Практический курс английского языка = Practical Course of English for Students of Economics. Учебное пособие для студентов экономических специальносте

of exchange,’ of $1,000, which promises payment of that amount at the time of delivery. The New York manufacturer, however, wants to be paid at once. He takes the bill to his bank, NY Bank, which ‘discounts’ the paper. That is, NY Bank pays the manufacturer the present value of the three-month $1,000 bill, which, of course, is less than $1.000; hence, the term discounting. The two parties agree that in calculating the present value NY Bank uses the current three-month interest rate. The bank now has in its portfolio the bill signed by the Raincity retailer. In effect, NY Bank has made a three-month loan to the retailer at the market interest rate.

Next, suppose that on the same day NY Bank realizes that it needs more liquidity and decides to sell this IOU by endorsing it to another bank, Streetbank. The buying bank discounts it, that is, pays the present value of the $1,000 face value. Of course, if Streetbank uses the same interest rate in the calculation, the selling price would be exactly what NY Bank paid the manufacturer. NY Bank can also sell the paper at the discount window of its banker, the New York Fed. In this case, the New York Fed ‘rediscounts’ the paper. If the discount window officer uses today’s three-month market interest rate to calculate the paper’s present value, NY Bank will be paid the same price that it would have received from Streetbank. The Fed would merely provide NY Bank liquidity. This service would be especially valuable to banks in areas with limited access to financial markets.

If the discount window officer calculates the present value using a discount rate lower than the market interest rate, the price that NY Bank receives will be higher. In this case, the Fed’s service to the bank is more than merely providing liquidity. It is a source of profit for the bank. The difference between the price the bank paid to acquire the IOU and the price it receives at the discount window is a result of the difference between the interest rate on the paper and the discount rate the Fed used. In effect, NY Bank borrows from the Fed at a lower rate (the discount rate) than the rate it charges the retailer.

Central banks, including the Fed, learned early on that by changing the discount rate, they could affect the profitability of borrowing from the Fed and thus affect the amount of credit in the economy. Until the 1930s, discount rate policy was the principal, if not the only, instrument of monetary policy.

In modern times, the Fed does not make loans to banks by rediscounting paper in their possession. The Fed simply makes outright loans, called advances. Perhaps to underscore the history of discounting or to keep up appearances, the Fed normally requires borrowing banks to post supporting collateral paper, even though ‘borrowers in good financial condition who seek short-term adjustment credit may be permitted to hold their own collateral appropriately earmarked.’

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Text 5

A Brief History of the Federal Reserve

The authority to create and regulate money rests with Congress, which is empowered, according to Article 1, Section 8, Clause 5, of the U.S. Constitution, “to coin money [and to] regulate the value thereof.” By enacting the Federal Reserve Act in 1913, Congress, in turn, created the Federal Reserve System and authorized it to create money and regulate its value. In designing the Federal Reserve System, Congress benefited from the experience of other countries central banks.

By the time the Federal Reserve was founded in 1913, the phrase ‘regulate the value’ had acquired an interpretation broader than mere regulation of the purchasing power of money. The Federal Reserve Act came in the aftermath of several financial panics, which were accompanied by the failure of many banks and nonfinancial businesses and by the disruption of commerce and general economic activity. In response, the act was specifically designed to provide the country with enough liquidity, to provide facilities for discounting commercial credit, and to improve the supervision of the banking system. Thus, from the beginning, the Federal Reserve Act mandated the functions of the Fed: (1) to provide enough money and credit to facilitate economic activity and (2) to supervise banks. In other words, safeguarding the health of the economy and the health of the financial system itself were the dual ultimate goals of the Federal Reserve.

By working toward these goals, the Fed hoped to prevent bankruptcies of financial and nonfinancial businesses and disruptions in economic activity. It failed, however, to avert the Great Depression of the 1930s, when thousands of banks and even more nonfinancial businesses failed. The level of economic activity became so weak that it could support only a shockingly small proportion of the labor force. Unemployment soared.

