Critical Thinking and Persuasive Communication

This week brought a little good news and a little bad news! The good news is that we managed to complete a second full week without a significant incident of web surfing or text messaging in class. But the bad news is that a few students appear to have developed a habit of unexplained absences.

We’ll address this new problem by taking the first of our frequent in-class examinations on Friday. I’ll discuss our plans with you in class on Tuesday, when we’ll meet as a make-up session for our Monday holiday.

We began this past week by speaking to entrepreneur John Bailey about MarketHealth 401k, his financial investments newsletter business. John explained how his nontraditional approach, one that measures the volatility of market data and then makes recommendations that are neither momentum trading strategies nor buy and hold, periodic rebalancing strategies, managed to anticipate the recent market melt down.

We then utilized our framework to explain why he is experiencing low subscriber volume despite following a mass market strategy. This problem, which is caused by his limited marketing resources and lack of mainstream industry credentials, is manageable for the firm because revenue levels are more than sufficient to cover the extremely low cost structure.

For comparative purposes, we then proceeded to utilize the same framework to analyze Walmart’s business policies. We noted how Walmart, in contrast to MarketHealth, possesses a wealth of resources and tremendous credibility regarding low consumer prices. However, these very characteristics pose problems for Walmart by hindering its ability to respond flexibly and effectively to smaller and cheaper rivals.

We noted that Walmart’s iron-clad commitment to rock bottom prices compels the firm to incur large infrastructural costs (and thus relatively high fixed costs) while spanning the globe in search of the lowest possible variable product costs. Because its revenue and variable cost policies result in razor-thin gross margins, Walmart is forced to undertake a perpetual quest to expand its sales volume in order to generate sufficient margins to cover its fixed costs and earn profits.

Such a quest, in today’s global economy, inevitably leads to a China-focused policy. We thus ended the week by reviewing the preliminary sections of our “Walmart in China” risk management plan, noting how the plan narrows its focus on the Chinese market as we approach its core sections. We also assessed certain variations that were imposed on the traditional framework, such as the use of Google search terms to complete the problem identification section, and the integration of the CVP section with the top panel of the COSO cube.

This week, we’ll wrap up our discussion of the Google plan, launch our actual audit exercise of the Leaders on Leadership public speaker series on campus, and begin our critical thinking and persuasive communication module to prepare for John Formica’s visit on February 29. The reading assignments that were originally due on Wednesday and Friday last week should be respectively reviewed again in advance of our sessions on Monday and Wednesday this week.

To prepare for Friday’s session, please complete a more substantive advance assignment, one that covers material that will be tested on that day’s in-class exam. First, please review a document in our Drop Box entitled Style.pdf to identify the elements of persuasive oral communication. Then please watch a video clip from Ronald Reagan’s famous Tear Down This Wall speech, and use the Style document to determine the key element(s) that Reagan emphasized during his address.

Please note that our first exam will occur on Friday, and that Friday’s advance assignment will be included in its scope. In addition, please recall that our first written assignment, regarding your group’s engagement letter for the Leaders on Leadership series, is due to me via email no later than Friday evening at 11:59 pm.

In the meantime … enjoy the holiday weekend!

An Actual Audit Exercise!

Last week, our discussions ranged from Mitt Romney to Martha Stewart, with a trip to virtual reality tossed in along the way!

We began the week with a wrap-up discussion of the Mitt Romney tax return engagement planning scenario. We explored how the three models of our framework interact with each other, addressing (for instance) why an “engagement efficiency” strategy based on email communications may backfire with a client who prefers more traditional methods of interaction. We also briefly reviewed an extension of the CVP model, one that begins with an assessment of the business strategy and concludes with an estimate of investment value. Finally, we discussed how billing rates can be designed with data that quantifies considerations such as staff wages, fringe benefits, overhead costs, and utilization (i.e. productive vs. unproductive) time.

After a brief segue into the primary goals of the elevator pitch communication technique, as well as a brief discussion of personal wealth management concepts such as asset diversification, buy and hold strategies, periodic portfolio rebalancing activities, and momentum trading, we proceeded to explore the technologically advanced communication system of Second Life.

Student representatives from most of our teams utilized their avatars to explore (in virtual form) Yale University’s Elihu paper mill, North Carolina State University’s brewery (which sits next to Ernst & Young’s Times Square headquarters building), and the Imperial College of London’s medical school hospital. We’ll revisit Second Life, later this semester, to explore an inventory audit game involving a virtual flour mill and winery on the campus of Southern Cross University of Lismore, Australia.

Incidentally, Providence College maintains a significant presence within Second Life on the Maryland Association of CPA’s CPA Island 2, as well as a small presence on the Internal Revenue Service’s Career Explorer Island. We’ll be visiting those facilities later this semester as well!

We wrapped up the week by discussing the special practice considerations that occur when uniquely powerful and influential employees like Martha Stewart (of MSO) and Sandy Weill and Jack Grubman (of Citigroup) must be constrained by their own internal controls. We reviewed the Illustrative Risk Related Culture Survey, which appears as Exhibit 2.5 of the COSO text, and discussed how the aggregation and analysis of data can provide client service personnel with helpful tools to broach uncomfortable (and risky) topics with clients.

