Running A Student Pub (into the ground)

Earlier this spring, the University of Windsor Students’ Alliance (www.uwsa.ca) announced that they were closing the student-owned-and-operated pub (The Thirsty Scholar) due to financial reasons. This announcement surprised me; why can’t a business successfully sell beer to an audience traditionally associated with beer and pubs? I suppose there are a myriad of potential reasons—students don’t like beer, the pub is paying outrageous rent to its landlord, or general mismanagement for starters. I decided to dig through the pub’s financial statements (they should be publicly available, as records for most student organizations are). You should check their financials web page… you may have better luck than I did (www.uwsa.ca/financials.php). I couldn’t find a working link to any financial statements for the pub that were more recent than April 30, 2009. Note to the UWSA executive: I suggest you hire a computer science student to fix up your website.

What’s the point of looking at these financials? What can they really tell us? Financial statements should be one source for examining an entity’s history. With a little interpretation, we can usually learn quite a lot. Financial statement sleuthing may not be as popular as CSI-style forensics, but really is not that much different. Let’s take a look at the statements that were available.  Note to reader: you will want to open a set of the financial statements and follow along with me.

The second page of the 2009 financial statements is the “Review Engagement Report.” A review engagement is one type of assurance on the financial statements. It’s not nearly as good as an audit engagement, but provides some level of comfort that the financial statements are not grossly misstated. The third page is the index—not useful.

The fourth page is the “Statement of Income” for the year with comparatives for the prior year. We find out that the pub had just over $450,000 of revenue, compared to $511,000 the year before, with beer sales declining from $172,000 to $123,000 (a 28% decline!). Gross profit increased though, which is usually good news. Gross profit is the amount left over after paying for the direct costs of beer, food, and liquor. For 2009, gross profit was $201,702. In order for the pub to be profitable, all the rest of the expenses needed to be less than that. Unfortunately this wasn’t the case. Actual expenses were $261,854, resulting in an operating loss for 2009 of $60,152. That’s a slight improvement from the prior year when the pub had an operating loss of over $95,000. What was by far the biggest expense? Wages. In fact, the wage expense exceeded the gross profit in both 2009 and 2008. That means the pub had no chance of being profitable even before it paid for any advertising, insurance, policing and security, or repairs on the facility. I hunted around for some industry statistics on drinking establishments and food services and I found the following data (www.restaurantcentral.ca/ResearchTrends/IndustryStatistics.aspx): average cost of goods sold was 36% of revenue, and average labour cost was 33.9% of revenue. The Thirsty Scholar’s numbers for 2009 were: Cost of goods sold, 56% of revenue; and labour, 48% of revenue. That both of those figures were so grossly out-of-line with industry norms suggests management incompetence. I’ve seen similar issues with student-run businesses before. Don’t get me wrong, I love student-run and student-owned businesses, but they must be run by people with appropriate training and it is important that the student associations ensure the managers are properly trained. Ok, enough on the income statement, let’s move on.

The fifth page is the “Statement of Retained Earnings,” which accumulates all the profit or loss retained by the business. Again, it isn’t good news for the Thirsty Scholar. By April 2009, they had accumulated total losses of almost $1 million. The losses that we saw on the income statement for 2009 and 2008 were not a short-term issue—the pub must have been accumulating losses for quite a while.

The sixth page, the balance sheet, is the last that I will examine for this post. Remember the key accounting equation: Assets = Liabilities + Equity. The Thirsty Scholar had total assets of $29,764 (mostly cash and accounts receivable). Their liabilities? $885,359! That’s incredible! They owed almost 30 times what they had in assets. I’ve rarely seen such a poor Asset:Liability ratio, and without digging too much further it seems pretty obvious that this business is broke both financially and structurally. Shut it down, pull the pin.

I hope you’ve enjoyed this somewhat macabre walk through the financial statements of a student pub. Next time you’re sitting in your local school pub enjoying a beverage, don’t forget the lessons we can learn from examining the financial statements of a business.

Drink responsibly!!

Note: this blog was originally posted on my site hosted by Pearson Education (http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

Financial reporting: between a rock and a hard place?

