Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985. Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand. She attended the University of Michigan and Wayne State University.
The story of Bernie Madoff is a classic drama involving business ethics. Madoff was the financial manipulator behind the largest Ponzi scheme in American history. A Ponzi scheme is set up so that the earlier investors are given "returns" which are not really earnings on their investment. Early investors get cash from the investments made by new investors--and the amounts are large, creating a vibrant market for new investors. When the system crashes, the last investors lose everything.
Ponzi schemes are made transparent within a financial statement that is a required part of annually audited financial statements: the Statement of Cash Flows. Because the change in cash is separated into three categories, it is easy to see where the money paid out actually comes from. The three categories are Cash from current earnings, Cash from (or paid for) investment assets, and Cash from stock investments or loans. A Ponzi scheme would not have escaped any audit done with integrity.
The 2016 television film on Bernie Madoff, starring Richard Dreyfuss, told the tale from Madoff's point of view. This year's version, starring Robert De Niro, is based on the book Wizard of Lies: Bernie Madoff and the Death of Trust by Diana B. Henriques. The book focused on the wide swath of financial destruction for institutions and individuals that Madoff's scheme caused.
Federal and state laws forbid sexual harassment, and some states mandate that employers proactively train employees about what behaviors constitute illegal harassment. But many employers approach this task as a "compliance mandate" that has to be satisfied in form. As a result, much of the the training lacks the substance needed to make it effective. Maybe you have been subject to some of this training.
As Jane Kasperkevic notes in article linked below, "To many U.S. workers, sexual harassment training has become synonymous with being cooped up in stuffy conference rooms with their co-workers watching cheesy, unrealistic videos. That kind of training goes in one ear and out the other. For many companies, the main concern is checking the training off their to-do list. Instead of tackling the issue and trying to build a culture where sexual harassment is not tolerated, they buy liability insurance in case an employee sues and move on. And playing those videos counts as training."
The EEOC received over 6,700 harassment complaints in 2016. Employers paid out $40.7 million in damages. Nevertheless, some employers still try to get away with doing the minimum. This communicates that the company does not have any interest in changing the environment of harassment. As Kasperkevic points out, "Videos designed for companies just concerned with compliance depict blatant and unrealistic behaviors. Sexual harassment in the modern workplace is much more complicated."
But many people DO care about the issue. A group of celebrities that includes Cynthia Nixon, Michael Kelly, Emmy Rossum, and David Schwimmer have recently put together six short films as part of a #thatsharassment public service series. (Based on true stories!). These were released on Facebook and there have been more than a million hits. Maybe the message is getting out to a wider audience via social media.
Source: "Yes, those sexual harassment training videos are terrible," by Jane Kasperkevic, Marketplace, American Public Media, May 30, 2017.
image from 123RF.com
The start-up Opendoor offers a new way to sell your house: Opendoor will buy it outright, charge you a convenience fee, and close the transaction within a few days. How is this possible? Opendoor is capitalized with $300 million in equity, which gives them the power to leverage even more. Opendoor is a "fat start-up."
What is a "fat start-up"? Mark Suster, a venture capitalist and "serial entrepreneur," differentiated lean and fat start-ups several years ago:
"Lean start-ups" have been the norm since the 2008 recession, as they minimize risk. But information technology--the ability to analyze enough sales data to accurately predict the resale price of a house--also minimizes the risk. Also, because houses are actual tangible assets (rather than intellectual property...or even "vaporware"), this start-up model is now able to raise a large amount of capital. So far, Opendoor has been able to sell houses within 90 days.
It sounds pretty good--which means that other companies are entering the business. I wonder if, over the next decade, we will see a disruption in the real estate industry in terms of this radical new template for home sales.
Source: "The Rise of the Fat Start-Up," by Farhad Manjoo, New York Times, May 24, 2017.
In 2013, Malaysian financier Jho Low made Steven Witcof's extravagant plans for the NYC Park Lane property seem possible. Low had promised 85% of the financing, and had provided twice the usual non-refundable down payment ($100 million instead of $50 million). The sales price was $684 million, but considerably more financing was in place for the renovation. Witcof planned to build a "superpower of ultra-luxury apartments" on this perfectly situated property in central Manhattan. “This was the best site in New York City and maybe the world,” said Mr. Witkoff. “We designed what the entire partnership thought was a beautiful building. Little did we know we’d face circumstances like this.”