So what should we expect to experience during the week ahead? We’ll begin on Monday by joining John Bailey of MarketHealth 401k on a conference call. We’ll spend the first ten minutes dialing into the call and introducing ourselves, thirty minutes discussing your group’s questions with him, and ten minutes (after hanging up) chatting about the call. I’ll also make sure to ask John about the concerns we discussed late last week, considering that John is an entrepreneur who manages his own firm.

Next, on Wednesday, we’ll review a professional outline of an Enterprise Risk Management plan involving Walmart’s China division. And on Friday, we’ll utilize all of the information that we plan to discuss this week to launch our Actual Audit Exercise of the Leaders on Leadership speaker series.

To prepare for these learning activities, please complete the following advance assignments and tasks. First, you and your group should have already posted your MarketHealth question on John Bailey’s Facebook page; please keep in mind that I will deduct a “lateness” participation point (i.e 1%) from your course grade for each day beyond the deadline that you fail to do so.

Next, in advance of our class on Monday, please review the material on the MarketHealth 401k web site and Facebook page a second time, as well as the wealth management material that we discussed in class this week, i.e. my CSCPA article and the document in our Drop Box entitled MarketHealth.pdf. In addition, please bring your fully charged mobile telephones to class on Monday.

In advance of our class on Wednesday, please review the document in our Drop Box entitled Walmart.pdf. Please note that I will ask you (i.e. the students) to “walk us through” this document on Wednesday!

And in advance of our class on Friday, please review the document in our Drop Box entitled Leaders.pdf. Our next group assignment will focus on this document; it will be due during the week of Monday, February 20.

It should be an interesting week! I look forward to exploring it with you.

An Important Note About Class Participation

This is not our customary “status update” for the week. That message is posted below.

This is an important note about class participation. As you know, a relatively brief Second Life assignment was originally due last Friday. The due date was then extended to yesterday to accommodate the requests of a number of students.

Eight of the fourteen groups met last night’s deadline. Thank you very much for doing so! I am looking forward to meeting your avatar in class today.

Six of the groups did not meet the deadline. Each of the students in those groups will lose one “participation point” from their course grade (i.e. 1%) for each day that goes by without completing the assignment.

As you know, our syllabus permits me to deduct up to 20% from the course grade for participation and attendance considerations. Regrettably, I need to begin doing so now.

Ethics and the Public Interest

First, please remember that “web surfing, reading, chatting, text messaging, and other activities that divert attention from the course may result in expulsion from the class.” With a curriculum that relies so heavily on interactive classroom discussion, I regret that I simply can’t (and won’t) permit such behavior.

But I digress … let’s review the progress that we made last week! Our goal was to complete our discussion of the three model framework, including problem analysis, planning for success, and planning for failure. We discussed the COSO framework in depth, exploring how the final few steps of the ERM cube define the roles of internal and external auditors within organizations.

We also reviewed the top and side panels of the cube, which describe how the leaders of different organizational functions and levels contribute to the planning process. And we plunged into the COSO text itself, reviewing charting and graphing tools such as heat maps, simple and complex (i.e. “stretchy”) bubble charts, and charts that describe how control and response activities reduce “inherent” risk estimates to “residual” levels that fall within “tolerance limits.”

Finally, we started applying this framework to a hypothetical client case involving Mitt Romney’s famous tax return. We didn’t have enough time to complete our discussion, but we’ll do so “first thing” on Monday. And we’ll continue to practice for our role playing exercise with PwC partner John Formica on February 29th.

After we complete our Romney case, we’ll begin our learning module entitled Ethics and the Public Interest. On Wednesday, we’ll explore the Martha Stewart insider trading scandal. And on Friday, we’ll do the same for the accusations that plagued Citigroup / Salomon Smith Barney trader Jack Grubman (and Citigroup CEO Sandy Weill) regarding the risk of fraudulent manipulation of corporate ratings by Wall Street analysts.

How shall we prepare for another exciting week of policy discussions? As you already know, by tomorrow (i.e. Sunday, February 5th) at 11:59 pm, at least one student from each group must send me (via email) the name of his or her Second Life avatar, along with a (truthful) confirmation that (s)he has downloaded and installed the software and has completed the brief software tutorial.

In advance of Monday’s class session, please read the table of contents and first chapter of a handbook entitled Business Planning and Entrepreneurship: An Accounting Approach. It has been embedded into the publisher’s web page. In addition, please read a 1 page PDF document entitled Elevator Pitch.pdf that has been placed in our Drop Box.

In advance of Wednesday’s class session, please read a brief press release that was issued by the Securities and Exchange Commission entitled SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading. And then, in advance of Friday’s class session, please read a brief two sheet “smoking gun” memorandum from Jack Grubman to Sandy Weill, using the “next” link at the bottom of the first screen to toggle from the first to the second sheet.

In addition, in advance of Friday’s class session, please read the MarketHealth investment newsletter that was published in September 2007, a year before the market crash. In particular, please take note of the section entitled Increased Market Volatility on the second page.

