Welcome To Aloke (Al) Ghosh’s Blog

Al (Aloke) GhoshWelcomzicklin-school-of-business_416x416e to my weblog, www.alokeghosh.com. Via this personal blog, I am sharing pertinent issues, current topics, and policy matters in the fields of auditing, financial reporting, and corporate finance with relevance for auditors, hedge fund and mutual fund managers, controllers and CFOs of public companies. The targeted audience includes my current and past students, colleagues from academia and practice, and anyone else fascinated by the crossroads of auditing, accounting and finance. Because my academic training and professional experience overlaps these three interconnected business fields, my commentaries/ideas/claims are often a distinctive outcome of a triangular subject-matter lens rather than a specialized subject-matter lens.

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An Enduring Relationship

Ambassador_AdamsThe enduring Finnish-American diplomatic relations is a tribute to the skilled statesmen from both countries who have served the interests of their nations with distinction.

There is a strategic geo-political explanation for the large U.S Embassy in Finland (US Embassy is the second largest embassy in Finland). Helsinki is about 110 km away from the Russian border. During the Cold War, Finland held a strategic position between two hostile blocks—U.S. and Soviet Russia. Finland was a “buffer zone” and a “military transit route.” Both sides cultivated the potential to use tactical nuclear weapons against targets in the Finnish territory, at least pre-emptively. Both sides engaged themselves in intensive intelligence activities in Finland and in the bordering areas.

Brief History

The United States and Finland have enjoyed almost centennial years of cordial relations. Upon gaining independence from Russia in 1917, Finland sought diplomatic recognition from the United States. However, the Wilson administration, concerned about Finland’s political instability and ties with Germany, refrained from granting Finland diplomatic recognition until 1919.

During the Great Depression of the 1930’s, Finland was the only nation to continue to pay off its World War debts it owed the United States.

Relations between the United States and Finland reached the lowest point during World War II. The United States severed diplomatic relations with Finland in June 1944 but did not declare a war against Finland. However, once Finland signed an armistice with America’s allies in September 1944 and expelled the Germans from its territory, the United States appointed a U.S. representative to Finland. In 1945, the two nations re-established diplomatic relations.

After World War II, U.S.-Finnish ties was marked by renewed stability and increasing cooperation. Finland pursued a strict policy of neutrality. The United States, acutely aware of Finland’s precarious geographical position, supported Finland’s neutrality and promoted policies that would not provoke Soviet retaliation. It also endorsed Finland’s independence and democratic institutions. U.S.-Finnish relations focused on economic assistance and expansion of trade.

 Finland’s Neutrality

Following World War II, Finland embarked upon a foreign policy of neutrality. Their policy sought cooperation with the East and the West. Known as the “Paasikivi-Kekkonen line” after 1945, it was meant to convince the Soviet Union that Finland had no intentions of undertaking foreign policies that were deemed dangerous to Soviet interests to avert possible future Soviet aggression against Finland.

Finland’s cautious and realistic foreign policy was successful. Finland maintained working relationships with the Soviet Union and its communist allies but also cultivated expanded contacts with the West. It carefully steered toward membership in the Nordic Council and admission to the United Nations in 1955.

 Secret History

The U.S. Embassy had a large and efficient Military Attaché department following WWII. Many of their officers spoke Finnish. A secret report of the Finnish general staff counter-intelligence department stated in 1953 that the one of the main tasks of the western Military Attachés was to study Finland as a future combat area.

The narrowest area, the “waist” of Finland, interested Americans and Soviet Russia. The Russians were not interested in the southern part of Finland. They were interested in the area where the distance between NATO and Soviet Union was the shortest, namely, northern Finland. This area was also of great interest to Americans.

NATO had regarded Finland as an area not possible to defend and it worried that Finland as a country was cooperating too closely with the Russians. NATO suspected that Soviet troops could cross northern Finland in about one week. Even if Finns resisted a Soviet Russian attack, they would be forced to retreat toward the south and not the west. The Western line of defense was drawn between Finland and the Scandinavian peninsula.

Enduring Relationship

Washington became positively disposed towards Finnish armed forces by the 1970s for several reasons. The Americans were impressed by the Finns’ fighting will and ability. The military officers in Finland were western-minded. More importantly, ordinary Finns were patriotic and anti-Communist. The educated guess was that, in the event of a war, the Finns would fight with the west against the Soviets. According to U.S. military experts, there would be no resistance worth mentioning from the Finnish side if American troops entered Finland.

2017 will mark the centennial celebrations between United States and Finland. United States is considered the leading protagonist in higher education, while Finland is considered the world leader in rendering top quality basic/elementary education for its youngsters. There are synergy benefits to be realized from close co-operation in education between the two countries.