The circumstances to which Mr. Witcof was referring was the discovery that Low had stolen the money from the people of Malaysia in a complicated money-laundering scheme. The U.S. Justice Department filed a civil forfeiture action against Mr. Low and the Park Lane property, accusing Mr. Low and Najib Razak of using $3.5 billion in a Malaysian development fund to invest in their own business ventures. These ventures included:
Real estate deals are often set up as partnerships, as this one was, because the tax benefits associated with real estate can flow directly to the tax returns of the individual partners. Partnerships also can be formed and dissolved more easily than corporations. Legal liability, however, is sometimes a consequence when other partners act in bad faith. This aspect is a major downside of the partnership form of business.
Source: "Malaysian Money. Opulent Ideas. But Now, for Park Lane, a Forced Sale." by Charles V. Bagli, New York Times, May 23, 2017.
image from Paste Magazine
The world is changing faster than ever, right? Isn't that common knowledge? Economist Robert Gordon tested out this premise by researching and organizing changes by date. He wrote a 700 page book called The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World). His research suggests that the rapid change was a one-time event, and that common knowledge may be based on an erroneous but understandable perspective.
The assumption that technology and growth is at an historical maximum--and likely to increase--probably comes from a perspective of how stagnant things were at an earlier time in the past. The podcast notes that a delivery person in the late 1500s (using a cart; not having running water) had the same type of life as a delivery person in the early 1800s. Many changes, however, occurred between the early 1800s to the 2000s. Gordon analyzes post-industrial events. As a macroeconomist, he focuses on productivity growth. His research points to a slowdown around 2004.
Other analysts have also commented on the productivity slowdown:
Middle and upper middle class success depends on productivity, so the realities of the business environment are a major factor in understanding and planning for the future. What does this mean for you?
Source: "Episode 772: Small Change," by Jacob Goldstein and Sally Helm, NPR: Planet Money, May 19, 2017. transcript
image from Quicken Loans
Unexpected expenses--a car breakdown, being forced to move, a medical problem--can create a need for a loan to cover your cash flow. Sometimes, the easiest source of a personal, unsecured loan is a credit card advance. Your bank may even have sent you unsolicited offers of a "cash advance" on your credit card. Here is why they might not be a good idea:
There are, however, some worse sources of emergency loans:
Card-holders should also be aware that buying foreign currency with a credit card is also considered a cash advance.
Source: "Steer Clear of this 'Bad Idea': Cash Advances on Credit Cards," by Ann Carrns, New York Times, May 19, 2017.
A 3-day AT&T strike began this weekend: more than 33,000 workers have walked off the job, protesting the lack of a fair contract proposal by AT&T management. The workers's union, the Communications Workers of America, has cited these issues:
AT&T is not expected to suffer much from the strike, as it has a cadre of managers who can take over workers' jobs on a short term basis. The company also feels that it has offered fair wage and pension increases (amounts were not given in the articles, which is typical in the middle of negotiations).
United Health Group has been sued by the Justice Department. The Justice Department alleges that UnitedHealth has over-billed Medicare by hundreds of millions dollars per year. It appears that UnitedHealth systematically made patients look sicker than they really were. Top managers at UnitedHealth Group appear to have been involved. The motivation was a plan to meet Wall Street revenue expectations.
As in several cases, it is one brave whistleblower that has gotten things started. Benjamin Poehling, a former finance director for UnitedHealthcare Medicare and Retirement, was the whistle blower. The Justice Department joined the action that he started.
Another entity, "Medicare Advantage" is involved. To understand the ethics problem, it is important to understand how Medicare and Medicare Advantage work and intersect.
Each dot in the graphic below, illustrating how these programs work, is explained in the text below the graphic:
1st dot, first line: Traditional Medicare members pay a monthly premium to the Centers for Medicare and Medicaid Services (C.M.S.), whether or not they visit a doctor. C.M.S. also receives funding from U.S. taxpayers.
2nd dot, first line: Under Traditional Medicare, members see a doctor, the doctor sends a copy of their medical report to C.M.S., to get paid.
3rd dot, first line: C.M.S. pays the doctor. Traditional Medicare compensates doctors according to the procedures they perform — lab tests, scans, operations, etc.
Medicare Advantage members:
1st dot, second line: Medicare Advantage members also pay a monthly premium to C.M.S., and often a separate premium to a private insurance company.
2nd dot, second line: If members see a doctor, the doctor sends a copy of the medical report to the private insurer, who then pays the doctor.
3rd dot, second line: C.M.S. pays the private insurer a base rate for each member. If the private insurer tells C.M.S. that the member required treatment for certain conditions, C.M.S. pays the insurer more.
According to the article linked below:
"Under the government’s popular old-age health program, Medicare Advantage, reporting unhealthier customers led to bigger payments from the federal government — $3 billion worth to UnitedHealth from 2010 to 2015 alone, according to the complaint. The Justice Department said misrepresenting people’s health was a civil fraud and sued for triple damages and other penalties."
