Developing Financial Literacy

Discussion with DECASeptember, 2013

Professor Grant W. Russell, FCMAPwC Leadership Fellow

Associate DirectorSchool of Accounting and Finance

University of Waterloo

IntroductionGrant W. Russell is PwC Leadership Fellow at the University of Waterloo. A Certified Management Accountant, CMA Canada honoured him by naming him a Fellow of the Society in 1988. He received the Distinguished Teaching Award from the University of Waterloo in 2000. His areas of teaching specialization are Cost Management Systems, and Performance Measurement Systems. He is currently Associate Director of the School of Accounting and Finance, responsible for professional accounting and finance programs at the undergraduate and graduate level.  Professor Russell's research interests lie in the accounting implications of advanced manufacturing technology, quality and productivity. He has published articles in number of journals along with a monograph with A. Atkinson on how firms determine the need for change and improvement.  In addition to his academic research, Professor Russell has consulted with many Canadian firms including Magna Corp, Summa Corporation, CIL, Nortel, Johnson & Johnson, Scarborough Public Utilities Commission, Bell Canada, Raymond Manufacturing, Saudi Arabian Basic Industries Company and Air Boss of America. He has been an active participant in CMA education programs for many years as a moderator, examiner, author and committee member.  Professor Russell has taught at Tsinghua and Fudan Universities in China, as well as the Bled School of Management in Slovenia

School of Accounting and Finance• 4 undergrad and 3 graduate programs• Expertise in accounting, finance, business• Designations exemptions and advanced

preparation toward CPA, CMA, CGA, CFA, CBV, CIA, CSC

The only fully integrated Accounting and Finance program in Canada

accounting + finance

Integrative Environment

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A little history…..• Periodic evaluation of educational system

– Bedford commission in the 1980’s– Accounting Education Change Commission in

the 1990’s– Now the Pathways Commission

• Set up by the AAA and AICPA

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The Pathways Commissionto study the future of accounting higher education

Supply Chain #1 Supply Chain #2 Supply Chain #3

Pathways Commission

Pathways Commissioners and Supply Chain Group members represent organizations up and down the human capital supply and demand sides of the accounting supply chain. There are some common elements to each of the supply chains, and there are also elements unique to each supply chain. For example, Supply Chain Group #1 has a more K-14 focus, Supply Chain Group #2 has a college/university focus, and Supply Chain Group #3 focuses on how regulation and standards impact possible pathways from education to practice.

Pathways Supply Chain AAA presentation, Oct 10,2010

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What’s happening in Canada• CICA moved to a competency assessment

model for UFE• now modified again for CPA• CMA Canada moved to a competency

based assessment (three major tests)– Entrance Examination (often exempted)– Case Examination– Board Report

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Time for a change…..• Current program instituted in 2003 – 1st

professional program (BAFM).• Change in student attitudes (the

millennials), change in social technology, change in teaching technology, arrival of new crop of young PhD's

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Our backward design….• What is our SAF’s situation?• What do we want competencies do we want our

students to have?• What kinds of feedback and assessment do we

need?• What learning activities are important?• Is the program integrated?• Can our students see this?

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What’s SAF’s situation?• Historically strong program

– Currently approximately 1,500 undergraduates in public accounting, management accounting and finance

– Approximately 250 M’Acc students– 47 full-time faculty in accounting and finance

(and support disciplines)

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Our facilities:

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Our facilities

Let’s explore Bonds

Bond analysis

But that’s just technicalWe have to get them engaged, so that they can do the other stuff:1. Understand business2. Problem solve3. Communicate4. Conduct themselves with ethics5. Have a love for management and leadership6. Have learned how to learn.

Understand business• A wonderful time of examples:

– Blackberry– CN & CP (avec MM&A)– SNC Lavalin – The C-Series– Desire to Learn– Canadian Airlines – (Bareskin? – let the bear

take you there….)

Imbuing Ethics• We need to produce Canadian citizens

who understand the subtlety of decision making.

• Let’s explore where we’ve gone wrong in the past.

What are Ethical Issues?• Sexual Harassment• Conflict of Interest• Environmental Issues• Financial Management• Employment Discrimination• Whistle-blowing

• Governance Issues• Executive Salaries• Gifts and Entertainment• Privacy • Downsizing• Corporate Philanthropy

What are Ethical Issues?• Sexual Harassment• Conflict of Interest• Environmental Issues• Financial Management• Employment Discrimination• Whistle-blowing

• Governance Issues• Executive Salaries• Gifts and Entertainment• Privacy • Downsizing• Corporate Philanthropy

Corporate Culture and Ethics• Ethics is a personal, not corporate level activity• The concept of managing “corporate” ethics is

one of influencing the behaviour of the group• The influence of an individual can be substantial• So? How do we as individuals make ethical

decisions?

