Accounting Is Not a Root Cause of the Financial Crisis, but It Has an Important Role to Play in Its Resolution. Discuss and Evaluate.

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In the wake of the recent financial crisis, the accounting profession has endured much criticism. The purpose of this essay is twofold. First, I will discuss the role of accounting in the crisis. To do this, I will analyse two principal allegations against the discipline in relation to the crisis; namely the issue surrounding fair value (mark-to-market) accounting, and the issue of the over-complexity of accounting rules and regulations. I conclude that although the abuse of the profession by investment institutions aggravated the financial crisis, accounting cannot be said to be a root cause. Second, I look at the potential of accounting to help with the resolution of the financial crisis. I argue that by enhancing the accounting standards and acting to eliminate weaknesses therein, accounting can play a significant role in aiding the global economy to recover. Several allegations have been made against the accounting profession, accusing it of precipitating the financial crisis. Of these, I believe two in particular depict the role of accounting in the financial crisis, these being the effects of fair values and the overly complex (and thus allegedly detrimental) nature of financial reporting. Let us first consider the issue foremost in the criticism against the accounting profession: that of fair values. According to Laux and Leuz (2010), the main allegations against fair value accounting in relation to the financial crisis were that they reported overstated leverage prior to the crisis and overstated losses during it, leading to excessive write-downs. These write-downs depleted the capital of banks and investment institutions, which consequently resulted in them making fire sales (selling their assets at very low prices) in order to meet their capital adequacy requirements. This then offset a downward spiral as a result of the contagion effects of the

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