Mr. Poehling, under the False Claims Act, filed a suit in 2011 as a private citizen suing on behalf of a government agencies he believed had been defrauded.
Source: "UnitedHealth Overbilled Medicare by Millions, U.S. Says in Suit," by Mary Williams Walsh, New York Times, May 19, 2017.
Photo credit: Dolly Faibyshev for The New York Times
What is the latest thing in selfie photography? The "selfie booth." In the photograph above, clients Kat Cohen and LaShonna Holloway are taking a photo in a special selfie booth at Tracy Anderson Method (a trendy, elite fitness chain). Other businesses that have used these booths include:
Sure, a lot of people take selfies at establishments they patronize WITHOUT using a selfie booth, but dedicated selfie rooms benefit both the customer and the business. Customers get to look their best for Instagram because they are well-lit and well-framed by the adjustable camera. Businesses can use the booth for product placement and design to help solidify a "look." One more medium in which to get across a message...
Source: "Step Into Our Selfie Booth and Help Us Build Our Brand," by New York Times, May 17, 2017.
image from the union campaign
New York City freelancers get shorted an average of $6,000 a year by businesses hiring them. When individuals brought this to the attention of the Freelancers Union, an organized effort resulted in a law that gives freelancers clout in collecting what is owed to them. The "Freelance Isn't Free" Act (Local Law 140 of 2016) passed in October 2016, and went into effect on May 15, 2017.
The law provides for:
Interestingly, the law is viewed by many observers as a win for employers as well.
Source: "New York freelancers have a new law on their side," by Aaron Schrank, Marketplace: American Public Media, May 17, 2017.
from NBC News
Are this week's political headlines what big business wants to see? The firing of FBI chief James Comey blindsided nearly everyone, and may have ramifications for near-future political stability. Generally, big business favors a predictable environment, with expectations fulfilled. This week's surprises may be unsettling. As far as the numbers go, Wall Street's reaction to Trump's firing of FBI director Comey was mixed. On the day of the announcement, the S&P 500 was up 0.05%, the Dow Jones Industrial Average fell 0.17%, and the Nasdaq added 0.09%.
But big business, which expected a lot from the Trump administration, may be most concerned about a change that will affect their bottom line. Matthew Peterson, a high-ranking analyst for LPL Financial, shared these thoughts:
"I think the biggest issue is what this does to the Trump agenda in taxes. The market really is expecting a cut. We still feel it's a matter of when, not if a cut happens. But any thought this gets pushed to 2018 is a market negative."
Will the next big story to hit the news cycle be a tax cut for big business, along the lines promised by the White House? We'll see if the administration gets down to the business of government.
Source: "Wall Street Dissects What Trump's Come Firing Means for Agenda..." by Keris Allison Lahiff, TheStreet.com, May 10, 2017.
Stitch Fix, Inc. is an online retail store that does all the shopping for each customer. Each customer first fills out DETAILED surveys, and can also post pictures of their best looks to Pinterest. Stitch Fix analyzes the results of the questionnaires and creates a box of 5 items per month for each customer--hand-picked to their taste. The cost of this algorithm-driven "personal shopper"service is $20, which can be applied to any purchase that month. Return shipping for unwanted items is free. There is a 25% discount if all items shipped are purchased in a given month.
What is interesting about this start-up is that it is growing while other retail companies are failing to meet sales goals...or closing altogether. Also, Stitch Fix also doesn't fit the typical Silicon Valley model of obtaining "gazillions" in venture capital funds. The modest investments it has received ($42 million) have caused them to manage their funds on a lean model...and a "lean lean" model. Their growth has been solid. Last year its sales were $730 million.
The key to their success? According to CEO Katrina Lake, it is "delivering what consumers want: making it easier to shop."
Source: "As Department Stores Close, Stitch Fix Expands Online," by Michael J. de la Merced and Katie Benner, New York Times DealBook, May 10, 2017.
Snap Inc., the parent company of Snapchat, had a disappointing first quarter. It lost $2.2 billion--much of which was the result of IPO-related compensation paid. The stock price fell from $22.98 (at the close of trading today) to $17.18 in after-hours trading, after the financial results became public. Snap's IPO price was $17 per share.
On the positive side, revenues for this quarter, $146.6 million, were much higher than 2016 revenues for the first quarter, $38.8 million.
Nevertheless, the number of Snapchat users, 166 million, fell short of the expected 169 million users. This may have been due to competition from Instagram's Stories.
Source: "Oh, Snap! Shares drop 25 percent after disappointing results," by Jana Kasparkevic, Marketplace: American Public Media, May 10, 2017.
