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Article
Publication date: 31 August 2010

William L. Smith, David M. Boje and Kevin D. Melendrez

The purpose of this paper is to analyze media storytelling and rhetoric surrounding the credibility of the longstanding accounting practice of mark‐to‐market valuation.

Abstract

Purpose

The purpose of this paper is to analyze media storytelling and rhetoric surrounding the credibility of the longstanding accounting practice of mark‐to‐market valuation.

Design/methodology/approach

The cascading storytelling model of progressive framing by the media of mark‐to‐market valuation was applied to story subsets of the three types of classic Aristotelian rhetorical appeals.

Findings

The authors found that the media blamed the accounting profession's mark‐to‐market valuation practices as substantive cause of recent corporate problems and declines in market values. In addition, the rhetorical framing of mark‐to‐market accounting practices in the media prompted the Financial Accounting Standards Board to a rush to judgment.

Research limitations/implications

The paper is limited to the analysis of the storytelling included. Different results from other sources may provide another result.

Practical implications

The failure in the media to address the duality between the logos of accounting and the ethos of the media narratives exacerbated the cascading activation. Understanding this duality may provide a different lens in looking at information dissemination. This is not only relative to stakeholders in making more informed decisions but should also serve as a warning to the profession, to have more voice, to use a rhetorical strategy that can have more saliency in the public arena.

Originality/value

The paper examined storytelling as interplay of retrospective narrative, the presentness of living story, and the antenarratives shaping the future of not only the unfolding economic crisis, but the future of accounting itself. In terms of rhetoric, we extended the application of pathos, ethos, and logos by examining a cascading activation theory model. This is one of the few studies of antenarratives and how through cascade rhetoric the future is shaped.

Details

Qualitative Research in Accounting & Management, vol. 7 no. 3
Type: Research Article
ISSN: 1176-6093

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Article
Publication date: 15 January 2018

Stephen Haswell and Elaine Evans

While the debate about fair value accounting (FVA) and the global financial crisis (GFC) of 2008-2009 has been explored in the academic and professional literature, there…

Abstract

Purpose

While the debate about fair value accounting (FVA) and the global financial crisis (GFC) of 2008-2009 has been explored in the academic and professional literature, there has been little debate about the consequences of FVA being implicated in the crash of Enron around 2001, and the effect of this on later FVA developments and the GFC. The purpose of this paper is to examine how well regulators, political actors, and other commentators may have understood the use, misuse, effects and consequences of FVA at the time of Enron, and to examine how this collective understanding (or lack thereof) has influenced later accounting policy, especially that going into and arising from the GFC.

Design/methodology/approach

Using content analysis, the commentary about FVA is traced through documents, primarily the US Congressional Hearings’ examination of the collapse of Enron that took place between December 2001 and December 2002. An assessment of the knowledge of and attitudes toward FVA is made from these and is then traced through later developments including policy responses before, during and after the GFC.

Findings

Links are found between the collapse of Enron and adjustments to FVA in the mid-2000s, which in turn became implicated in the GFC. These linkages are explored in the context of a fair value world view held by global standards setters in the mid-2000s. During the timeline from the 1990s to the mid-2000s, those advocating and adopting FVA as part of this world view, may have had collectively an insufficient understanding of the consequences or effects of FVA technology.

Originality/value

The study provides evidence of a direct link between Enron, the response of global standard setters, and the GFC controversy.

Details

Accounting, Auditing & Accountability Journal, vol. 31 no. 1
Type: Research Article
ISSN: 0951-3574

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Article
Publication date: 5 March 2018

Jeff Downing

This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and …

Abstract

Purpose

This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and “mark-to-market” interchangeably, to denote an accounting regime where changes in the prices of banks’ assets affect regulatory capital. “Historic-cost accounting” has been used in the paper to denote an accounting regime where changes in asset prices do not affect regulatory capital.

Design/methodology/approach

The author built a model that examines how the accounting regime affects banks’ incentives to sell assets and how the impact of the accounting regime on asset sales affects lending.

Findings

In a bust, fair value strengthens banks’ incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Consequently, lending can be higher under fair value. Conversely, in a boom, historic cost strengthens banks incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Hence, lending can be higher under historic cost.

