Global Financial Crisis Analysis

The provided assignment delves into a comprehensive analysis of the global financial crisis, exploring its causes, effects on various economies, and the importance of learning from past crises. The document includes a list of references to relevant studies, articles, and books that investigate the impact of the 2008 financial crisis and other significant economic events, such as the Asian financial crisis in 1997. It also touches upon the use of partial least squares structural equation modeling (PLS-SEM) in management accounting research and the value-enhancing capabilities of corporate social responsibility (CSR). The assignment appears to be focused on understanding the complexities of global financial crises and their repercussions on economies, highlighting the significance of responsible economic practices.

Contemporary
Accounting Theory

EXECUTIVE SUMMARY
This report summarises concept of accounting theory which covers all the policies that are
launched by legal authorities. Whenever a corporate crisis takes place government take
appropriate action to deal with and modifications according to its requirements are made. It
results in development of accounting standards. Political parties follow specific process of
setting accounting regulations and there are various types of issues which influences them. These
are threat of governmental regulatory intervention, noncompliance, refusal of business entities to
contribute etc. It is vital for legal authorities to deal with such type of influences appropriately in
order to implement new accounting standards.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
The way in which corporate crisis in every era lead to improved accounting regulations for
financial reporting........................................................................................................................1
TASK 2............................................................................................................................................4
Critical evaluation of political process of accounting standard setting.......................................4
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting theories are the set of frameworks, methodologies and assumptions that are
used in study and application of different rules and regulations related to financial reporting.
Main objective of it is to maintain a proper and complete record of transactions that were made
by an organisation in a specific time period (Bordo, Redish and Rockoff, 2015). Main purpose of
this assignment is to develop understanding of changes in accounting standards due to corporate
failures.
This report covers various topics such as the way in which corporate crisis in every era
lead to improved accounting regulations and critical evaluation of the way in which these were
set in the past came through a complex political process in global context.
TASK 1
The way in which corporate crisis in every era lead to improved accounting regulations for
financial reporting
According to Nelson and Katzenstein, (2014), whenever corporate crisis take places at the same
time accounting regulations are improved by legal authorities of the country in order to reduce
possibility of such type of failure. During the year 2007 and 2008 global financial crisis took
place and affected whole world. Financial market all around the world got affected due to this. It
has resulted in slower growth of economy and loss of billions. At the same time number of large
financial institutions were collapsed and it is considered as the worst crisis since the great
depression. Causes of this situation are numerous and the factor which is considered as the main
reason of it is crash of US housing market (Erlingsson, Linde and Öhrvall, 2016).
According to Drydakis, (2015), Primarily it was caused by deregulation of finance sector
which permitted banks to engage in the hedge funds. After this, financial institutions such as
banks demanded for mortgage in order to support the profits which were being acquired by them
from sales of derivatives. Interest only leans were introduced by them which were affordable for
subprime borrowers. All the homeowners who were not able to afford conventional loans were
allowed to take these mortgages. It was resulted in the doubled percentage of them. Since year
2007 value of them was 1.3 trillion dollars. At the end of year 2005 housing prices started to
decline and by mid of 2007 it was dropped by 4%. Due to this banking crisis took place and
created financial issues. This financial crisis also knows as great recession in the history. The
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situation of this crisis firstly begun in March month of year 2008 and costs around 187 billion
dollars. Lehman Brothers which is one of the largest financial institution became bankrupt. The
Federal reserve acted to improve the conditions in two vital marketplaces which were broke
downswing the panic in the fall of 2008. At this time, European Central Bank refused to
mutualise debts and instead of this a rescue package is offered by it (Global financial crisis of
2008, 2019)
. Its causes and effects include Economy wide recession in United States, US housing and
mortgage bust, long period slow growth in countries burdened by debt, bank crisis etc.