Helsinki, August 29, 2016




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The Joy of Being Wise

joyconnolyJoy Connolly,1 a Professor of Classics and the Dean for Humanities at New York University, has been appointed as the Provost of the Graduate Center of the City University of New York. As the Dean for the Humanities at New York University, Professor Connolly was responsible for about 400 faculty in 30 departments, programs, centers, and institutes. Her primary research interests include Roman republicanism, rhetoric, civic discourse, classical reception, and the role that aesthetic experience plays in the formation of political judgments.

With immense pride and excitement, we welcome Professor Joy Connolly to Graduate Center and to the City University of New York.

The City University of New York (CUNY)

The City University of New York, or CUNY as it is popularly known, is the largest urban university in the United States. CUNY is an integrated system of senior and community colleges, graduate and professional schools, research centers, institutes and consortia. The City University of New York receives funding from New York State and the City of New York. Presently, the CUNY network of colleges and schools provides high-quality, accessible education for more than 274,357 degree seeking students at 24 campuses across New York City.

CUNY faculty includes recipients of the Nobel Prize, the Pulitzer Prize, the National Humanities Medal, the National Medal of Science, the National Endowment for the Humanities, the Rockefeller Fellowship, the Schock Prize, the Bancroft Prize, the Wolf Prize, Grammy Awards, the George Jean Nathan Award for Dramatic Criticism, Guggenheim Fellowships, the New York City Mayor’s Award for Excellence in Science and Technology, the Presidential Early Career Awards for Scientists and Engineers, and memberships in the American Academy of Arts and Sciences and the National Academy of Sciences. For example, Paul Krugman, the Nobel Laureate in Economics, is a Distinguished Professor of Economics at the Graduate Center of CUNY. Professor Krugman was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography.

CUNY alumni includes an awe-inspiring list of individuals. Some prominent examples include Colin Powell (Former Secretary of State), Barbara Boxer (U.S. Senator from California), Max Kupferberg (Manhattan Project physicist), Ray Romano (TV actor and comedian), Joy Behar (comedian and writer), and Matthew Goldstein (Former Chancellor of CUNY). Refer to the website below for a comprehensive list of CUNY alumni.


Graduate Center, the City University of New York

Residing within the City University of New York (CUNY), the Graduate Center (GC) is an advanced teaching and research center. With over 35 doctoral and master’s programs of the highest caliber, and 20 research centers, institutes, and initiatives, the GC benefits from highly ambitious and diverse students and alumni. Through its public programs, the GC enhances New York City’s intellectual and cultural life. A distinct advantage for the Graduate Center is that it can draw upon its more than 1,700 faculty from across the CUNY college-campuses and scientific institutions dispersed throughout New York City.

Devoted exclusively to graduate education, the Graduate Center provides rigorous academic training in the humanities, sciences, and social sciences. GC remains the principal doctoral-granting institution of the CUNY system. As of June 2013, the CUNY PhD in Business is offered jointly by the Graduate Center and Baruch College.

Baruch College, the City University of New York

If you want a business degree, graduate or undergraduate, you must walk about 10 blocks south and head for the CUNY’s crown jewel, or its Kohinoor, Baruch College. Baruch College has about 18,000 students with around 80% majoring in business, which makes Baruch College the largest business school in the U.S.

With a legislatively mandated mission, the CUNY education system acts “as a vehicle for the upward mobility of the disadvantaged in the City of New York … ensuring equal access and opportunity.. to students, faculty and staff  from all ethnic and racial groups.” 

In spirit, the CUNY education-system embodies the much revered Finnish education system!

 Helsinki, August 17, 2016.

 1Irish meaning of the name Connolly is wise or brave.


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A Sach of Gold for the Common Man

gs_logoArguably the best financial company in the world, for almost 150 years, Goldman Sachs has served the financial needs of wealthy individuals, corporations and rich sovereign nations. Their business activities include investment banking, serving the financial needs of institutional clients, investing and lending, and wealth management. Because of their ability to attract top talent and pay handsome compensation, their payroll includes the best and the brightest talents that money can buy.

Goldman’s clients include high-net-worth individuals, families, foundations and endowments. What is the Gold standard for a high-net-worth client? Let us start with any positive number followed by a minimum of 7 or 8 zeros. Six zeros may be too modest an amount to get the attention of the Wall Street luminary. What remains indisputable is that Goldman’s business interests do not hinge around a “commoner” with modest income.

Low and behold, the company has decided to rebrand its uppity image. The financial behemoth is now in the online savings-banking business and eager to attract savings deposits as meager as $1. A cataclysmic metamorphosis.