PM images/Getty images via the podcast linked below
NPR's Planet Money posed these questions recently:
Alan Blinder, former vice-chair of the Federal Reserve Board, was consulted with respect to the value of a lost tooth over time. (He was considered an expert because one of the major responsibilities of the Fed is to manage inflation.) Based on an informal survey of what kids were getting in the 1970's (50 cents a tooth), today kids should be getting $3 per tooth. But the figure is higher. Parents reported that kids in their circles were currently getting "anywhere from $5 to $20 a tooth".) But Delta Dental has been formally polling customers for twenty years on this matter. According to Delta, the 2017 tooth fairy is doling out an average of $4.66 per tooth. In any event, the price of a lost tooth is rising faster than the rate of inflation. According to the podcast, Planet Money calculated lost tooth inflation to be 10% per year. Alan Blinder says that, at least for the past decade, inflation in the U.S. has averaged 2% a year.
What might this discrepancy mean? Another economist, Justin Wolfers, explained it this way: "income elasticity of demand." Reporter Kenny Malone unpacked the economic jargon with this analogy:
"So let's say that you get a raise - 10 percent. If all of a sudden you started making 10 percent more, that doesn't mean that you're going to suddenly spend 10 percent more on every single part of your life. You're not going to spend 10 percent more necessarily on food, for example. But there are these categories of things that we might spend more than 10 percent more on now that we have the money. And Wolfers suspects that children are one of those things we like to splurge on."
The second valuation question deals with an employment agreement between dairy truckers and their employers that is based on a law in Maine. The truckers worked 10 or 12 hour days, but were paid for 8 hours--no overtime. This difference amounts to $10 million--and hinges on a "missing" Oxford comma.
What is an Oxford comma? If you look at the headline for this post, you can see a second comma after the word "contract." This is called an "Oxford comma" and many argue that it should be omitted because it is not needed because the word "and" is a sufficient separator in the series. However, there can be ambiguities when it is omitted. The statute in question says that all workers are to be paid overtime, EXCEPT a worker involved in canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of perishable foods.
The truckers' interpretation is that they are involved in delivering a perishable food, but are NOT doing the work of "packing for shipment or distribution." If they are not excepted, then they are due the overtime pay. The case is still in the courts.
The third question involves government spending for infrastructure--$1 trillion as promised by the White House. But government contracts are tricky and there are several categories of projects--bridges, roads, sewers, dams. One trillion dollars would not even fix the projects that have been identified in New York City, according to the podcast.
Value is trickier than it may seem at first...
Source: "Episode 759: What's it Worth to You?"[podcast], by Robert Smith, Kenny Malone, Noel King, NPR: Planet Money, March 17, 2017. [transcript]
a previous post on the website Medium
"The medium is the message," is a quote from Marshall McLuhan in his 1964 book Understanding Media: The Extensions of Man. At the time, he was addressing television's effect on society. An example of his thesis was that children's TV programming itself--a passive and entertaining environment--would have more of an effect on society than the content of the shows that the kids watched. Observers have commented on what McLuhan might say about the current use of technology. But the developers of the blog platform Medium (the company name, not the type of communication vehicle) were thinking of a different meaning of the word "medium" when they launched the site.
The blog platform Medium is a vehicle for business leaders (and employees..or anyone) to make their views heard and promulgated as though they were news or feature stories, a service which overlaps the function of a press release. The posts average around 600 words--longer than a tweet, but shorter than an op-ed essay. Medium CEO Ev Williams had this to say about the genesis of the site:
"We thought: Well, a tweet isn't long enough for a lot of ideas, so might we build a platform with a constraint, but it's not super short, maybe it's medium length. We were in a conference room and wrote Medium on the whiteboard, and I said: ‘That's what we should call it'."
CEOs have used Medium to defend a product or unfortunate event, and to offer apologies or compensation. Employees have used the site to make public labor practices which they consider to be unfair. Investors have commented on the behaviors and compensation of senior managers.
A communication medium where business stakeholders can communicate directly with a population they wish to reach--as well as receive comments and feedback--can be an efficient tool as part of a marketing and branding strategy.
Source: "Medium: The go-to place for CEO's to share their stories," by Jana Kasperkevic, Marketplace; American Public Media, May 5, 2017.
The AICPA, which is the professional organization that promulgates standards for accounting reporting and auditing, is issuing guidelines on assessing and mitigating cyber risk. Amy Pawlicki, who is the vice president of assurance and advisory innovation at the AICPA, gave one reason why the guidelines are important:
“Everybody is at risk of getting breached. The framework gives companies a way to show that they’re doing the best that they can to avoid a breach or respond to a breach if that happens.”
