How did Financial Reporting Contribute to the Financial Crisis?

Mary E. Barth, Wayne R. Landsman
2010 The European Accounting Review  
We scrutinize the role financial reporting for fair values, asset securitizations, and derivatives played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely were insufficient for investors to assess
more » ... operly the values and riskiness of bank assets and liabilities. Although the FASB and IASB have taken laudable steps to improve disclosures relating to asset securitizations, in our view, the approach for accounting for securitizations in the IASB's Exposure Draft that would require banks to recognize whatever assets and liabilities they have after the securitization is executed better reflects the underlying economics of the securitization transaction. Regarding derivatives, we recommend disclosure of more disaggregated information, disclosure of the sensitivity of derivatives' fair values to changes in market risk variables, and implementing a risk-equivalence approach to enable investors to understand better the leverage inherent in derivatives. We also conclude that because the objectives of bank regulation and financial reporting differ, changes in financial reporting needed to improve transparency of information provided to the capital markets likely will not be identical to changes in bank regulations needed to strengthen the stability of the banking sector. Although accounting standard setters and bank regulators should find a common ground, it is the responsibility of bank regulators, not accounting standard setters, to ensure the stability of the financial system.
doi:10.1080/09638180.2010.498619 fatcat:qdnvf5und5gqbiczri6qra5ali