In the aftermath of the Great Depression, the Banking Acts of 1933 and 1935 amended the form and functions of the Federal Reserve. In addition to giving the Fed power to regulate rates on savings and time deposits, the 1933 act established the Federal Open Market Committee (FOMC), the third component of the Federal Reserve System. The 1935 act restructured both the Board and the FOMC by removing the secretary of the Treasury and the comptroller of the currency from these two bodies, thereby making the Fed more independent. The next major amendment came with the Depository Institutions Deregulation and Monetary Control Act of 1980 (DID&MCA). As Chapter 5 points out, this act deregulated deposit rates and subjected all depository institutions to reserve requirements.

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These three acts—the Banking Act of 1933, the Banking Act of 1935, and DID&MCA of 1980 – were concerned with the Fed’s role as a regulator both of the banking industry and of economic activity. Two additional acts focused primarily on the Fed’s role as a regulator of economic activity. The Full Employment Act of 1946 directed the government to promote ‘maximum employment, production, and purchasing power.’ The term government was interpreted to include the Federal Reserve. The goals of monetary policy were further refined by the 1978 Full Employment and Balanced Growth Act, commonly called the Humphrey-Hawkins Act in honor of its prime sponsors, the late senator Hubert Humphrey and Congressman Augustus Hawkins. The preceding years had been characterized by high and rising inflation rates. The Humphrey-Hawkins Act instructs the Fed to pay attention to the rate of unemployment and the rate of growth of real GDP but also to the rate of inflation. It also requires the Fed to report semiannually to Congress about its outlook on economic activity and inflation and to relate this outlook for the economy to that set down by the administration in the annual Economic Report of the President. Additionally, the HumphreyHawkins Act requires the Fed to set and report on targets for money growth. The requirements of the Humphrey–Hawkins Act reflected not only the public’s awareness and concern about inflation but also the ascendancy of monetarism, a school of thought whose basic tenet is that inflation is caused by excessive growth of monetary aggregates.

To date, none of the laws mandates a rigid set of practices to which the Fed must adhere regardless of economic conditions. The practices that the Fed has pursued in striving to achieve its twin goals of safeguarding the health of the economy and the health of the financial system have changed over time, as the Fed has adapted to the economic and political realities of the day.

Unit 5

A C C O U N T I N G

Text 1

Deloitte, Touche, Tohmatsu

The name of this world-known auditing company − Deloitte, Touche, Tohmatsu − owes its existence to its founders who, from the very start of their careers, realized the importance of world-wide practice. The history of the company can be traced through their names: Deloitte, Touche, Tohmatsu.

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Deloitte. William Welch Deloitte was one of the fathers of accountancy. He came from a rich French family who had to leave France during the Revolution. He began learning business at the age of 15 working as an assistant to the Official Assignee at the Bankruptcy Court in the City of London. At that time accountancy profession grew from its early days in the business of sorting out the affairs of bankrupts. At the age of 25 Deloitte opened his own office opposite the Bankruptcy Court in London. He was the first independent auditor in Britain. He made his name with the industry of the day – the railways. In 1849 he discovered frauds on the Great North Railway and invented a system of accounts to protect investors from mismanagement of their funds. His reputation as a professional accountant was rather high. Some years later he became president of the newly created Institute of Chartered Accountants in Britain. In 1893 he opened offices in the United States and began to audit different businesses.

Touche. George Touche came from Scotland, and when he qualified as an accountant in Edinburgh, there was no e at the end of his name. It was Touch and was pronounced in the same way as the Scottish loch. But since it was often mispronounced he decided to change it later. In 1883 he graduated from Edinburgh University and set off to the south to seek his fortune. Investment trust business was experiencing a boom, and that gave him a chance for making a career in this field. He took up saving businesses from financial disasters which were very frequent in those days because investment trust business was quite new. George Touche had a lot of clients and had to work very hard. Soon he earned a very good reputation for a true flair for his business and honesty. In 1899 he started his own business ‘George A. Touche and Co’. In 1900, he and John Niven set up the firm of Touche, Niven and Co in New York. Many large companies of both in the US and Britain became his clients. His company enjoyed high reputation and popularity among businessmen.