Nortel. The word is never used in a positive way in Canada. Nortel Networks Corp. was one of the most dramatic corporate failures in the country. While Nortel’s collapse and failure occurred over a decade ago (in 2000), remnants of the scandal still remain, including recent stories in national newspapers (see Jan 30/12 and Feb 14/12). While there were some obvious business factors that precipitated the company’s failure (including a collapse of the entire high-tech sector), poor and fraudulent accounting practices were clearly in play. The specifics of the fraud are still being investigated but a few things are clear and impact students taking an accounting course.

  1. Management probably had financial reporting incentives that differed from those of other stakeholders—particularly shareholders. In the recent news about Nortel it seems clear that management was keen to receive bonuses that were triggered or affected by the profitability of the firm. It appears that those incentive contracts were based on some non-GAAP (i.e., unofficial) profit number. Instead of reporting the GAAP-compliant profit (which was negative), management decided it would be “better” to artificially inflate the financial statements to show a profit so they wouldn’t look as greedy for taking their bonuses. That makes some sense—how happy would you be if your boss took a bonus but everyone else got nothing? Of course, that doesn’t make it right, it just makes it logical. Another option available to management would have been to properly disclose the negative GAAP net income and not take their bonuses. Financial incentives are strange beasts and can create odd logical-but-unethical behaviour.
  2. Financial reporting involves a lot—a LOT—of flexibility and judgment. This doesn’t make accounting good or bad, it just is. If users of financial statements are unaware of this flexibility, they may use financial statements improperly. If we think about the most common financial statement metric discussed, net income, many readers might feel that it must be an accurate number. More experienced financial statement users are aware that net income is simply the sum of a bunch of estimates and, therefore, an estimate itself.In addition, the two main building blocks of financial statements, assets and liabilities, are future oriented. That is, the value of an asset or a liability requires some estimation of what will occur in the future. Nortel obviously used this flexibility to its advantage for many years. As a future user of financial statements, you need to read them with a fair degree of skepticism. It’s not that they’re wrong, but they’re definitely not perfectly correct. Nortel is a reminder of this aspect of financial statements.

The collapse of Nortel is a high-profile reminder of some underlying characteristics of financial statements—they are prepared by people with extensive insider information and potentially odd incentives, and they contain a ton of estimation. Nortel’s fall contains many other interesting lessons, and we may revisit it over the next while as the Nortel investigation continues. If you have any questions or comments on Nortel or on the concepts discussed above, please leave a comment below.

Note: this blog was originally posted on my site hosted by Pearson Education (http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

Pensions – Paying for them for life

The recent federal budget included some interesting ideas about the correct retirement age and the impact that pensions have on taxpayers. Most post-secondary students are young and really don’t give much thought to pensions—what they are, how they work, or how they affect the finances of a business. Other than tobacco lawsuits, pensions are one of the largest liabilities that a business will ever face, and they impact retirees, soon-to-be-retirees, and young employees alike. In the case of post-secondary institutions, pensions also have a substantial impact on tuition and current students. They are worth paying attention to.

First, let me quickly explain what pensions are and how they impact financial statements. A pension is a future payment to a current employee that is paid out once the employee retires. There are two basic types of pensions: defined benefit (DB) plans and defined contribution (DC) plans. The type of plan (DB or DC) has a massive impact on how we account for the pension plan and its potential effect on financial statements. If you’re comfortable reading IFRS, see IAS 19.43 and 19.48 for more information. For the sake of this discussion we’ll consider DC plans as relatively simple, with few accounting concerns. DB plans, on the other hand, should not be dismissed as quickly.

A DB plan essentially guarantees a current employee a set amount once he or she retires. Hence, it clearly meets the definition of a liability: it’s a current obligation from a past transaction that arises due to the employee working for the employer, and will be settled in the future when the pension is actually paid out. Estimating the amount or the liability is difficult but not impossible. For instance, we need to estimate how long the employee is likely to live. Once the experts estimate the pension liability, the employer and employee must begin saving enough money to eventually be able to pay that liability. This pot of money is referred to as the pension asset. Determining the correct amount to save is difficult as well, since it requires estimating a future rate of return. In a volatile market like we’ve had for the past 5–10 years, this can be very challenging. When the pension liability exceeds the pension asset, it is an underfunded pension since there won’t be enough cash to settle the liability when the employee retires and the employer is on the hook to make up the difference. If the employer only had one employee, an underfunded pension might not be a significant dollar amount. But when thousands of employees are involved, as in most universities in Canada, the underfunded pension amount can be substantial. How much? A recent Globe and Mail article reports that the University of Toronto is facing an underfunded pension liability of almost $1 billion. This works out to about $20,000 per student currently enrolled at U of T. Other schools are not immune, and when scaled by student enrolment are actually in worse shape. The University of British Columbia and some other schools in Canada operate DC plans, and therefore have no underfunded pension liability.

