...How did Financial Reporting Contribute to the Financial Crisis? Mary E. Barth & Wayne R. Landsman a a b Graduate School of Business , Stanford University , Stanford, CA, USA b Kenan–Flagler Business School , University of North Carolina at Chapel Hill , Chapel Hill, NC, USA Published online: 07 Jul 2010. To cite this article: Mary E. Barth & Wayne R. Landsman (2010) How did Financial Reporting Contribute to the Financial Crisis?, European Accounting Review, 19:3, 399-423, DOI: 10.1080/09638180.2010.498619 To link to this article: http://dx.doi.org/10.1080/09638180.2010.498619 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the...
Words: 13452 - Pages: 54
...93–118 Did Fair-Value Accounting Contribute to the Financial Crisis? Christian Laux and Christian Leuz I n its pure form, fair-value accounting involves reporting assets and liabilities on the balance sheet at fair value and recognizing changes in fair value as gains and losses in the income statement. When market prices are used to determine fair value, fair-value accounting is also called mark-to-market accounting. Some critics argue that fair-value accounting exacerbated the severity of the 2008 financial crisis. The main allegations are that fair-value accounting contributes to excessive leverage in boom periods and leads to excessive write-downs in busts. The write-downs due to falling market prices deplete bank capital and set off a downward spiral, as banks are forced to sell assets at “fire sale” prices, which in turn can lead to contagion as prices from asset fire sales of one bank become relevant for other banks. These arguments are often taken at face value, but evidence on problems created by fair-value accounting is rarely provided. We discuss these arguments and examine descriptive and empirical evidence that sheds light on the role of fair-value accounting for U.S. banks in the crisis. While large losses can clearly cause problems for banks and other financial institutions, the relevant question for our article is whether reporting these losses under fair-value accounting created additional problems. Similarly, it is clear that determining fair values for illiquid...
Words: 14541 - Pages: 59
...61) Journal of Modern Accounting and Auditing, ISSN 1548-6583, USA Fair value accounting under financial crisis HE Cai-xia1, ZHANG Chi2 (1. School of Accounting, Zhongnan University of Economics and Law, Wuhan 430073, China; 2. School of Management, Huazhong University of Science and Technology, Wuhan 430073, China) Abstract: The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight three important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or U.S. GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Key words: fair value accounting; historical cost accounting; financial crisis 1. Introduction The recent financial crisis has turned the spotlight on fair-value accounting (FVA) and led to a major policy debate involving among others the U.S. Congress, the European Commission as well banking and accounting regulators around the...
Words: 2462 - Pages: 10
...How did Financial Reporting Contribute to the Financial Crisis? Mary E. Barth Graduate School of Business Stanford University Stanford, CA, 94305 mbarth@stanford.edu. Wayne R. Landsman Kenan-Flagler Business School University of North Carolina at Chapel Hill, Chapel Hill, NC 27599 wayne_landsman@unc.edu. May 2010 Forthcoming, European Accounting Review, 2010 We appreciate comments from seminar participants at the Bank of Spain, Rob Bloomfield, Elicia Cowins, Hilary Eastman, Gavin Francis, Christian Kusi-Yeboah, Jim Leisenring, Martien Lubberink, Richard Rendleman, David Tweedie, and an anonymous reviewer. We acknowledge funding from the Center for Finance and Accounting Research at UNC-Chapel Hill and the Stanford Graduate School of Business Center for Global Business and the Economy. Electronic copy available at: http://ssrn.com/abstract=1601519 How did Financial Reporting Contribute to the Financial Crisis? Abstract We scrutinize the role financial reporting for fair values, asset securitizations, derivatives, and loan loss provisioning played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely was insufficient for investors to assess...
Words: 12577 - Pages: 51
...| BENEFITS AND CHALLENGES OF FAIR VALUE ACCOUNTING | ACCT 525-22936 Current Issues in Accounting | Professor Kabani | Robert Larison | 10/20/2013 | In this paper I look at the benefits and challenges that are likely to follow the migration into the use of Fair Value Accounting. Perhaps, there is no issue today that carries with it as much controversy as does “FVA”. | BENEFITS AND CHALLENGES OF FAIR VALUE ACCOUNTING INTRODUCTION I do not think any topic in accounting has gathered as much interest as has the subject of “Fair Value Accounting” “FVA”. Heightened by the financial crisis of recent years “FVA” has received enormous attention by both academia and the business community alike. Rarely do “conspiracy theorists” make their way into the humdrum subject matter of accounting, but when it comes to the issue of “FVA” accounting, almost anything and everything has been postulated. The most widely held belief is that the move to “FVA” is to blame for the financial crisis of 2007. (Sorkin, 2008.) I have evaluated “FVA” and the transition from “historical value accounting “HVA”. In particular, I have researched the evolution within the Financial Accounting Standards Board (FASB) as it pertains to “FVA”. I have also reviewed the move toward the establishment of one set of standards for worldwide accounting as evidenced by the “convergence” project. With that in mind, we only need to look to the International Accounting Standards Board and its IFRS to get a...
