T he perennial debate at the AICPA over "plain paper"—indeed, over the definition of plain paper and the nature of compilations—continues to flourish, but for the time being there are no new regulations or even exposure drafts. Nevertheless, the world is not standing still. Florida submitted—with as much grace as possible—to court decisions that radically changed the nature of the profession. In fact, the Sunshine State skipped ahead of the AICPA and recently created a fourth level of reporting applicable to both CPAs in traditional firms and those working in new types of entities, such as American Express. What changes appear in Florida's regulations? And what more might the new players in this game ask for? The Journal presents a report at "half-time."

  Assembled statements and airborne swine

In mid-1998, after multiple trips to court, the state of Florida found itself having to cope with licensed CPAs working in unlicensed entities (see "We've Seen the Future, and It's Florida," JofA, Sept.98, page 13). Back in 1996, however, Lloyd "Buddy" Turman, executive director of the Florida Institute of CPAs (FICPA), had said that all these changes had about as much chance of happening as pigs learning to fly. In a November 1998 statement, he had to backpedal: "As you periodically scan the skies, remember it's not a bird, it's not a plane—it's a pig flying in Florida!" So what are the changes? For one, the Florida State Board of Accountancy created a fourth level of service—the assembled statement—that has standards but provides no assurance. The board allows both CPAs in alternative structures and those in traditional firms to perform assembled statement engagements. In Turman's words, "'Assembled financial statements' provide for the output of manual or automated bookkeeping or data processing services in the form of financial statements." "Assembly" includes preparation of a working trial balance, assisting in adjusting the books of account and consulting on accounting matters. The issuing entity must print the transmittal letter on its letterhead. The FICPA has posted an explanatory article by Turman as well as the text of the regulatory changes online at www.ficpa.org .

"Are the new definition and creation of 'assembled financial statements' the perfect world scenario?" asked Turman. "Absolutely not!" However, he said it was the best solution, given court orders. Turman did tell the Journal in the September article, "I think every state that finds itself in the same position as Florida will be forced to adopt our model."

So is it a done deal?

In spite of what has already occurred, all is not settled for the AICPA, NASBA or even Florida. Much depends on what happens with the Uniform Accountancy Act. The UAA is a model for states to adopt, and it could change the public accounting statutes of most states (parts of the UAA will be introduced in many state legislatures this year). The CPA profession has an interest in the extent to which it is adopted; so does a group calling itself the Coalition for Affordable Accounting (CAA), which includes such well-known consolidators as H&R Block, American Express and Century Business Services. The Journal spoke with George R. Young II, CPA, PhD, an assistant professor of accounting at Florida Atlantic University, who, although not affiliated with the CAA, has studied its members' positions and how they may affect crucial definitions and regulations.

"Basically, the CAA says compilations should not be classified as an attest service," said Young, who practiced public accounting for nine years before becoming a professor. In fact, Young said that compilation services do not fit the conceptual definition of attestation services provided by the Auditing Standards Board. "When I teach auditing, I point out that the compilation report states that no form of assurance is expressed on compiled financial statements," he said. "The framers of the UAA and many states, however, believe there exists an 'aura of assurance' conveyed by the compilation language (particularly the indication that the compilation was prepared in accordance with SSARS) and the implicit representation of skill necessary to perform this service. This implicit assurance is the reason many states consider compilations an attestation service."

The classification of compilations as an attestation service allows certain states (and other states that adopt this provision of the UAA) to restrict their use to licensed audit firms. Is there an option for nonlicensees? Young said, "Safe-harbor language is offered by states that restrict the use of the standard compilation report language. UAA section 14-3 also contains safe-harbor language that allows nonlicensed practitioners to refer to the financial statements they prepared as a 'presentation.'" But he pointed out that the word "presentation" is not familiar to users of unaudited financial statements. Bankers, for example, are aware of the standards that must be met when a compilation is prepared but have no idea what a "presentation" entails (unlike assembled financial statements, there are no standards for the preparation of a "presentation").

