Contemporary Issues In Accounting - Case Study Example

Introduction The world economies have continuously witnessed different accounting scandals and criminal activities. The recent global crisis is an example in this direction and economies are looking for ways to come out of the downturn. This is creating a situation where the growth rates are depleting. The prime reason for it has been the recession which has engulfed the entire globe. The recent economic crisis and debacles have highlighted the failure of creative accounting by accounting setters which has resulted in people exploiting it and making organizations fail. Proper accounting rules was an aspect which was ignored by all economies which resulted in the economies faltering. The situation started with the US housing market and slowly led to liquidity crisis. The paper thus looks into various aspect of global financial crisis and tries to draw findings as how the accounting rules were ignored. It also presents light into the way different organizations and economies fared due to recession and the manner in which the proper accounting rules could have reduced the magnitude of the crisis. Global Crisis The crisis started when “prices of assets started falling continuously thereby decreasing consumption expenditure which led to postponement of capital expenditure, resulting in more unemployment and finally leading to contraction”. (Ryuhei, 2009) This impacted “financial institutions and banks as it led to liquidity crunch” (Kirkpatrick, 2009) creating a serious situations. This is evident from the failure of Enron which failed to ensure proper accounting rules in its working. (Coffee, 2008) Their financial statements were inflated and the actual position of the financial conditions was not disclosed. This led to a situation where people lost confidence and finally led towards the failure of Enron. Poor accounting rules leading towards crisis Poor accounting rules on the disclosure aspect especially when we consider the manner in which CEO’s were paid additional salary irrespective of the organizational performance shows poor accounting rules as the rules of recording revenue after it is earned was ignored. This was due to the fact that compensation were paid as an incentive for the good work but was paid before the results came out which led towards a crisis which grew as firms at the individual levels and big accounting firms failed to disclose their transactions. (Mitton, 2001) The firms followed a principle where the risks were focused on few financial instruments rather than being diversified. This created a situation where risk multiplied manifold. It was seen that IAS 16 was exploited by firms to match their individual needs. Improper use of IAS 16 which with matters relating to the “treatment of assets, especially plant and equipment and property” (Deloitte, 2010) further made organisation not adheres to the accounting norms. It tries to explain how the non-current assets value will be found, situations when the assets need to be treated as long term, the treatment relating to deficiencies and surplus and impairment. This thus helps to “ascertain the correct value of the assets that will help the user of the financial statement gauge the correct value of the enterprises”. (Deloitte, 2010) Lack of organisation effort on this part led towards poor implementation of the accounting policies. This also became a reason for the global crisis. For example it is seen that certain quarters raised voice regarding the use of fair value accounting. Using the fair value accounting would have helped to ensure that the correct value of the assets would have been disclosed which would have reduced the effect of the crisis. (Poskitt, 2005) This would have helped the investors and helped them to ensure proper mechanism to check risk. This also demonstrates that floundering the accounting rules at different places mounted the problems for the organization which finally led towards their failure. Poor disclosure in accounting framework led towards the crisis Since, firms did not disclose their actual working and performance the effect of this was failures of institutions. This spread to other institutions and slowly the entire economy saw lack of corporate governance. This can be seen from the example of Enron which did not disclose all its transaction to the shareholders in the financial statement. Later when it was founded it resulted in the loss of public confidence. (Austin, 2008) Thus not adhering to the accounting rules makes organization stay away from the corporate governance which made economies loose vital resources and led towards the crisis. The inefficient implementation of the accounting principles like fair value principle, market based return and the manner in which the remuneration process of CEO’s further gave organizations the freedom to use ways and measures to work in a manner which they felt suitable further led towards lack of accounting rules and the crisis. This is a condition where organizations lack disclosure in their accounting methods. Poor accounting policies led towards crisis Also the lack of accounting policies with relation to disclosure and corporate governance further added to the crisis as it was easy to manipulate the financials and this made companies like Enron fail and look towards government support. Thus, accounting policies along with poor corporate governance increased the problem of crisis. (Kirkpatrick, 2009) Poor risk management is seen by the lack of accounting policies at the organisational which was seen as a violence of accounting rules which led towards the crisis. The “shortcoming from the board and the internal management especially in the banking sector” (Kirkpatrick, 2009) highlights improper accounting policies and poor accounting rules. This shows the negligence on the part of the management to have a policy in