Finally, by Friday evening at 11:59 pm, please skim MarketHealth’s web site and Facebook page, discuss (with your group) the material, and post at least one intelligent question (per group) for John’s consideration on his Facebook Wall. I only have one constraint; if someone else has already posted a question by the time that you reach it, please post a different one!

If neither you nor your group members owns a Facebook account, please send me your question by email. I’ll post it on his Wall for you.

Lots to do … but I promise that it’ll be interesting!

The Three Model Framework

As a preliminary comment, please keep in mind that our syllabus notes that “web surfing, reading, chatting, text messaging, and other activities that divert attention from the course may result in expulsion from the class.” The vast majority of you are meeting those expectations, of course, and I’d like to thank you for doing so.

The goal of the past week was to expand upon the Libby Box model by proceeding to explore the Cost-Value-Revenue (CVR) and Enterprise Risk Management (ERM) models. Whereas the Libby Box model helps us define and measure our problems, challenges, and concerns, the CVR and ERM models help us design and establish systems to address and resolve those problems, both today and in the future. The CVR model is primarily focused on helping us succeed; conversely, the ERM model is primarily focused on helping us avoid failure.

We applied the Libby Box model to a case example involving an Italian restaurant on Federal Hill in Providence, Rhode Island. We also briefly reviewed the CVR model, which was covered in a previous Management Accounting course, and then discussed the four central steps of the ERM model. In particular, we emphasized how human error complicates the event identification process (recall the captain of the Costa Concordia cruise ship), and how preventive internal controls and crisis response activities are designed to address different types of events (recall M&M bags and nuclear fuel rod canisters).

This Monday, we will briefly discuss the stress testing reading assignments that were originally assigned for last week’s sessions, and we will complete our introductory discussion of the COSO cube. We will also discuss the following exhibits that appear in the second half of the required COSO text, the half that begins on sheet 135 of 246 of the PDF file and is called Application Techniques: Exhibit 5.2 on page 34, and Exhibits 5.13 through 5.15 that appear on pages 47 through 49. Please review these materials to prepare for our class session.

On Wednesday, we will begin to prepare for our special session with PwC on February 29th by discussing a tax client scenario involving Mitt Romney’s tax return. Please read a recent newspaper editorial about this issue to prepare for Wednesday’s session.

On Friday, we will begin our discussions of our Second Life learning activity, and of our upcoming conference call with publisher John Bailey. To prepare for our class session, please arrange for one or more students in your group to open a free account with Second Life, to download and install the free software on your computer, and to complete the brief tutorial. Please note that you will need to use a computer that can handle video games with highly sophisticated graphics, and a high-speed internet cable connection. At the very least, an extremely strong wi-fi signal is required, though with Second Life, it’s always better to be physically plugged into the wall.

So much to do, so little time … but we are certainly making progress!

Enterprise Risk Management

It was a pleasure meeting all of you this week! I’m delighted that we’re off to a good start.

The goal of this introductory week was to refresh our memories about the scientific method, and to apply it to a few examples from the history of western civilization. For instance, we discussed the importance of professional skepticism (i.e. “I might be wrong”) in Darwinian evolutionary terms and in contemporary computer “hacking” engagements.

Next week, we will extend our knowledge of professional skepticism to the task of critical thinking and the discipline of Enterprise Risk Management. For Monday’s session, please read a blog entry about Libby Boxes that was published by the Financial Accounting Standards Research Initiative, and consider how the five boxes could be used to describe Darwin’s studies of sea turtles and finches. Then please read another blog entry about the FBI’s cybersecurity efforts, and consider how it reflects our previous conversation about PC’s Cyberfriar and Angel systems.

On Wednesday, our conversation will become a bit more sophisticated! To prepare for our session, please read a pair of articles about stress testing, one regarding medical tests and another regarding banking institution tests. Consider how we might utilize the Libby Box framework to develop models for such tests.

And then, on Friday, we will (finally) plunge into the field of Enterprise Risk Management. To prepare for our conversation, please read the free executive summary of the ERM Integrated Framework. Please focus, in particular, on the four central steps of the famous COSO Cube: Event Identification, Risk Assessment, Risk Response, and Control Activities.

Finally, I have a pair of minor tasks to assign to you! By Tuesday evening at 11:59 pm, if you wish to create your own team of four or five students, please let me know (via email) the members of your team. And by Thursday evening at 11:59 pm, please obtain a copy of the required text that is described in our syllabus.

Whew … that looks like a lot of work! So please don’t forget my comments about “reading vs. skimming” …

Introduction To The Course

Welcome to our course blog! I am looking forward to collaborating with you this semester.

This week, we will review our syllabus and blog materials on Wednesday, and will define our expectations on Friday. There is no advance reading assignment for Wednesday, but for Friday, please read the following article:

Learning to Design and Teach an Accounting Capstone. Jervis, Kathryn J; Hartley, Carol A. Issues in Accounting Education; Nov 2005; 20, 4; ABI/INFORM Global pg. 311.

The article will be posted in our blog’s “drop box” this week. It is also available via several electronic publication services that are accessible in our PC library.