Words: 2522 - Pages: 11
...Stakeholder Theory 4 3.2 Positive Accounting Theory 5 3.2 Efficient Market Hypothesis 7 4.0 Discussion and findings 8 5.0 Conclusion 10 Reference 12 Relationship between Fair Value Measurements with Investor Confidence during Global Financial Crisis Abstract As investor, the needs of information which can reflect accurate financial information matching with current market condition is essential. Using fair value methods and measurement for asset valuation is one of the best accounting methods which can reflect current market condition accurately. But FVA cannot be separated from the critique especially when global financial crisis hit the world. Critique said FVA decrease investor confidence to invest in market which made more illiquid market during the time. In this paper, our aim is to find the relationship between fair value accounting, method, and measurement with investor confidence. We have been searched the data from previous journal that has been worked before to prove our assumption which are Fair value has decrease investor confidence and investor rely on information which is provided only by fair value measurement. 1.0 Introduction and Motivation There have been many studies on the role of FVA to global financial crisis (GFC) which may result in different opinion and open debate in the future. Most of the past research papers consist of the focus of this paper which is to find in depth more on how the fair value (FV) measurement may or may not affect...
Words: 4953 - Pages: 20
...The Role of Accounting in the Financial Crisis: Lessons for the Future S.P. Kothari kothari@mit.edu 617-253-0994 and Rebecca Lester rlester@mit.edu MIT Sloan School of Management E60-382, 30 Memorial Drive Cambridge, MA 02421 December 14, 2011 ABSTRACT: The advent of the Great Recession in 2008 was the culmination of a perfect storm of lax regulation, a growing housing bubble, rising popularity of derivatives instruments, and questionable banking practices. In addition to these causes, management incentives, as well as certain US accounting standards, contributed to the financial crisis. We outline the significant effects of these incentive structures, and the role of fair value accounting standards during the crisis, and discuss implications and relevance of these rules to practitioners, standard-setters, and academics. This article is based on a presentation by Deputy Dean and Professor SP Kothari of the Sloan School of Management, Massachusetts Institute of Technology, at Baruch College on October 25, 2010. 1 Electronic copy available at: http://ssrn.com/abstract=1972354 The Role of Accounting in the Financial Crisis: Lessons for the Future I. Introduction The Great Recession that started in 2008 has had significant effects on the US and global economy; estimates of the amount of US wealth lost are approximately $14 trillion (Luhby 2009). Various causes of the financial crisis have been cited, including lax regulation over mortgage lending,...
Words: 9946 - Pages: 40
...Brothers: In its last reported financial statements before it went bankrupt, Lehman Brothers reported a loss of $US 2.4 billion for the first six months ended May 31, 2008 (vs. a net income of $US 2.4 billion for the first six months ended May 31, 2007). The shift of $US 4.8 billion in net income is largely driven by a dramatic fall of $US 8.5 billion in Lehman’s revenues from principal transactions, which include realized and unrealized gains or losses from financial instruments and other inventory positions owned. A significant portion of the downward shift in principal transactions revenues is actually explained by unrealized losses of $US 1.6 billion in the first semester of 2008 vs. unrealized gains of $US 200 million in the first semester of 2007. Thus, accounting at fair value for some financial assets amplified Lehman's downward earnings performance. Hence, it can be put forward that FVA, through its magnifying impact on earnings volatility, may have contributed to aggravate investors', regulators' and governments' perceptions with respect to the severity of the crisis, itself characterized by record volatility in the prices of many securities and goods. On a related note, the increased volatility brought forward by FVA is conducive to the use of equity-based compensation, especially stock options, which value is then enhanced (according to the Black-Scholes model, volatility is one of the key inputs in option valuation). Prior research 此前的研究 suggests that there is a strong...
