Financial Reporting


Banks’ Financial Reporting and Financial System Stability by Prof. Viral Acharya

Vacharya_photoThe use of accounting measures and disclosures in bank contracts and in regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and non-market mechanisms in limiting bank debt and risk overhang in good economic times, as well as mitigating the consequences of risk overhang that could compromise the stability of the financial system in downturns. Professors Viral Acharya and Stephen Ryan examine how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system.

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Lower Earnings, Higher Stock Prices: The Voting Machine

 “The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers.”- Graham and Dodd, Security Analysis

Earnings drive stock prices, so says investing lore. As earnings rise, stock prices move higher. As earnings fall, stock prices move lower. If it were only that simple.

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October Auction to Feature Rare 1792 US Federal Bond

The most highly prized stock and bond certificates signed by important people usually have a backstory, and the 1792 US Federal bond signed by George Washington, scheduled for auction on October 19th at the Museum of American Finance, is no exception.

In order to establish the national credit, and also to liquefy and reorganize the outstanding debt after the Revolutionary War, US Treasury Secretary Alexander Hamilton proposed the Plan of Assumption, to exchange all state debt for new US Treasury bonds, reflecting the struggle for independence as national, rather than local. All state debt instruments were to be exchanged at face value, and the numerous state obligations would receive one of only six new Treasury issues. This made the marketplace far more efficient as investor interest could be focused on only six issues. This bold plan was highly controversial, and resulted in a stalemate in Congress, resolved months later through a political agreement on a new location for the capital of the nation on the Potomac, in what was to become Washington, DC.


The face of the 1792 George Washington Bond

The plan was extremely successful, and formalized the national debt, which was held by a broad cross section of the population, and in a few years this debt became one of the highest credits in the world. The new Treasury bonds were among the first securities traded on the New York Stock Exchange, another institution Hamilton encouraged. The Plan of Assumption was one of the crucial elements of Hamilton’s advanced financial infrastructure which created the environment for the rapid growth of the 19th century. This exceedingly rare bond is one of the most important objects in American financial history, and the first example of this instrument to be offered in public auction; serious interest is expected.

One of the first US Treasury bonds is dated January 17, 1792 (size 17 ¾”x 5 ½,”  Anderson US-195). The bond's seemingly odd denomination, $123.99, resulted from the exchange  formula used when Washington’s non-performing Virginia state bonds were  surrendered for US Treasury bonds.Exceedingly rare and part of the Copps Collection, only two others like it are known - one exhibited in the Museum of American Finance, and another at George Washington University Library.


The reverse of the 1792 US Bond signed by George Washington.

Washington later sold this bond, and in the note on the verso asked that the proceeds be kept in his account at the Treasury, and then signed his name. Leaving his funds in the US Treasury was a very patriotic choice, as the government was in crisis mode dealing with the Whiskey Rebellion in western Pennsylvania.

The auction Saturday October 19 at 10:30 am is part of the annual Wall Street Coin, Currency and Collectibles Show, taking place at the Museum of American Finance, 44 Wall Street, New York City, October 17 – 19, 2013.  Museum admission is free for the Bourse weekend.

Show info: and 203-292-6819.
Auction Info: and 201-944-4800

–John E. Herzog is organizer of the Wall Street Coin, Currency and Collectibles Show and also founder of the Museum of American Finance and now its chairman emeritus. He has spent his life in the financial services industry. As a collector he has specialized in the financial instruments of the American Federal period, which made the creation of the United States possible. The Museum holds a major portion of his collection, and uses it in exhibits.


Three Questions with Gregg L. Nelson

With the Securities and Exchange Commission’s (SEC) decision on the possible incorporation of International Financial Reporting Standards (IFRS) into the US system still outstanding, many are wondering about the implications for their work and organizations.

Gregg L. Nelson, vice president of accounting policy and financial reporting for IBM Corporation, shares his thoughts on this important matter. He also explains how accounting and finance professionals might benefit from attending the 18th Annual NYSSA International Financial Reporting Conference & Workshops from Jan. 8-10, 2013 in New York City.

Gregg is one of a number of prestigious speakers who will be sharing their expertise at this important conference, which is presented by IASeminars and the New York Society of Security Analysts (NYSSA). Other conference speakers include senior representatives from the International Accounting Standards Board (IASB), Financial Accounting Standards Board (FASB), SEC, Public Company Accounting Oversight Board (PCAOB), etc.

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Presenting Your Investment Research: Six Elements of an Expert Presentation

We have covered writing your research report, but what about presenting it orally to an audience? No matter what the occasion, successful analysts know how to persuade a room full of clients and/or colleagues that the insights in the written report are a must-read. Here are the elements of an expert presentation:

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The Leadership Issue: Investment Reports Must Ask 'Who's in Charge Here?'

When you are researching a company, be sure to tackle the leadership issue. Your clients will see true added value in your recommendations if you go beyond a company's bottom-line numbers and carefully look at the powerful but intangible factors that can make or break a company.

