The Failure of the Accounting System - Article Example

The article talks about the failure of accounting system in anticipating the catastrophic global financial crisis. This gap has made it clear that still a large gap persists between the academic accounting research and accounting in action. Another reason given for the failure of accountants in anticipating the looming crisis was their inability to read the macro political factors and focusing too much on the micro factors. This all contributed to the collapse of world's largest and most powerful economies of the world. The paper, in general, tries to identify the various factors in the field of accounting research that contributed to the fall of financial system in the USA. It also talks about how weak laws and financial reporting requirements as a result of insufficient accounting research have contributed to the crisis apart from irresponsible behavior of the bankers and the banks. This article is written in this time because the entire world is going through a turbulent phase of global financial crisis which has not only paralysed the US economic system, but also the world economic system. The main point that the article discusses is the financial reporting requirements and in particular the valuation regulations. The article uses the secondary research methodology when analyzing the role of accounting research in its attempt to curb or stop the looming crisis. It talks about the fair value accounting and how it contributed to the fall in the accounting system. It pays particular attention to the manipulation that many companies did in order to window-dress their financial statements and use it as a tool to justify money laundering, over-valued SIVs etc. However, at the same time, it criticizes the role of accounting research by using the observational secondary research. It says that even when the fair-value accounting was at its peak, the researchers were unable to publish any data or any empirical data about the problems that it could cause. Instead, during the years preceding crisis, there was no research done on the issue, and it was after the crisis had been fully operational that accountants starting paying heed to the issue and starting researching the topic. This again is used by the writer, as an evidence to signify the gap between accounting in practice and accounting research through observation and secondary research as a methodology. The article then comes down to the third argument that is used a factor showing the gap between accounting research and accounting in practice. It sheds light on how accounting research fails to indentify the macro economic factors and macro implications of methods and strategies used by accountants. One particular case that can be discussed here is that of Enron. Enron accountants start coming up with new ways to show that their company is profitable when there is nothing in the company. This was called hypothetical cashflow accounting. This was a fake concept, but no accounting firms or research organization bothered to look at the issue or check the validity of the method. As a result, the organization went bankrupt and effects of this bankruptcy were felt throughout the financial system. All of this put cyclical pressures on the American economy. In order to support his claims, the methodology used here again is that of secondary research. However, the article also raises a very good point that this crisis will act as a bridge to narrow the gap between accounting research and account practice if taken seriously. (Muis, 2008) The other ways of bridging the gap between accounting research and accounting practice is to understand the politics of standard setting, rethinking transparency and the role of accounting firms. All of these factors contribute to the persistent gap between the accounting researches accounting practice (accounting in action). The writer has correctly identified the politics of standard setting as a factor which contributes to the gap between accounting research and accounting practice. It also talks about the role that lobbying has played over the years in standard setting. Lobbying firms usually try to set those standards which benefit them irrespective of what is needed for fair accounting procedures and policy. For this purpose, the writer has collected the political data of various economies in order to find out the magnitude of lobbying as a factor that contributes to the gap between accounting research and accounting practice. Similarly, the writer has also placed great emphasis on the role of accounting firms. Again the methodology used here was the secondary research. The advent of financialization in the USA economy changed the shape of the USA's financial system forever. Many firms started using it as a tool for tax evasion and other benefits. These practices were manipulated towards tax evasion than to show the true and accurate picture of the organization. (Meigs, 1990). The role of Political economy in accounting has never been exaggerated enough. As a result of which accounting standards allow accountants to use their own judgments when needed for accounting treatment of different/unique accounting transactions. As a result, various discrepancies exist in the accounting practices in different cultures and practice which has contributed to the fact that there is no uniform accounting culture in different countries. Although this article is a fair effort by Arnold and Sikka in their attempt to identify the causes of global financial crisis, still a lot of research needs to be done for coming up with the remedies that can help us solve the problems. The writers of this article have done a commendable job in coming up with the factors that contribute to the gap between accounting research and accounting action, but the job is only half done, until we identify the remedies or solutions for these problems. For example, the writer has identified that one of the major reasons for the gap in the accounting research and accounting in action is because of the fact that financial reporting requirements are weak and they are subject to political influence and lobbying. However, there is nowhere in the article where it has been discussed how the situation can be improved. He could have also identified the remedies to the problems like establishment of an international financial reporting board which could deal with the problem of variations in accounting standards throughout the world. He could have also suggested that a financial reporting standard board should be established that is free from any political influence and is not susceptible to lobbying. Although, these remedies are not exhaustive, they could have helped the accountants to solve the problems prevalent in the accounting system and would have played its part in bridging the gap between accounting research and accounting in action (accounting practices). (Randall, 1996) In the end, we can conclude that this global financial crunch has played its part in plummeting demand of various items in the economy and in turn it has resulted in closure of many businesses and unemployment which has multiplied the economic problems that the world is going through. It is up to the governments now, to deal with this problem wisely and play the right cards to get rid of the problem. One way to solve this problem is to encourage accounting researchers to supply the firms with empirical data to tackle this problem. Another way is that the governments can counter the problem is by giving out bailouts to the industries which have experienced a massive decline in demand. This would revive these industry and result in multiplied times increase in the aggregate demand and sooner or later, we may get rid of the problem. (Healy, 2009). References: Harold Randall. (1996). Accounting 3rd Edition. Letts Educational. Stephen Ross. (2002). Corporate Finance 7th Edition. McGraw Hill Frank Wood. (2008). Accounting 11th Edition. Financial Times Management William Meigs. (1990). Accounting: The Basis of Decision Making. McGraw Hill Jack Healy. (2009). U.S. Home Sales Remain Sluggish as Supply Soars. The NewYork Times. Retrieved on 20 May 2010. http://www.nytimes.com/2009/05/28/business/economy/28econ.html_r=2&emc=eta Muis, J. (2008). Written submission to the Advisory Committee on the Auditing Profession, US Department of Treasury, Washington, DC, May 23. Read More