Avant-Garde Acquisition

Recently, Goldman Sachs acquired GE’s internet-banking subsidiary with a total of $16 billion in retail deposits to get a foothold into the online banking business. The company’s online banking business called ‘GS Bank’ is keen to attract even more deposits by offering generous interest rates regardless of the amount deposited.

Online versus Traditional Banking

Traditional banks require an average of above $4,000 in average daily balance for not charging any monthly maintenance fee. Also, a checking or savings account typically pays between 0 and 0.1% in annual interest rate. The benefit is that the deposits are insured up to $250,000 by FDIC regardless of the financial health of the bank, which is intended to avoid a bank run. However, depositors pay a steep price for the benefits of a traditional bank. Customers are slapped with all types of fees/charges and the interest rates on the deposits are measly.

The online banking has changed the thrifty culture of the traditional banks. Normally, online banks do not require a minimum deposit (e.g., CapitalOne 360, Discover bank). Some online banks offer free checking facilities. More importantly, as any traditional bank, the online deposits are also insured up to $250,000 assuming that the online bank is registered with the FDIC (the online page will indicate whether it is the case). Because online banks do not operate physical locations, they do not incur the high costs of managing a network of branches. Consequently, online banks can pass on some of their cost savings to depositors in the form of higher rates.

GS Bank is offering annual interest of 1.05% for all deposits without any minimum balance and time restrictions. CDs are paying around 1.20% for one year term deposits. Compared with borrowing on the bond market, however, it is cheap.

Benefits to Goldman from Online Banking

To finance its investments, Goldman Sachs must borrow from the bond market. The interest rates in the bond market are much higher (between 3% and 4%). Therefore, assuming a constant rate of return on their investments, there is a 2%-3% spread from acquiring funds at a cheaper rate.

Based on its 2015 annual reports (FORM 10-K), Goldman has $97.519 billion in deposits. Additionally, it has 42.787 billion in short term borrowings. If Goldman can replace all of its short term loans with online banking deposits, an extreme case scenario, the annual interest cost savings generated would be around $1.3 billion. Assuming that the savings are in perpetuity, the present value of the cost savings using modest discount rates is around $13 billion. Because presently there are 426.4 million shares outstanding, the potential cost savings alone could generate a pop in the stock price by $30.

As a common Man, are you ready to invest in a Sach of Gold?

Helsinki, Finland, August 5, 2016.

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Academics and Central Banks

raghuram_rajan--621x414A central bank is a public institution charged with managing a country’s monetary policy and regulating member banks. The main objective of a central bank is price stability. By statute, many countries also require their central banks to support full employment. Governments often appoint influential academics as the Chair/Governor of the Central Bank. Ben Bernanke, Professor at Princeton University, served as the Chair of the Federal Reserve, the Central Bank in the U.S., from 2006 to 2014. Stanley Fisher, a prominent macro-economist from MIT, served as the Governor of the Bank of Israel from 2005 to 2013. An academic staff at Trinity College Dublin, Philip Lane was appointed the Governor of the Central Bank of Ireland in 2015.

In 2013, India’s then Prime Minister, Dr. Manmohan Singh, invited Raghuram Rajan, a high profile financial economist and a Professor at the Chicago Booth School of Business, to become the Governor of the Reserve Bank of India for a three-year term. When Dr. Rajan took over the reins of India’s monetary policy, India was grappling with high consumer price inflation, industrial slowdown, a free falling rupee, and a widening current account deficit.

Key achievements

During his short tenure span of three-years, Dr. Rajan is credited to have

  • Strengthened the Indian currency.
  • Boosted investor sentiments.
  • Contained the current account deficit from around 5% to around 1.9% by levying added import duty on gold.
  • Reduced inflation to 8% from 11%.
  • Established the “Joint Lenders Forum” to foster greater coordination among bankers and discuss every loan decision above Rs. 5 Crore in forum so that bad loans can be prevented.
  • Forced the recognition of non-performing loans (bad loans).

Non-Performing Loans

Mr. Rajan’s priority was to purge the banking system of bad loans by forcing banks to remove non-performing loans from their balance sheet. The de-recognition of bad loads forebodes bad news for banks because they would need to recapitalize the balance sheet if their equity cushion fell below the mandated levels. Moreover, banks would be forced to call out the bad players.

In country that wants to open up the economy, India has 27 government-controlled banks which account for 70% of the country’s banking assets. Much of the bad bank loans are confined to India’s state-owned banks. According to the Economist, nearly 17% of all loans need to be written off. Therefore, the problems of bad loans are quire severe.