Say you are researching a company that is "white hot" right now, for example. If the person at the helm is clueless when it comes to leadership skills, the company will not be around for long.

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No-Nonsense Investment Reports that Keep Your Clients Coming Back

These days, more than ever, your clients demand investment research reports that provide balanced, hard-hitting analyses of the facts.

Meanwhile, you want to give your clients valuable information that will keep them coming back—and help your career by differentiating you as an insightful analyst.

Here are five strategies to help you exceed your clients' expectations.

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If You Want to Work As a Trader, It’s a Lot Less Clear Than It Used to Be That You Should Be Working at Goldman Sachs


It used to be clear that Goldman was the place to be if you’re a trader.

Now it’s not.

Goldman’s traders continued to make some of the biggest money in the third quarter. However, they also made losses on more days than rivals.

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2011 Brings Financial Statement Changes

Although the US Securities and Exchange Commission has yet to make up its mind on whether the US will abandon US Generally Accepted Accounting Principles (GAAP) in favor of the International Financial Reporting Standards (IFRS), that doesn’t mean financial statement accounting is standing still. Rule changes and clarifications by various US based accounting standards boards affect a number of areas in US financial statements.

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2010—The Year of the Integrated Report

Corporations are clearly increasing the quantity and quality of their environmental, social, and governance reporting in response to investor pressure and a growing awareness of the consequences of a failure to manage the associated risks. But few have taken the next step—to formally integrate their financial and ESG reporting. However, 2010 may be remembered as the year the integrated reporting movement truly began to gather steam.

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Solutions for Hedge Fund Managers Considering the GIPS Standards

Although the GIPS standards do not address the particular challenges of hedge funds, claiming compliance is possible and increasingly important for hedge funds. Creation of a client presentation, the process and frequency of portfolio valuation, and net performance stream calculation methodology are some of the issues hedge funds tackle in claiming compliance.

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Target-Date Funds: Not a Set-It-And-Forget-It Option

Since its inception, the 401(k) retirement plan has presented plan sponsors and participants with a significant challenge, requiring both groups to act as financial planners and portfolio managers for retirement investments. Participants are expected to forecast their retirement income needs, arrive at an appropriate asset allocation, and choose among contribution and investment options accordingly. Plan sponsors must create the universe of options from which participants choose and provide advice to participants, but only to the extent that such advice does not give rise to fiduciary responsibility under ERISA (Employee Retirement Income Security Act of 1974). This system has allowed a large number of plan participants to remain uninformed with respect to a very complex set of retirement plan decisions.

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Financial Reporting Issues Crowd Agenda

To say that vital financial reporting issues are clamoring for attention is a major understatement. Not only are huge accounting convergence projects underway with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), but controversies surrounding such issues as bank window dressing and underfunding of public pension are also hitting the business pages.

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Book Review: Overhaul

Overhaul by Steven RattnerWhen Steven Rattner led Team Auto—the taskforce charged with saving General Motors and Chrysler—he brought to the table his restructuring and private equity experience from his prior jobs as deputy chair at Lazard Freres and managing principal of Quadrangle Group. But, more importantly for the readers of his book, Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto IndustryRattner has also retained the writing skills from his early days as a New York Times journalist. The result is a graphic account, almost hour-by-hour record of the largest industrial restructuring ever. This book can serve as a lesson for financial professionals interested in this type of financing, and a cautionary tale about the ever-increasing role of government.

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CFA Prep Podcast: IFRS Dominates CFA Curriculum

CFA Exam Prep PodcastIn this clip from the CFA Level I Sample Class, instructor Andrew Spieler addresses how the financial reporting transition from US GAAP to IFRS will have a large effect on the CFA Level 1, Level 2, and Level 3 exams. “IFRS is now the dominate part of the CFA curriculum,” Spieler notes. CFA students will need to be prepared in order to manage this transition in the exam.

CFA Podcast: IFRS Dominate CFA Curriculum


Poll: The Goldman Sachs Ruling

On April 16 the SEC filed charges against Goldman Sachs for defrauding investors in a mortgage-backed collateralized debt obligation. The SEC alleged that Goldman Sachs omitted and misstated crucial facts about the CDO, most importantly the role of the hedge fund firm, Paulson & Co.’s direct involvement in the selection of the portfolio and bet against the deal. Three months of uncertainty over the case ended last week when Goldman Sachs agreed to make a $550 million settlement with U.S. regulators. While some watchdogs are disappointed that the settlement is much lower than the estimated $1 billion, others believe that $550 million is enough to stir a change and influence other institutions to employ better business practices. Tell us what you think. 


Commentary: Shareholder Activism in a Post-Lehman World

As the global economy gradually recovers from the impact of the worst global financial crisis since the 1930s, companies continue to lay off thousands of employees and financial institutions are expected to write down trillions of dollars of toxic assets. In addition, governments have spent or committed to spend exponential sums of money in order to stabilize their economies. Investors have been particularly affected by the consequences of the financial crisis, having suffered a significant reduction in the value of their investments in a number of companies. According to the World Federation of Exchanges, as of February 2009, the global equity market capitalization was estimated to have reduced by $31 trillion since the peak prior to the crisis.