Tohmatsu. The Japanese company of Tohmatsu owes its origin to Admiral Nobuzo Tohmatsu. He started his career as a naval attache at the London Embassy. At that time he was also an instructor at the Naval Academy. Many of his students were talented people taking interest in economics. Tohmatsu took an interest for accounting. He qualified as a certified public accountant at the age of 57. After that he became president of the Japanese Institute of CPAs. At that time Japanese government wanted to establish national audit firms. Tohmatsu, together with one of his students decided to respond to the challenge. So in 1968, Tohmatsu and Co was incorporated. From the very beginning this company was internationally focused. It was not surprising, that it merged with another globally focused company Deloitte & Touche.

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Today Deloitte Touche Tohmatsu is one of the largest auditing companies of the world. It provides their clients with efficient consultative services wherever they are.

Text 2

AICPA Code of Professional Conduct

51 Preamble

1.Membership in the American Institute of Certified Public Accountants is voluntary. By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.

2.These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.

Section 54 – Article III: Integrity

To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

1.Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions.

2.Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.

3.Integrity is measured in terms of what is right and just. In the absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: “Am I doing what a person of integrity would do? Have I retained my integrity?” Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment.

4.Integrity also requires a member to observe the principles of objectivity and independence and of due care.

Section 56 – Article V: Due Care

A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality

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of services, and discharge professional responsibility to the best of the member’s ability.

1.The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member’s ability with concern for the best interest of those for whom the services are performed and consistent with the profession’s responsibility to the public.

2.Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member’s professional life. It is a member’s individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member’s services meets the high level of professionalism required by these Principles.

4.Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.

Section 55 – Article IV: Objectivity and Independence

A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.

1.Objectivity is a state of mind, a quality that lends value to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation services.

2.Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare financial statements in the employment of others, perform internal auditing services, and serve in financial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment.

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3.For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conflicts of interest.

4.Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of Generally Accepted Accounting Principles and candid in all their dealings with members in public practice.

Unit 6

F I N A N C E

Text 1

Bull and Bear Markets

Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is strong, jobs are plentiful and inflation is low. Bear markets are the opposite – stock prices are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation. In either scenario, people invest as though the trend will continue. Investors who think and act as though the market will continue to rise are bullish, while those who think it will keep falling are bearish.

What causes bull and bear markets? They are partly a result of the supply and demand for securities. Investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These forces combine to make investors bid higher or lower prices for stocks. To qualify as a bull or bear market, a market must have been moving in its current direction (by about 20% of its value) for a sustained period. Small, short-term movements lasting days do not qualify; they may only indicate corrections or short-lived movements. Bull and bear markets signify long movements of significant proportion. The best-known bear market in the U.S. was, of course, the

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Great Depression. The Dow Jones Industrial Average lost roughly 90 percent of its value during the first three years of this period.

Investors turn to theories and complex calculations to try to figure out in advance when the market will scream upward or tumble downward. In reality, however, no perfect indicator has been found. In their attempts to predict the market, economists use technical analysis. Technical analysis is the use of market data to analyze individual stocks and the market as a whole. It is based on the ideas that supply and demand determine stock prices and that prices, in turn, also reflect the moods of investors. One tool commonly used in technical analysis is the ad- vance-decline line, which measures the difference between the number of stocks advancing in price and the number declining in price. Each day a net advance is determined by subtracting total declines from total advances. This total, when taken over time, comprises the advance-de- cline line, which analysts use to forecast market trends. Generally, the A/D line moves up or down with the Dow. However, economists have noted that when the line declines while the Dow is moving upward, it indicates that the market is probably going to change direction and decline as well.

A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Investors often attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward. Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios. Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures and currencies they believe will gain value. Growth is what most bull investors seek.

Text 2

Functions performed by the Financial System and the Financial Markets

The great importance of the financial system in our daily lives can be illustrated by reviewing its different functions. There are seven basic functions of the financial system in a modern economy.