"Furthermore, the safe-harbor language of the UAA is not available to CPAs according to SSARS no. 1—they are required to use the compilation report language. So it can be a vicious cycle: A Florida CPA who issues an assembled financial statement violates AICPA rules." That CPA may end up having to offer the more expensive compilation report.

Feared or admired, American Express and similar companies have been successful both in marketing their consolidation services and winning in the courts. In the fall of 1998, right after American Express won its final court case in Florida, a company spokesperson told the Journal simply, "We asked for several things, and we're happy with what the state agreed to." The activities of the CAA, however, suggest that the consolidators want still more. Apparently, American Express is not as happy as it could be.

Great Britain and Ireland embrace WebTrust; other countries consider it

Assurance Service Goes Global
Great Britain is getting a lesson in Web assurance from its former colonies. The AICPA and the Canadian Institute of Chartered Accountants (CICA) have reached an agreement with the Institute of Chartered Accountants of England and Wales to offer WebTrust to its members. Also joining the WebTrust family are the Institute of Chartered Accountants of Scotland and the Institute of Chartered Accountants in Ireland. The AICPA and CICA have had discussions with accounting bodies in Australia, New Zealand, the Netherlands, France, Belgium, Germany, Japan and Malaysia.

COSO's New Fraud Study: What It Means for CPAs

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has just published a follow-up study to its landmark 1987 report . Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies , examines financial reporting fraud cases the SEC has brought against U.S. public companies. Here, the authors of the study share some key findings and add their recommendations.

COSO commissioned this study to help in its efforts to combat financial statement fraud and find the answers to these questions: Who is committing fraud? What is the nature? The study examined instances of alleged fraudulent financial reporting by SEC registrants reported in SEC Accounting and Auditing Enforcement Releases (AAERs) in the 11-year period from 1987-1997. The study identified approximately 300 total frauds and specifically covers 200 randomly selected companies involved in financial statement fraud. The study identifies key company and management characteristics that could help auditors identify the warning signs.

Exhibit 1: Common Financial Statement Fraud Techniques

Who's committing the fraud?

Companies committing financial statement fraud were relatively small. The typical company had well below $100 million in total assets in the year preceding the fraud. Most companies—78% in fact—were not listed on the New York or American Stock Exchanges. And as might be expected, some companies committing fraud were experiencing net losses or were barely breaking even in the periods before the fraud. The median net income was only $175,000 in the year before the fraud—financial pressures may have provided incentives for the fraudulent activities of some companies.

Senior executives were frequently involved. In 72% of the cases, the AAERs named the CEO; in 43% they named the CFO. As for audit committees, most met about once a year—and 25% of the companies didn't have audit committees at all. Of those that did, more than half the audit committee members (65%) did not appear to be certified in accounting or have current or prior work experience in key accounting or finance positions.

The boards of directors in companies with the alleged fraudulent reporting were generally insiders and "gray" directors (outsiders with special ties to the company or management), with significant equity ownership and apparently little experience serving as directors. Collectively, the directors and officers owned nearly 33% of the companies' stock, with the CEO/president personally owning about 17%. In nearly 40% of the boards, no director had served as an outside or gray director on another company's board.

In nearly 40% of the companies, the proxy provided evidence of family relationships among the directors or officers. The founder and current CEO were the same person or the original CEO was still in place in nearly half of the companies. In more than 20% of the companies, there was evidence that officers held incompatible job functions, for example, acting as both CEO and CFO.

External auditors were also involved. In the 195 fraud cases where AAERs explicitly named individuals, auditors were named in 56 (29%)—either for alleged involvement in the fraud (30 cases) or for negligent auditing (26 cases). And problematic companies jumped around: More than 25% of the companies changed auditors from the last clean financial statement period to the last fraudulent financial statement period.

What kind of frauds?

Overall, the frauds were relatively large in amount when compared with the small size of the companies involved: The median amount of financial statement misstatement or misappropriation of assets was $4.1 million although the median amount of total company assets was only $16 million. The frauds were not one-shot deals, either: Most frauds overlapped at least two fiscal periods, frequently involving both quarterly and annual financial statements. The average fraud period extended over 23.7 months.

