Global Financial Crisis And Regulation Of Financial Accounting Finance Essay - Free Essay Example

This report is related to issue, problems of recent global financial crisi. How it effects economy and people and research methods used to identify the reasons and few analysis of people what they think how this crisis came and the end some recommendations to overcome or to prevent from this crisis in future. Research Background As we are going to talk about and investigate about financial crisis, which effected globally the whole econonomy. This is essential to have knowledge about the term financial crisis and its major impacts to the economy. Financial crisis is applied or used generally to a variety of situations in which some financial institutions or assets abruptly lose a huge portion of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions co-existed with these fears. Other situations that are often called financial crises include stock market crashes and the explosion of other financial bubbles, currency crises, and sovereign defaults. Financial crisis has occurred throughout the past century, however if we talk about the current scenario it actually started to show its impacts in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. The collapse of Lehman Brothers on September 14, 2008 marked the beginning of a new phase in the global financial crisis. Governments around the world struggled to rescue giant financial institutions as the fallout from the housing and stock market collapse worsened. Many financial institutions continued to face serious liquidity issues. The Australian government announced the first of its stimulus packages aimed to jump-start the slowing economyFinancial crises directly result in a loss of paper wealth; they do not directly result in changes in the real economy, may indirectly do so, notably if Financial crisis is a situation precipitated by a general lack of confidence in a countrys financial system (Aizenman, J 2007). Several theories are however developed by different economists related to the occurrence, causes and prevention of global crisis. But there is little consensus, however, and financial crises are still a continuous occurrence throughout the world. Key Objectives As we have referred various circumstances under which financial crisis may happen and its disastrous ongoing results to the whole world economy. It is crucial to find the way outs for the global crisis. The solutions can be achieved by setting some norms and international standards. The following are the key objectives under which, we will accomplish our research report. Determine the various primary causes of financial crisis Associate the causes with IASB (International Accounting Standard Board) Straightaway connect and justify our analysis with related financial accounting theories Adopt the various accounting procedures to undertake research and justify them. Analyze the timeline for an overview of the latest measure taken by the IASB in response to the financial crisis View an overview of the IASB activities related to global crisis Apply further research methods to appraise global financial crisis in more depth Discover the possible outcomes for this international dilemma Implementation of the outcomes worldwide Theoretical Perspectives In this research we tried to relate the various theories of accounting discussed during the class. At first below diagram is a representation of factors contributing to housing bubble. Housing bubble means when the rates of houses significantly rise. This happened mainly in the years 2007-2010, time of financial crisis. People believe that real estate bubble mainly in America was the partial reason for global crisis. Above (Factors contributing to housing bubble) In the above diagram we can directly see the political and government influence. Here we can relate it with public interest theory of regulation and capture theory of regulation. Whereas the capture theory here dominates public interest theory of regulation. Although according to public interest theory the regulation is introduced to protect the public, but regulatory mechanisms often controlled by groups most affected by regulation like political and government. So these theories directly justify this situation, the major cause of financial crisis. As the bank plays critical role in current market system, when the larger banks show signs of crisis, it is not just the wealthy that suffer, but potentially everyone. With a globalized system, a credit crunch can ripple through the entire (real) economy very quickly turning a global financial crisis into a global economic crisis. As the legitimacy theory relies on social contract and does not rely on the economic based assumption that all action is driven by self-interest and wealth maximization. For example, an entire banking system that lacks confidence in lending as it faces massive losses will try to shore up reserves and may reduce access to credit, or make it more difficult and expensive to obtain. In the wider economy, this credit crunch and higher costs of borrowing will affect many sectors, leading to job cuts. People may find their mortgages harder to pay, or remortgaging could become expensive. For any recent home buyers, the value of their homes is likely to fall in value leaving them in negative equity. As people cut back on consumption to try and weather this economic storm, more businesses will struggle to survive leading to further job losses. If we talk about economic interest group theory it is solely motivated by self-interest. This also became the reason for recent financial crisis. Different Countries were often in conflict with each other. Economic environment plays a crucial role for outbreak and reoccurrence of conflict. In particular wars often start following growth collapses (Collier et al, 2009). Sharp economic slowdowns and low level of income per capita appear to increase the likelihood of conflict and contradictions. While some commentators propound the view that the financial crisis is some sort of a self-fulfilling prophesy of the shortcomings of a market system, others see the principal cause the government interference on the normal operations of the financial markets (Kaufman, et al, 1999). As we talk about IASB, it has been making steady progress toward stabilizing and strengthening the global financial system by fortifying prudential oversight, improving risk management, promoting transparency, and reinforcing international cooperation. While confidence in the financial system has improved, more work is required to restore the soundness of some global banks balance sheets, to avoid leaving the global financial system vulnerable and restricting its ability to provide the credit needed to fuel sustainable economic growth. Research Methods Methods applied Financial crisis has been severed since the huge depression in the world economy. Due to the financial crisis, there is been very a lot of contractions in the real economy like credit losses, write downs, liquidity shocks, deflated property values etc. We can demonstrate the various huge losses due to financial crisis in four categories as: (1) U.S. loss estimates; (2) U.S. housing sector; (3)U.S. financial sector; and (4) global loss estimates. In April 2009, the International Monetary Fund (IMF) approximated entire near-term universal losses on U.S. credit-related debt to be $2.7 trillion. Development predictions in 2009 are pessimistic across the board. Expenses straightaway attributable to the disaster include new spending by the federal government, including the Troubled Assets Relief Program (TARP) ($700 billion) and the stimulus package passed in February ($787 billion). As far as housing sector is concerned, banks took benefit of less interest rates and securitization opportunities to institute