Colliding Politics and Personalities

The Modi government, which came to power with a huge mandate in 2014, has had major disagreements with Dr. Rajan’s economic policies. The current government is more ‘dovish’ and prefers a low interest rate environment to spur domestic investments while electing to ignore the risk of higher inflation from pursing an aggressive monetary policy. In contrast, Mr. Rajan was more ‘hawkish’ on inflation and, as a result, he was more focused on controlling inflation by keeping the interest rates high even at the cost of choking potential investments. Also, the Central Bank’s aggressive policy to recognize bad loans may have contributed to the disagreement between the government and the governor of central bank.

The current BJP party is led by a charismatic leader who is predisposed to governing with an iron hand. The top gun of India’s Central Bank was also a high-powered intellectual, a renowned economist, and a man with strong economic convictions. Fireworks are inevitable!

The Outcome

After some modest ideological confrontations with the BJP party, Dr. Rajan abruptly decided to step down as the Governor of the Reserve Bank of India and not seek a second term. CNBC deems Mr. Rajan as the world’s best central banker because of his commitment to structural reforms and because of his ability to stabilize prices and exchange rate during his short term. Did he deliver? The market believes so!

Unfortunately, India is the big loser in this Bollywood-style drama. The country is deprived of the services of a financial superstar who could have guarded financial markets and helped the Indian government pursue pro-market reforms.

Helsinki, July 25, 3.36P


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Tryst with Transylvania

transylvaniaSituated in central Romania and surrounded by the Carpathian mountain chain, Transylvania or the “land beyond the forest” is easily one of Europe’s best-preserved medieval towns. Bram Stoker’s 1897 vampire novel was inspired by Vlad Dracula, a 15th-century Wallachian nobleman who lived in a castle close to Brasov (a town south-east of Transylvania). According to some estimates, Transylvania has about 100 castles and fortresses and about 70 fortified churches.

Some travelers describe Transylvania as ‘the last truly medieval landscape in Europe,’ which seems quite accurate. Hergé, the creator of Tintin, might have had Transylvania in mind when he wrote ‘King Ottokar’s Sceptre’! Some of the more prominent Saxon regions in Transylvania including Sighișoara, Biertan, and Viscri are deemed as Unesco World Heritage Sites.

Brief History

Because of Transylvania’s colossal natural beauty, the region was coveted and acquired many times over by various empires and kingdoms. The region was an integral part of the Kingdom of Hungary between 950-1526. Subsequently, it became an independent Principality (1526-1690) before being reabsorbed by the Habsburg Empire. It was united with Wallachia and Moldovia to form what we know as Romania today after the Austro-Hungarian Empire was dissolved in the Treaty of Triannon. After World War I, Transylvania became part of Greater Romania.

The region was dominated by Wallachians, Moldovans, Hungarians, Germans, Romas, Jews, and Armenians. Because of the diversity in racial composition, Transylvania’s history is marked by turbulent periods. The cultural differences within Transylvania are stark. According to experts, the South is dominated by a Saxon culture, the East and North East characterized by a Hungarian culture, the North is more Slavic.

Traditional Cuisine

Transylvania’s cuisine is heavily influenced by German, Greek, and Turkish cultures. The key condiments include thyme, red pepper, tarragon and some regions specific wonders like leuștean and cimbru. The staple ingredient is built around lamb, beef, chicken or pork.

All meals traditionally begin with a soup or ciorbă which has many variations including beef, egg yolk, flour dumplings, homemade pasta, or regional vegetables. One national treasure is ciorbă de burtă or a soup made of a cow’s stomach. Soups are traditionally served with a red or green pepper on the side to spice up the palate. As a leading producer of cabbage (varza), it is not surprising to find variations of cabbage cooked in slow heat with various types of animal protein. The most popular side dish is mămăligă – polenta served with a dollop of fresh smântână (sour cream).

Some of the popular main courses include sarmale (cabbage rolls stuffed with spiced pork and rice), Tochitură (pork and beef stew cooked in spicy tomato or wine sauce) served with fried egg yolk. The most popular grill food is a distinctive form of sausage called mici (grilled rolls of minced pork, beef and lamb). What distinguishes a mici from other types of sausages is the absence of any sheath around the meat.

The dessert menu includes strudels and cakes, clătite, (crepes filled with chocolate or fresh fruit) and the simply divine papanaşi or a fried dough sweetened with cream cheese or jam (a sweet beignet). Food is typically served with wine, which is less than mediocre (the natives beg to disagree), beer, which is of high quality, or ţuică (plum-based snap liqueur sure to give you a hangover).

Beware, the culinary experience in Transylvania is expected to increase the chances of a heart attack. But then who cares about the efficacy of arteries pumping blood into the heart when one has a date with ‘Ambrosia’ and divine food.