Typical financial statement fraud techniques involved the overstatement of revenues and assets (see exhibit 1 ). More than half the frauds involved overstating revenues by recording revenues prematurely or fictitiously. Many of the revenue frauds affected only transactions recorded right at the end of a period (see exhibit 2 ). About half the frauds also involved overstating assets by understating allowances for receivables, overstating the value of inventory, property, plant and equipment and other tangible assets, and recording assets that did not exist (see exhibit 3).

Implications for CPAs

The report gives some concrete advice on what auditors can do to combat fraud.

• The relatively small size of companies' committing fraud suggests that they may be unable or even unwilling to implement cost-effective internal controls. Auditors need to challenge management to ensure that a baseline level of internal control is present.

• Given that some of the companies experienced financial strain in periods preceding the fraud, auditors need to monitor an organization's going-concern status, especially with new clients. (In fact, consideration of going concern is now required on all audits.)

• Auditors should be aware of the possible complications arising from family relationships and from individuals holding significant power or incompatible job functions.

• Because frauds so often run over many reporting periods, auditors may need to consider interim reviews of quarterly financial statements as well as the possible benefits of continuous auditing strategies.

• Auditors may need to consider and test internal controls related to transaction cutoff and asset valuation. They should design testing procedures to reduce audit risk to an acceptable level. Procedures affecting transaction cut-off, transaction terms and account valuation for end-of-period accounts and transactions may be particularly pertinent.

• Auditors need to understand risks unique to the client's industry and management's motivation towards aggressive reporting—particularly the tone at the top and client internal control. An appropriate level of professional skepticism is a requirement for each engagement.

• Companies with weak boards and audit committees present an audit challenge. Auditors should assess the substance and quality of client boards and be alert for boards dominated by insiders and others with strong ties to management or the company. Auditors also should be wary of audit committees that rarely meet or that are composed primarily of nonfinancial experts.

For further consideration

Fraud is not a one-article topic, but an ongoing problem. Those wanting further details should consult the Journal index for more articles on fraud. The Institute's Web site ( www.aicpa.org ) has an executive summary of the study, which is available in its entirety from the AICPA (product no. 990036JA) for $20 for members, $25 for nonmembers. q

—Mark S. Beasley, CPA, PhD., assistant professor, department of accounting, North Carolina State University; Joseph V. Carcello, CPA, CIA, CMA, PhD, associate professor, the department of accounting and business law, University of Tennessee; and Dana R. Hermanson, CPA, PhD, director of research of the Corporate Governance Center, associate professor of accounting, Kennesaw State University, Georgia

Running the Numbers

A s anticipation builds for the NBA playoffs that will begin this month, the specter of the 1998-99 NBA season that almost wasn't is a distant memory to many basketball fans.

"The popular witticism is that billionaire owners and millionaire players can't figure out how to divide two billion dollars," said William Hessberg, CPA and disgruntled hoop fan, of the lockout that began at the close of the 199798 season.

William Hessberg, CPA and hoop fan, analyzed Celtic financials.
(PHOTO BY: TOM SOBOLIK/BLACK STAR)

Instead of just crossing his fingers and hoping for a speedy resolution to the league's labor dispute, however, Hessberg put pencil to paper and ran some numbers while he waited for the season to begin.

Specifically, Hessberg wanted to find out whether the NBA franchises were actually producing millions in profits, where the money was coming from and where it was going. He decided to use the Boston Celtics as a case study for his analysis.

"The Boston Celtics are the best source for answers," Hessburg said. "The Celtics are a limited partnership that is traded on the NYSE (symbol BOS), and they issue an audited annual report."

Although other teams are part of publicly traded companies, he added, their numbers often are combined with other business segments and are hidden in consolidated reports.

