CONTEMPORARY ISSUES IN ACCOUNTING AND FINANCE

CONTEMPORARY ISSUES IN ACCOUNTING AND FINANCE

CONTEMPORARY ISSUES IN ACCOUNTING AND FINANCE

Introduction

The main purpose of this research study is to make an argument on the issue that whether the accounting profession bears any of the blame for the current financial crisis or not.

Discussion

Accountants and non-execs should accept their share of the blame for the current financial crisis in the markets, according to ACCA president Richard Aitken-Davies.

In an article for the Guardian, Aitken-Davies wrote that 'perhaps we accountants haven't said no enough' when confronted by short-termist accounting and questionable risk management at some of the major financial institutions (Albrecht, 2003).

'If directors ignored bad habits, if they accepted complacency after a prolonged bull market then they should be held accountable (Albrecht, 2004). If they have overseen failure, and allowed greed to flourish then they are accountable for this, too,' he wrote.

Many bankers pilloried fair value accounting when the sudden seize-up of credit markets in the fall of 2008 drove the clearing prices for key assets held by their institutions to unprecedented lows. Economist Brian Wesbury represented the views of that group when he declared, “Mark-to-market accounting rules have turned a large problem into a humongous one (Allcorn, 1996). A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value.” Wesbury and Forbes argue that marking to market pushed many banks toward insolvency and forced them to unload assets at fire-sale prices, which then caused values to fall even further (Alles, 2006). Persuaded by such arguments, some politicians in the United States and Europe have called for the suspension of fair value accounting in favour of historical cost accounting, in which assets are generally valued at original cost or purchase price.

Fair Value Accounting

Fair value accounting is not the cause of the current crisis. Rather, it communicated the effects of such bad decisions as granting sub prime loans and writing credit default swaps.… The alternative, keeping those loans on the books at their original amounts, is akin to ignoring reality.” Shareholder groups have gone even further, asserting that marking to market is all the more necessary in today's environment.

Capitalism

The investment advisory group of the Financial Accounting Standards Board (FASB) stressed that “it is especially critical that fair value information be available to capital providers and other users of financial statements in periods of market turmoil accompanied by liquidity crunches (Andersen, 2009).” In this view, if banks did not mark their bonds to market, investors would be very uncertain about asset values and therefore reluctant to help recapitalize troubled institutions.

Good or Bad Accounting Theories

We do not want banks to become insolvent because of short-term declines in the prices of mortgage-related securities. Nor do we want to hide bank losses from investors and delay the cleanup of toxic assets—as happened in Japan in the decade after 1990(Anderson, 2005). To meet the legitimate needs of both bankers and investors, regulatory officials should adopt ...