Protecting company assets is a main factor in establishing good internal control--and computer information is a key asset. In addition, the purchase of cyber insurance can provide a hedge against the costs that may be incurred in the event of a breach. "Description criteria" in the guidelines provide benchmarks for establishing procedures to protect computer information. "Control criteria" allow companies to test the effectiveness of the procedures that have been implemented.
Source: "AICPA To Roll Out Third Part of Cyber Risk Management Guidelines," by Rheea Rao, Wall Street Journal, May 4, 2017.
The National Association of Colleges and Employers reports that internships, including paid internships, are more numerous than they have been for several years. They report that paid interns, who typically do the same work as entry-level employees, are averaging $3,000 per month in 2017. They also qualify this statistic by noting that it is difficult to measure the number of unpaid internships that exist, so those figures are not included in the average.
The tech industry interns in the video above actually make more than most full-time workers in the United States. So those extremely high-paid positions are the exception. Intern pay ranges are subject to factors that include: location, individual talent and preparation, the size of the intern pool for a skilled position, and the industry standards.
Source: "Paid interns are averaging $3,000 a month," by Reema Krais, Marketplace: American Public Media, May 4, 2017. [podcast]
from the DailyHolidayBlog.com
If surfing social media or watching local news, the casual reader is likely to run into a holiday or two that is not recognized by their employer or any union contracts. Some examples:
These "weird holidays" are used to inspire marketing campaigns...or maybe the marketing campaigns create the holidays. The linked podcast explores how public relations personnel pitch holidays to media sites...and that Congress has actually passed laws that formalize these holidays.
In this 24-hour-news-cycle era, the holidays meet a need of broadcasters to fill air time, so the relationship works well between the entities pitching a product (and getting a free venue for promotion) vs. the media producers' need for stories. Publishers of holiday calendars (e.g. Chase's Calendar of Events) make money selling calendars to those who might benefit.
By the way, two of the holidays that occur today, May 3, 2017, are National Raspberry Popover Day and National Lumpy Rug Day.
Source: "Episode 765: The Holiday Industrial Complex," by Kenny Malone and Noel King, National Public Radio: Planet Money, April 18, 2017. [transcript]
Steve Ballmer, a "numbers guy" who retired from his position as CEO of Microsoft in 2014, is about to launch a new project: USAFacts.org. This is a database of financial information about where the U.S. government gets its money, and how it spends it. Ballmer describes it as a set of financial information equivalent to the 10-K documents filed by publicly traded companies, as required by the Securities and Exchange Commission.
Pulling this together took $10 million (from a combination of personal funds and grants). Ballmer says that he is "happy" to provide operational funding of three to five million dollars a year as well. He can certainly afford it. I am grateful for this new source of information--especially since it was pulled together by someone with a reputation for integrity...and whose personal curiosity led him to develop this "wonky" site. I have already learned that government entities employ over 24 million taxpayers in the United States.
By the way, if Steve Ballmer's name sounds familiar, but you just can't place it--he also owns the L.A. Clippers basketball team.
Source: "Steve Ballmer serves up a fascinating data trove," by Andrew Ross Sorkin, New York Times, April 27, 2017.
Minh Uong, NYT
The headlines about Trump's proposed tax plan mostly opine that it represents a huge tax cut for the wealthy. But the article linked below highlights a different aspect of the plan. Like current tax law, there are loopholes...but unlike current law, there is a significant loophole that could benefit individuals.
Under current tax law, the maximum tax rate on personal income earned as an employee is 39.6%. Under the tax plan proposed by the White House last week, the maximum rate would be slightly reduced to 35%. However...the maximum rate for business income would be significantly lower: 15%. "Businesses" would not only include big publicly traded corporations, but also LLCs. These LLCs (limited liability corporations) are sometimes owned and operated by just one person. They are currently taxed on a "pass-through" basis, which means they are taxed at the personal rate as though they were a sole proprietorship ("Schedule C" on a 1040 federal tax return) or a partnership (1065 tax form with K-1s that flow to the 1040).
Therefore, if an individual incorporated and received their income through an LLC, their maximum tax rate would be 15% not 35%: a huge difference.
Incorporation could have unforeseen consequences--some of which differ from state-to-state. For example, in California, there is an annual filing fee of $800, plus additional progressively higher fees on gross incomes above $250,000. A careful analysis must be undertaken, with several "what-if" scenarios, before deciding to incorporate.
Source: "Under the Trump Tax Plan, We Might All Want To Become Corporations," by Neil Irwin, New York Times, April 28, 2017.