For the year ending June 30, 1998, the Celtics' revenue was $75.7 million. The breakdown (in millions) of that revenue was as follows:

Income was 20% higher than in the previous year when the numbers were as follows:

Broadcast revenue and ticket sales were the key factors behind the improvement in Boston's financial results over the last two years, Hessberg said. The broadcast fees came from league contracts with national broadcasters (NBC and Turner Sports) and local networks.

The Celtics sold more tickets in the 199798 season than in the prior year because the team was better, Hessberg said. Boston improved its record over the year before by 21 wins.

On the expense side, operating expenses for both years were roughly the same ($62.3 million in 1997 and $61.9 million in 1998).

Players' salaries are the biggest part of operating expenses. "In the 199798 season, the Celtics paid their 17 players just under $27 million," said Hessberg. "Veteran guard Dee Brown was the highest paid Celtic at $3.5 million."

By increasing the revenue and keeping operating expenses down, Boston managed to increase income from operations to $13.8 million in 1998 from $722,519 in 1997. Not bad off-the-court action for a team that has had some success on court as well.

"The Celtics had revenues of $76 million last year. If you multiply that by 29 teams, that equals $2.2 billion dollars," Hessberg said. "With the new TV deal, total revenues for this season could get closer to $3 billion."

Let's hope the owners and players have ended their squabbling for good and can find a way to share the $3 billion NBA pie. n

Accounting Is Not Their Strong Suit

Source: New England Business Service, Inc., Groton, Massachusetts; survey of 300 small business owners.

Linux: Tomorrow's Windows or Fad-of-the-Year?

Bill Gates' real bte noire may turn out to be not a resurgent Apple or posse of government lawyers, but an obscure Finnish computer programmer named Linus Torvalds. In 1991, while a student at the University of Helsinki, Torvalds began work on Linux (LINN-ux), a new operating system similar to Unix. In the following years, it became an underground hit with computer geeks. Although it is more complicated to set up than the far more popular Windows and Apple operating systems, many programmers claim it is more stable—a lot less prone to crash. But one of its biggest advantages is that it's free and open. Torvalds and a loosely knit community of programmers continually update it, and anyone can download it, package and sell it and create application programs that will run on it. Still, it might have always remained a minor player, except that earlier this year, amid growing public dissatisfaction with Microsoft's near monopoly, IBM threw its support behind Linux.

The “official” Linux logo:
The penguin marches on Redmond.

Corporations—major purchasers of operating systems—have had two main problems with Linux: Since there is no "Linux Company," it has been hard to get support. And very few programs were being written for it. (That is, there were few spreadsheet, word processing and accounting programs that would run on Linux.) However, IBM is shipping its Netfinity network server computers with Linux installed alongside Windows NT. The hardware giant will offer support through a leading Linux distributor, Red Hat Software, Inc. ( www.redhat.com ). And leading chip manufacturer Intel also showed its support for Linux by making an investment in Red Hat. Hewlett-Packard and Dell too are beginning to sell machines that can run Linux.

Meanwhile, more applications are being written that will run on Linux. The Journal spoke with Errol Allahverdi, president of Appgen Business Software, Inc. ( www.appgen.com ). "We always made Unix—and later, Windows—software, which we sell through resellers. They started asking us, 'Can't you write something for Linux?' We said we could—but what would we do about support for the customers?" Appgen found its solution by getting together with Caldera, Inc. ( www.caldera.com )—a Linux distributor like Red Hat—which was willing to form a partnership with Appgen to support Linux products. Appgen now offers a suite of accounting products that run on Linux. "We found it very stable. You just can't afford downtime in mission-critical tasks, so Linux stability is a big selling point." Allahverdi said many network servers now run Linux, especially Web servers necessary for e-commerce. "I used to think it was nonsense for Microsoft to worry about competition. But not anymore."

Nevertheless, Windows remains the overwhelming favorite. And programmers have pointed out that Linux is still difficult to set up and may not make an easy transition from a server product to a desktop operating system—for the average user, Linux may turn out to be a flash in the pan. But as one IT consultant said, "Maybe Linux's popularity will scare Microsoft into making better products."

