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Accounting’s Role in the Financial Crisis
Introduction
The accounting profession is responsible for delivering the information necessary to make correct decisions. To promote the dissemination of high quality information, accounting standard setters constantly struggle to keep standards up to date with the ever evolving markets. In light of the recent financial crisis, fair value accounting has come under scrutiny. Some critics go as far as to blame the whole crisis on fair value accounting. I assert that fair value increases a company’s transparency. Thus, through this principle, the responsibility of the accounting profession mentioned above is further accomplished: investors are getting necessary information on which to base their decisions.
Although fair value is blamed, the main problem does not lie in the standards, but rather, it lies in the fact that companies take measures to leave investors in the dark by not fully disclosing information. The officers that are responsible for financial reporting are not always concerned with delivering the needed information to the investors through their financial reporting. At the heart of it, third parties such as analysts, investors, standard setters and especially auditors may be responsible for encouraging and allowing such behavior to occur.
Fair value allows for certain assets to be valued at the amount for which they could be exchanged in an open market transaction. The problem with this arises when the market for an asset that a company values at fair value becomes illiquid. Without a market exchange to base the fair value off of, the value of the asset is determined through the use of complex models that the company must come up with (usually through the use of a specialist); these difficult to value assets are known as Level 3 assets.
During the financial crisis, prices for mortgage related securities fell significantly and markets for them became illiquid. The result was
Introduction
The accounting profession is responsible for delivering the information necessary to make correct decisions. To promote the dissemination of high quality information, accounting standard setters constantly struggle to keep standards up to date with the ever evolving markets. In light of the recent financial crisis, fair value accounting has come under scrutiny. Some critics go as far as to blame the whole crisis on fair value accounting. I assert that fair value increases a company’s transparency. Thus, through this principle, the responsibility of the accounting profession mentioned above is further accomplished: investors are getting necessary information on which to base their decisions.
Although fair value is blamed, the main problem does not lie in the standards, but rather, it lies in the fact that companies take measures to leave investors in the dark by not fully disclosing information. The officers that are responsible for financial reporting are not always concerned with delivering the needed information to the investors through their financial reporting. At the heart of it, third parties such as analysts, investors, standard setters and especially auditors may be responsible for encouraging and allowing such behavior to occur.
Fair value allows for certain assets to be valued at the amount for which they could be exchanged in an open market transaction. The problem with this arises when the market for an asset that a company values at fair value becomes illiquid. Without a market exchange to base the fair value off of, the value of the asset is determined through the use of complex models that the company must come up with (usually through the use of a specialist); these difficult to value assets are known as Level 3 assets.
During the financial crisis, prices for mortgage related securities fell significantly and markets for them became illiquid. The result was
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