Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing

The aim of this paper is to explore the effect of financial institutions accounting rules, i.e. book or fair value, on the allocation of resources so as to identify its social costs and benefits.

During the last two decades the issue whether bank assets and liabilities should be accounted for at their historical (book) value or at market (fair) value has been the object of an intense debate among regulators. In the end, fair value accounting, supported by the Joint Working Group of Standard Setters², seems to have the upper hand. Although these points can be disputed on the basis of asymmetric information and managerial incentives to truthfully reveal information, the prevailing view is that a sufficiently high level of penalties could restore incentives for managers to report the true market values of assets and liabilities.

The case in favour of fair value accounting has been based on the idea that fair value could increase market discipline and lead managers to take the right value maximizing decisions. Yet, it has been argued that fair value accounting increases the volatility of banks profits, and this will hurt the business of banking, which is based on the long term relationship of a bank with its clients (Chisnall, 2000). Additionally, it has been argued that fair value accounting lacks accuracy as it relies on subjective proxies for the market value of nontradeable financial products (as loans). On the other hand, value accounting may help preventing systemic crises, as information on banks financial distress is obtained earlier³.

This paper takes a completely different view of the book vs. fair value accounting debate.

Our objective is not to counter this argument but to point out that there is at least another important dimension at work, the degree of intertemporal smoothing, and that it may support the use of book value accounting. From that perspective, the main achievement of our paper is to show the dark side of the comparison and to point out that the use of fair value accounting does not dominate book value accounting in a straightforward and robust way. Moreover, if we allow for fair value disclosure, the whole argument in favour of fair value accounting seems to vanish⁴. Indeed, the market discipline argument is based on disclosure of the fair value of assets and liabilities, not on its effective use in accounting with its fiscal and legal implications.

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The Ethics of Creative Accounting

Introduction

The term 'creative accounting' can be defined in a number of ways. Initially we will offer this definition: 'a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business'.

To investigate the ethical issues raised by creative accounting we will:

· Explore some definitions of creative accounting

· Consider the various ways in which creative accounting can be undertaken.

· Explore the range of reasons for a company's directors to engage in creative accounting.

· Review the ethical issues that arise in creative accounting.

· Report on surveys of auditors' perceptions of creative accounting in the UK, Spain and New Zealand.

Definitions

Four authors in the UK, each writing from a different perspective, have explored the issue of creative accounting. Ian Griffiths, writing from the perspective of a business journalist, observes:

Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting. (1986:1)

Michael Jameson, writing from the perspective of the accountant, argues:

The accounting process consists of dealing with many matters of judgement and of resolving conflicts between competing approaches to the presentation of the results of financial events and transactions... this flexibility provides opportunities for manipulation, deceit and misrepresentation. These activities - practised by the less scrupulous elements of the accounting profession - have come to be known as 'creative accounting'. (1988: 7-8)

Terry Smith reports on his experience as an investment analyst:

We felt that much of the apparent growth in profits which had occurred in the 1980s was the result of accounting sleight of band rather than genuine economic growth, and we set out to expose the main techniques involved, and to give live examples of companies using those techniques. (1992:4).

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Creative accounting: some ethical issues of macro- and micromanipulation

Abstract

This paper examines two principal categories of manipulative behaviour. The term ‘macro-manipulation’ is used to describe the lobbying of regulators to persuade them to produce regulation that is more favourable to the interests of preparers. ‘Micromanipulation’ describes the management of accounting figures to produce a biased view at the entity level. Both categories of manipulation can be viewed as attempts at creativity by financial statement preparers.

The paper analyses two cases of manipulation which are considered in an ethical context. The paper concludes that the manipulations described in it can be regarded as morally reprehensible. They are not fair to users, they involve an unjust exercise of power, and they tend to weaken the authority of accounting regulators.

Introduction

Financial statements provide information that is used by interested parties to assess the performance of managers and to make economic decisions. Users may assume that the financial information they receive is reliable and fit for its purpose. Accounting regulation attempts to ensure that information is produced on a consistent basis in accordance with a set of rules that make it reliable for users. However, communications between entities and shareholders may be deliberately distorted by the activities of financial statement preparers who wish to alter the content of the messages being transmitted. This type of distortion is often referred to as ‘creative accounting’ or ‘earnings management’. While opinions on the acceptability of accounting manipulation vary, it is often perceived as reprehensible.

