Discuss and Evaluate the Following Statement ‘Accounting Is Not a Root Cause of the Financial Crisis but It Has a Key Role to Play in Its Resolution’ Essay

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Over the years, economic systems have evolved, becoming heavily reliant on funding from external parties who often have little (if not no) relation to the company. Subsequently, the role of the accounting profession grew exponentially, as it became increasingly crucial to inculcate confidence in the financial information provided by companies. Standards enforced by regulators (FASB and IASB) aimed to help instil trust and facilitate transactions between investees and shareholders, by providing criteria to ensure the publishing of relevant, reliable and transparent information to help support efficient markets. (Hoogervorst ,2012) Naturally, following the onset of the crisis in 2007 and “collapse” of the market in 2008, many have blamed accounting for the shattering of this trust, highlighting the influence of Fair Value Accounting. FVA is the valuation of an asset or liability based on the current market price (Laux and Leux 2010,93). Consequently, the debate has led to the questioning of the practice and need for accounting. Hence, it is paramount to discuss the above topic to rebuild the former trust and appropriately and accordingly amend accounting standards to restore its credibility. This essay will proceed to underline that accounting is not a root cause of the crisis, as well as, investigate methods in which it can aid to resolve it. Critics’ main allegation towards accounting being a root cause, is the argument that FVA accentuates asset prices in both economic booms and busts, allowing overstatement of prices and write ups in booms and downward pressure on prices in weak markets during busts(Lefebrve and et al 2009,14).. Pre-crisis, firms were able to record substantial accounting gains from loan securitizations, through FVA, dutifully creating a surge in investors seeking opportunities in this domain which banks aimed to meet. The above speculates that

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