Category: Accounting

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The Essays of Warren Buffett: Third Edition

It’s a pleasure to report that this weekend marks the release of the third edition of The Essays of Warren Buffett: Lessons for Corporate America.  Originally published as the centerpiece of a symposium sponsored by Cardozo Law Review in 1997 at which Warren Buffett debated 20-some law professors (listed after the jump) on every important issue facing corporate America, this book is a thematic arrangement of Buffett’s annual letters to the shareholders of Berkshire Hathaway from 1977 to the present.

As I explain in my Introduction,  the central theme uniting Buffett’s essays is that the principles of fundamental business analysis, first formulated by his teachers Ben Graham and David Dodd, should guide investment practice. Linked to that theme are management principles that define the proper role of corporate managers as the stewards of invested capital, and the proper role of shareholders as the suppliers and owners of capital. Radiating from these main themes are practical and sensible lessons on the entire range of important business issues, from accounting to mergers to valuation.

The book has particular significance for devotees of behavioral economics who are skeptical of strong claims about market efficiency, as the book provides both the philosophical architecture of value investing and the intellectual defense of that practice, which distinguishes sharply between price and value.
UPDATE:  Read More

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Incorrect Citations

Wonderful as it is to be cited, being cited incorrectly poses a dilemma.  If your article is referenced for a proposition it does not support, what should you do?  Should you alert the author of the piece or the editor of the journal?   Should you ignore it?  Should you correct the reference the next time you publish on the topic?

Perhaps the ideal response varies with the degree of error.   Scholars delight to participate in the discourse, after all, and sometimes a citation that seems incorrect to an author is really  a way to advance the conversation.  A reference in ensuing scholarship explaining that contribution would be apt.   Sometimes a piece is cited for a general point that an author rather than a reader would recognize as a bit afield. No response at all is okay.

But what about a statement that is clearly wrong? Suppose someone makes an assertion that European accounting law is principles based and cites my Vanderbilt Law Review article challenging the whole notion of principles based accounting.   It infuriates me.  I want to write to the author and editor to object.  But should I? Should  I care?

The problem is even worse than appears, because while I am particularly sensitive to incorrect citations to my own work, I also see incorrect citations to the work of others with which I’m familiar.  It appears that many writers and editors today cite things without really reading them.  It seems as though someone should say something.  But who?  And to whom?

Nordstrom on Global Outlaws

I was recently listening to a podcast by Carolyn Nordstrom of her 2008 Franke Lecture in the Humanities, Emergent(cies).  Nordstrom discusses the extraordinary power wielded by those in control of an underground economy of weapons, drugs, and human trafficking.  Paul Farmer attested to Nordstrom’s extraordinary dedication to ferreting out the transactions that knit together so many imperiled and privileged lives.  I look forward to reading her book Global Outlaws.  This excerpt describes her aims in it:

I am interested in the intersections of crime, finance, and power in activities that produce something of value: monetary, social, and cultural capital, power, patronage, survival. . . . Public media focus on . . . aggressive individuals under the sensational banner of “crime,” yet this interpersonal violence constitutes a small percentage of the universe of criminal actions. Smuggling cigarettes brings in far greater profits and economic repercussions. Robbing an entire country or controlling a transnational profiteering empire is the gold standard of crime.

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Young Business Law Scholar Call for Papers

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School has announced its third annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  This year’s Workshop will be held on April 5-6, 2013 at GW in Washington.

The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty. By providing a forum for the exchange of creative ideas in these areas, C-LEAF aims to encourage new and innovative scholarship.

I’ve participated in both previous Workshops and can attest that participants have benefited from the exchange of ideas and getting acquiainted with newer scholars.  About 100 papers are submitted and the C-LEAF faculty select about 10 for presentaiton.  At the Workshop, senior scholars comment on each paper, followed by a general discussion.

Three papers receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF.  C-LEAF makes no publication commitment, but chosen papers are featured on its website as part of the C-LEAF Working Paper series.   Read More

Penn State Scandal: Could a Corporate Compliance Model Have Prevented It?

The Penn State scandal has become ever more shocking with each new revelation. My colleague Kathleen Boozang argues that it is time for higher ed to learn from other large enterprises about the importance of compliance:

It appears that even now, Penn State lacks a compliance program, the creation of which Special Investigative Counsel Freeh’s Report recommends. Previously limited to financial fraud and HR issues, a June 21, 2012 posting by Penn State’s internal auditor announces a poster redesign advertising its hotline number, to which any ethical or legal concerns can now be reported.  Important will be training throughout the university regarding the law’s protection of whistleblowers, about which, according to Freeh’s Report, top university leaders were unaware.

While it is stunning that, even now, Penn State has not advanced further in setting up these protective measures, it is fair to say that much of higher ed has been slow to adopt compliance best practices common to the healthcare sector and most business entities.

In related news, the Institute of Internal Auditors met in Boston last week. It looks like they will need to play an increasing role in the higher education setting, especially if internal compliance methods are not mere “rituals of verification.”