This paper will try to identify some manipulative behavior on the part of preparers of financial statements, taking into account some important ethical concerns.

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An Attempt to Go Beyond Conventional Financial Accounting Information

Abstract

Conventional financial accounting information is slanted in favour of certain economic interests. This paper argues in favour of accounting information capturing and showing relevant aspects of the economicsocial situation, and of decision-making based on it allowing for decisions to be taken with economic-social, and not purely economicweighted, awareness.

Introduction

What is expected or should be expected of a company’s accounting information? Is not accounting information sometimes used as an instrumentalization? Is not the actual accounting system itself already the fruit of such instrumentalization? Is it not at times a totem to legitimize certain situations and results?¹

It is said that the accounting system produces the information required by users, but in my view such an affirmation may cloak a fallacy. I would suggest, rather, that the accounting system produces the information required by the accounting system itself, and that this suits some groups, at times to the detriment of others. This self-feeding or vicious-circle-reasoning system is also to be found in our economic system, which does not necessarily produce what society² needs so much as what the economic system itself needs (production without attention to the social costs thereof, to cite one example).

It is in my view difficult – from an intellectual and non-technocratic stance and without any class links – to accept nowadays a conceptual framework of financial accounting whose sole objective in company accounting information is for it to be useful in assisting certain users to take their economic decisions, the latter being taken in a restricted, short-sighted and self-interested view of what is economic, from the reductive reasoning of homo oeconomicus, as proposed by the FASB (SFAC no. 1) or the IASC (Conceptual Framework). A conceptual framework slanted towards a certain view of the company within the framework of the free-market economic system.

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An Analysis of the Accounting Principles Applied By the European Farm Accountancy Data Network

In spite of its relative importance in the economy of many countries and its growing interrelationships with other sectors, agriculture has traditionally not received much attention from accounting researchers, practitioners and standard setters. Consequently, farm financial statements typically do not respond very well to the particular characteristics of agricultural business and the information needs of farmers and their stakeholders. Together with other reasons, like a generally lower level of managerial sophistication, this has led to a situation in which farmers are more reluctant to prepare accounting reports and use this kind of information to a lesser extent than the agents in other economic sectors (Poppe, 1991; Poppe and Breembroek, 1992). Several authors, like Kroll (1987), André (1987), or Sabaté and Enciso (1997), have pointed out that when farmers use accounts, it is mainly to comply with tax and subsidy requirements.

On the other hand, it is generally believed that accounting can improve farm management and lead to better farm performance (see for example, Luening, 1989; Allen, 1994). Furthermore, agricultural lenders often claim more and better accounting information (Bronstien, 1995; Crane and Leatham, 1995), which is consistent with empirical evidence that accounting data makes a significant contribution to explaining and predicting farm failure (Argilés, 1998). Given the government interference in many agricultural markets in many countries, also policy makers have a need for accounting information.

In Europe, the Common Agricultural Policy (CAP) has been one of the cornerstones of the economic and political integration process, and to date the European Union’s Directorate for agriculture still is the one with by far the largest budget. It is logical therefore that the Commission of the European Community (CEC) has a need for information on the financial performance and condition of farms to support decision making for and control of the CAP. This information need is not limited to aggregate macro-economic data, but also extends to the level of individual farms, and the European Commission had to make an effort to obtain standardized information. For this reason the Council of the European Commission created the Farm Accountancy Data Network (FADN)¹. This network collects accounting information at the level of individual farms, and gathers every year data from a rotating sample of 60.000 professional farms across all member states.

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Accounting Information and the Prediction of Farm Viability

Abstract:

Farms make little use of accounting and until now have been largely excluded from the scope of accounting standards. However, we hypothesize that the use of accounting based information can significantly improve the explanation and prediction of farm viability/failure. Two dichotomous logit models were applied to sub samples of viable and unviable farms in Catalonia, Spain. One model included non-accounting-based variables, while the other also considered accounting-based variables. It was found that, when accounting variables were added to the model there was a significant reduction in deviance.