Make no mistake about it, there are a limited number of options when facing an underfunded pension plan. The employer can try to renegotiate the terms of the pension plan with employees (which is VERY difficult) or the employer must generate additional money to save in the pension asset, which reduces or eliminates the underfunding. Post-secondary institutions have limited ways to earn additional revenue, and primarily have to rely on tuition increases. Should students be concerned? Definitely. I don’t think you need to worry about your institution going bankrupt, but I do think you should be informed about where your tuition dollars are spent. Do a quick search and see if your institution has a DB or DC plan. If it has a DB plan, is it underfunded? If so, by how much? What strategies does the institution have to fund that liability and how much are you paying for? To get started, try using the search term <institution name> pension plan news.

As a faculty member, I’m keen to get a pension when I do retire and I don’t mean to bash pensions or pension administrators. In all fairness, the bulk of the underfunded pension liabilities are the result of the financial market crash in 2008 rather than deliberate mismanagement. We don’t necessarily need to blame anyone for the situation we’re in, but we do need to work together—students, faculty, and administrators—to develop a strategy to solve the problem. I hope that you feel more knowledgeable about pensions and how they affect your school, and that you are willing to ask your accounting instructor more about this topic—it does affect you.

Note: This post was originally posted on my blog hosted by Pearson HIgher Education (http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

Kill Powerpoint. Long live dancing!

This is a great example of using arts to express difficult science concepts. John Bohannon suggests that we should stop mis-using Powerpoint and wasting hours of everyone’s time, be a bit more creative and deliver a much more effective message. If you’re an educator, a researcher, or a lover of arts you’ll truly appreciate this TED talk.

Income equality drives social health?

This is a real eye-opener. What is really driving social wellness? Things like infant mortality, mental health, crime etc? It turns out that income equality, that is the magnitude of the difference between the top 20% and bottom 20% of a country’s population may be a very significant factor. Richard Wilkinson presents some very compelling statistics, damning statistics for countries like the UK and USA, that suggest we need to reduce income differences. There are a variety of ways of doing that – pretax salary/bonus mechanisms and income tax methods. As a human (well most days), I truly appreciate the power of the message he delivers. As a tax teacher I love to see the role that income tax can play in creating a functional and healthy society!

Major thanks to John Burton for passing this video along!

Alcohol round 2

A reader and I had a face-to-face discussion a few months back regarding alcohol use on campus which led to my initial post regarding alcohol use/abuse by university students. I received a follow up email from that reader this week after they had a conversation with a relative currently attending Harvard.  Apparently alcohol is not an issue on Harvard, or at least for this particular university student.  The student is too busy with their academic studies and the legal drinking age in Massachusetts is 21 so they can’t legally drink even if they had the time.  I was glad to hear that but a bit skeptical.  Family morals and expectations probably have more to do with this individual story than any other factor.  That is great news for this particular student (and their family) but not necessarily great news for the rest of the higher education system.

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Earlier in the week I read a news article about a new study that is going to study alcohol usage for 2,000 university students for the next five years.  In particular, the research will examine the impact on actual consumption that perceived levels of peer drinking has.  That is, does a student drink more if they think their peers are drinking more?  I suspect the answer is yes but I look forward to hearing the definitive answer.

I was trying to reconcile my preconceptions about drinking and peer-drinking with the one piece of data from Harvard.  Is Harvard really all that different?  Perhaps.  On average Harvard may have more intelligent, wealthier, more driven students than other institutions.  On the other hand, George W attended Harvard so maybe Harvard students really aren’t that much different.  Does Harvard have an issue with alcohol abuse?  A quick search on Google found the following: Harvard’s Alcohol Amnesty Policy.  Harvard thinks that students are more likely to seek help for alcohol related issues if Harvard promises to NOT contact the student’s parents, hence the “amnesty”.  Perhaps Harvard believes that its students are mature enough or bright enough to use alcohol sparingly.  Apparently not.  Alcohol related patients at the university infirmary have increased by 43% in the last two years.  And those are years when George W wasn’t even on campus!

