As it all started with the US, let us start with what happened there. Highly complex financial instruments called derivatives, which are also called by some economists as the “weapons of mass destruction”, were introduced in 1990s. Because of the deregulation of derivatives in the US, the big investment banks and financial conglomerates, like JP Morgan, Citibank, Lehmann Brothers, Morgan Stanley, etc. introduced “Collateralized Debt Offerings” or CDOs, a type of Asset Based Securities and collateralized by debt obligations including bonds and loans. Then, there were also those Rating Agencies like Standard & Poor’s; Moody’s which falsely rated the derivatives as totally safe instruments (AAA rating). These securities became so popular in US that the investment banks started selling more and more of them, ultimately urging the ordinary people to take more and more loans from the market, thus affecting the Securitization Chain (which is the chain consisting of Home Buyers at the first stage, Lenders at the second, Investment Banks at the third and Investors at the last stage). Prices of homes skyrocketed and ultimately led to the sub-prime mortgage crisis of 2008. Thus, we can say that the prices of homes were not fairly valued in US.
Take the case of Ramalinga Raju, chairman of Satyam Computer Services, who made an accounting fraud of around INR 8000 crores, which left India paralyzed and the investors questioning the nation’s moral and financial stability. It was all because of that fraud he did that the stock price of Satyam initially touched highs; otherwise you can see its price now. The company was running into losses, but still Raju made the deliberate accounting error just to keep investors happy about the company’s performance.
Now, let us talk about how IASB responded to GFC and let us see the actions it took. In September 2005, the IASB took the initiative to prepare an exposure draft regarding international fair-value accounting standards. The main reason behind it was to reduce the complexity of the guidance on measuring fair value. This draft became the single source of guidelines for all fair-value measurements and increased convergence in all International Financial Reporting Standards.
IASB then decided to publish a paper to summarize its preliminary views about fair-value measurement, which would be drafted at a later stage after discussions. The FASB had already developed its own fair-value measurement standard, SFAS 157, which provided the detailed and consistent guidance on that topic. This draft stated about fair-value measurement in inactive markets and also the incorporate guidance published by the FASB on measuring this fair-value in such markets. It got published in May 2009. It contained all the measures to avoid the consequences of the global financial crisis of 2008. The IASB and FASB, in June 2010, together published an exposure draft of amendments that contained methods to capture uncertainty analysis for fair-value measurement.
As the financial crisis was a global one, it affected all the countries worldwide, including Australia. The AASB, as the name suggests, is an Australian government agency for setting up the nation’s own accounting standards. The mission with which it was set up was to:
(a) Help in developing and maintaining high-quality financial reporting standards across all sectors in the Australian economy, and
(b) Make contributions in the development of global financial reporting standards and to facilitate the inclusion of the Australian community into the global standards.
Now, let us look at how AASB responded to the GFC. It set new standards that were specifically designed for their own economy. Some of the achievements and progress made by AASB are mentioned below:
(a) It formulated the accounting standards that are specifically meant for Australian entities to prepare their financial reports so that users of those reports can make completely informed decisions.
(b) It helped Australia to participate in the development of a single accounting standards source across the world.
(c) It formulated new accounting standards for those Australian entities which do not come under the reporting requirements of the Corporations.
(d) The staff of AASB improvised on their own accounting standards by being in close touch of the IASB and its representatives and taking suitable advices from them.
(e) A number of implementation issues were pointed out by the AASB, which needed to be addressed. Majority of them being re-valuation of property, plant or equipment under construction and the presentation of discontinued operations.
And the list goes on and on about the efforts AASB put to amend their accounting standards. And again, it did so in order to help the Australian entities go by their own economy’s standards and not face any risk of the unethical use of the fair-value accounting methods used internationally so that their economy won’t have to again face the risk of a crisis arising out of unfair-value accounting means.
Conclusion
As we all know how devastating GFC was, the main point of agenda here was to discuss the role of fair-value accounting on GFC. We have seen examples of US, INDIA and measures taken by accounting Standard Boards, International and domestic, to improve and scrutinize Fair-Value Accounting.
Global financial markets require several kinds of trust to operate efficiently. Ethics are at the very core of an accounting professional. If he/she comes out to be a fraud, there is no way that organization can survive with respect to a long term perspective. If they don’t follow fair-value accounting means in their system, it is for sure that at some point of time they will fall. Can the world sustain then? These are some questions which everybody should know the answer to and they do, but when greed comes into play, ethics go away. Customers are crushed and executives only focus on filling their pockets with lots and lots of money by creating fraud here and there. While the ethics of the accountancy profession have not been argued in the current article, we understand the consequences of not following the above mentioned values pretty well. This GFC clearly underlines how high the stakes become when ethics are relegated and the accounting standards are amended for personal use.
List of References
[1] Fair Value Measurement, IAS 40 vs. Exposure Draft, Erasmus University Rotterdam
[2] Australian Accounting Standards Board Annual Report 2008-09
[3] McTeer, Robert. “Mark –to-Market Accounting: Shooting Ourselves in the Foot.” National Center For Policy Analysis. 24 Mar. 2009. 30 Apr. 2009
[4] Fair Value Issues and the Sub Prime Crisis, Ernst & Young, 13th Melbourne Money and Finance Conference, Melbourne, June 2008
[5] Fair Value Option for Financial Liabilities, AASB comments on IASB Exposure Draft ED/2010/4, July, 2010
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[7] The Global Financial Crisis: Analysis and Policy Implications, Dick K. Nanto, Specialist in Industry and Trade, Oct. 2, 2009
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