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

27 Pages Posted: 6 Jul 2011

See all articles by Michel Magnan

Michel Magnan

Concordia University - Department of Accountancy

Garen Markarian

HEC - University of Lausanne

Date Written: February 6, 2011

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.

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

JEL Classification: M41, M43, G20, J33

Suggested Citation

Magnan, Michel and Markarian, Garen, Accounting, Governance, and the Crisis: Is Risk the Missing Link? (February 6, 2011). Available at SSRN: https://ssrn.com/abstract=1879869 or http://dx.doi.org/10.2139/ssrn.1879869

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Garen Markarian (Contact Author)

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

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