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Savings Function. As we noted earlier, the system of financial markets and institutions provides a conduit for the public’s savings. Bonds, stocks, deposits, and other financial claims sold in the money and capital markets provide a profitable, relatively low-risk outlet for the public’s savings. Those savings flow through the financial markets into investment so that more goods and services can be produced in the future, increasing society’s standard of living. When savings flows decline, however, the growth of investment and living standards begin to fall.

Wealth Function. For those businesses and individuals choosing to save, the financial instruments sold in the money and capital markets provide an excellent way to store wealth (i.e., to preserve value) until funds are needed for spending in future periods. While we might choose to store our wealth in “things” (e.g., automobiles and clothes), such items are subject to depreciation and often carry great risk of loss. However, bonds, stocks, and other financial instruments do not wear out over time and usually generate income; and, normally, the risk of loss is much less than for other forms of stored wealth.

Liquidity Function. For wealth that is stored in financial instruments, the financial marketplace provides a means of converting those instruments into ready cash with little risk of loss. Thus, the financial system provides liquidity for savers holding financial instruments but in need of money. In modern societies money consists mainly of deposits held in banks and is the only financial instrument possessing perfect liquidity. Money can be spent as it is without the necessity of converting it into some other form. However, money generally earns the lowest rate of return of all assets traded in the financial system, and its purchasing power is seriously eroded by inflation. That is why savers generally minimize their holdings of money and hold other financial instruments until spendable funds really are needed.

Credit Function.In addition to facilitating the flow of savings into investment and providing liquidity for stored wealth, the financial markets furnish credit to finance consumption and investment spending. Credit consists of a loan of funds in return for a promise of future payment. Consumers frequently need credit to purchase a home, buy groceries, repair the family automobile, and retire outstanding debt. Businesses draw upon their lines of credit to stock their shelves, construct buildings, meet payrolls, and grant dividends to their stockholders. State, local, and federal governments frequently borrow to construct buildings and other public facilities and cover daily cash expenses until tax revenues flow in.

Payments Function. The financial system also provides a mechanism for making payments for goods and services. Certain financial assets, mainly checking accounts and negotiable order of withdrawal (NOW)

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accounts, serve as a medium of exchange in the making of payments. Plastic credit cards issued by many banks, credit unions, and retail stores give the customer instant access to short-term credit but also are widely accepted as a convenient means of payment. Plastic cards and electronic means of payment, including computer terminals in homes, offices, and stores, are likely to displace checks and other pieces of paper as the principal means of payment in the years ahead.

Risk Function. The financial markets offer businesses, consumers, and governments protection against life, health, property, and income risks. This is accomplished first of all by the sale of life and property-ca- sualty insurance policies. Policies marketed by life insurance companies indemnify a family against possible loss of income following the death of a loved one. Property-casualty insurers protect their policyholders against an incredibly wide array of personal and property risks ranging from ill health, crime, and storm damage to negligence on the highways. In addition to making possible the selling of insurance policies, the money and capital markets have been used increasingly by businesses and consumers to “self-insure” against risk. This simply means building up one’s holdings of securities, deposits, and so forth, as a precaution against future loss.

Policy Function. Finally, in recent decades the financial markets have been the principal channel through which government has carried out its policy of attempting to stabilize the economy and avoid excessive inflation.

Text 3

Fidelity Bonds, Surety Bonds, and Criminal Insurance

Two important types of insurance available to companies are called fidelity bonds and surety bonds. While many people think only of natural perils in connection with insurance, other unplanned losses can be insured. One such type of loss is due to theft and other criminal behaviors of employees.

Employees who are placed in positions of trust—especially positions that require handling money, such as cashiers, accountants, bartenders, and loan collectors—can embezzle or steal large sums of money from the company. Fidelity bonds protect employers against losses caused by dishonest and fraudulent acts of employees.

A second type of unplanned loss occurs when a company is unable to meet the performance terms of a contract. For example, a customer who asks a contractor to build a new warehouse may lose money if the warehouse is not completed by some specified date. In this case, the cus-

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