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Accounting is not a root cause of the financial crisis, but it has an important role to play in its resolution.
Finance & Accounting
Pages 3 (753 words)
Many economists consider the financial crisis also known as the sub-prime crisis that shocked the world in the year 2007-08 to be one of the worst crisis of all times. The United States of America was the epicenter of this crisis…
The United States of America was the epicenter of this crisis. The sub-prime crisis caused many key businesses to close down and equity markets all around the world recorded tremendous decrease of their respective indices. This financial crisis almost created mass scale unemployment around the world. It is very interesting to study the role of financial accounting in this crisis. Many experts have expressed the view that the method of fair value accounting have exacerbated this crisis but did not initiate it. The first part of this essay will aim to analyze the role that fair value accounting played during this crisis and whether it has enhanced the crisis or not. Second part of this essay tries to find out whether accounting can provide remedial solutions to this crisis. Role of accounting in the financial crisis According to Financial Accounting Standards, even in the absence of active market or during unfavorable market conditions the banks are required to calculate the values of its assets which will be different and lower than the true value. The final figures of various financial instruments like the Credit Default Swap are calculated at fair value and as a result create misleading impressions. ...
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