store which could help to fight the worsening situation. (Ryuhei, 2009) Poor risk management Poor accounting policies have been the prime reason for the recent economic crisis. This is seen from the poor risk management policies by banks. They over relied on the market and also on the agencies. The over exposure of funds of the banks in CDO’s and instruments showed lack of corporate governance and looking towards investment avenues which were risky. (Kirkpatrick, 2009) This shows that the banks looked towards the newly creative accounting investment avenues whose actual performance was doubtful. This raises concern as the banks were going out of their policy of risk management. Excessive investment in risky securities Banks started to view that “the rating of AAA and AAA- meant that the funds are safe”. (Moxey & Priddy, 2008) They started to take it for granted and all measures on the part of the banking intuitions were lacking. Over investment in this securities resulted in banks failing and over exposure to the risk made investments risky. This was an act of complete ignorance of the risk measures which the accounting rules for banks warrants of. Lack on monitoring led towards crisis The lack of interference from world banking bodies like “World Bank and other banks mitigate to reduce risk were not present”. (UN Conference, 2009) Lack of other bodies and reforms over exposed the banks. The policies of the bank countered each other. This gave no uniformity and to take a common path to come out of the global financial crisis was difficult. Banks thus faltered in their accounting rules and didn’t disclose transactions of such high nature. Later when the market failed and economies took a downturn then banks already had an overburden from this investment avenues started making loss which resulted in failures. This is completely a sign of poor accounting rules which led towards the crisis. Poor risk management by economies is also seen from the fact that the economies felt markets would never crash and continue to grow. The fact that economies even after receiving signals early on did not react to it and continued in the same manner shows negligence of corporate governance and over reliance on the bull market. The fact that economies were not ready for such a crisis shows their over reliance on the bull market and lack of practices to deal with a situation if a crisis happened. This shows lack of corporate governance to deal with matters. (Fairfax, 2010) Economies didn’t have strategies to combat it highlighting poor risk management policies. Lack of plans on the accounting front to deal with crisis Also, since the management did not have a backup plan to deal with the rising risk associated with investment and polices to combat those shows lack of management practices to deal with the situation in hand. (Ryuhei, 2009) The management allowed the accounting rules to be floundered and organization had a view that the superficial growth rate would continue and in no way people would come to know that the accounting rules were being moulded through creative accounting. This was seen as a big factor which led to the downfall of many stock markets and economy as a whole. The lack of proper accounting policies practices to ensure that accountability is fixed led towards the collapse of the economies. (Fairfax, 2010) This is a situation which highlights lack of accounting rules and policies. This can be seen from the fact that credit agencies were not hold accountable for providing wrong rating to different instruments. Conclusion This clearly shows that proper accounting rules was neglected and it was taken for granted that the economies would not crash and continue to grow. Lack of governance from government, banks, management and individuals highlights, that economies were not prepared for it and lacked accountability. (Fairfax, 2010) The other problem seen was lack of transparency leading to poor accounting rules which led to this problem. The agencies and institutions were not looking forward to tools and risk policies which could safeguard them even after the crisis broke out resulted in creating further problems. Economies thus need to lay stress on accounting rules and ensure that they have a strategy and policy in place which helps to improve disclosures. To ensure that such a crisis doesn’t happen again accounting rules is an important aspect. Along with it special attention need to paid to strategies and monitoring process in all areas so that the performance improves and this will help to improve the efficiency. References Austin R, 2008, “The credit crunch and the law”, Corporation and Taxation law monograph series, Sydney Coffee J, 2008, “The 2008 Ross Parsons address in Corporate law financial crisis”, pg 36 Deloitte, 2010, “IAS 16 Property, Plant & Equipment”, IAS Plus, Deloitte Touche Tohmatsu Fairfax L, 2010, “Corporate Governance and Securities Law response to financial crisis”, Journal of Business & Technology Law, pg 1-5 Kirkpatrick G, 2009, “The corporate governance lesson from global financial crisis”, Financial Market Trends, OECD Moxey P & Priddy S, 2008, “Corporate governance and credit crunch”, Association of Chartered Certified Accountants Mitton T, 2001, “A cross firm analysis of corporate governance on the East Asian Financial Crisis”, Journal of Financial Economics, Elsevier Science Poskitt R, 2005, “Disclosure Regulation & information risk”, Accounting & finance, volume 45, issue 3, page 457-477 Ryuhei W, 2009, “International trade during the financial crisis: WTO supervisory functions should be enhanced”, Research Institute of Economy, Trade & Industry, IAA UN Conference, 2009, “World Financial and Economic Crisis and its impact on development”, retrieved on October 26, 2010 from http://weitzenegger.wordpress.com/2009/07/03/world-financial-and-economic-crisis-and-its-impact-on-development/ Read More