Originality/value

This paper identifies a new channel through which the accounting regime could affect lending. The accounting regime can affect banks’ incentives to sell assets. The resulting difference in sales can affect banks’ ability to make new loans. Hence, in a boom, although banks book mark-to-market gains under fair value, asset sales could be higher under historic cost. Lending, thus, could be higher under historic cost. Conversely, in a bust, although banks book mark-to-market losses under fair value, sales could be higher under fair value. Lending, thus, could be higher under fair value.

Details

Studies in Economics and Finance, vol. 35 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 31 May 2011

Eric J. Levin, Alberto Montagnoli and Gwilym Pryce

Downward movements in house prices can exacerbate bank crises if mark‐to‐market methods of asset valuation are used by lenders to assess their current balance sheet…

Abstract

Purpose

Downward movements in house prices can exacerbate bank crises if mark‐to‐market methods of asset valuation are used by lenders to assess their current balance sheet exposure. There is an imperative to find methods of house price index calculation that reflect equilibrium prices rather than temporary undershoots. The purpose of this paper is to propose a new methodology in order to evaluate whether market house prices are different from their fundamental asset prices.

Design/methodology/approach

This paper proposes a method for house asset valuation that incorporates expected house price appreciation as an endogenous variable. This avoids the necessity to make conjectures about expected future house price appreciation when applying Poterba's user‐cost method of house asset valuation. The methodological extension to Poterba's user‐cost method of house asset valuation endogenises expected house price appreciation as the no‐arbitrage expected price appreciation consistent with the term structure of real interest rates. A benchmark equilibrium house valuation can be calculated because the term structure of real forward interest rates is observable in financial markets. This enables market house prices to be compared with the benchmark equilibrium valuation in order to determine if house prices are overvalued or undervalued.

Findings

The paper presents the results of a worked example to illustrate how this approach could be applied in practice.

Research limitations/implications

There are a number of issues associated with the measurement of user cost which we do not address here and which the authors hope will provide fruitful avenues for future research. There are also issues regarding the impact of tax frameworks on the returns to housing, particularly the taxation of mortgage interest and imputed income. More work also needs to be done in comparing the performance of the extended Poterba model against alternative approaches, such as those that use expected inflation and/or long‐run average house price appreciation, or the real interest rate spread to proxy for expected capital appreciation, and how these different approaches compare in different institutional and socio‐economic contexts.

Practical implications

The authors' results underscore the rationale for mortgage banks to use marking to model instead of marking to market, and this in turn should reduce unnecessary macroeconomic instability when the market prices of houses undershoot fundamental value.

Originality/value

The paper shows how the term structure of real forward interest rates, observable in financial markets, can be used to extend the Poterba model.

Details

International Journal of Housing Markets and Analysis, vol. 4 no. 2
Type: Research Article
ISSN: 1753-8270

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Book part
Publication date: 14 November 2016

Robert H. Herz

Abstract

Details

More Accounting Changes
Type: Book
ISBN: 978-1-78635-629-1

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Article
Publication date: 1 January 1995

Bryan Howieson and Phillip Hancock

Accountants have long sought methods by which the concept of risk can be communicated through financial statements. Traditionally, certain financial ratios such as the…

Abstract

Accountants have long sought methods by which the concept of risk can be communicated through financial statements. Traditionally, certain financial ratios such as the current ratio and leverage ratios have been used for this purpose. Other information cues such as the variability of accounting earnings and asset size have also been employed as proxies for an entity's riskiness. Research suggests that these accounting numbers have an implicit, if not explicit, impact upon the risk expectations of financial analysts and securities markets (see, for example, Beaver, Kettler and Scholes [1970]; Eskew [1979]; Elgers [1980]; Farrelly, Ferris and Reichenstein [1985]).

Details

Managerial Finance, vol. 21 no. 1
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 9 July 2010

Donald Palmer and Michael Maher

We use normal accident theory to analyze the financial sector, especially that part of the financial sector that processed home mortgages, and the mortgage meltdown. We…

Abstract

We use normal accident theory to analyze the financial sector, especially that part of the financial sector that processed home mortgages, and the mortgage meltdown. We maintain that the financial sector was highly complex and tightly coupled in the years leading up to the mortgage meltdown. And we argue that the meltdown exhibited characteristics of a system or normal accident; the result of a component failure (unusually high mortgage defaults) that, in the context of unique conditions (which included low interest rates and government policy encouraging home loans to less credit-worthy households), resulted in complex and tightly coupled interactions that financial elites and government officials were ill-equipped to control. We also consider the role that agency and wrongdoing played in the design of the financial system and the unfolding of the mortgage meltdown. We conclude that a fundamental restructuring of the financial system, so as to reduce complexity and coupling, is required to avert future similar financial debacles. But we also conclude that such a restructuring faces significant obstacles, given the interests of powerful actors and the difficulties of labeling those responsible for the meltdown as wrongdoers.