After this situation International Accounting Standard Board (IASB) and Financial
Accounting Standard Board (FASB) established a financial crisis advisory group (FCAG) in year
2008. Main purpose behind this launch is to provide advice on the financial reporting
improvements. Main objective of this group is to help stakeholders of business entities to get
transparent and accurate view of financial statements of organisation. Another purpose of it was
to ignore critical situations such as financial crisis 2008 in future. The most substantial weakness
which is being identifies by FCAG is delayed credit loss recognition in International Financial
Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP)
(Improvements after global financial crisis, 2019).
According to Jean Pierre Mustier this financial crisis has changed the banking for better
as the new regulations that were imposed by IASB are much easier to collaborate. The new
group which is being launched by legal authorities is the way to deal with the financial crisis
which took place in year 2008. It was a great development after the corporate failure and a
modification in the accounting standards so that possibility of happing of such type of event
again in future can be reduced (Nitzl, 2016).
Another era of corporate crisis is Asian financial crisis 1997 which affected most of the
areas of East and Southeast Asia. It was started in July 1997 and raised fear for economy of all
the countries all around the world. This crisis took place in Thailand when legal authorities of
nation were forced to float currency of the country due to lack of foreign currency. At this time
whole region become bankrupt. As the result of this situation most of the territories in Asia and
Japan saw slumping currencies. The countries which were affected due to this crisis were
Indonesia, South Korea and Thailand. The nations that were less impacted by this situation were
China, Singapore, Malaysia, Vietnam, Taiwan etc. It is also known as Asian Contagion and the
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main reason behind it, was a sequence of currency devaluation and other situations which were
begun in July 1997 (Asian financial crisis 1997, 2019).
.
According to Justin Kuepper, Asian financial crisis 1997 affected all the Asian Markets
as it was related to currency failure. Main cause of this situation was series of asset bubbled.
Continuous growth in the country’s export economies promoted high level of foreign direct
investment which resulted in the decrement of real estate values and increased corporate
spending. Due to this crisis value of other Asian currencies also gets decreased as all the regions
in Asia were affected by this issue. It started when Bangkok unpegged the currency of Thailand
from United State’s Dollar, setting off a series of devaluation of currency and huge battle of
capital.
According to Almeida, Kim and Kim, (2015), this crisis was resolved by International
monetary fund which is an international organisation established in Washington DC. It facilitates
international trade and promote as well so that all the countries can acquire foreign direct
investment. Under this, 189 different nations are working in order to achieve global monetary
cooperation, secure financial stability, promote high employment etc. At this time IFRS were
implemented by most of the organisations in Asia as all of them foster for foreign direct
investment in order to operate business in appropriate manner. With the help of it internal and
external stakeholders of the companies which were operating business in Asian countries can get
detailed information regarding actual position of the country and it guide them to form
appropriate decision regarding investment or other.
According to Harvie and Van Hoa, (2016), it has helped to develop the economy of Asian
countries and resulted in appropriate resolution of financial crisis which took place in the mid-
2007. At the same time IMF provided loans to develop Asian economies. At the end of 1997
almost 110-billion-dollar short term funds were provided by the organisation to the business
entities of Asia. In exchange to this favour IMF required the nations to adhere to strict situations
which includes higher taxation and decreased public spending. The other restrictions that were
imposed by IMF for these territories were related to closing liquid financial institutions without
concern of employment. In order to fulfil all the requirements of legal authorities it was very
important to follow all the accounting principles appropriately. When IFRS were imposed within
Asian countries, it directed all the companies to comply with international financial reporting
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standards so that detailed information can be delivered to the stakeholders in order to enhance
foreign direct investment. It was a good modification in the accounting standards after such type
of crisis and helped other countries to strictly follow accounting regulations so that this type of
situation won’t take place in their country.
