Fair value accounting's role in the recent financial crisis

2013 ◽  
Vol 4 (3) ◽  
pp. 271 ◽  
Author(s):  
Thomas LaCalamito
Keyword(s):  
Financial Crisis ◽  
Fair Value ◽  
Recent Financial Crisis

Role of Accounting and Audit in the Recent Financial Crisis

2013 ◽  
pp. 91-98
Author(s):  
Alev Dilek Aydin
Keyword(s):  
Financial Crisis ◽  
Global Financial Crisis ◽  
Fair Value ◽  
Financial Reports ◽  
Historical Cost ◽  
The Public ◽  
Creative Accounting ◽  
Recent Financial Crisis ◽  
Audit Reports

This study aims to assess the role of accounting and auditing in the recent financial crisis. After each crisis, there have been serious discussions concerning the reasons behind those crises. However, no consensus has yet been achieved until now. In this context, the analysis of the relationships among financial crisis, accounting, and auditing is of utmost importance in better evaluating the structural reasons behind the crisis. There are several points that this chapter aims to analyze to indicate the contributions of accounting and auditing to the recent global financial crisis. These points are: impacts of disregarding the main principles of accounting, the wide use of fair value accounting over cost-based accounting, incorrect and misleading financial and audit reports, applications of creative accounting, and lack of transparency and weaknesses of the auditing process. The debates generally concentrate on the use of fair value (mark-to-market) accounting in the financial reports as opposed to the historical cost method. It should be emphasized that accounting is very important as a key mechanism of market economies, because of its crucial role in the functioning of the markets in accordance with the public interest. The chapter concludes with several suggestions by taking the fact into consideration that accounting and auditing systems should be revised for the better protection of interests of the third parties such as investors, potential investors, and the state.

Role of Accounting and Audit in the Recent Financial Crisis

2013 ◽  
pp. 1496-1503
Author(s):  
Alev Dilek Aydin
Keyword(s):  
Financial Crisis ◽  
Global Financial Crisis ◽  
Fair Value ◽  
Financial Reports ◽  
Historical Cost ◽  
The Public ◽  
Creative Accounting ◽  
Recent Financial Crisis ◽  
Audit Reports

This study aims to assess the role of accounting and auditing in the recent financial crisis. After each crisis, there have been serious discussions concerning the reasons behind those crises. However, no consensus has yet been achieved until now. In this context, the analysis of the relationships among financial crisis, accounting, and auditing is of utmost importance in better evaluating the structural reasons behind the crisis. There are several points that this chapter aims to analyze to indicate the contributions of accounting and auditing to the recent global financial crisis. These points are: impacts of disregarding the main principles of accounting, the wide use of fair value accounting over cost-based accounting, incorrect and misleading financial and audit reports, applications of creative accounting, and lack of transparency and weaknesses of the auditing process. The debates generally concentrate on the use of fair value (mark-to-market) accounting in the financial reports as opposed to the historical cost method. It should be emphasized that accounting is very important as a key mechanism of market economies, because of its crucial role in the functioning of the markets in accordance with the public interest. The chapter concludes with several suggestions by taking the fact into consideration that accounting and auditing systems should be revised for the better protection of interests of the third parties such as investors, potential investors, and the state.

Is There a Future for Fair Value Accounting After the 2008–2009 Financial Crisis?

2010 ◽  
Vol 13 (03) ◽  
pp. 469-493 ◽  
Author(s):  
Bikki Jaggi ◽  
James P. Winder ◽  
Cheng-Few Lee
Keyword(s):  
Financial Crisis ◽  
Financial Markets ◽  
Fair Value ◽  
Accurate Information ◽  
Fair Value Accounting ◽  
Accounting Regulation ◽  
Recent Modification ◽  
Fas 157 ◽  
Recent Financial Crisis ◽  
The Impact

This paper evaluates the role of fair value accounting in recent financial crisis, and examines whether the call for its demise is justified. Critics argue that fair accounting regulation added to the volatility in financial markets and aggravated financial crisis. On the other hand, supporters of this regulation argue that fair value accounting has been the victim of the recent financial crisis. They believe that this regulation is important for providing transparent, reliable, and accurate information on asset values to investors. After evaluating the impact of fair value accounting regulation on financial crisis, we examine negative and positive aspects of this regulation. Our discussion shows that fair value accounting provides useful information during stable market conditions, but its usefulness may become questionable during unstable and volatile financial markets. Overall, this regulation has the support of financial professional bodies. Some professionals are, however, concerned about recent modification to the fair value accounting rule, i.e., FAS 157-4, because this modification may not enhance reliability and accuracy of financial information. Despite recent modification, discussion on fair value accounting is far from over. Critics of the regulation still believe that this regulation should be eliminated, but the positive aspects of this regulation support its continuation.

A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis

2011 ◽  
Vol 87 (1) ◽  
pp. 59-90 ◽  
Author(s):  
Brad A. Badertscher ◽  
Jeffrey J. Burks ◽  
Peter D. Easton
Keyword(s):  
Financial Crisis ◽  
Fair Value ◽  
Commercial Banking ◽  
Data Availability ◽  
Regulatory Capital ◽  
Asset Sales ◽  
Fair Value Accounting ◽  
Firm Level ◽  
Level Increase ◽  
Recent Financial Crisis

ABSTRACT Critics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis. JEL Classifications: M41; M42; M44. Data Availability: Data are available from sources identified in the article.

scholarly journals Did Fair-Value Accounting Contribute to the Financial Crisis?

2010 ◽  
Vol 24 (1) ◽  
pp. 93-118 ◽  
Author(s):  
Christian Laux ◽  
Christian Leuz
Keyword(s):  
Financial Crisis ◽  
Empirical Evidence ◽  
Fair Value ◽  
Evidence Based ◽  
Fair Value Accounting ◽  
Descriptive Data ◽  
Fire Sales ◽  
The 2008 Financial Crisis ◽  
Recent Financial Crisis

The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, toward the overvaluation of bank assets during the crisis.

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