Noroc (cheers)!

Brasov, July 11, 2016, 1.45P

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Can Migration Explain Britain’s Decision to Exit EU?

BrexitNearly 52% of British citizens (17.4 million) voted in the ‘referendum’ on Thursday to exit the European Union. The outcome is startling because, from all accounts, the economic cost to Britain in the short- and long-term is expected to be staggeringly high. In less than 3 days, the global financial markets lost more than $3 trillion. During this period, the FTSE lost more than 100 billion pounds. The British pound, which was trading at an exchange rate of around $1.7 about a year ago is trading today at around $1.35.

The worst may not be over. Many sophisticated analysts believe that the pound could fall to as low as $1.10 within a year and it is projected that the U.K economy might hit a recession with a precipitous decline in property prices.

Why did the majority of the voting electorate elect to exit the EU and embrace large economic costs? One common explanation is linked to the sustained inflow of migrants from other EU countries.

Migration Statistics

Statistics disproves this theory. In 2015, the inflow of foreign nationals into Great Britain was 630,000. The increase in foreign population in 2015 as a percentage of Britain’s population, which is around 65 million, is less than 0.01%. Most economists would consider such an increase as a rounding error.

Between 1990 and 2015, Britain’s population grew from 57 million to 65 million, which translates into a modest increase of less than 1% per annum. Again, this small magnitude of the inflow of foreign nationals into Britain is unlikely to drum up mass hysteria among British citizens. Granted, the politicians have exploited the foreign migration issue to harness their individual political careers. However, the migration numbers from the census bureau do not support the casual observation that migration is a key factor driving the British anger.

If the scale of ‘legal’ migration fails to provide a compelling narrative why the majority of British nationals, principally the English, chose to exit the EU, there must be other persuasive economic explanations why 17 million rational British individuals didn’t hesitate to marry into an economic uncertainty.

Factor Price Equalization Theory

The Nobel Laureate in economics, Paul Samuelson, wrote his theory of “factory price equalization” in 1948. His theory might provide deeper insights into Britain’s current dilemma.

The Theory: According to factor price equalization theory, the prices of identical factors of production (typically labor and capital) will be equalized across countries as a result of international trade in commodities. Thus, when two countries have a free trade agreement, even without free mobility of labor, any differential in wage rate (price of labor) and rent of capital (interest rate) between two trading countries is expected to slowly dissipate. With the advent of free mobility of labor, as in the case of EU-Shengen countries, the factor price equalization process converges rapidly.  

Wage Disparity

Anecdotal evidence suggests that much of the migration of EU nationals into the U.K. has been mostly from Eastern Europe, which is typically identified as having depressed wages. For instance, according to World Bank statistics, the average monthly wage rate of Poland is €430, for the Baltic States (Lithuania, Latvia and Estonia) it is €380, for Hungary it is €358, for Romania it is €279, and for Bulgaria it is €215. For some Western European countries like Spain and Portugal the wage rates are also quite low (around €600).

In sharp contrast, the average monthly wage rate of Great Britain is around €1,550. Thus, the average wage rate of U.K is about 3 to 5 times larger than the wages of the migrant countries.

Economic Outcomes

  • Negative outcomes
  1. Wages in the host country are expected to decline as new migrants from lower wage-rate countries provide their services at a lower price in the U.K. The influx of competition injects considerable downward pressure on the wage rate of the host country. Unfortunately, U.K. workers must bear the brunt of this cost. In the absence of any barriers to entry in the labor market, i.e., specialized degrees or technical skills, wages of the host country will decline. Typically, “blue collar” workers who do not have a comparative advantage are most affected by migration. In contrast, “white collar” workers remain unaffected because migration does not affect competition in this sector.  
  2. Depending on sector specific labor migration, the abundance of labor force will also lead to some loss of jobs. Again, the job loss is expected to be confined to the blue collar working class because of fierce competition and limited growth opportunities in this sector.

The combination of job losses and a decline in wages gives rise to public discontent, anger, and resentment. This resentment is likely to be confined to working class. This is a strategic reason why the voting pattern in the referendum can be explained by the level, or lack, of education. The more affluent people or the more educated people would vote against an exit while those with lower levels of education or having less financial security would vote in favor or an exit.

  • Positive outcomes

Economists often underscore the gigantic economic benefits of migration. Yes, wages/rates decline with migration but it spurs investment, which in turn leads to more jobs. Consumers always benefit from migration and trade because of lower prices.

