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This paper examines the effects of fair value accounting on financial statement reliability and in light of the current credit crisis. First, the paper discusses how the Enron accounting scandal impacted legislation regarding accounting practices. Then it considers how issues of financial statement and valuation estimate reliability when fair value methods are used and the role that fair value accounting methods played in the development of the credit crisis are quite interconnected, with the former being an alleged primary cause of the latter. Both ideas are analyzed in depth. The paper concludes by stating that the volatility noted in the market following the implementation of fair value accounting practices is an indicator that the practices are working.
From the Paper:"This second options is perhaps the more plausible of the two, as there was certainly some indication in the current credit crisis that estimates--even good-faith estimates--of the value of certain securities, other assets, and entire institutions were grossly misrepresentative (AICAP 2009). There is also little doubt that the fair value accounting methods have led to an increase in market volatility, although more time is needed to determine whether this is a temporary circumstance based on the novelty of the accounting methods prior to the downturn, or if the observed trend of increased market volatility will be a long term effect of fair value accounting methods."
"This latter state of affairs seems likely, as the use of fair value accounting practices means that values must be continually adjusted based on existing market fluctuations (AICAP 2009). As changes in value necessarily have an effect on the market, it only stands to reason that the more frequently and drastically values are adjusted, the more the market will fluctuate in response."
Sample of Sources Used:
- AICPA. (2009). "FAQs about fair value accounting." The American institute of certified public accountants. Accessed 2 October 2009. http://www.aicpa.org/MediaCenter/fva_faq.htm
- Moyer, L. (2008). "How fair is fair value accounting?" Forbes. Accessed online 2 October 2009. http://www.forbes.com/2008/06/24/accounting-banking-sec-biz-cx_lm_0625sec.html
Cite this Term Paper:
Fair Value Accounting and the Credit Crisis (2012, April 01) Retrieved February 28, 2020, from https://www.academon.com/term-paper/fair-value-accounting-and-the-credit-crisis-150740/
"Fair Value Accounting and the Credit Crisis" 01 April 2012. Web. 28 February. 2020. <https://www.academon.com/term-paper/fair-value-accounting-and-the-credit-crisis-150740/>