...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...
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...Yuxiao Xiang ACC625 Critical Thinking #2 1. Ad Hominem Did Jason who owned an investment firm cook the books to avoid paying tax in 2015. Jason looks sneaky, and he graduated form a poor community college. He does not have enough education on accounting ethics. Therefore, Jason does cook the books to avoid paying tax in 2015. 2. Slippery Slope Should Jason manage the earnings when his company operate at loss? If Jason did not manage the earnings, his investors will loss confidence on Jason and never invest on his firm. Then, his company will fail without investment. Therefore, Jason should manage the earnings when his company operate at loss. 3. Ad Populum Does market value accounting significantly contribute to the financial crisis?...
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...Perspectives—Volume 24, Number 1—Winter 2010—Pages 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...
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...stories involving public pensions, analysts were becoming increasingly critical of GASB regulation over the pension systems. When compared to the requirements of the private retirement systems, it was lacking in transparency. Thus, GASB replaced statement 27 with 68. Government entities with a financial period ending June 30, 2015 will be first to experience the implementation of GASB 68. Many feel that GASB 68 is part of the solution for the ever-increasing public pension crisis in the United States but is reporting for the first time ever in most cases a rather large Net Pension Liability (NPL) on the face of the financials going to solve the problem of underfunded pensions. Employees within the public sector generally enjoy a rather generous pension when compared to others but when they are looked at for their sustainability they fail miserably. Chicago retirement system for teachers, fire fighters and others us underfunded by nearly $24 billion, with residents facing potential 150% increase in property taxes. (Birrer, 2014) Public pension systems in the United States are in need of change if they are to be sustainable for the future. GASB 68 aims to educate the readers of the financials such as voting citizens as to the state of the entities current pension system’s sustainability. The significance of GASB 68 can be explained by the following example: “Think of a governmental pension plan as though it were a mortgage. Under existing requirements, institutions only have...
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...Economic Perspectives—Volume 24, Number 1—Winter 2010—Pages 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...
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...in June 2011, a substantial part of the Paper P1 syllabus continues to concern matters of corporate governance. Section A6 of the Paper P1 Study Guide requires to have knowledge of the different approaches to corporate governance, inter alia, the development of corporate governance codes in principles-based jurisdictions (A6(d)), the Sarbanes-Oxley Act (2002) as an example of a rules-based approach (A6(e)) and the objectives, content and limitations of corporate governance codes intended to apply to multiple national jurisdictions, namely the OECD principles of corporate governance (A6(f)). specification in something such as a code of best practice ... One thing is clear, though. Whatever the model, the public must know about it and about how it is operating in practice. Disclosure should be a central feature of any corporate governance regime. Shareholders, potential shareholders and the wider public are entitled to real, meaningful detail about the way the directors say they are carrying out their stewardship role. The annual report and, in these times, the company’s website are important forums for disclosure. Directors who take the fundamental notions of openness, integrity and accountability seriously …… will be well on the way to good corporate governance.” to US and non-US companies with a US listing. Some of the provisions of SOX are in direct conflict with provisions in the law or practices of other countries. In reality, this has led to some companies delisting from the...
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...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...
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...LIBOR & LIBORGATE Recently there was a news that Barclays would pay $453 million to U.S. and British authorities to settle allegations that it had manipulated LIBOR , a benchmark interest rate that affects some $350 trillion worth of financial transactions. The scandal has since spread to implicate major banks and government regulators around the world, and could be one of the most expensive to hit the financial industry since the 2008 financial crisis. Now the questions which arises in our mind are What is LIBOR exactly?, How it is calculated?, How did Barclays manipulate LIBOR etc. LIBOR IN BRIEF LIBOR is an acronym for the London Interbank Offered Rate, a benchmark interest rate that is published daily. Libor is published under the auspices of the British Bankers’ Association (“BBA”),a trade association with over 200 member banks that addresses issues involving the United Kingdom banking and financial services industries. The BBA defines LIBOR as: The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11:00 [a.m.] London time. We can also define LIBOR as an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Investors around the world use the LIBOR to calculate the interest rate on myriad forms of debt, from home...
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...June 2010, Vol.6, No.6 (Serial No.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...