Finally, while Googling around this evening I found this tragic story: Alcohol Poisoning Suspected Cause of Clemson Student’s Death.  Very sad.  I met a number of Clemson staff a month ago at a conference.  All the staff I met were very involved in student life services beyond just academic stuff and I know they will be feeling the pain.  I was very impressed with what I saw going on at Clemson – great student support, great residential programs, excellent faculty-student interactions, lots of effort to ensure students had the necessary support to succeed.  Despite all that help, this student still made some poor choices last Friday night.

I’m not sure why this topic keeps rolling around my brain.  I have no expectations of prohibition but it does seem to be heavily centered around education.  Education of the risks of alcohol.  If universities do not take responsibility for the education or at least ensure more effort to provide educational opportunities for students about alcohol then I’m not really sure we should label ourselves Institutions of Higher Education.  I would love for some students to leave some comments on this.  Why do you binge drink?  It is costly and makes you feel crappy the next day.  What are the upsides?

Community on campus- what are we doing?

Perhaps I’m naive but I fully believe that the best student university experience is one that is integrated: academics, sports, health, housing, student growth – all aspects of student life.  That requires breaking down or minimizing barriers between those functional areas on campus.  How many faculty cross the physical threshold into student housing?  How many faculty hang out with staff or students outside of formal meetings?  Do faculty job requirements and incentives promote such cross-over or discourage us from doing it?

I’ve got a very bright 14 year old daughter (and an equally smart 11 year old son – there I was the “equal Dad”!) who will likely (hopefully) attend a university before too long.  What type of experience do I want her to have?  Do I honestly believe that she would get an amazing experience at my institution?  The best possible experience?  And if I don’t believe that why do I think that a sub-par experience is acceptable for other parents’ kids?

 

 

 

 

 

 

 

Its easy to look at this situation and say that change is out of our hands; an institution is an unmovable force best left alone.  Realistically what can one faculty member do to promote change on their campus or even more broadly, on campuses across Canada?  Not much sadly, but I am confident that one faculty member promoting change is likely to accomplish more than no faculty members promoting change.  As Parker Palmer reminded me in The Heart of Higher Education, across North America campuses are full of individuals that want a better student experience.  If they each think they are the only one on their campus they will keep their heads down and never connect with other like-minded people.  If we each raise our hand and say “I’m interested in promoting change and improving the state of education” perhaps small communities can form where the wheels will start turning.  At the least we will be able to take comfort or cover as we run into walls and resistance.

Let me bring this back to the topic at hand which was building community and improving the student experience rather than faculty revolt or faculty revolution.  If we want to bridge the divide between faculty and students and faculty and staff and begin to build true “community” there are small, relatively easy steps we can take.  First, we need to lead by example; that is, faculty themselves must become a community rather than merely a set of people.  A community involves support, encouragement, valuable and constructive feedback, laughter, and ultimately sharing in each others peaks and valleys.  Let’s stop shaking hands and give each other a hug once in a while.  Start dropping in for random chats with faculty down your hall or even way across the campus.  Make connections that are outside your comfort zone.  If we want students to grow and be comfortable with the unknown we should probably model courage and tackle the unknown as well, even if that unknown is a really odd faculty member with leather patches on the elbow of their tweed jacket.

I admit that building community is much bigger than simply being friendly towards our colleagues but before we run we need to crawl.

The importance of human touch in community

Dr. Abraham Verghese tells wonderful stories of how important human touch is when diagnosing patients and later care with those patients. He claims that the shift towards technology in medicine has eroded a very important, but simple aspect–human touch. I wonder if we’re missing that human contact in higher education these days? Classes of 200-1,000 students, hybrid or online delivery. Where and how do we build connections and relationships with each other?

If you listen long enough, patients will tell you exactly what is wrong with them

Many of you know that I’m working on a Masters degree in education, currently I’m through about 1/3 of the thesis.  I struggled for over a year to find a topic that was the right combination of doable, personally interesting, addressing a current challenge, and potentially influential.  I don’t know how my thesis will stack up on those four dimensions at the end but the topic I chose was exploring how professionalism is taught to accounting students and what it takes to do that well.

