Accounting, Governance, and the Crisis: Is Risk the Missing Link?

Abstract:     
The period 2007-2010 marked one of the most severe economic and financial crises in living memory. In this paper we focus on two of accounting’s key functions within organizations and markets, financial reporting and governance. In this respect we find that accounting exhibited shortcomings in its structural foundation and in its application. Salient is its failure to account for uncertainty and to adequately capture, measure, and disclose the impact of risk-taking on the financial statements, thus undermining their reliability and, potentially, their relevance as indicators of economic performance. Consequently, boards were provided with misleading numbers, and compensation was based on paper profits that did not materialize. As such, accounting carried undesirable elements that interacted with other malicious market characteristics such as excessive risk taking by bankers, and failure in regulatory and market oversight, thus potentially contributing to deteriorating economic conditions. The paper concludes with suggestions for further research in this area.

Number of Pages in PDF File: 27

Keywords: crisis and accounting, fair value accounting, accounting and risk

JEL Classification: M41, M43, G20, J33

working papers series