Pascal on Power and Justice (A Thought for the New Year)

The past few years I’ve tried to find an inspiring quote for the New Year for the blog. There’s a rich vein of insight to be mined from the Carnegie Council podcasts, which I recently discovered on iTunes. One speaker I particularly enjoyed was Krishen Mehta, a former partner with PricewaterhouseCoopers who is now the co-chairman of Global Financial Integrity’s advisory board. Asked about what motivated him to try to stop the shocking abuse of tax havens and mispriced trade by oligarchs, he said the following:

It really is a war against the poor. The inequity that has existed in the past is going to continue unless civil society is informed, asks the right questions of its government, of its business leadership, and asks for more responsibility. One of my favorite writers is Blaise Pascal, who said that “justice and power must be brought together so that whatever is just may be powerful and whatever is powerful may be just.”

A recent study concluded that, “For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate.” Mehta, by contrast, is not only creating value, but doing so for the most vulnerable people. How appropriate that a thinker admired by both mathematicians and philosophers would inspire him.

Image Credit: Augustin Pajou. As described on Wikimedia Commons: “Blaise Pascal (1623–1662) studying the cycloid, engraved on the tablet he is holding in his left hand; the scattered papers at his feet are his Pensées, the open book his Lettres provinciales.”

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Will in Insolvency

In this week’s New Yorker, Nick Paumgarten, in the Talk of the Town, kindly draws on my work  about the cultural contingency of financial reporting; he quotes me on the need to update the idea of insolvency.  Usually defined as the ability to pay debts as they come due, or assets exceeding liabilities, there has always been a strong objective thrust to the notion.  The emphasis is on measured financial activity reduced to a verifiable expression of ability. 

But as Nick notes, equally important is a debtor’s will to pay.  The differences appear in the contrast between the United States and Greece.When  Standard & Poor’s recently lowered its credit rating of the U.S. Treasury by one notch, it registered doubt not so much about the country’s ability to pay its debt, but the will of its incumbant political class to do so. In contrast, Greece’s political elite seem committed to finding ways to meet that country’s debts; alas, its resources compared to its obligations raise real doubt about their ability to do so. 

Another example of the difference between the ability and the will to pay debts arose in the September 2008 tussle over what to do about American International Group. It was then the world’s largest insurance company and shortly before the crisis  boasted a market capitalization of $180 billion. Much of its trillion-dollar balance sheet was securely housed in walled-off insurance subsidiaries.  Read More

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Accounting for Power

Recent revelations in Japan suggest just how important an understanding of accounting may be.

In a post in late March, I related that many Japanese were willing to give the benefit of the doubt to TEPCO, the operator of the damaged Fukushima Dai-Ichi nuclear plant, in the days following the March 11 earthquake and tsunami. The most common excuse in the language, “Shikata ga nai” (“It can’t be helped”), struck most people as apposite, given the historical rarity of 9.0 earthquakes and 15-meter killer waves.

By now, the situation has almost been integrated into the everyday, at least for those of us far from the reactor. People speculate whether the government nuclear agency’s lead spokesperson is wearing a wig, and a cable news channel has a daily segment, “Kyou no genpatsu kiiwaado” – “Today’s nuke reactor keyword”. Any goodwill toward TEPCO has long since evaporated, thanks to its management’s sloth in apologizing, its spokespersons’ frequent misstatements and evasions in daily press conferences, and sympathy for the thousands displaced from the evacuation zone, their livelihoods derailed (and their pets and livestock reluctantly left behind to starve, an aspect of the story that has mobilized many activists here). But it turns out that even the initial goodwill was probably misplaced.
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From “Qui Pro Domina Justitia Sequitur” to “Elite Frauds Go Free”

Should they change the motto at the Department of Justice? John Ashcroft modestly covered a statue of lady justice during his tenure as AG. But a series of reports suggests that, at least when it comes to financial heavyweights, Domina Justitia has left the building.

Consider first Morgenson & Story’s article, “In Financial Crisis, No Prosecutions of Top Figures:”

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

To be sure, the DOJ has talked a good game here, unleashing Operation Broken Trust to catch the small fry. But even in December of last year, Andrew Ross Sorkin was ringing alarm bells:

To hear Eric H. Holder Jr. tell it, the Justice Department is aggressively cracking down on financial fraud. . . . But after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”? Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)

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Finance’s Revolving Door: Perfected or Passe?

Washington’s revolving door is legendary. Everyone knows the connections between lobbyists, members of Congress, staffers, and favored firms. They’ve been mapped in health care, oil, agriculture, and many other industries. Finance journalists chronicle a superclass shuttling from beltway to bourse and back. Yves Smith and Matt Taibbi post on “sleazewatches” and $2,200-a-ticket conferences where the regulated schmooze with the regulators.

But what if the revolving door is the wrong metaphor? What if, instead, there has been a fusion of state and corporate authority in the banking sector? What if Peter Orszag never left the government when he dropped the OMB Directorship to make at least ten times as much as a vice chairman at Citibank? Gabriel Sherman suggests as much when he describes a lucrative cursus honorum for DC elites:

The close alliance among Wall Street and the economics departments of the major universities and the West Wing of the White House is the military-industrial complex of our time. That it has an effect on our governance is beyond question. How pernicious and distorting these effects are, how cynical many of its participants might be, and what might be done to change the system are being fiercely debated in Washington. In fact, to the layperson, the most surprising thing might be the degree to which people like Peter Orszag see the government and Wall Street as, essentially, parts of the same industry.

Conservative Kansas City Fed President Thomas Hoenig has already argued that “big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities.” Texas Republican Randy Neugebauer has called eight banks “TSEs,” or taxpayer-supported entities. And at a recent conference on macroeconomics, Steve Randy Waldman made a legal point fundamental to all the economic dilemmas discussed.
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