The Politics of Winner and Losers

A fundamental human natural law is that there are winners and losers in any society. An optimal and emancipated society aspires to minimize the number of losers while maximizing the number of winners. Judging from the referendum, a disproportionally small segment of the U.K population appropriated much of the gains from being part of the European Union, while a large segment of the population lost because of the union.

The U.K experience is a reminder that gains from trade, or common markets, must accrue to all strata of society. Otherwise, there will be social unrest or perverse outcomes that are to the detriment of the country’s long term economic welfare.

Migration issue is a sensitive topic in the U.S. as well where the discussion centers around illegal immigration. Whether the benefits of migration accrue to the majority of the citizens of the host country will decide whether ultimately host countries become more welcoming towards migration (illegal or legal).

At the end of the day, we are all migrants. Some migrated recently, while others migrated a while back.

Helsinki, July 1, 2016; 9.59P

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Chatham Professor Earns Distinguished Fulbright Award

Indian Express, North America Edition

New York – March 1, 2016 – Aloke (Al) Ghosh, Professor at Baruch College has been chosen as a recipient of the prestigious Fulbright Aalto University Distinguished Chair Award for research in Finland and other European countries.

 Ghosh is a Professor of Accountancy at the Zicklin School of Business. Starting in the summer of 2016, he will engage in scholarly activities, conduct research, give lectures, conduct seminars for doctoral students and faculty, and consult with senior administrations at Aalto University.

“I feel extremely honored to be receiving this prestigious award,” said Ghosh. “Consistent with the Fulbright goals and objectives, my endeavor would be to exemplify the power of international academic exchange, share my knowledge and understanding of cultures with the intention of bridging the academic and cultural gaps between the U.S. and Finland and with the ultimate goal of a more peaceful and prosperous world.”

Professor Ghosh graduated from Tulane University, in New Orleans, where he earned his Ph.D. in Accounting and Economics. His Master’s degree, which is in Economics, is also from Tulane University. Speaking about his expertise and how it has contributed to his selection of the Fulbright Honor he said, “I graduated from Tulane in 1993, which was 23 years ago. Because my academic training includes Economics, Accounting, and Finance, I am able to use an interdisciplinary lens to provide unique and distinctive insights on business subject matter rather than use a specialized lens derived from one area of expertise.”  He continued, “My endeavor would be to engage in high quality scholarly research with faculty at Aalto, give lectures on my subject matter of expertise, conduct seminars for doctoral students and faculty, and consult with senior administrations at Aalto University.”

Ghosh has published numerous articles relating to topics in financial reporting and analysis, capital markets, auditing and corporate finance. These articles have appeared in The Journal of Accounting and Economics, The Accounting Review, Review of Accounting Studies, Contemporary Accounting Research, Journal of Finance, Auditing: A Journal of Practice and Theory, Journal of Corporate Finance, Financial Management, Journal of Management Accounting Research, Journal of Business Finance and Accounting, and many others.

With the support of the United States government and through binational partnerships with foreign governments, especially the Fulbright Center in Finland, the Fulbright Scholarship Program sponsors U.S. and foreign participants for exchanges in all areas of endeavor, including the sciences, business, academe, public service, government, and the arts and continues to increase mutual understanding between the people of the United States and the people of other countries. Currently, the Fulbright Program operates in over 155 countries worldwide.

Chatham Professor Earns Distinguished Fulbright Award

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Equestrian Polo Designer Fails to Score

198_Polo_Ralph_Lauren_logo_profileThe stock price of Ralph Lauren, an upscale apparel company renowned for its Polo brand, has taken a thrashing lately. The stock has declined by about 50% over the past one year because of sluggish demand in the US and a decline in the value of its overseas sales from a strong dollar. In the third quarter of this year, the company reported a colossal 39% drop in  earnings.  The company also lowered its fiscal 2017 guidance numbers. Investors fear that the company may be at the vortex of a long-term slump.

End of an Era

To energize the polo pony, Mr. Ralph Lauren, the iconic designer-founder of Ralph Lauren and its sole Chief Executive Officer (CEO) and Chief Creative Officer, finally decided to step down as the CEO after being at the helm for almost 50 years. Mr. Lauren is hoping to inject some youthfulness into the septuagenarian polo team. Stefan Larsson, who is a former H&M executive and president of Old Navy, was hand-picked by Mr. Lauren to take charge of a company that is under attack.

Mr. Larsson will report to Mr. Lauren, although Mr. Lauren characterized their relationship as a “partnership” which is understandable considering that Mr. Lauren is the largest individual shareholder in his company and is expected to play a role in major decisions. Essentially, the company is separating the roles of the professional manager from that of the creative manager. The separation of the two roles will help assure Wall Street that the creative aspirations do not bleed the financial foundations of company.