Costs of Ethical Failures• Damage to reputations - loss of customers• Low employee morale

– high turnover– high absenteeism– low productivity

• Disruption of communications up and down hierarchy

• Personal damage to people

Corporate Support for Poor Ethics

• Celebrating the “sharp cookie” who “does what it takes” to get results

• Understanding that “everyone does it”• Permitting policy violations if “nobody

knows”• Weak control systems allowing employees

and others the ability to get away with it

Corporate Support for Good Ethics

• Having good vertical communications within the organization

• Setting the tone at the top, along with managing the ethical culture of the firm

• Promoting ethics awareness education for all

• Developing a corporate code of ethics

A “never to forget” picture

Andersen staff being sworn in at US Congressional Committee (one of 10) January 24, 2002. ROB January 25, 2002, p. 6.

What other picture does it remind you of?

Tobacco Executives swear to tell the truth at Congressional Hearings, 1994, and go on to testify to the non-addictive qualities of tobacco

(Courtesy California Department of Health Services)

David DuncanPicture courtesy of news.bbc.co.uk 

Joseph BerardinoPicture courtesy of Anderson

Sam WaksalPicture courtesy of http://images.usatoday.com/money/_photos/2002-08-07-waksal.jpg

Martha StewartPicture courtesy of bdphillips.com

Enron -1 • Oct 4 2000 - Enron Press Release date - "Fortune

magazine has named Enron "America's Most Innovative Company" for five consecutive years, the top company for "Quality of Management" and the second best company for "Employee Talent." In addition, Enron ranks in the top quarter of Fortune's "Best 100 Companies to Work For in America." Enron's Internet address is www.enron.com. The stock is traded under the ticker symbol ENE." --  from an Enron press release, 4 October 2000

• Jan 2001 Enron had a market value of more than $77 billion. Stock price was $82 per share.

Enron -2 • Oct. 29, 2001 Monday – • Stock plans for 15,000 workers were locked down, workers were

powerless to bail out of their rapidly depreciating Enron stock for 16 days, starting Oct. 29.  Lay talks to Bush's Commerce Secretary Donald Evans and asks for help regarding an impending credit rating review by Moody's Investors Service. Evans said he did nothing. Moody's downgrades Enron's credit rating. During that time, shares lost more than a third of their value, from $ 15.40 to $ 9. In all, Enron's 401(k) retirement plan lost an estimated $ 1.3 billion during the stock's plunge from more than $ 80 in January 2001 to less than $ 1 when the firm sought bankruptcy protection Dec. 2. On  this day, Moody's cut Enron’s credit rating to just above junk-bond level. 

Worldcom• WorldCom, which owns the nation's No. 2

long-distance carrier MCI, said late Tuesday that more than $3 billion of expenses in 2001 and $797 million in the first quarter of 2002 were wrongly listed on company books as capital expenses, thus not reflected in its earnings results.

Soc Gen - 2• Societe Generale, France's second-largest bank,

stunned financial markets when it announced a single trader had cost it 4.9 billion euros ($7.1 billion) in one of the largest ever frauds by a rogue employee.

• The trader, Jerome Kerviel, was a relatively junior 31-year-old on the futures desk in Paris, whose role was to make "plain vanilla" hedges on European stock-market indexes.

• SocGen said in a statement that the trader used his knowledge of the bank's control procedures "to conceal these positions through a scheme of elaborate fictitious transactions."

Soc Gen #3

• He recently received a jail sentence of 5 years

• And was required to pay back the full €4.9 billion

http://i.telegraph.co.uk/multimedia/archive/00865/money-graphics-2008_865763a.jpg

Do you recognize this famous man?

Picture courtesy of http://www.total-banker.com/

He was aided by this man........

Picture courtesy of http://assets.nydailynews.com/polopoly_fs/1.413642!/img/httpImage/image.jpg_gen/derivatives/landscape_635/alg-accountant-david-friehling-jpg.jpg

....with a tiny accounting practice

Picture courtesy of http://thereformedbroker.files.wordpress.com/2009/03/friehling.jpg?w=300

Lehman Bros

Picture courtesy www.telegraph.co.uk 

A house with many tenants.......

