Journal of Applied Research in Accounting and Finance (JARAF), Vol. 2, No. 2, 2007
4 Pages Posted: 6 Feb 2008 Last revised: 18 Aug 2014
In our July 2007 editorial, we warned of the dangers associated with gathering storm clouds in global credit markets. By August the predicted tempest had arrived, sweeping away billions of dollars in value and graphically demonstrating the erroneous approach to appraising and pricing risk which had insinuated itself into capital markets in prior years. Credit markets froze over, and even the strenuous efforts of central banks around the world in pouring enormous quantities of liquidity into the banking system has achieved a less than complete thawing.
The missing ingredient, taken for granted prior to the onset of the crisis can be encapsulated in one word, trust. The existence of trust is a necessary precursor to the existence of liquid and efficient capital markets. The institutional and regulatory frameworks within which advanced capital markets operate are designed to engender and sustain this vital ingredient.
Yet the events of 2007 suggest that much of the institutional and regulatory fabric of the global capital markets has been stretched to the point where in many cases it can no longer sustain the trust and confidence necessary for the facilitation of the free flow of capital. Staples as basic as credit ratings have had their value and credibility called into question. Meanwhile, financial reporting practices continue in many cases to lead to confusion rather than clarity.
In the previous edition of JARAF, Sir David Tweedie and Wayne Lonergan produced insightful critiques of aspects of modern day accounting and practices which simply defy common sense. Some of the practices they attacked pertained to complex phenomena such as financial instruments and the application of impairment testing to intangible assets. Yet both authors also suggested that undesirable and obfuscatory practices extend far down the complexity scale, into the realm of simple and commonly encountered transaction types, including leases. Given this critique, it is a timely privilege in this edition of the journal to present work on the subject of the effect of the capitalization of off balance sheet leasing transactions on financial measures by Charles Mulford and Mark Gram. Professor Mulford and his associates have made enormous contributions to the field of applied research in accounting and finance and have carved out reputations as leading thought leaders in their chosen field.
Their work has been in the best tradition of what Professor Briloff might have described as the avoidance of nonsensical esoteric modeling exercises in favour of the practical art of upping sleeves and dipping into the messy reality of real world financial disclosures.
Given the likelihood of a surge in corporate bankruptcies across the developed world during 2008, another practical and timely contribution in this edition comes from Ghassan Hossari, Sheikh Rahman and Janek Ratnatunga, who provide a useful evaluation of sampling controversies in ratio based financial distress modeling. The insights set out in this paper will be of interest to anyone who makes use of these tools.
Finally, this edition of the journal concludes with a look by Suresh Cuganesan and David Lacey at an area of burgeoning concern, the growing problem of identity fraud, and some early evidence on organizational responses to this increasingly profound operational problem.
Again as another year concludes, we thank the editorial board and contributing authors for their work in promoting quality applied research in the area of accounting and finance, and express the hope that little by little, the types of insights to be found within the pages of the journal contribute to the improvement of practice in future.
Keywords: financial reporting
JEL Classification: M40, M41
Suggested Citation: Suggested Citation