Brutal Cost Cutting

Under the new strategy labelled as “New Plan Forward,” the incoming CEO intends to slash costs to fashion a reversal in downward profits. The company intends to close 50 stores, lay-off about 1,000 employees (or 7% of its workforce), and remove three of the nine layers of management that stand between the CEO and sales team.

The clothing production lead times will be amended from 15 to 9 months. Certain clothing lines will be on a hyper fast production time whereby it will be moved from the development stage to the shop floor within eight weeks.

The cost cutting strategy is bold and brutal, the Swedish CEO intends to slash costs by about $180 million to $220 million per year which is in addition to the $125 million in cost cutting completed last year.

Restructuring Costs

According to the plans, the company is projecting $400 million in restructuring charges and additionally the company intends to write off as much as $150 million in inventory that is scheduled to be liquidated. Evidently, near term earnings numbers are going to take a big hit before increasing.

Uncertain Prospects

The reasons for Mr. Lauren giving up some operational and financial control of the company after 50 years are notable and praiseworthy. Once a founder-owner company becomes sufficiently complex, the natural economic progression for the company is to retain a high quality professional manager who is responsible for supervising day-to-day operations, mange investments, and make optimal financing decisions with the objective of maximizing firm value. The advent of a professional managers also assures investors that the financial aspects of the company are not being compromised as creative side blossoms.

However, some of the restructuring plans are hard to assess. Some immediate concerns include,

  1. Why hire a CEO from outside the company? Why not hire an insider who understands the value of the brand?
  2. Can young CEO render value while being under the influence of a powerful founder-owner?
  3. Why pick a CEO from a low-priced apparel designer company that is not a direct competitor?
  4. Why are the business models that helped revive the fortunes at Old Navy and H&M likely to be useful for Ralph Lauren?
  5. Cost cutting strategies can only render value up to a point, eventually the principal driver of earnings is revenue growth.
  6. Too much cost cutting can also harm the brand value because of a loss in human capital.

Considering all these questions, the future of Ralph Lauren remains highly uncertain.

Helsinki, June 21, 12.48P.

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How Mobil(e) is ExxonMobil?

Losing Triple A Credit Rating

Losing Triple A Credit Rating

ExxonMobil Corp. had the honor and distinction of having a gold-plated AAA credit rating since the post WWII period. However, fortunes can change abruptly when one is trading products of mother nature. Last week, Standard & Poor’s (S&P) downgraded Exxon Mobil’s credit rating for the first time in almost 70 years from the coveted “AAA” rating to a “AA+” rating citing expectations of continuing low oil prices. ExxonMobil joins two other US companies with S&P AA+ credit ratings; General Electric Co. and Apple Inc. The two remaining US companies with the highest possible corporate AAA debt ratings are Johnson & Johnson and Microsoft Corp.

Exxon Mobil History

ExxonMobil is an American multinational oil and gas company based in Texas. It is the largest direct descendant of John D. Rockefeller’s Standard Oil Company. Exxon Mobil was formed in 1999 by the merger of Exxon (formerly Standard Oil Company of New Jersey) and Mobil (formerly the Standard Oil Company of New York). ExxonMobil is also the Fifth largest publicly traded company by market capitalization. ExxonMobil was the second most profitable company in 2014.

Downgrade Reasons

S&P stated that the “company’s debt level has more than doubled in the recent years, reflecting high capital spending on major projects in a high commodity price environment and dividends and share repurchases that substantially exceeded internally generated cash flow.”

S&P also said that while Exxon made efforts to reduce capital spending, the maintenance of production and replacing reserves will ultimately require the company to spend more. Because the company is returning cash to shareholders, instead of building cash or reducing its debt, the company faces limits on credit improvements even when oil prices recover.

S&P cautioned that it could further lower its rating on Exxon if the company is unable to sufficiently adapt to a prolonged period of low commodity prices. The downgrade is not a complete surprise. In February, S&P downgraded rival Chevron Corp and warned that such a move was also possible for Exxon.

Shareholder Payments

ExxonMobil paid out $325 billion as dividend and share repurchases over the last 11 years which exceeded its outlays for new property, plant and equipment of $272 billion over the same period. During the fourth quarter of 2015, the company paid out $3.6 billion in dividends and share repurchases, which is more than it earned in that quarter.

In February, Exxon Mobil changed its strategy and declared that it would only repurchase shares to offset dilution, and not pay back cash as dividend.  

Why Repurchase Over Dividend

Many companies prefer stock repurchase over dividends. One explanation is accounting based therefore cosmetic and the second explanation is more economic.

