Transparency in Developing Financial Records - Report Example

Accounting Theory Name: Instructor: Course: Date: Accounting Theory Jim Kroeker testimony Jim Kroeker shared his views on mark-to-market practices and implications to a panel as the acting Chief Accountant working in the Office of the Chief Account. The office is responsible for providing advice to commission regarding accounting and all auditing matters. He focused on financial reporting when starting his testimony asserting that their systems on financial reporting had met global standards and a great asset in the capital markets. He attributed this success to the continued commitment towards providing investors with accurate financial information necessary for supporting decisions on capital allocation. Kroeker insisted that it is because of their reputation that investors have enjoyed benefits due to transparent systems that offer excellent accounting services to investors. He notes that safeguarding the good reputation by those entrusted the capital markets is critical to ensure investors needs are prioritized at all times. Through transparency in developing financial records, investor confidence is boosted and consequently capital markets growth (U.S. Securities and Exchange Commission, 2009). Kroeker further explained that federal security laws are responsible for developing authority and responsibility of the commission by prescribing approaches to be during accounts preparation. The federal security also ensures investors are provided with critical information regarding the making of investment decisions. The commission therefore acknowledges the Financial Standards the Financial Accounting Standards Board (FASB) role and the significance of its independence. The board is responsible for setting of financial and accounting standards to prevent unnecessary influences. Kroeker insisted in his testimony that fair value is critical as it needed by all industries. The financial and accounting functions must seek to gather views of all investors and other stakeholders as major players in the capital markets and FASB would also achieve its goals towards improved financial reporting. Kroeker asserted that, FASB is a very important body that should be supported in order to effectively fulfill its role as the standard setter through independent accounting (U.S. Securities and Exchange Commission, 2009). . In addition, Kroeker explained that FASB expertise is crucial to investors as they benefit a lot form this Boards Judgment. In fact, FASB proactively addresses the needs of participants in capital markets especially the investors. To achieve effectiveness, the board must therefore support auditors during difficult decision making processes through responsiveness to all those involved in accounting and reporting collaborations. Fair value accounting history A historical analysis of fair value accounting revealed that it is a crucial element in communicating investment value to key stakeholders especially investors in the capital markets. This decision was arrived at after careful considerations of prior financial crises in an attempt to avoid future crises that characterize contemporary institutions. The application of fair value grew in 1975 to prevent concerns related securities measurements. Due to increased challenges and transparency issues, fair value measurements was therefore a remedy to such risks which went undetected leading to huge losses in many institutions. Additionally, Kroeker stated that moral hazard also arose when some institutions venture into high risk business to alleviate their economic situation (Magnan, Thornton & Cirano, 2009). Therefore, fair measurement of value could function without mark-to market but other standards of accounting required “fair value accounting”. The recognition of the importance of fair value accounting was emphasized especially its relationship to increased transparency. Mark-to-market accounting constitutes the incorporation of fair value financial auditing and measurements. The recognition that without mark-to-market application there are unidentified losses on investment helps prevent investment impairment. Kroeker explained that there have been efforts to improve fair value accounting by the Commission whereby recommendations to improve the standards of fair value accounting were the main focus. Indeed, best practices to encourage transparency during disclosure of fair value accounting would improve the overall process of financial reporting at all levels. To ensure success in improving financial and transparency reports all capital market key players must work together on complex financial issues manifest in reporting. The Commission has also engaged in numerous studies on fair value accounting addressing different issues such as the impact of fair value accounting recommendations as they relate to balance sheets of financial institutions and its effect on failures experienced by banks as at 2008. The commission made several recommendations aimed at improving the standards of fair value and the suspension of the mark-to-market fair value conditions that existed (Curtis, 2009). Kroeker concluded by asserting that the efficiency of capital markets is directly dependent on transparent information on all financial matters that promote confidence of all investors. Transparency not only leads to stability of finances but also greatly enhance investor’s confidence while at the same time recognizing their needs. Collaborations and commitment to work together on difficult financial issues