2008 Financial Crisis and Its Implications for Change in the Accounting Industry

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Date Submitted: 09/22/2011 09:18 PM

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The 2008 financial crisis was marked by wrong doing by industry, banking, financial institutions, stockbrokers, and government. Many government contractors “cheated on the figures”, spin off past of their holdings overseas or through mergers to avoid legal protection. Stockholders were lied to or decided by public figures. Bankers and mortgagers made bad loans and often oversold. Government disguised cost and index figures by changing nomenclature and the elements of index figures, or as to give the problem a false impression as to the country’s economic condition. All these actions culminated total public mistrust in the financial representations of formerly trusted and relied upon institutes. The accounting industry was implicated by association because it had been relied on to honestly present “The figures”, clearly, changes needed to be made in accounting methods, procedures and measurement to promote better understanding and provide financial figures more clearly, as to protect the public interest and restore faith and trust in accounting industry.

In 2008, AIG, Lehman Brothers, Citibank, Merrill Lynches and Goldman Sachs went bankrupt or were bought by other companies at below the market value of the company’s net assets. It seems that in this financial crisis, accounting rule may be partly to blame. Accounting plays an important role in business and most of people question about its fair value measurement model. Compare to fair value measurement of assets and revenue recognition, accounting conservatism is enabled to reduce information risk and protect investors. For example, Lehman Brothers, using the fair value model, is over sensitive in reflecting gains and slow reflecting losses. Ignoring the stability of the accounting principles had become one reason for causing Lehman Brothers bankruptcy. Therefore, it would appear that accounting conservatism ought be established with a fair value accounting framework, in order to improve the...