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  • I’ll give my supervisor major credit for paring the project down to make it doable, thanks Harry!
  • Helping students develop into professionals has been a stated, formal goal of mine for almost five years.  I struggle to see why we think that simply filling heads with technical accounting knowledge will result in developing successful accountants.  Hence, the personal interest in the topic.
  • My sense of accounting faculty hiring over the past 10 years is that there has been a significant change in the composition.  Yes, we’re hiring more research-trained and research-capable faculty than before but we’re hiring less faculty with professional designations, professional training, and ties to the profession.
  • My hope with the thesis is that I can find some “low-hanging fruit” around teaching professionalism where accounting academics can make some serious progress in the near term.

One of the highlights of the thesis so far has been the background research that I’ve done on this topic.  I’ve found an absolute plethora of material about teaching professionalism in medical schools.  Doctors are probably 15 years ahead of accounting education.

The other day I found this wonderful story in the NY Times. Generous benefactors have provided $42M to the University of Chicago.  The funds are meant to help develop programs and curriculum specifically around teaching bedside manner, managing the doctor-patient relationship, and “kindness” to med students.  I think that accounting educators can and will learn a lot from this new endeavour at Chicago.  Accountants spend too long learning the technical material and not enough time learning how to be professionals.  Strong technical knowledge is necessary but not sufficient for professionals; accountants and doctors both.

Well kudos to the Bucksbaums for ponying up the cash.  Let’s keep our ears to the ground to see what we can learn from this and then apply it in accounting education.  Even better, lets start making some progress on our own, we don’t need to let the doctors lead us through the desert, we’re pretty smart on our own.  After all, if we listen carefully enough the answer is likely to find us.

Alcohol on Campus

As I promised in an earlier post, I am writing about alcohol use/abuse by students (and I suppose others) on campus.  Its been over a month since I said I would write about this so why now?  There have been a number of unfortunate events coinciding with the start of the new academic year including at my own institution.  For instance, a student from Calgary apparently died of alcohol abuse at Acadia last week, at least two students died at Queen’s University over the past year as a result of alcohol related issues, and most recently there was a major bar fight and stabbing on the sleepy UBC Okanagan campus just two days ago.  On a more public scale but off-campus, it doesn’t take much detective work to realize that the Vancouver riots were fuelled by alcohol.  Generally there are two views on this: (1) its just kids growing up, we all went through it, or (2) this totally inappropriate for any institution of higher learning.  I will self-declare as being fully, 100%, in the second category.  There may be a line where we cross into “no-fun territory” or “the constitution gives me the right to drink on my own time” etc, but we’re no where close to that now.

First question that must be asked: Are we satisfied with the current situation or do we consider it acceptable?  Let me spin that question around just a bit, do kids need to get completely inebriated once or twice or every weekend to “grow up”?  In my opinion, no.  100% no.  The type of thinking that considers that a feasible or viable option must be expelled from our society.  Do I need to hit my thumb with a hammer every day so that I comprehend pain and “grow up”?  Of course not.  If we define “growing up” as becoming mature thinkers capable of contributing positively to society and tackling some of the great issues in the world, I fail to see how binge drinking can even be considered a necessary condition.

Second question: What can we do to avoid these tragedies?  First we need to educate the students on the issues with binge drinking.  I’m not talking about sitting 500 frosh down and lecturing them, we’re educators for crying out loud, surely we can find a way to help students learn about the issues and ramifications of alcohol abuse that doesn’t involve their repeated first-hand experience.  Second, we MUST provide alternative activities for students that don’t involve alcohol.  I suspect, although I don’t have evidence, that many students drink because their peers drink, its THE thing to do an a Friday night, and there’s no great alternatives.  Let’s take the lead on this, be innovative and help these students out.  Third, universities must help create a sense of unity and community within the student body.  Students must learn tolerance and respect and treat each other, staff and faculty as family.  My family is in no way perfect, I verbally fought with my siblings and parents but we didn’t stab each other or cut each other with broken beer bottles.

Finally, if you are a faculty member as I am, take the lead.  Ask your Dean, Provost, and President what your campus is doing to ensure the campus is a safe and healthy learning environment for everyone.  Don’t accept hand waving answers.  And share your initiatives and proposals.  We’re all in this together.  I’m sure there is some great research and reading on this, its on my list for the winter break.  If you know of anything please post as a comment and I’ll start building my reading list.

That’s my rant for today.  To the parents affected by the events I mentioned in this post, my deepest condolences and I apologize for not doing more to protect your kids.