was undoubtedly an important aspect towards the success of fair value accounting standards in the capital markets. Robert Hert Statements Robert H Herz was the chairman of the “Financial Accounting Board (FASB) and he joined to the Board on sustainability accounting which aimed at innovating standards that were industry specific. The sustainability board aims at delivering measurements on key supportability issues that effect organization execution after some time. This reporting is for financial specialists, and is not more extensive to gather those individuals intrigued by enterprises from an ESG perspective, yet rather at giving an arrangement of data on ESG issues that matter from a venture perspective. What Hert noted from speculators is that they were extremely intrigued by the issues yet they needed to filter through so much information that was not standardized, practically identical, and went for a more extensive social obligation groups. They had been stating that they could have some arrangements for more institutionalized measurements, focused at the issues that were truly important to a specific industry depending on what they needed. They couldn't care much about the carbon discharges of a speculation bank. This was not important to their venture theory, but rather for a utility that was manifest (Magnan, 2008). Paul E. Kanjorski Despite the fact that Kanjorski, a 12-term Democrat, spoke to a sheltered average workers region, Republicans had seized upon the issue as they headed into Campaign 2008. They had been highlighting it and different instances claimed self-managing by congressional Democrats to scrutinize the new dominant part's dedication to one of the guaranteed changes on which it cleared into force the previous fall: tidying up the reserving procedure through which legislators in some cases additional money into spending bills for colleagues, donors and relatives. In addition, the lawful framework had kept Kanjorski's adventure new. A province judge managing countersuits between previous Cornerstone representatives and the organization debilitated seat warrants for a percentage of the Kanjorski family. However, three days prior to a booked disdain listening to a year ago, Cornerstone petitioned for insolvency insurance, slowing down the suit. Kanjorski, who alongside his head of staff was summoned in one of the cases yet never affirmed, said he was putting away some of Cornerstone's property although they couldn’t represent the financial institution. Relationship between fair value accounting and global financial crisis There have been numerous questions on the extent to which fair value accounting contributed to the global financial crisis. Fair value accounting involves the use of available information about markets in order to approximate assets and liabilities value. Different arguments have attributed “fair value accounting or mark-to-market accounting” to the global financial crisis. This concept is based on the application of available current market information to determine assets and liabilities value in order to provide investors with updated information on the economic position of organizations. Compared to the historical cost accounting, it is clear that both approaches have supporters and opposers. However, fair value accounting has been alleged by political and industry investor to offer information that is unreliable to investors and consequently the global financial crisis (Masood, & Bellalah, 2014). It is broadly accepted that the act of stamping resources for business sector costs and not saving for expected misfortunes on credit portfolios added to the troubles of the money related frameworks by developing misfortunes at a moment that banks and different financial institutions could minimum bear the cost of it. In any case, the report by the Financial Crisis Advisory Group presumed that in light of the fact that in many nations the lion's share of bank resources were not checked to advertise, but rather kept at their noteworthy, those qualities were most likely thought little of the misfortunes that were being uncovered by the emergency (Pozen 2009). Fair value accounting principles did not contribute to the budgetary emergencies, however, they permitted banks to exaggerate the estimation of their advantages through a worldwide gathering made out of present and previous controllers and corporate authorities that were mentioned in a report to be discharged earlier (Laux & Leuz, 2010). The report emanating from the Financial Crisis Advisory Group, additionally prevented effective endeavors by legislators to compel changes in accounting decisions and said that financial reporting evaluation ought to have been kept separate from administrative principles, in opposition to the expectation of huge financials institutions. The message to political commentators was not to debilitate and constrain going against some of what had been originating from the European Commission and from individuals in Congress as well as the Securities and Exchange Commission (Bachert, 2012). Fair value accounting would be clear if every monetary resource were what FASB regarded as Level 1 exceedingly fluid and simple to esteem at direct market costs. Since they did not generally possess these qualities, notwithstanding, FASB made a standard, FAS 157, which took into account two different levels. The most key feedback of reasonable quality fair value financial records is that it drives banks to the verge of indebtedness by dissolving their capital base. In the perspective of numerous