To explore the frontier

Not even the most gung-ho Linux supporters are saying Windows-based applications will disappear anytime soon—if ever. Still, the curious CPA can explore this new system. Although the adventurous can download Linux and start experimenting (see www.whatis.com , under "Linux," for details), it may be easier to buy a packaged version that includes some support. In addition to the distributors noted above, S.u.S.E ( www.suse.com ) also sells Linux. Resources for the novice and a history of Linux are available at www.linux.org .

Top 10 Technologies—Plus 5 for Tomorrow

Deciding on the top 10 technologies for CPAs has become a tradition. This year, however, the AICPA information technology (IT) committees expanded the list to cover 30 items—the top 10 issues, applications and technologies. Earlier in the year, the Journal covered issues and applications ("Y2K Tops Tech Issues List," JofA, Jan.99, page 16, and "Top 10 Technologies: The Applications," JofA, Mar.99, page 12.) Below is a discussion of the underlying top 10 technologies themselves, which serve as the basis of the applications and issues. The committees also chose five additional items that, while not yet part of any of the top 10 lists, still bear watching.

1 Communications technologies—bandwidth. If you look at the Internet as a giant plumbing system, "bandwidth" is the measure of how wide the "pipes" are. Telephone lines—ubiquitous and accessible with a low-cost modem—are the narrowest pipes. Other options—T-1 lines, ISDN and cable service—are faster but tend to be less available and more expensive. A video training session, for example, involving dozens of participants—each at a desktop computer—in different cities, requires large bandwidth to work effectively. As one top 10 conference participant explained, "The major impediment to many mobile applications today is the lack of sustainable and reliable bandwidth." As cable and other high-speed technologies become available to more people and as the big corporate players sort out who will provide the necessary hardware, bandwidth will become more plentiful.

2 Remote connectivity tools—products that keep you in touch. Today's technology is blurring the lines between office, road and home. It's more than just e-mail—one participant said he stores key information on a Web site (which can be password-protected) so, if his laptop crashes while he's on the road, he can rent another and download all the files he needs. The flipside of the coin, though, is the problem of security.

3 Portable technology—notebooks and palmtops. These small computers are getting even smaller, more powerful and less expensive. They let auditors in the field access files and do research, turning "wasted time"—a plane trip or a train commute—into productive time. As these new products are lighter than conventional laptops, CPAs increasingly may take them everywhere. "Information where and when we demand it is becoming a hallmark of professional business," said one participant.

4 Electronic authorization—the digital signature. What is the digital equivalent of "signing on the dotted line"? That is, how can you sign a piece of e-mail—or any document sent electronically—so your recipient is sure it came from you? The much-touted paperless office will require digital signatures—consider how much time and energy can be saved by employees filing amended W-4 forms, for example. A wide variety of software products are already available—see the security options that come with Microsoft's Outlook Express.

5 Electronic authentication—digital certificates. Related to the digital signature above, an electronic certificate provides a level of assurance for data sent over the Internet. One company is already marketing a digital certificate that allows doctors to securely prescribe medications over the Internet. VeriSign ( www.verisign.com ) provides certificates for CPA WebTrust.

6 Image processing. Using this technology, you could take each piece of paper in your office, scan it onto a disk and catalog it on your computer so every bit of information is always accessible. The issue here, according to one participant, is being able to index the information in each hard copy document as you scan it in—without laboriously typing in key words. Fortunately, optical character recognition (OCR) software is getting better, and this process soon will be completely automated. There's also the human factor, one committee member pointed out—too many people are still more comfortable with paper.

7 Data mining and OLAP. Data mining is searching through databases for relationships that might help in making business decisions. For example, can you find a correlation in sales figures between people who purchase golf clubs and those who purchase tennis equipment? Online analytical processing (OLAP) is the ability to extract data from a database and view them from different perspectives: A CPA could create a series of spreadsheets showing golf club and racket sales in June, over several years, and compare these figures with other sporting-goods sales at the same time. Although this information and analysis can be very useful, OLAP programs are still expensive (an estimated $2,500 for each user). However, one participant said there would be data-mining applications even for smaller firms—pulling detailed information out of Form 1040's and using the result as an aid in estate planning, for example.

