The Global Financial Crisis: Challenge to Accounting Research by Brenner - Article Example

Current Issues in Financial Accounting Name: Institution: Course: Date: Current issues in financial accounting Introduction The Global Financial Crisis: Challenge to accounting research Accounting policies and practices have from the recent past been undergoing crisis and instability I the global market. In the past bankers have been blamed for creating financial crisis a problem associated to securization of loans by banks (Brenner 2002). The magnitude also has been rising and this has called for assessment in every area of business, accounting and economics. The current financial crisis deeply implicates accounting practices especially in proposals dealing with the recapitalization of financial institutions and the restoration of the world or global financial system. Review and analysis of the article Objectives The main objective of this research is to understand the accounting changing roles and identify the crisis which are being faced in financial accounting and give a way of solving it. In trying to identify the crisis, two reason s for academic failures in accounting were determined which include, the unrelenting gap between the world of academic research and the world of accounting in action and the failure to understand the connection between micro accounting and regulatory technologies (Brenner 2002. The financial reporting requirements for asset valuations and off-balance sheet items should first be understood which will help to reduce the magnitude of financial crisis. Bridging the break between the accounting in action world with the academic research was another objective for this research. According to the done research, accounting practice is highly concerned with the financial crisis (Brenner 2002). Here the main objective was to understand the role of financial reporting on the valuation of assets and off-balance sheet entities. This research is needed to reduce reliance on quantitative database and to develop the methodological tools was and relations to practice are required to bridge the gap between academic research and the accounting in action was a major challenge to this objective. The article achieved this objective as some progress in the managerial accounting field was noted which showed a move towards accounting in action within. According to Hopwood (1983) use of case study and ethnographic research methodologies made organizations to work towards the “accounting action”. The article also had the objective of understanding the relationship or the link between accounting and macro political economy. The research major aim in this objective was to determine whether fair value accounting in the accounting practice has a pro-cyclical impact on the economy and understand whether the pressure exerted in the accounting standard should make financial reporting to include financial stability. The research also aimed to understand the role of financial accounting in the capital markets (Brenner 2002. The paper achieves its objectives as after the research it concludes that accounting is shaped by political powers in that accounting is seen to be merely political. According to this research, accounting is mainly influenced by political and ruling elites and dominant ideologies which then affect income, power and wealth distribution in the society. This is because the manipulation of the accounting action by political elites leads to a financial crisis. Another objective of this research was to address the problem of systemic risks within the global financial system (Brenner 2002. To achieve this, it called for a research is to understand the political processes and power relationships that precluded and still precludes the creation of stronger institutional and regulatory arrangements for governing the financial sector and instead relied upon private sector institutions. It was also the objective of the research to determine the extent to which false confidence in accountings ability to provide transparency to self-regulating capital markets contribute to systemic instability through the provision of ideological support for the dangerous levels of global financial liberalization and national deregulation. Another objective of this research is to determine ways of reducing its dependence on quantitative databases and to develop methodological tools and links to practice needed to bridge the accounting in action and the academic research Bodies of literature identified During the research, two bodies of literature were identified which included: Deloite & Touch USA, LLP professional’s provided more than 14, 000 securitized offering with insights, value and uniformity. This body was of value to the study as it offered them with expert services in the financial sector, analytics, due diligence, accounting and tax which are the major issues leading to financial crisis as noted by Brenner (2002). PwC and the Structured Finance Group are other literature bodies which were identified during the research. These bodies had been involved in the securitization transactions worth billions of dollars. These bodies used a combination of various types of securitization, methods of valuing assets, due diligence, modeling, consultations on operations, tax, accounting and even tax reporting and technology which were the major issues in the financial crisis. Research design These were the phases or stages designed to help the researchers to analyze the financial crisis. According to Brenner (2002) the financial crisis originated from the 1970s due to the global overproduction and declining profit rates. To respond to this crisis, US economy adopted a monetary, fiscal, regulatory and trade policies to enhance growth and expansion of the global financial sector. It was due to the action that three potential inquiry avenues were discussed to help them understand how macro political economy poses questions to accounting relationship with the financial crisis. They include: The politics of standard setting This is the first step to the research which was used to examine how financialization influenced financial reporting standards. In this step the relationship between financial reporting rules and the increasing power and political influence to the financial sector, influence of accounting rules to the financial services industry strategy and structure and the influence of the financial industry to the US Financial Accounting Standard Board (FASB) would be identified (Brenner 2002). The role of accounting firms This is the second stage in the analysis was to designed to evaluate the role of which major accounting firms in the financial crisis. It was at this stage when the fact that financialization of the economy led to profitable niches was discovered. According to Hopwood (1983) firms entered the burgeoning business of securization services to investment banking. Here research was required to assess the extent of accounting firms involvement in the securitization process in toxic debts and off-balance sheet vehicles structuring. They also sought to understand the nature of the due diligence, tax, modeling, valuations and accounting services offered to their investment banking clients and the firms responsibility in the financial crisis. Rethinking transparency This is third stage which was required to examine the ideological roots of the transparency and its role in the governing of the day to day extraordinary complex and volatile financial system (Hopwood 1983). From this phase, it was discovered that accounting and auditing play an essential role of ensuring that reliable and relevant information is disclosed to investors. Findings of the research It was found that financial reporting was politically influenced. According to the research, a very close relationship between accounting reporting and macro political economy was shown (Brenner 2002). Political influence leads to manipulation in the financial reporting and this is one major issue which led to the financial crisis in the world. A preliminary review of the firms marketing literature by the researchers showed that the firm’s advisory teams were also involved in the securitization industry of loans which led to the financial crisis. This was as a result of accounting firms like US and Europe being directly involved in the securitization and structured finance process as argued by Brenner (2002). It was also concluded that a financialised economy is an unstable economy as the presence of it demonstrates a fragility of the international financial system and the need for capital controls to reduce the systemic risk. Implications of the study for accounting theory and practice This study suggests that we should not be over dependent on quantitative databases and fail to grasp or adopt developments within the accounting practice world. Therefore, we should describe ways in which financial accounting standards, accounting ideologies, and accounting firms should be implicated in the crisis build up (Brenner 2002). According to this study, our governing theories have provided us with insufficient bases for the understanding of the transformations in the international political economy. It also implied that the short comings in the financial accounting explained our failure to anticipate the financial crisis facing the world currently and also act as a limitation to our ability to analyze, interpret and respond to the crisis. According to Brenner (2002), the study therefore, challenges us to re-evaluate our research agendas so as to make accounting research contribute to a broader social political analysis of the crisis facing the financial sector. The research or study on accounting practice and theory was to understand the reasons why accounting research has failed to anticipate the crisis that was ballooning in the accounting practice world (Brenner 2002). This will enable the researchers to identify proper methodologies and theories to be able to interpret the accounting crisis. Conclusion There are so many factors which have led to the current global financial crisis. Accounting research has experienced critique by the fact that they have failed to anticipate the financial crisis. According to Brenner (2002), some people have argued that the banking system is too opaque for the accounting researchers to penetrate and this has suggested that the research must be limited and shaped by the available quantitative databases. This therefore calls for a serious methodology to find ways to engage the accounting practice world. This financial crisis therefore poses a challenge to us to re-evaluate our research agendas and methodologies and also the institutional incentives so as the accounting research can contribute to a broader social and political analysis of the financial crisis. References Brenner, R. (2002). The boom and the bubble: The US in the world economy. Verso: London, May 23. Hopwood, A. G. (1983). On trying to study accounting in the contexts in which it operates Accounting Organizations and Society, March 8. Read More