brokers, reasonable quality fair value financial reporting had constrained a "manufactured" decrease in resource values that were liable to bounce back after the budgetary emergency decreased. To speculators, nothing was more counterfeit than broadcasting that an advantage was justified regardless of a value that nobody was really eager to pay. The run of the mill financial specialist, additionally, it was less sure that declines in the business estimation of numerous bank resources were the brief consequence of exchanging illiquidity, not the enduring after effects related to the defaults in most financial institutions. Concerns about FASB rules changes after the hearing After increased pressure from legislators and a few groups of the budgetary business, the Financial Accounting Standards Board (FASB) conducted voting on making it simpler for corporate administration to esteem resources on their asset reports with less respect at business sector costs. The board, which sets U.S. bookkeeping strategy, was congratulated by the managing and account division and also influenced by Congress. This move seemed to make things friendly for financial businesses allowing them engage without increased risk levels. The new rules were likely to enhance little incentives towards cleansing of their balance sheets through avoidance of assets deemed risky. In addition, the accounting board carried out modifications on one of its proposals to conceal any possible harm likely to be observed by some critics. However, key stakeholders such as investors and auditors among others did not cease blaming FASB for the speedy changes establishing a working panel to re-evaluate the financial regulations. The proponents of fair value accounting contended that authentic expenses of the assets on an organization's accounting report frequently bore little connection to their present value. According to historical expense bookkeeping guidelines, most resources are conveyed at their price tag or unique quality, with minor alterations for deterioration over their or for gratefulness until development. A building claimed by an organization for a considerable length of time is therefore prone to show up on the books at a much lower worth than it would really be expected in today's business sector. In any case, these decisions did not give enough confidence to brokers watching the business estimation of their resources fall; they grumbled noisily to their chosen agents, who undermined to enact fair value accounting benchmarks unless FASB gave more support. Subsequently, in April 2009 FASB immediately proposed and embraced another tenet, which rational criteria for deciding when a business sector is liquid enough to meet all requirements for imprint to model valuation effectively. The standard was intended to permit more securities to be facilitated by bank models rather than by business markers. Around the same time, FASB issued yet another principle on the best way to represent securities when they were hindered for a long time. The principle said that just the credit-misfortune segment of such impedances would influence a bank's salary and administrative capital, with the rest going into the extraordinary record for other complete incomes in the financial sectors. It is essential to remember that money related proclamations are investigated by different gatherings for diverse purposes. Financial specialists utilize these announcements to survey drawback dangers and potentials for profit development, controllers in order to guarantee that banks have adequate capital and pay that can withstand misfortunes on advances or different resources possibilities. Given these distinctive destinations, government controllers ought not to link money related reporting from capital prerequisites for banks. This is what the new FASB rules sought to solve. References Bachert, K. (2012). Fair Value Accounting: Implications for Users of Financial Statements. Frankfurt: Peter Lang, Internationaler Verlag der Wissenschaften. Curtis, J. W. (2009). Mark to market and fair value accounting: An examination. New York: Nova Science Publishers, Inc. Laux. C. & Leuz, C. (2010). Did fair-Value Accounting Contriute to the Financial Crisis? Retrieved from http://fic.wharton.upenn.edu/fic/papers/09/0940.pdf Magnan, M. (2008). Fair Value Accounting and the Financial Crisis: Mssenger or Contributor? Retrieved from http://www.craig.csufresno.edu/IJB/Volumes/Volume%2019/V193-2.pdf Magnan, M., Thornton, D., & Cirano. (2009). Fair value accounting. Montreal, Que: Center for Interuniversity Research and Analysis on Organizations. Masood, O. & Bellalah, M. (2014). Role of Accountants and Fair Value Accounting Leading Towards the Global Financial Crisis. Retrieved from http://www.craig.csufresno.edu/IJB/Volumes/Volume%2019/V193-2.pdf Pozen, R. (2009). Is it Fair to Blame Fair Value Accounting for the Financial Crisis? Retrieve from https://hbr.org/2009/11/is-it-fair-to-blame-fair-value-accounting-for-the-financial- crisis U.S. Securities and Exchange Commission. (2009). Testimony Concerning Mark-to-Market Accounting: Practices and Implications. Retrieved from http://archives.financialservices.house.gov/media/file/hearings/111/sec_-_kroeker.pdf U.S. Securities and Exchange Commission. (2009). Testimony of Kevin J. Bailey Deputy Comptroller Office of the Comptroller of the Currency. Retrieved from U.S. Securities and Exchange Commission. (2009). Zack, G. M. (2009). Fair value accounting fraud: New global risks and detection techniques. Hoboken, N.J: John Wiley & Sons. Read More