TASK 2
Critical evaluation of political process of accounting standard setting
In order to set accounting standards, it is very important for the political parties to analyse
detailed information of market conditions so that appropriate modifications can be made
according to requirements of market. There are various types of influences that could influence
accounting standard setting process. The procedure which is followed to set accounting standards
is as follows:
 Identify topic: It is the first stage of setting accounting standard in which legal
authorities identify bets suitable topic. It is identified by analysing market conditions or
corporate crisis which took place due to improper execution of business activities. It is
the main responsibility of political parties to select a topic which could be used to resolve
corporate crisis which can affect performance of organisation (Persakis and Iatridis,
2016).
 Conduct pre agenda research: Under this stage pre agenda research is conducted when
a specific topic is selected for the purpose of launching a new accounting standard
according to market conditions. With the help of such type or research strategic decisions
for the launching of an accounting regulation can be formulated.
 Make agenda decision: When a research is conducted by political parties then they
make best suitable decision which is based upon the research which is being conducted
for the purpose of pre agenda. It can help to analyse that best decision is being taken by
government to resolve corporate crisis.
 Issue document for public comment: When decision regarding the agenda is being
taken then a document is being issued in the market for the purpose of getting comments
of public. It helps to analyse that the new standard which is going to be launched in the
market will be accepted by general public or not.
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 Host public hearing or round tables: It is the next step of accounting standard setting
process in which political parties host public hearings in order to receive feedback from
local public regarding new standard which is going to be launched in the market. With
the help of it legal parties can form decision regarding implementing new standard or not.
 Re-deliberate based on comments: Under this stage modification in the standard
according to the comments of public are made. With the help of it a new accounting
regulation which is required by business entities can be launched. It helps to fulfil
requirements of organisations which are dealing with corporate crisis.
 Issue final standard: In this stage of setting accounting standard when appropriate
modifications are made according to comments of public then decision regarding issuing
it, is formulated. When all the procedures are finished then this stage comes in which
political parties issue new standard in the market.
Implementation: This is the last stage of accounting standard setting process in which business
entities implement new standard in their accounting procedures in order to fulfil requirements of
legal parties. It helps them to operate business in appropriate manner in which all the operations
are executed according to rules and regulations that are imposed by government (D. Carnegie,
2014).
All the above described steps are followed by political parties while setting accounting
standards for business entities. Main purpose of this process is to implement such rules and
regulations which can help organisations to execute business appropriately and represent
transparent information to the stakeholders. With the help of it they can formulate strategic
decisions such as making investment, providing credit, buying products, supplying goods etc.
There are various types of influences which affects the procedure of setting accounting
standards. All of them are described below:
Lobbying by particular interest groups: Interest groups are the major players in most
of the political systems. Political parties have become more broadly based, their inherent
aggregating function means that fewer interests are actually articulated or advocated by the
parties. All the variants that are used by government are being influenced these groups. There are
four types of them and all of them leave different influences on the procedure of setting
accounting standards. These are public, single issue, ideological and government. Main issue
which take place due to them is their interference in the process of setting rules and regulations.
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In order to deal with them it is vital for all the political parties to analyse their cause and resolve
the problem (Bowen and Khan, 2014).
Noncompliance: It is another issue which also influences process of setting accounting
standards. They have to analyse that the new rules that are going to be imposed are acceptable by
the organisation or not. If businesses are not able to comply with them then it can result in failure
of new project. For this purpose, support and contribution of companies is required. If legal
authorities figure out that the new standards are not appropriate or proper then modifications in
them can be made according to the requirement.
Refusal of organisations to contribute in the standard setting process: While setting
accounting standards it is very important for political parties to be supported by organisations so
that strategic decisions regarding imposing a new rule can be formulated. Sometimes business
entities refuse to contribute in the procedure and in this situation legal authorities are required to
try to get their support and motivate them to take part in the process of setting accounting
standards. It can help to make sure that new regulation is credible, effective and appropriate
which could be adopted by all the companies in order to make sure that business is executed
according to legal requirements (Wang, 2014).