Investors tend to focus on accounting earnings, mostly earnings per share (EPS), which is computed as net income divided by number of shares outstanding. When a company buys back (repurchases) its own stock, it reduces the shares outstanding and thereby increases its EPS. This type of an increase in reported EPS is cosmetic (nip and tuck). Shareholders care about the pie (earnings) and not how the pie is being shared (EPS). So stock buyback initiated to increase EPS is a akin to a magician’s show intended to circumvent reality.

The advantage of stock buyback is that it is a one-time cash payout unless the company elects to announce future buybacks. Dividends, on the other hand, are more permanent in nature and investors expect continuation of dividend payments when one is announced. Therefore, companies wanting to preserve future cash prefer stock buyback over dividend.

ExxonMobil wants to buyback stock to offset the stock price decline from declining oil prices. Given the low oil prices, it has cut back on its planned investments or production capacity. However, when oil prices bound back, it wants to preserve cash to fund its future growth which is why it prefers stock buyback over dividend.

Stock Price

ExxonMobil’s stock price went down from a high of around $103 in 2014 to a low of $72 in 2015. The stock is back at around $90. With oil prices trending up, we can only expect ExxonMobil’s stock price to continue its upward trajectory.

Chatham; June 11, 2.11P


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The Mexican Wall (Mart) Spectacle

walmartWal-Mart Stores, the leading private employer in the world, operates in 25 countries with a strong presence in Mexico. Roughly about 20% of Wal-Mart’s 11,500 locations are based in Mexico. Over the last three years, the Justice Department has been investigating allegations that Wal-Mart paid bribes in Mexico to obtain permits. 

A group of beneficial Wal-Mart owners filed a complaint with the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that Wal-Mart’s auditor, Ernst & Young (E&Y) was aware of the bribery long before the company disclosed this irregularity to U.S. authorities in 2011. According to the complaint letter, E&Y as the independent auditor should have reported the suspected bribery to the SEC as soon as it became aware of such improprieties in 2006.

Bribery Act

The Foreign Corrupt Practices Act of 1977 (FCPA) makes it unlawful for persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. The Act was amended in 1998. The anti-bribery provisions of the FCPA now applies to foreign firms and makes it illegal for foreign companies to pay bribes in the U.S.

The Act levies criminal and civil liability for paying bribes to foreign government officials. The Justice Department has jurisdiction over the FCPA.


The Justice Department launched an investigation following a 2012 New York Times article about the alleged Mexican bribes. According to the article, Wal-Mart Mexico unit paid middlemen to obtain permits and that Wal-Mart executives chose not to pursue an internal inquiry into the suspicious payments.

Although the three-year investigation remains incomplete, according to Wall Street Journal, the case could be resolved with a fine and no criminal charges against Wal-Mart executives because the charges may not be as severe as previously anticipated.

Auditor’s Obligations

According to the auditing standards (AU section 317), auditors have a responsibility to design procedures that provide reasonable assurance of detecting illegal acts. In cases of bribery, the auditor is also implicated because bribing a foreign government official is illegal in the US and also because any bribery is likely to have a material effect on a company’s financial statements.

Companies that pay bribes generally record the underlying transactions in their accounting books as legitimate operating expenses to avoid detection. Since bribes often involve disbursements of cash, recording a bribe as a legitimate operating expense results in false reporting of expenses on the income statement.

What are the duties of the external auditor when it becomes aware that its client is suspected of violating FCPA provisions?

The answer may surprise you.

  • If an outside auditor discovers an illegal act, it is required to notify responsible authorities within the company including the company’s board and audit committee.
  • The external auditor is not required to notify the government.
  • Only when the company refuses to take corrective actions or the company’s books are compromised is the auditor obligated to notify the government.

Essentially, the rules and obligations are suggesting that the company has the obligation to correct improper acts and also inform appropriate government authorities.

Top Gun: Tom (Cruise) Ray

According to Chief Tom Ray, past Chief Auditor of PCAOB and my colleague at Baruch College,  external auditors are not legally obliged to inform outside regulators about potential scandals except in limited circumstances. Auditors are required to report those acts to management and the board’s audit committee, which is responsible for monitoring financial reporting and disclosure practices. The accounting firm also needs to evaluate whether the bribers would have a material impact on financial statements.

Top gun in auditing, Tom states that only when the company doesn’t take appropriate actions, an outside accounting firm may be legally required to report the problem to a federal agency,


Needless to say, Wal-Mart will become target of lawsuits. E&Y, with its deep pockets, is also likely to become a prime target. However, if the norm is to pay bribes to secure contracts, especially in developing and emerging countries, U.S. companies are at a disadvantage relative to almost all other countries that do not have anti-bribery provisions.  

Maybe it is time to have an anti-bribery world statute.



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