Words: 3771 - Pages: 16
...Original Article How to ‘mark-to-market’ when there is no market Received (in revised form): 12th December 2010 Samuel Francis is an attorney and certified public accountant experienced in corporate, litigation, audit and tax matters focusing his practice on financial services and investment management. He holds a BS in accounting from the City University of New York, Brooklyn College and a JD from Fordham University School of Law. He is the author of the 2009 award-winning article ‘Meet Two-Face: The Dualistic Rule 10b-5 and the Quandary of Offsetting Losses by Gains’. Fordham Law Review 77(6): 3045–3094. Correspondence: Samuel Francis, 321 Roselle Avenue, Cedarhurst, NY 11516, USA E-mail: samfrancis@optonline.net ABSTRACT At the center of the global financial crisis of 2007–2008 was the collapse of American International Group, brought on by extensive unhedged positions in derivatives, such as credit default swaps, and possibly exacerbated by mark-to-market accounting rules. Even though these rules generally produce the most realistic valuations of derivatives, a heated debate broke out over their application in a dislocated market. The foremost concern was that forcing financial institutions to mark down assets to their current market prices actually causes further declines. Regulators largely dismissed such concerns, but acknowledged that the existing standards could use additional clarification and modification. Many scholarly studies have since concurred that...
Words: 6287 - Pages: 26
...International Accounting Standards Board (IASB) has one main role; this main role is to promote the use of accounting standards and to bring convergence of international financial reporting standards and national accounting standards. Other roles IASB consist of develop drafts of International Financial Reporting Standards (IFRS) and to carry out tasks alongside with the International Financial Reporting Committee (IFRIC), where the IASB role is to approve the interpretations by the IFRIC. Australia has joined the revolution of accounting integration by the intention to adopt IFRS in 2003, with implementation required for reporting periods on or after 1 January 2005 (Nobes & Zeff, 2008). Intention of adopting IFRS is to embrace international harmonisation by having a single universal set of accounting rules and to optimize accounting quality reducing diversity in accounting practices and information asymmetries. Concurrently, many scholars has raised doubts and speculation of this ideology of accounting standardisation stirred up by the adoption of the controversial International Accounting Standards (IAS) 39 or in Australia, the Australian Accounting Standards Board (AASB) 139: Financial Instruments: Recognition and Measurement which has been subject to much criticism (Armstrong, Barth, Jagalinzer, & Riedl, 2008; Barth, Landsman, & Lang, 2006). Due to this uproar, the IASB has decided to review the standards for financial instruments formulating a new financial instrument...
Words: 2897 - Pages: 12
...Research in Higher Education Journal Centering the business capstone course on the banking crisis: concrete integrated pedagogy Khalid A. Razaki Dominican University Wayne Koprowski Dominican University Peter Alonzi Dominican University Robert Irons Dominican University Abstract The recent financial crisis offers instructors rich material for business programs regarding the relations between accounting, business law, economics, and finance, as well as ethical issues. This paper offers a concrete approach to developing a business capstone course built around the financial crisis and the lessons it offers business students. Complete pedagogical modules are offered for each discipline, including suggestions for specific assignments in each discipline. Key Words: Capstone Course, Banking Crisis, Pedagogy Centering the Business Capstone Course, Pate 1 Research in Higher Education Journal INTRODUCTION A capstone course is essential in the business school curriculum. It provides each student the time to refresh their grasp of and to hone their ability to apply the principles, tools, and methods of the fields comprising the business curriculum. Further, it gives students the opportunity to integrate the insights of the various fields. The effectiveness of the capstone course can be enhanced by centering the capstone course on the 2008 financial crisis. All students share the common experience of the 2008 crisis’s violent shaking of the economy. It immediately affected each...
Words: 10514 - Pages: 43
...NIIT University | Ethics in Finance | | | Aman Sawhney | | | Contents Introduction 1 Why Ethics Matters 1 Ethics and Ethical Dilemma 2 Creating an Ethical Environment 3 Reasons for Unethical Behavior 4 Ethical issues in Finance 4 Financial Statement 5 Fictitious Revenues 5 Off-balance Sheet Financing 5 Hidden Reserves 5 Hostile Takeovers 6 Insider Trading 6 Introduction Ethics in general is concerned with human behavior that is acceptable or "right" and that is not acceptable or "wrong" based on conventional morality. General ethical norms encompass truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all aspects of life, including business and finance. Financial ethics is, therefore, a subset of general ethics. Ethical norms are essential for maintaining stability and harmony in social life, where people interact with one another. Recognition of others' needs and aspirations, fairness, and cooperative efforts to deal with common issues are, for example, aspects of social behavior that contribute to social stability. In the process of social evolution, we have developed not only an instinct to care for ourselves but also a conscience to care for others. There may arise situations in which the need to care for ourselves runs into conflict with the need to care for others. In such situations, ethical norms are needed to guide our behavior. As Demsey (1999) puts it: "Ethics represents the attempt...
