For over 30 years, the Educational Foundation for Women in Accounting (EFWA) has been helping women move into, and ahead in, the accounting profession. The Journal spoke with foundation president Genevieve Gallagher, CPA, about the foundations general goals and its most recent developments.

The EFWA just announced funding for a second Woman-in-Transitionformerly known as a Displaced HomemakerScholarship. Said Gallagher, This is for a woman striving to improve her situation who would like to enter the profession but cant afford to. It provides $4,000 a year for four years. The EFWA also offers Laurels Scholarships, from $1,250 to $5,000 a year, primarily for women CPAs pursuing advanced degrees and careers in teaching. These can be used as research grants to help women complete projects that lead to tenure, said Gallagher.

Numerology for Accountants

Do financial statements universally favor some numbers over others? The idea seems to defy logic. In a random string of numbers pulled from a companys books, each digit, 19, would seem to have one chance in nine of starting a given number. But according to a 60-year-old formula making its way into the accounting field, some numbers really are more popular than others. A disruption in the pattern may reveal an inefficient process, an honest mistake or outright fraud. Benfords Law is the newest tool in the auditors arsenal.

Sixty years ago, Frank Benford, a physicist at General Electric, examined disparate sets of data, such as baseball statistics, street numbers of people in listed biographical dictionaries and electricity bills, and concluded some numbers crop up more than others. His law, which is borne out by examination of census data and Dow Jones averages, for example, says that the chance that the first digit of a number in a set of data will be 1 is 30.1%, nearly one in three, not one in nine. Each digit, whether it appears in Dow Jones averages or is pulled from the front page of the New York Times , has a different probability of showing up.

Mark J. Nigrini, PhD, started his career as a chartered accountant in South Africa, but, for the last decade, he has been working as a professorcurrently on the faculty of the Cox School of Business at Southern Methodist Universityresearching number patterns and applying them to real-world situations. Benfords Law gives us the expected patterns of the digits in a list of numbers, he told the Journal . These patterns should appear in accounts-payable invoices and accounts-receivable numbers, for example. When patterns vary from those set down by Benford, there may be a problem. Variations may reveal employees are listing expenses as $24 to avoid a $25 voucher limit. Or consider a manager who has a $3,000 signing authority. Benfords Law tells me that, say, only .6% of all numbers should start with 29. If I get more than that, maybe a manager is approving too many $2,900 invoices, right under his limit. Sometimes, said Nigrini, patterns change because of an error. Invoices entered more than once will change the frequencies.

Benfords Law may also catch fraud, thanks to psychology, said Nigrini. People just dont think Benford-like. If someone is cutting a $400 check every week for nonexistent janitorial services, those checks will skew the digit distribution. A thorough application of the law will find the fraud.

The big time
Benfords Law is no longer a mathematical curiosity. At least one firm, Ernst & Young LLP, is already applying it. Were using advanced analytical tools, such as the application of Benfords Law, more and more, said James Searing, a partner and the firms director of strategic service development. The future of audits is already here. Theres more focus on total business risk, leading to greater use of information technology to detect anomalies, exceptions and errors of misstatement. E&Y has developed proprietary software that applies Benfords Law to a clients data. The more we use such analytical tools, the more we find. In actual engagements, E&Y has turned up the same problems Nigrini discussed: When spikesdigit frequencies that violate Benfords Lawinvolve numbers corresponding to dollar amounts just under a particular managers maximum signing authority, Searing suspects trouble. Maybe managers are breaking down one project into several pieces to circumvent a higher level of oversight for some reason. Clients want to know when employees are going around their control systems.

At other times we see spikes at $15 or $25, said Searing. Even though these are low-dollar items, that might mean a client is writing a separate check for each express-mail delivery. That is a very expensive way to process invoices and write checks. By advising the client to arrange for monthly billing for express mail, E&Y can make the audit a value-added service.

Searing made a medical comparison: X-rays give doctors another way of looking at the body, and this analytical tool gives us another way of looking at a company. Neither doctor nor CPA can abandon professional judgment and rely entirely on these tools. In fact, E&Y does not universally apply Benfords Law, nor does U.S. GAAS address it. Nevertheless, Searing said, In the long term, advanced analytical tools, such as the application of Benfords Law, will be part of the audit. They may very well help us to reduce the overall risk of auditing, increase the reliability of the audit opinion and increase value to the client.

As partners in some firms are considering a union with
American Express or a similar companymerging accounting and
financial servicespartners in other firms are taking another road:
adding investor services themselves. A survey of 100 partners in small to
midsize firms compares the two trends: selling or starting a new niche.

Source: Advisors Capital Investments, Inc., Woodstock, Connecticut.

Short takes, notes and items of interest

Wellington Fund Founder Dies

Walter L. Morgan, a CPA who created one of the oldest mutual funds still in existence, died a month after his 100th birthday. Morgan spent his entire adult life in the financial community, becoming the youngest CPA in Pennsylvania shortly after his graduation from Princeton in 1920. Early in his career, he prepared tax returns for high-income individuals and expanded his practice to include investment advice. Before the crash of 1929, Morgan raised $100,000 from relatives and businesspeople in his home state of Pennsylvania and put together what he felt would be a stable financial portfolio, called the Industrial and Power Securities Co. In 1935 he renamed it the Wellington Fund after the Duke of Wellington, the British general who defeated Napoleon. Today, the fund has $23 billion in assets.

In 1951, Morgan hired John C. Bogle, who became his heir at the company and is now a member of the Independence Standards Board. Bogle founded the Vanguard Group of mutual funds, which includes the Wellington Fund. Morgan maintained offices at Vanguard even after his 1970 retirement and went to work twice a week until 1997.

