PART XI - ACCOUNTING ISSUES

Summary

Accounting and Systemic Risk: An Introduction

During the most recent financial crisis the role accounting played in exacerbating the effects of the crisis seemed to be a regular focus of debate in academic, analyst/investor, media and policy circles. This debate focused on several issues including: the use of fair value accounting, securitization and related entities off-balance sheet treatment, derivatives especially related to credit default swaps and whether accounting exacerbated pro-cyclicality. Barth and Landsman (2010), Laux and Leuz (2010) and Ryan (2008) discuss and provide useful synopses of the academic work on these issues.

Most of the published academic work tried to assess whether the application of fair value actually caused or at least added to the systemic risk. The broad consensus seems to be that it is not possible to demonstrate this association let alone any causation. Many publications and commentators also discuss a need for shifting from opacity to greater disclosures with varying degrees of specificity.

In contemplating what would be useful for this Handbook it seemed important to consider what we could provide that added some insight for our readers. My own view, formed while observing this late 2000's crisis unfolding from inside an investment bank in multiple roles as well as participating indirectly in accounting regulation and academic analysis, suggested that the role accounting played in exacerbating the systemic risk would be hard for academics to validate in the systematic way that is necessary for a credible publication.