8 Interconnectivity tools—ODBC, DDE, COM, CORBA. These acronyms stand for the tongue-twisting "open database connectivity," "dynamic data exchange," "component object model" and "common object request broker architecture." Basically, these refer to systems or methods of sharing database information—the communications glue between databases and applications, according to one committee member. Although these terms are relatively unfamiliar now, they'll get more attention in the coming months as companies increasingly share data across systems for e-commerce applications. Said one participant, "The time is at hand when the combination and integration of applications will be more important than any of a system's pieces."

9 Agents. An agent is a program that runs automatically without a user's having to start it. For example, the online job service Monster Board ( www.monster.com ) allows users to enter the types of jobs they're looking for. Even when the users are off-line, an agent scans the Monster Board job database daily and sends an e-mail when it finds a job matching the user's criteria. In the future, "audit agents" may become a part of accounting software, allowing for "continuous audits."

10 Database technologies. How do you organize and manage databases, particularly the enormous repositories that large companies have? A specific issue for CPAs is how to audit and maintain the integrity of all this information. One participant said database technologies could be part of a decision support system—an application that analyzes business data for a company's decision makers. However, such systems require superior project management and a lot of money. A related issue is data mining (see item 7 ).

Five on the horizon

The committee members identified these five technologies as up-and-coming. Although these are not yet making a big impact on CPAs, many believe they will in the future.

1 Voice and speech systems—voice applications. These involve getting rid of your keyboard and talking to your computer. Applications are becoming more sophisticated, but many participants felt they were not yet far enough along for widespread use. As these systems develop, the big change could be in practice management—secretaries and administrative assistants may become obsolete.

2 Smart cards. They look like credit cards but have embedded chips that contain personal information—your medical history and your bank account, for example. They can be used to transfer money, in the same way as an ATM card, but also to facilitate the transfer of business and financial information between a CPA and a client. Pay phones in some European countries accept smart cards, but they have not caught on yet in the United States. Participants split widely on their use—some were excited about them, but others dismissed the cards as a solution in search of a problem or "technology's equivalent to the Susan B. Anthony dollar."

3 Extensible markup language (XML). XML is the smarter sibling of HTML, the language of the Internet. It defines each piece of data, thus allowing information to be widely shared across all platforms. The implications of XML are enormous. For details, see "The XML Files".

4 Knowledge systems and knowledge management. In a firm or company that has huge amounts of information, how do you make sure everyone in the organization knows what is available and how to get it? The key is knowledge management, and that means having the right software as well as a thoughtful, logical organization of data. Lotus Notes and Microsoft's Exchange are two products that can help an organization manage information.

5 Continuous auditing. The title describes it—a system that is always auditing a company's statements. Companies could discover irregularities almost instantly—not at the end of the year when the problem has become a nightmare. Of course, continuous auditing requires a sophisticated system with the right programs and excellent controls. Nevertheless, one participant said the only question was when continuous auditing would become a reality, not if .

Beyond the basics

This article provides merely an introduction to these 15 complex technologies. More details are available at www.toptentechs.com , www.sandismith.com and www.whatis.com . q

GASB Goes West for New Member

To replace retiring Barbara Henderson of California, the GASB has once more turned to the Pacific Coast. Richard C. Tracy, director of audits for the city of Portland, Oregon, will join the board July 1. He brings with him a history of committee work, serving currently as chairman of the GAO's Government Auditing Standards Advisory Council and formerly as president of the National Association of Local Government Auditors and a member of the Government Finance Officers Association committee on accounting, auditing and financial reporting.

Richard Tracy brings performance measurement expertise to the GASB.
(PHOTO BY: BRETT K. PATTERSON/BLACK STAR)

The Journal spoke to Tracy about some of the key government accounting issues he expects to address in the short and long term. "Of course, I'm looking forward to helping complete the government financial reporting model," he said, referring to an issue that's been on the GASB's agenda for years. "It's rapidly coming to a close, but there will be implementation issues to address for several years." Other immediate issues, he said, included note disclosures and accounting for post-employment benefits, such as pensions and health care.