relaxed lending standards that operate mortgage lending to the early part of the decade end to end. Within year 1990 and 2008, the quantity of houses in the America inflated only marginally. The total mortgage debt outstanding more than quadrupled during that same period. Increased borrowing by U.S. households was partially offset by climbing asset prices. However, there came the period, where the increased property values came to almost an end after reaching a peak in 2006, with home prices eventually dropped by 27% by 2008. The explosion of the housing bubble has almost extinguished construction and sales procedure. American landlords are also in problem, with the percentage of overdue mortgages at an all-time high while 20% of all mortgages are in a negative equity position. The financial sector is still very shaky. From 2001 to 2003, total housing mortgage-backed security (MBS) issuance almost double from $1.3 trillion to $2.7 trillion. As the MBS market frozen, the collateralized debt responsibility market took off. As the housing bubble burst, the market for these securities dried up and their values have fall. Shrinking balance sheets and shaken confidence in the financial sector have in turn weakened the demand for other types of debt, such as corporate bonds and commercial paper. At the similar time, the price of insure bank debt through credit evasion exchange has increased, dazzling investors uncertainty toward the Goodwill of banks. Forced to minimize their balance sheets to satisfy rigid capital requirements, banks have controlled lending. The result has been devastating for businesses and consumers seeking loans. Although the U.S. subprime mortgage and other domestic markets were the first to absorb the devastating effects of a bursting global asset bubble, it was only a short while before foreign markets realized similar effects. There was huge fall of 53% on Global market capitalization since its peak on October 31, 2007. The effects on the real economy are similarly striking. Global growth averaged 4.1% a year between 2000 to 2008. In March 2009, the World Economic Outlook database targeted world output to be -1.0 to -0.5%, an impressive fall from 2008, when output was 3.2%. Further losses related with the crisis originated as businesses throughout the globe were forced to write down their assets. There is been a loss of nearly $1.3 trillion since 2007. The unemployment rate gradually increased to 8.9% in March 2009, compared to just 6.7% in March 2008. The housing market throughout the world has also suffered a sharp downturn. The UK market has experienced a 17.6% downfall since 2007. Total global CDO issuance peaked in 2007 at $179 billion, but fell precipitously to just $5 billion in 2008-a 97.2% drop. So if we compare the above given data, it becomes clear that the financial crisis has become a global c oncern. Our examination or investigation into the severity of the current financial crisis serves as a critical point of reference for the analysis and recommendations set forth in this Report. Justification of applied Methods We targeted the U.S. economic, financial system as it is best viewed as an integral part of the overall global financial system. No longer can the United States modulate in a vacuum. Coordination with other national regulators and cooperation with regional and international authorities is required. This Report, however, is far more than a collection of abstract themes. Rather, we have designed the Report to serve in a clearer manner by using very broad methods to undertake our research. We have tried to evaluate the major global financial problems, which all related to and depend upon US economy. Analysis According to Moseley, F (2009) the main reasons of financial crisis are decline in rate of profit and strategies to restore rate of profit because when rate of profit went down, investors cut down the wages of employees and also downsize employees and big crisis came at that time. Many people believe that this global financial crisis came because of government regulations due to lots of relief to banks and mortgage industry this crisis came. For instance zero down payment. Evaluation Although government regulations and lack of government intrest was the reason of financial crisis but besides that the major reason of crisis was bank policies related to giving loans to people on very easy requiremnets. Limitations of Research Although we try to find as many articles, journals and books from library resources, still according to us we couldnt do it thoroughly because of Vast scope of the given issue Lack of proper resources from the library Theories applied only, which were discussed in class Sometimes information overloaded from the internet, difficult to take help from the appropriate resource Time limitation between group-mates Recommendations Following are the given recommendations for any economy worldwide. By applying these recommendations, severe global economic situations can be resolved to certain extent and world can be rescued from future economic crisis. When developing accounting standards the accounting standard setters give consideration to the potential economic and social implications of any changes During case of professional judgement, Information generated should faithfully represent underlying transactions and be neutral and verifiable Main accounting concepts and theories of various countries should be standardised. This will make easier for local companies to list on foreign stock exchanges. IASB should make accounting standards more consistent and logical, so that its get easy for every economy to adopt and apply them When world economy was declined, standard setters were in firing line. So the standard-setters should be more accountable for their decisions. One of the key objectives of financial reporting ÂÂ ­ as stated in numerous attempts to work out a conceptual framework for accounting standard setting ÂÂ ­ is to provide information that is useful in making business and economic decisions. Also the communication between standard-setters and their constituents should be enhanced. There should be more confidence in pellucidity and incorruptibility of financial reporting, which is critically important to global financial stability and sound economic growth. To develop standards of high quality and unbiased, accounting standard setters must enjoy a high degree of independence from undue commercial and political pressure, but they must also have high degree of accountability through appropriate due process, including wide engagement with stakeholders and oversight conducted in the public interest. There should be removal of the issuance of money from governments hands, because as long as government controls issuance, either directly or via their central bank proxies, they can and will manipulate it to their own political advantage. Consistent with the need of maintaining and enhancing high quality accounting standards, the Boards should use every effort to achieve converged solutions. National governments, financial market participants, and the global business community should actively support the development of a single set of high quality accounting standards. Team Participation Report We are two members in team. We had good coordination with each other throughout the research report. We both learnt lots of financial aspects from each other via this report. We had group meetings according to each others availability. We together did research for the whole report. Sometimes we had conflicts between each others different views during the report making. But we also learnt how to solve the conflicts and reach to an appropriate solution. We also didnt find any cultural problem as well. Time was the crucial aspect for both of us and we hope that we utilized it in a right manner.