• This is Ugland House, George Town, Cayman Islands. Its sole tenant is Maples and Calder, a law firm and company services provider. Yet, amazingly, this modest little office building on South Church Street is the current address of 18,857 corporations. Picture courtesy of http://piedtype.com/2009/05/05/the-

little-building-that-could/

Sino-Forest• Bre-X replay, but now lumber instead of gold

– Behavioral trap• Humans tend to rely significantly on context, difficult to

transfer the lessons from the Bre-X scam because gold is different from lumber

• Fraud is fraud

• Sino-Forest reported large lumber holdings which turn out not to be owned by Sino-Forest– Peak market value ~$5 billion

The Replay• Listed in Canada

– Developed securities regulation and legal framework, therefore trusted jurisdiction

• Assets outside of Canada– Cost of flying to China cuts down on the number of

due diligence visits; lack of understanding of the foreign market

• Reliance on “independent” oversight– Can you trust the auditor?

Accounting Fraud• Somewhat more sophisticated because it

requires presenting a fake story in the public realm– Many potential investigators– Cannot be construed as accidental

• The auditors cannot just be incompetent anymore, they must be “in-on-it”

This is not a unique US preserve. Don’t forget Bre-X

Canadian “fraudstars”

http://media.canada.com/cfe7ac49-e090-4323-a853-83766709cd57/brexfelderh_cw_073107.jpg

Bre-X : Fallout• CEO died before suffering legal repercussions• Felderhof moved to Cayman Islands (no

extradition)– Returned to Canada after criminal statute of

limitations passed, fought and won against the OSC• Trustee in bankruptcy finally gave up pursuing

former Bre-X executives on March 21, 2013– Saga started in mid 1990s!

Sino-Forest• Bre-X replay, but now lumber instead of gold

– Behavioral trap• Humans tend to rely significantly on context, difficult to

transfer the lessons from the Bre-X scam because gold is different from lumber

• Fraud is fraud

• Sino-Forest reported large lumber holdings which turn out not to be owned by Sino-Forest– Peak market value ~$5 billion

The Replay• Listed in Canada

– Developed securities regulation and legal framework, therefore trusted jurisdiction

• Assets outside of Canada– Cost of flying to China cuts down on the number of

due diligence visits; lack of understanding of the foreign market

• Reliance on “independent” oversight– Can you trust the auditor?

Accounting Fraud• Somewhat more sophisticated because it

requires presenting a fake story in the public realm– Many potential investigators– Cannot be construed as accidental

• The auditors cannot just be incompetent anymore, they must be “in-on-it”

Or Livent

and Garth Drabinsky and Myron Gottlieb

Or YBM Magnex International, Inc. or Philip Services Corporation

Picture courtesy of thestar.com

Or YBM Magnex International, Inc. or Philip Services Corporation

Allen Fracassi, President and Chief Executive Officer and (r) Philip Fracassi, Executive Vice President and Chief Operating Officer, Philip Services Corporation.

http://www.hazmatmag.com/issues/image.aspx?src=/daily_images/HM-20080601-022-battlebrewing-15371_MI0001.jpg&size=170

Or Michael (and Marlen and friend) Cowpland

Picture courtesy of www.itbusiness.ca Picture courtesy of blogs.ottawacitizen.com

Nortel - 1• Frank Dunn CMA

was recently acquited of criminal charges

• Nortel allegedly shifted income from one period to the next by the use of reserves to maximize bonuses Picture courtesy of www.lightreading.com 

Nortel 2• Bonus amount of $30 million dollars• Audit fees of approximately $300 million• At its height, Nortel employed 94,500 worldwide,

with 25,900 in Canada alone.  Nortel's market value fell from approximately 400 billion dollars in September 2000

Westjet versus Air Canada• Westjet used recent hire from Air Canada

to break into confidential AC files• Settled for approximately $30 million……

Of course, Lord Black of Crossharbour

• “Confusion” between personal and corporate assets

• This is a common problem for small personal corporations for tax purposes

Picture courtesy of www.evidentia.net

Not to forget Mr. Mulroney and his friend Karlheinz Schreiber......

Picture courtesy of statismwatch.ca -

Sextant I: The Story• Hedge fund based in Toronto, focused on

commodity markets• Unique investor opportunity to access

esoteric investments with “big picture” trends

• Only for sophisticated investors• Outsized returns included a single month

of 70%+

Sextant II: The Reality• Fund assets were routed to private Icelandic

companies owned by the fund manager Otto Spork– In violation of the fund’s Offering Memorandum

• The private companies were “valued” using data from the manager, which determined the fund’s returns, and therefore the performance fees– More fund assets collected by the manager

Sextant III: The Context• Asset prices do not usually move significantly in

short periods of time– What price moves 70% in one month?– Alternatively, how much leverage was used?