In the future, Tracy hopes the GASB will look at financial condition indicators: For example, "The health of a government entity—what signs do we look for to make a judgment about it?" The topic that's really near and dear to him, however, is performance measures. "Better public accountability requires looking beyond the finances to the whole picture of how an entity is doing." Tracy frequently writes and speaks about the topic.

Although the GASB is based in Norwalk, Connecticut, Tracy will continue to hold his job in Portland—except for the chairman, all GASB members work part-time.

E*Tradean online broker much in the newsearns the WebTrust seal. 

 E*Trade Puts Its Stock in WebTrust

Online trading has become as fashionable as it is controversial. A simple desktop computer gives anyone a chance to become the next Warren Buffett with a virtual seat on the stock exchange. But with this newfound financial freedom come concerns about security and privacy. After all, this isn't about buying a Stephen King novel from Amazon.com—some people have a substantial portion of their net worth in the stock market and depend on E*Trade to buy and sell on a daily or even hourly basis. However, E*Trade ( www.etrade.com ) has taken a step toward increasing consumer confidence by becoming one of the largest companies—and certainly the most famous—to join the WebTrust family.

Ev Johnson: Providing a secure anchor in the tense world of day traders.
(PHOTO BY: TOM SOBOLIK/BLACK STAR)

The Journal spoke with Ev Johnson, an architect of WebTrust and a partner of Deloitte & Touche, LLP, which performed the E*Trade engagement. He emphasized the unique nature of a company such as E*Trade, which is completely dependent on the Internet—unlike a traditional company, with only a portion of its business on the Web. "It's crucial for E*Trade to keep its customers' confidence," he said. The company's elaborate system required an eclectic mix of the accounting firm's staff during the certification process. "We sent auditors, authorities on securities trading and specialists in computer security." E*Trade successfully made it through the audit process, posted the seal in November 1998 and trumpeted its achievement through press releases and advertisements in major newspapers.

E*Trade: A company that deals only online gives consumers confidence.

News, notes and items of interest

The Silicon Index

n Dow Jones has launched an index to monitor Internet stocks. Among the 40 companies being tracked are Amazon.com, E*Trade, Excite, GeoCities, Infoseek, Lycos and Yahoo. The Chicago Board Options Exchange has created an index option based on this new index (ticker symbol ECM).

Ode to an Incredibly Complicated FASB Statement

n Having trouble with Statement no. 133, Accounting for Derivative Instruments and Hedging Activities? Accounting professor Charles J. F. Leflar, of the University of Arkansas, wrote a poem to help his students understand it, with apologies to William Shakespeare:

To bifurcate or Not to bifurcate, That is the Question. Tis it nobler in the mind Of moral FASB To suffer the slings and arrows of outrageous fortune: Stating contracts at their face tho Some might argue distortion. Let legalities prevail. Or to suffer tortures, earthly or Divine, To effect the bifurcation, to deny the contract, To tear asunder into the components. The Nature of the matter, laid bare for all to see. They speak! Give birth, the FASB state—Let what is hidden be known! Ring the bells, Trump the horn and let all know The essence of the transaction. Bifurcate the embedded derivative.

Local Boy Makes Good

n James V. Long, a Journal editorial adviser and a CPA involved in several accounting committees in Texas, was honored by the Financial Executives Institute. Long has served on the FEI's national executive committee and the national board of directors. The FEI cited his work on a statewide reception that brought together state legislative and business leaders and his strong people-management skills.

The Board's Professor

n Ray Whittington, Ledger & Quill director of the school of accountancy at DePaul University has been appointed to the AICPA auditing standards board. An alumnus of the Institute's accounting and review services committee, Whittington is the only academic member of the ASB.

A Misspelling Corrected

In the article "Merging for Security" (JofA, Apr.99, page 39), we misspelled the name of the firm Meyners and Co., of which Bruce Malott is the managing partner.