Countering Opportunism in Structuring and Valuing Transactions: The Case of Securitizations

33 Pages Posted: 10 Apr 2009

See all articles by Steve Bryan

Steve Bryan

Fordham University - School of Business

Steven B. Lilien

City University of New York - Stan Ross Department of Accountancy

Bharat Sarath

Rutgers, The State University of New Jersey - Accounting

Date Written: April 9, 2009

Abstract

During the financial crisis of 2008, the debate on the accounting profession's role has focused mostly on mark-to-market accounting rules. We argue that there are other weaknesses in the accounting rules as applied to securitizations that pre-date the current crisis. The accrual system that underlies all accounting allows revenues to be recognized in advance of cash flows but requires reserves on receivables. Similarly, the fair value system books unrealized gains, but fails to recognize reserves explicitly. In illiquid markets, fair value estimates have to be based upon internal models. Compensation arrangements that are closely tied to these estimates create a perfect setting for managers to increase their compensation by inflating asset values. We propose a method of recognizing fair value reserves that builds upon existing practice. Such reserve accounting, an application of conservatism, will mitigate procyclical swings in fair value estimates and reduce incentives for overly optimistic asset valuations.

Suggested Citation

Bryan, Stephen and Lilien, Steven B. and Sarath, Bharat Sarrukai, Countering Opportunism in Structuring and Valuing Transactions: The Case of Securitizations (April 9, 2009). Available at SSRN: https://ssrn.com/abstract=1376103 or http://dx.doi.org/10.2139/ssrn.1376103

Stephen Bryan

Fordham University - School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Steven B. Lilien (Contact Author)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3163 (Phone)
646-312-3161 (Fax)

Bharat Sarrukai Sarath

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

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