Threat of governmental regulatory intervention: Some of the governmental bodies
influence the process of setting new accounting standards as they are not satisfied with the
concept of this. It is very important for political parties to deal with this issue properly. Some of
the regulations may also impact on the launch of new standard in the market and to deal with this
problem it is very important for legal parties to comply with them. It can facilitate launch of new
standard in the market.
All the above described issues influence the process of setting accounting standards. All
of them can leave negative impact upon the decisions that are related to the new regulations. In
order to deal with political parties are required to take strict actions and formulate strategies
which can help to resolve the problem appropriately. It is very important to follow all the steps of
the procedure in order to make sure that the new standard which is going to be launched in the
market will be effective or not. For this purpose, political parties have to get support of
companies and ask them to contribute in the process (Malik, 2015).
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CONCLUSION
From the above project report it ash been concluded that accounting theory is the set of
rules and regulations that are imposed by legal parties. All the business entities are required to
comply with all of them so that business can be executed without interruption of political parties.
Various types of corporate crisis such as Asian and global financial crisis take place and results
in development of accounting standards. Appropriate procedure is followed by government of
countries for the purpose of setting accounting standards in order to help companies to record
their financial information in a proper format.
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REFERENCES
Books and Journals:
Nelson, S. C., & Katzenstein, P. J. (2014). Uncertainty, risk, and the financial crisis of
2008. International Organization. 68(2). 361-392.
Drydakis, N. (2015). The effect of unemployment on self-reported health and mental health in
Greece from 2008 to 2013: a longitudinal study before and during the financial
crisis. Social Science & Medicine. 128. 43-51.
Bowen, R. M., & Khan, U. (2014). Market reactions to policy deliberations on fair value
accounting and impairment rules during the financial crisis of 2008–2009. Journal of
Accounting and Public Policy. 33(3). 233-259.
Persakis, A., & Iatridis, G. E. (2016). Audit quality, investor protection and earnings
management during the financial crisis of 2008: An international perspective. Journal of
International Financial Markets, Institutions and Money. 41. 73-101.
Bordo, M. D., Redish, A., & Rockoff, H. (2015). Why didn't Canada have a banking crisis in
2008 (or in 1930, or 1907, or…)?. The Economic History Review. 68(1). 218-243.
Erlingsson, G. Ó., Linde, J., & Öhrvall, R. (2016). Distrust in utopia? Public perceptions of
corruption and political support in Iceland before and after the financial crisis of
2008. Government and Opposition. 51(4). 553-579.
Nitzl, C. (2016). The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature. 37. 19-35.
Malik, M. (2015). Value-enhancing capabilities of CSR: A brief review of contemporary
literature. Journal of Business Ethics. 127(2). 419-438.
D. Carnegie, G. (2014). The present and future of accounting history. Accounting, Auditing &
Accountability Journal. 27(8). 1241-1249.
Modell, S. (2015). Theoretical triangulation and pluralism in accounting research: a critical
realist critique. Accounting, Auditing & Accountability Journal. 28(7). 1138-1150.
Almeida, H., Kim, C. S., & Kim, H. B. (2015). Internal capital markets in business groups:
Evidence from the Asian financial crisis. The Journal of Finance. 70(6). 2539-2586.
Harvie, C., & Van Hoa, T. (2016). The causes and impact of the Asian financial crisis. Springer.
Wang, L. (2014). Who moves East Asian stock markets? The role of the 2007–2009 global
financial crisis. Journal of International Financial Markets, Institutions and Money. 28.
182-203.
Online
Global financial crisis of 2008. 2019. [Online]. Available through:
<https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176>
Improvements after global financial crisis. 2019. [Online]. Available through:
<https://www.bna.com/credit-financial-crisis-b73014449320/>
Asian financial crisis 1997. 2019. [Online]. Available through:
< https://www.thebalance.com/what-was-the-asian-financial-crisis-1978997>
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