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Hive Mind: Organizational Psychology and the Financial Crisis

Illustration by Mark AndresenEconomists agree about the mechanism for the current financial crisis: a plunge in real estate prices led to widespread mortgage defaults, crushing the value of securities backed by those assets. This caused banks to shut down available credit and sent the global economy into a tailspin. “If there hadn’t been a housing bubble, we wouldn’t be having this tragedy today,” says Hersh Shefrin, PhD, professor of behavioral finance at Santa Clara University and the author of Ending the Management Illusion: How to Drive Business Results Using the Principles of Behavioral Finance (McGraw–Hill 2008).

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Whither Efficient Markets? Efficient Market Theory and Behavioral Finance

The notion of efficient markets has been the subject of rigorous academic research and intense debate for more than a century. As early as 1889, George Rutledge Gibson wrote in The Stock Exchanges of London, Paris, and New York that when “shares become publicly known in an open market, the value which they acquire may be regarded as the judgment of the best intelligence concerning them.” A reference to the concept of efficient markets is also found in French mathematician Louis Bachelier’s 1900 dissertation Théorie de la Spéculation. But it wasn’t until the mid 1960s, through the independent work of MIT economist Paul A. Samuelson and Eugene Fama, then a PhD candidate at the University of Chicago, that the efficient markets hypothesis (EMH) gained widespread acceptance.

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The Hierarchy of Risk: A New Approach to Risk Management

Risk culture is comprised of those values and behaviors, on the parts of both management and employees, which define an organization’s awareness of and approach to risk. As the financial crisis continues, the most successful firms have been those possessing risk cultures with high awareness, quick escalation, and strategic flexibility. There are echoes of behavioral finance in the way an organization’s view of risk may be skewed by its current investment appetite, its compensation and incentives, and its degree of knowledge of historical risk. Complicating this risk culture is quantitative modeling of limited historical data, decreasing transparency due to financial product innovation, and overreliance on credit ratings.

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Investing in Troubled Times

Illustration by Mark AndresenIn these troubled times, with investors unsure of when or where to place their funds for maximum benefit, one investment tenet should be clear: bet on entrepreneurs. Our research of 27,000 publicly traded global companies, employing more than 12 years worth of data, demonstrates that entrepreneurial companies consistently outperform peer nonentrepreneurial companies by a wide margin. With very few exceptions these results remain true even after adjusting for year, market cap size, region, and sector. And, following the tumultuous market collapse in 2008–2009, it appears that entrepreneurial companies are now poised to perform better than ever.

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Current Major Differences Between IFRS and US GAAP

At last year's meeting in Pittsburgh, Pennsylvania, representatives of the G-20 renewed their commitment to complete convergence in accounting standards by June 2011—less than two years away. While the group did not explicitly propose worldwide adoption of IFRS (International Financial Reporting Standards), that is the implication, because it hardly seems likely that the rest of the world will drop IFRS in favor of GAAP (US Generally Accepted Accounting Principles). The following table offers a side-by-side comparison of the two standards. 

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SEC in a Quandry over Its Push for IFRS

Illustration by Mark Andresen The seemingly unstoppable juggernaut of US IFRS (International Financial Reporting Standards) adoption has collided with the global financial crisis, one of the few barriers that may be capable of derailing the rush to a single international accounting standard. Adoption of IFRS in the US is now far from a given, and even the roadmap published by the US SEC (Securities and Exchange Commission) in November 2008 has the potential to be sidetracked or possibly abandoned now that President Obama’s administration has taken office.

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The Unfair Attack on Fair-Value Accounting

Illustration by Mark Andresen The blame game for the financial crisis has no limits. In an effort to divert attention from their own culpability, bankers who took risks they did not understand and politicians who encouraged mortgage lending to people with shaky credit have pointed the finger at the accountants. Banks faced with severe losses on their structured debt portfolios and other securities pressed regulators to suspend accounting policies that oblige the banks to record these holdings at fair value, which usually means the current market price.

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The G-20 Agenda for Regulatory Reform

Meeting behind impressive security barricades in a revitalized Pittsburgh, Pennsylvania, representatives of the G-20 (Group of 20) nations announced agreements in principal on a number of fronts, including financial services regulation, stimulus efforts, global trade, reallocation of IMF (International Monetary Fund) shares, and rebalancing national economies. The group affirmed its new standing as the global economic forum of record, formally eclipsing the G-7 (Group of 7) and the G-8 (Group of 8).

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Mending the Seams: International Regulatory Reform

Illustration by Mark AndresenAs the global economy begins to find its way back from the brink following the financial crisis, the impetus is shifting from the day-to-day efforts to keep the system afloat to the long-term fixes that are needed to maintain and increase its stability and flexibility. All eyes are on the national governments and regulators who continue to shape a structure that either will be up to the task of managing an increasingly globalized economy or will fall short of the mark, resulting in the lack of a sustainable recovery, further crises, or both.

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