Emerald Management Review:
Accounting in and for the subprime crisis

Abstract:

Purpose - To identify the accounting rules that apply under poor-quality mortgages and under capital illiquidity. Design/approach/methodology - Looks at the background from 1995, and at the four waves of the crisis from 7 February 2006 (New Century Financial restatement); 10 July 2007 (Moody's downgrading of subprime based securities); 5 October 2007 (Merrill Lynch loss announcement); and 22 January 2008 (AMBAC loss announcement). Outlines the standards that apply, and to what they apply. Explains fair value accounting and disclosures standards as they apply in detail; and securitization rules.

Findings - Finds that the subprime crisis showed that no rules or standards could control the animal spirits of the market. Shows that it has raised several issues for accounting standard setters, and for teachers.

Research limitations/implications - Unfortunately, predates the collapse of the global financial system, but poses several questions to be addressed, such as: (1) the separation of reported fair value losses and their market signals for before and after the balance sheet date; and (2) the opacity of off-balance-sheet subprime positions.

Originality/value - Presents an early, but detailed and coherent, view of the crisis from an accounting point of view.

Keywords:

Article Type:

Technical paper

Reference:

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