JARAF Editorial, Volume 3 (1) July 2008
Journal of Applied Research in Accounting and Finance (JARAF), Vol. 3, No. 1, 2008
6 Pages Posted: 5 Sep 2008 Last revised: 18 Aug 2014
Date Written: July 30, 2008
George Bernard Shaw once remarked that his favoured means of joking was to tell the truth, in his view the funniest of all things in the world. Looking back over the manner in which events have unfolded over the past year, it is tempting to ask whether he would take a similarly wry view of the tumultuous unravelling of global capital markets which has occurred over that timeframe.
In large part, the present crisis can be understood as the product of an enormous dissonance between symbols and the underlying phenomena to which those symbols relate. Thus it was possible for debt securities constructed on pyramids of mortgages and other loans whose credit quality was at best dubious to attract gilt edged ratings.
And while the riposte that history is replete with like events may be true as a statement of bare fact, the sheer dollar magnitude of this latest bout of disease is staggering in its proportions. For this reason we are grateful to be in a position to include Michael Lim’s excellent article on the causes and consequences of the subprime crisis in this edition of the journal.
More than this, the realisation that symbols such as numbers or ratings may not correspond meaningfully to real underlying empirical phenomena is an evergreen challenge for the domains of accounting and finance and for those who work within those domains or rely upon their products.
Robert Sterling clearly articulated the source of a very real danger present everywhere in the accounting and reporting domain. In his timeless essay Confessions of a Failed Empiricist, he observes that "accountants tend to think of accounting as dealing with the most concrete reality but I think they suffer from what is called "maya" in Eastern philosophy - the illusion that numerals are reality as opposed to numerals corresponding to or representing reality."
How much more difficult do matters become when the hoped for correspondence between symbol and real world phenomenon fails to emerge or worse, had no prospect of ever emerging due to the utter artificiality of the symbolic or representational frame?
In Volume 2(1) of this journal, Sir David Tweedie quipped that he longed for the day when an aircraft in which he was being propelled from one place to another might actually be resident on the balance sheet of the organisation whose logo appeared on the tail. Should we follow Shaw's advice and laugh at this truth or regard the message it conveys as a shameful lament?
Perhaps the most astonishing feature of the codified and sanctioned representational dissonance which haunts so many elements of financial statements and their accompanying notes is the sanguine view so many seem to take of the capacity of our modern "efficient" institutions to unravel and thus see through the many riddles inside mysteries inside enigmas which populate their pages.
No doubt it was exactly that sort of clairvoyance which allowed investors to sustain the belief that loss exposure profiles on AAA rated slices of collateralised debt obligations whose underlying reference assets consisted of thousands of highly correlated mortgages drawn from the red light layer of the credit spectrum mapped tightly to the profile associated with a blue ribbon single name corporate issue.
For our own part, we continue to hold the view that research which delves into the empirical substrate of financial reports, which challenges dissonance and declines to accept, prima facie, the capacity of markets or information users to deftly avoid what might be termed the "lost in translation" problem - is of very great inherent value.
The work of Professor Marlene and David Plumlee on information loss pertaining to IFRS reconciliations falls squarely into this category. So too does the contribution of Professors Comiskey and Mulford on the vexed subject of negative goodwill.
It was Cicero who observed that the objective of writing is not just to be understood, but to avoid the possibility of being misunderstood. Viewed throughout that lens, the quality of much in the financial reporting domain leaves a great deal to be desired. Yet by giving substance to problems encountered in the pages of the reports, the authors whose work is represented in this edition of the journal assist in the identification of harmful pathogens and in the configuration of potential mechanisms through which these can be exercised. This seems to us a far more invigorating approach to the empirical domain than limp obeisance to the alleged omniscience of the market.
JEL Classification: M40, M41
Suggested Citation: Suggested Citation