Roles and Practices in Accounting: Did Fair-Value Cause the Global Financial Crisis?

Abstract

This paper debates how did fair-value accounting (FVA) that were deeply affected by the global financial crisis (GFC). The GFC that started in advanced economies spreading to emerging markets and low-income countries, which has been affected in the middle of 2007 and into 2009, as have various empirical studies which have examined the role of FVA in the GFC. In this paper, using the quantitative methodology where value-relevance of fair value estimates of assets and liabilities reported under FVA provided by FAS 157, in terms of a simple theoretical and empirical analysis literature framework. This empirical study proposed that this is not a normal cyclical crisis of capitalism but a global crisis, which requires a change in the management policy to be tackled with new regulatory frameworks for financial institutions in order to stimulate economic activities. In other words, FVA may have amplified the crisis. These findings could be fruitful and helpful for outside users of accounting reports and also for regulators and legislators in their attempts to constrain the incidence of earnings accounting practises and to enhance the quality of accounting information. Future research is needed to meet up-to-date information regarding the nature of capital markets and financial institutions. This requires a new theory of economics; for instance, a change from equilibrium theory to reflexivity theory which requires a change in the underlying model of the economic activity framework and valuation challenges that arise from the use of FVA in financial reporting.