Words: 2682 - Pages: 11
...é The Effects of Mandatory IFRS Adoption in the EU: A Review of Empirical Research October 2014 Information for Better Markets An initiative from the ICAEW Financial Reporting Faculty The Effects of Mandatory IFRS Adoption in the EU: A Review of Empirical Research forms part of the Information for Better Markets thought leadership programme of ICAEW’s Financial Reporting Faculty. ICAEW operates under a Royal Charter, working in the public interest. As a world leading professional accountancy body, ICAEW provides leadership and practical support to over 142,000 members in more than 160 countries, working with governments, regulators and industry to ensure the highest standards are maintained. The ICAEW Financial Reporting Faculty provides its members with practical assistance and support with IFRS, UK GAAP and other aspects of business reporting. It also comments on business reporting issues on behalf of ICAEW to standard setters and regulators. Its Information for Better Markets thought leadership programme subjects key questions in business reporting to careful and impartial analysis so as to help achieve practical solutions to complex problems. The programme focuses on three key themes: disclosure, measurement and regulation. We welcome comments and enquiries on this report and on the other aspects of the Information for Better Markets programme. To contact us, please email bettermarkets@icaew.com. © ICAEW 2014 All rights reserved. If you want...
Words: 80078 - Pages: 321
...How Fair Value Measurement Changes Risk Management Behavior in the Insurance Industry JANUARY 2013 SPONSORED BY Financial Reporting Section Society of Actuaries PREPARED BY Bruce B. Rosner, FSA, MAAA Ernst & Young LLP Mark J. Freedman, FSA, MAAA Ernst & Young LLP The opinions expressed and conclusions reached by the authors are their own and do not represent any official position or opinion of the Society of Actuaries or its members. The Society of Actuaries makes no representation or warranty to the accuracy of the information. In addition, the discussion and examples presented in this paper are for educational purposes. They are not to be viewed as an authoritative statement by the Society of Actuaries or Ernst & Young LLP on the quality and/or appropriateness of an individual company’s practices or an indicator of “better” practice from one company relative to another. © 2013 Society of Actuaries, All Rights Reserved Acknowledgments We would like to acknowledge and thank a number of individuals who contributed to the success of this study: • Ronora Stryker and Jan Schuh from the Society of Actuaries for providing leadership and coordination The Project Oversight Group for guidance throughout this project: • Robert Baldwin • Mark Bergstrom • Jim Bridgeman • Joonghee Huh • Kathryn McCarthy (Chair) • James Norman • Jim Reiskytl • Doug Van Dam The companies that volunteered to be interviewed anonymously for this study Other members of the Ernst & Young team who...
Words: 15078 - Pages: 61
...Ethical risks and threats in the accounting profession Accounting ethics is primarily the study of moral values and judgments as they apply to accountancy. Accounting ethics were first introduced by Luca Pacioli in 1494 in his book “Summa de arithmetica, geometria, proportioni, et proportinalita”, and later expanded by government bodies, professional organizations and independent companies (Humphrey 2005). Throughout 2001 and 2002, the financial scandals in in the USA and some other countries, such as Australia, dramatically demonstrated how the efficiency of financial markets is based on assumptions of trust and ethical behavior of corporate managers (McPhail 2001). The collapse of companies such as Enron, WorldCom and Global Crossing in the USA, HIH Insurance and OneTel in Australia, and Parmalat in Italy, has led to a loss of confidence by the investing public in the system of financial reporting and accountability. The globalization and diversification of accounting services, combined with market competition and high profile corporate collapses has drawn attention to the accounting profession and its perceived ethical standards. (Cooper 2007) Ethical values provide the foundation on which a civilized society exists. Without the foundation, civilization collapses. On a personal level, the answer to the question of the highest aspiration might be wealth, fame, knowledge, popularity, or integrity. But if integrity is secondary to any of the alternatives, it will be sacrificed...
Words: 2284 - Pages: 10
