at the same time (so the fv credit quality “gain” is offset by those losses).

I was surprised by this adjustment of Moody’s as I don’t think they make the adjustment for assets write-downs…

Bob Lipe???