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...analysis to support management decision. Xerox also did not take care of the employees’ welfare and neglect to the good ideas from them. Therefore, some good people left the company. The corporate reporting and planning process was very long and bureaucratic, with more detail than most managers could absorb. Even worse, the reporting formats were not consistent between divisions that lead to the difficulty for the management to make decisions and analyze data. Management control system after 1980 David Kearns who was newly appointed as the chairman in 1982 was well aware of the problems faced by Xerox and hence developed a corporate revitalization plan called “Leadership through Quality” (LTQ). This plan emphasized on three major components which are; employee involvement, competitive benchmarking and the quality improvement process. Employee involvement as mentioned in LTQ is the problem solving process that uses quality circles, people empowerment, Ishikawa’s fish bone chart, and other tools. Competitive benchmarking is a standard for comparing internal performance to the best within the industry while the quality improvement process is more on reviewing and continuously improving all internal processes by following a process which focuses on meeting customer requirements. Xerox as advised by Al Senter, developed Financial Executive Council (FEC) which consists of senior Corporate Finance staff and the chief financial...
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...Holland, University of Glasgow, The Adam Smith Business School, University of Glasgow, Main Building, Glasgow, G12 8QQ, Scotland Abstract: This paper develops a model of the information intermediation role of analysts in the ‘market for information’ (MFI). It illustrates how the same type of ‘soft’ intangibles information changes as it progresses through analyst information intermediation processes. The latter concern: company disclosure; analyst acquisition and analysis of company information; analyst reporting processes; and market impacts. The common information concerns ‘soft’ or qualitative information about the company intellectual capital (IC) or intangibles in the company business model. Banks and bank analysts are used as examples. Knowledge, social and economic factors in the wider ‘market for information’ (MFI) are shown to be major influences on ‘soft information’ and how it changes in analyst information intermediation processes. Negative knowledge and social factors play a role in weakening and eventually destabilising economic processes in analyst and the MFI. They were important factors in creating knowledge and information problems in analysts and the MFI, both ongoing, and during the crisis of 2007-09. These factors are also part of a solution to the problems. The solutions include improved, transparent knowledge of business models of companies, analysts, and rest of MFI. They also include active use of social forces to create critical and reflexive performativity...
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...Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others. Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company. Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional...
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...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 recent GFC and how it affecting investor confidence. These past studies will help to construct this paper immensely and hopefully...
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...... 3 Body ...................................................................................................................................................... 3 Conclusion ............................................................................................................................................ 9 Reference .................................................................................................................................................... 11 2 1344493 1. Introduction Corporate Governance has become a fundamental problem for each corporation recently. The bankruptcy of Lehman Brothers – the fourth largest investment bank in US and the largest bankruptcy in US history has started the US financial crisis and spread all over the world. Since then, the corporate governance failures have exposed massively and Barclays is one of the obvious examples with Libor manipulation scandal in June 2012. The Chairman of the Treasury Select Committee, Andrew Tyrie MP, gave his comment that the extremely weak board governance and internal compliance in a long time resulted in the wrong actions by individuals with intention of personal benefit. Obviously, the corporate governance in general and in the case of Barclays should be considered carefully. 2. Body Overall, the Guardian.com has demonstrated the problems of Barclays after the Libor scandal. The...
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...* Critical Analysis on Costs and Benefits of the Financial Sector Within the UK. * * * * * * * * * * * * * * * * * Introduction The international financial crisis has drawn an international attention in financial regulation and policies made by governments have become increasingly prominent. In particular, strengthening financial regulation in London as an international financial centre requires huge efforts. London has been able to an international financial centre continuously, mainly due to a large number talent are familiar with the financial industry London has a unique advantage in language and location (Re, 2005). In addition to banking sectors, insurance, trust, securities and asset management business also developed. However DeMartino (2000) highlighted the current global economic depression and international financial crisis, along with UK Treasury published paper “The reform of the financial markets” referred to as “the worst crisis in 60 years”. In contrast, Frieden (2000) described the analysis of the causes of the British government's international financial crisis, and make policy recommendations on how to strengthen financial regulation. UK Financial Regulation Authorities According to Green (2011) Britain's “2009 Banking Act” was taken effect in which compared with the previous various banking laws, this law shows characteristics such as authorizing the Bank...
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