Details

Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A
Type: Book
ISBN: 978-0-85724-205-1

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Article
Publication date: 9 February 2015

Hilde Patron and William J. Smith

The purpose of this paper is to study the impact of the relaxation of mark-to-market (MTM) standards on community banks’ share prices. Mark-to-market valuation of…

Abstract

Purpose

The purpose of this paper is to study the impact of the relaxation of mark-to-market (MTM) standards on community banks’ share prices. Mark-to-market valuation of securities became increasingly common in the late 1990s and 2000s, as regulators sought to create more transparent and more current depictions of bank financial positions. However, MTM accounting may be sub-optimal in the presence of severe market frictions, such as those experienced during the financial crisis of the late 2000s. To comply with capital requirements associated with MTM accounting, banks of the late 2000s dramatically liquidated portfolios with potentially solvent assets in illiquid markets, taking huge losses. During the financial crisis, mortgage-backed securities held by banks began to plummet in value. Banks were forced to either liquidate these assets even though there were no buyers or dramatically reduce the values of their portfolios based on fire-sale prices. On a cash-flow basis, these securities had value, as many mortgages bundled in these securities continued to be paid on time; however, with markets frozen, market prices did not reflect this value.

Design/methodology/approach

This study shows that, for a sample of 134 community banks, share prices increased after the MTM relaxation, even after accounting for a variety of other economic factors.

Findings

This paper shows that, perhaps counterintuitively, the steps taken by the Financial Accounting Standards Board to relax MTM accounting standards may have acted as a stabilizing factor on the market price of community bank shares by allowing banks to selectively liquidate assets, boosting asset prices until uncertainty was resolved.

Originality/value

This paper examines the impact of recent changes in accounting standards on the perceived risks associated with the banking sector. It specifically focuses attention on the impacts these changes had on community-based banks within the USA.

Details

Journal of Financial Regulation and Compliance, vol. 23 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 29 May 2009

David Hirshleifer and Siew Hong Teoh

Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause…

Abstract

Purpose

Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause “systemic risk.” This paper seeks to consider the externality in the choice of ex ante risk management policies by individuals and firms, concerned with private risk, not with their contribution to systemic risk.

Design/methodology/approach

The implications for debates over fair value accounting are considered.

Findings

One consequence is that individuals and firms become overleveraged from a social viewpoint. The recent credit crisis exemplifies the importance of this problem. The US tax system taxes equity more heavily than debt, and therefore exacerbates the bias toward overleveraging. A possible solution is to reduce or eliminate taxation of corporate income and capital gains. Preparedness externalities can also cause firms to become too transparent, and thereby subject to financial runs.

Originality/value

The paper offers insights into systemic risk, coordination failures, and preparedness externalities, focusing on tax and accounting policy.

Details

Journal of Financial Economic Policy, vol. 1 no. 2
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 3 May 2016

Ryan P. Brizek, P. Georgia Bullitt, Rose F. DiMartino, Margery K. Neale and P. Jay Spinola

To describe and analyze a proposed rule recently issued by the US Securities and Exchange Commission (“SEC”) that would overhaul the use of derivatives and financial…

Abstract

Purpose

To describe and analyze a proposed rule recently issued by the US Securities and Exchange Commission (“SEC”) that would overhaul the use of derivatives and financial commitment transactions by registered investment companies and business development companies.

Design/methodology/approach

This article summarizes the various aspects of the proposed rule, discusses the elements of the proposed rule in greater detail, explains the effect of the proposed rule on existing guidance from the SEC and its staff, and notes the potential transition period for any final rule.

Findings

While the proposed rule is subject to public comment and subsequent consideration by the SEC and its staff, if the proposed rule is adopted in its current form it would result in sweeping changes for registered investments companies and business development companies.

Originality/value

This article contains a detailed overview of a recent SEC rule proposal regarding the use of derivatives by registered investment companies and business development companies and practical guidance from experienced asset management lawyers.

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