In a recent interview, Morgan reflected on his first job in public accounting at a salary of $28 a week. When I asked for a raise, my boss told me he wasnt particularly smitten with my work. Seventy years ago, he realized there was a career path other than partnership.

Finding, hiring and retaining quality staff topped the list of practice management concerns in a recent poll conducted by the AICPA management of an accounting practice (MAP) committee. It was the third year in a row that firm managers ranked staffing as their number one problem.

We have competition within the profession, and we have competition with other financial service providers, said Leslie A. Murphy, partner in charge of litigation support and business valuation services at Plante & Moran, LLP, in Detroit, Michigan, and a member of the MAP committee.

The combination of competition and accelerated hiring needs creates pressure on firms that will only become more acute in the future, she said.

Although the FASB exposed its proposed mortgage amendment for only 45 days, it still received a number of helpful suggestions from the accounting community, some of which were incorporated in the recently released final document. FASB Statement no. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, amends Statement no. 65, Accounting for Certain Mortgage Banking Activities, issued in 1982.

According to Kevin Stoklosa, an assistant project manager at the FASB, the board made three major changes to the ED. The proposed statement broke out retained securities between those held for salewhich would be required to be put in tradingand those not held for salewhich would have the option of being classified as trading, available for sale or held to maturity in accordance with Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities . The board believed any retained security that the company intended to sell should go into trading.

However, comment letters, including one from the Mortgage Bankers Association, criticized this division, pointing out it did not exist in other types of securitizations. The FASB dropped this provision after it was pointed out that Statement no. 115 can be interpreted to say an entity cant even classify something as available for sale if there is a specified period of time in which to sell it. But the main reason for the change, according to Stoklosa, was that the board agreed with respondents that the accounting for securities retained after the securitization of mortgage loans should be the same as the accounting for securities retained after the securitization of other types of assets. Said Stoklosa, Now, a mortgage banking enterprise can go right to Statement no. 115 to make a classification, choosing trading, available for sale or held to maturity. The only requirement the new statement adds is that if you have a sales commitment in place you must put it into trading. Thus, Statement no. 134 accounting is more consistent with other guidance.

The change also affected retained nonsecurity interests. To be consistent, the board eliminated the trading requirement for retained nonsecurity interests that are held for sale. The portions of Statement no. 65 relating to nonsecurity interests remain unamended. The board believed it would have been inconsistent to require a trading classification for retained nonsecurity interests intended to be sold if it no longer required one for retained security interests intended to be sold.

The final change was in the transition: The ED said the guidance would be effective on issuance, but some small mortgage companies said it would be hard to make the change so quickly. The final statement is effective for the first fiscal quarter beginning after December 15, 1998, with earlier application permitted.

To order Statement no. 134, call the FASB at 203-847-0700, ext. 555.

The Accounting Hall of Fame has named Arthur R. Wyatt its 61st member. Wyatt spent the early part of his career teaching at the University of Illinois, where he received his PhD in 1953. He became a full professor and wrote books and articles, including a study of accounting for business combinations now considered a classic. He entered public accounting in 1966 at Arthur Andersen, where he rose to partnership in 1968, eventually becoming head of the firms accounting principles group.

The AICPA appointed him to AcSEC in 1973 and he was the committees chairman from 1977 to 1979. He served on the Institutes board from 1980 to 1984. A year later he became a member of FASB. Turning his attention to international standards, he represented the United States at the IASC and was its chairman from 1990 to 1993. After his 1992 retirement from Andersen, he returned to teaching at the University of Illinois.

Daniel L. Jensen, Deloitte & Touche Professor of Accounting at Ohio State Universitys Fisher College of Business, who is the Accounting Hall of Fame committee chairman, made introductory remarks at Wyatts induction: A man of principle and conviction, known for his independence and clear thinking, he helped shape the accounting profession in both national and international spheres through distinguished careers in both academe and accounting practice.

Most people wouldnt think the life story of a CPA would make for interesting reading. Then again, most people might just be wrong.

Harvey S. Winebergs Thanks for Your Trust: Memories of an Untamed Accountant (Bonus Books, Inc., $24.95) gives readers an engaging, behind-the-scenes peek at the exploits of a CPA to the rich and famous.

I thought it was time that the public got a different perception of public accountants, Wineberg said recently in an interview. I was lucky that there were a few famous people I could talk about. Some of the celebrities who add spice to Winebergs narrative include Chicago sports personalities Bobby Hull, Leo Durocher and Jerry Reinsdorf; jazz star Ramsey Lewis; and former Illinois senator Paul Simon. In this autobiographical account, Wineberg traces his career from his salad days at the University of Wisconsin to his current position as president of the Chicago-based CPA firm of Wineberg & Lewis PC. Throughout the book, which was released last summer, readers get an insiders perspective on how Wineberg developed his practice by cultivating relationships with key clients and by maintaining a diligent work ethic.

Case in point is Winebergs step-by-step account of his wheeling and dealing on the contract he negotiated for hockey great Bobby Hull. The deal landed Wineberg in the headlines of the July 5, 1972, Chicago Daily News: Accountant Wineberg helped the Golden Jet (Hull) to work out worlds biggest sports contract.

Wineberg also shares with readers the business strategies and philosophies that he has distilled from more than 40 years in public practice.

There is no other field in accounting like public practice. It gives you your freedom and independence, said Wineberg. Even if you are part of a firm, you are kind of working for yourself. And if you are with the right people, youre part of everything.