Answered By: Peter Z McKay Last Updated: Oct 29, 2014 Views: 216
There is a great deal of information on the role of Accounting and the Financial Crisis. The most important issue is the question of whether "Mark-to-Market" or "Fair Value" accounting contributed to or caused the crisis.
- Financial Crisis Advisory Group (FCAG)
FASB and the IASB created a Financial Crisis Advisory Group (FCAG) to assess the standard-setting implications of the global financial crisis. The FCAG issued a report that concluded that "accounting standards were not a root cause of the financial crisis" and references other documents to support that contention. You'll find information about the FCAG including the report here: http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175801889213.
You can find many more articles and references using the Business Articles Databases. For example, using the search terms "accounting and financial crisis" in Business Source Premier retrives the following article:
- "Is It Fair to Blame Fair Value Accounting for the Financial Crisis?"
By Robert C. Pozen. Harvard Business Review, Nov. 2009, Vol. 87, Issue 11, p84-92.
When the credit markets seized up in 2008, many heaped blame on "mark to market" accounting rules, which require banks to write down their troubled assets to the prices they'd fetch if sold on the open market -- at the time, next to nothing. Recording those assets below their "true" value, critics argued, drove financial institutions toward insolvency. Proponents of marking to market, on the other hand, said it exposed executives' bad decisions. If not for this fair value accounting practice, investors would be kept in the dark about the banks' real state of affairs. In this article Pozen, the chairman of MFS Investment Management dispels the myths about fair value accounting. For example, it's untrue that most bank assets are marked to market -- in 2008 just a third were. Not all write-downs reduce the banks' regulatory capital. Nor is it true that under historical cost accounting, companies don't have to acknowledge changes in market value; they're required to record permanent impairments to assets. After explaining the controversy, Pozen proposes a solution: new, transparent practices that would draw on the best of both historical cost and fair value accounting. If adopted, they could balance the banks' desire to present assets in a good light with investors' need to understand the banks' exposures -- and perhaps make everyone happy.
- "Did Fair-Value Accounting Contribute to the Financial Crisis?"
By Christian Laux and Christian Leuz. Journal of Economic Perspectives Vol. 24 (1) Winter 2010, p. 93-118.
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.