• If the fund is supposed to trade certain commodities, it is possible to check on the movements and compare to the fund’s performance– Big problem when Sextant reports trades in water!

Sextant July 2008

Sextant IV: The Fallout• Otto Spork resides out of the jurisdiction

so has not been tried, although his daughter was sanctioned by the OSC

• Occurred during the Financial Crisis, not the biggest fire to put out– More auditor issues: BDO delivered the 2007

audit opinion in February 2009, the OSC issued cease trading orders in December 2008

And local to Waterloo Region.....

Picture courtesy of Google images

The Pigeon King... Arlan Galbraith

Picture courtesy of news.ca.msn.com

The Link to Financial Crises• Warren Buffett has a saying, “When the tide

goes out you can see who has been swimming naked.”

• Fraud is often discovered during periods of broader crisis, as the economic music stops– The victims of the fraud suffer the loss at the worst

possible time• Industry wide fraud may cause the very crisis

that uncovers the fraud

Some ethical situations told to me

• The government scam• The policy run-around• the expense account caper• the budget blow-up • the income reallocation game

Picture courtesy of www.vehiclehi.com 

Conclusions• Ethical behaviour is vital• Ethical behaviour is personal• Individuals can be influenced (or

controlled) by corporate cultures• As participants of business and

accounting, we can be a major influence

Financial Literacy Competition • Designed by uWaterloo’s School of

Accounting and Finance in collaboration with our Business Studies teachers team

• Experiential learning opportunity for students• Run for two years: 22 schools in 2012,

approximately 40 in 2013• Target everyone in 2014!

Financial Literacy Competition What’s in it for students?• Incentive to learn about personal and

business finance• Assess awareness of financial literacy• Reward for knowledge of financial issues• Foster interest in disciplines of finance,

accounting, and business

What’s the test like• General Financial and Business acumen• Micro- and macro- economics• Accounting• Compound interest• A total of 75 questions – range of

questions from easy to tough.

Here’s some examplesWhat is the correct order of the business cycle?a. Recession, Expansion, Peak, Troughb. Trough, Recession, Peak, Expansionc. Expansion, Recession, Trough, Peakd. Expansion, Peak, Recession, Troughe. Trough, Expansion, Recession, Peak

Another Macro question

All other things equal, a country with a large trade deficit will:a. Experience an increased demand for their country’s productsb. Experience large cash inflowsc. Experience a decline in the value of their currency over timed. Experience an increase in employment in their country over timee. Experience no effect.

An accounting question

If assets total $500,000, common shares totaled $105,000, retained earnings totaled$125,000, then liabilities would total:a. $395,000b. $375,000c. $385,000d. $270,000e. $480,000.

Another Accounting Question

Non-liquid capital would include which of the following items?a. Cashb. Accounts receivablec. Marketable securitiesd. Intellectual property (ideas, talent)e. None of the above.

Interest Rate ProblemsAssume a bank offers an annual return rate of 5% to customers on their deposits. Howmuch interest does the bank owe to a customer who deposited $20,000 5 years ago,assuming the simple interest method?a. $5,000b. $25,000c. $25,526d. $5,526e. $4,200.

General Business

Who will be the new Governor of the Bank of Canada?a. Chris Hadfieldb. Mark Carneyc. Ben Stillerd. Stephen Poloze. Jim Flaherty.

General Business

Where does one find a credit card verification code?a. It’s the first four digits of a credit card numberb. It’s the expiry date of the credit cardc. It’s the three digits on the back of a credit cardd. It’s not part of the credit card, but is retained by the card owner like a PINe. None of the above.

Financial Literacy CompetitionMay 27, 2014• One-hour online written test• 75 questions• Administered within each high school• Open to Grades 9 and 10

– Selection at discretion of business teacher• Reward and recognition

Interested in helping• Sign up the 10 best in your school• Provide us with questions you think might be

fit the FLC• Tell other interested teachers and boards

about the opportunities• If you have already participated, let us know

that your comments on how well it has worked in the past.

Financial Literacy CompetitionMay 27, 2014• FLC microsite:

– afm.uwaterloo.ca/FLC.html• Registration:

– Opens: January 6, 2014– afm.uwaterloo.ca/flcreg/

Questions?• Contacts:

– Grant Russell, DirectorUndergraduate & Graduate ProgramsSchool of Accounting and Financerussell@uwaterloo.ca

– Patty Mah, Associate DirectorAdmissions and CommunicationsSchool of Accounting and Financepatty.mah@uwaterloo.ca