Background

A voluminous literature on failure prediction models has been developed since Beaver (1966) and Altman's (1968) seminal studies.

Research into failure prediction in agriculture is comparatively scarce. To the author's knowledge the earliest empirical studies in this area began with Reinsel and Brake (1966). Krause and Williams (1971), Bauer and Jordan (1971), Johnson and Hagan (1973) and Dunn and Frey (1976) used discriminant models to assess farm loan repayment. These studies were undertaken at a time in which the indebtedness of US farms was increasing and this was more and more difficult to manage (Murdock and Leistritz, 1988, p. xiii). The subsequent agricultural crisis and high incidence of farm and agricultural bank failures, coupled with unexpected losses by agencies providing loans to farmers during the mid 1980s, stimulated new research (Ibid.). Shepard and Collins (1982) explained farm failure at the macroeconomic level, while Grisley (1985), Griffis (1988) and Lins et al. (1987) measured the financial health of farms.

Subsequent research into attempts to cope with the financial crisis of US farms involving explicative or prediction models can be classified in three groups. Some analysts focused on the economic viability of farms: Kauffman and Tauer (1986) and Smale et al. (1986) used binomial logit models to do this, while Adelaja and Rose (1988) used a simultaneous-equation model. Another group used multinomial logit models (Lines and Zulauf, 1985), ordered logit models (Lines and Morehart, 1987; and Wadsworth and Bravo-Ureta, 1992) and a multiresponse ordered model (Carley and Fletcher, 1988) to explain and predict various degrees of financial health. The third group, from which we highlight the work of Mortensen et al. (1988), Turvey and Brown (1990) and Knopf and Schoney (1993), used binomial logit models to predict farm loan repayment. In the same group, Turvey (1991) compared the predictive accuracy of the linear probability model, discriminant analysis, logit and probit.

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Akuntansi Internasional : Harmonisasi Versus Standardisasi

Abstrak

Adanya lingkungan dan kondisi hukum, sosial politik dan ekonomi yang berbeda-beda antar negara menyebabkan standar akuntansi juga berbeda. Globalisasi yang tampak antara lain dari kegiatan perdagangan antar negara serta munculnya perusahaan multinasional mengakibatkan timbulnya kebutuhan akan suatu standar akuntansi yang berlaku secara luas di seluruh dunia. Dalam hal ini terdapat dua pendapat mengenai standar akuntansi internasional yaitu harmonisasi dan standardisasi.

Kata kunci: lingkungan, standar akuntansi internasional, harmonisasi, standardisasi, IASC, FASB

Sebuah survey yang dilakukan oleh Deloitte Touche Tohmatsu International pada tahun 1992 terhadap 400 perusahaan skala menengah di dua puluh negara maju menunjukkan, bahwa alasan mereka untuk melakukan bisnis di pasar internasional adalah karena adanya kesempatan bertumbuh (84%), untuk mengurangi ketergantungan pada perekonomian domestik (39%), memenuhi permintaan pasar (34%) dan biaya operasi yang lebih murah (24%) (Iqbal, Melcher, Elmallah, 1997 : 5). Survey tersebut menunjukkan salah satu kenyataan bahwa ada kecenderungan banyak perusahaan untuk menjalankan bisnis secara global dan tidak hanya terpaku pada bisnis di negara asal. Menjual di pasar dalam negeri dianggap tidak lagi memberikan keuntungan yang diharapkan, sementara pasar luar negeri begitu terbuka untuk ekspansi.

Kecenderungan meningkatnya globalisasi di bidang ekonomi semakin tampak dengan adanya kesepakatan-kesepakatan antar negara dalam satu region tertentu, seperti European Union (EU), North American Free Trade Agreement (NAFTA), Asia-Pacific Economic Cooperation (APEC). Indonesia sendiri merupakan salah satu dari delapan belas negara anggota APEC.

Globalisasi bidang ekonomi juga tampak dengan munculnya fenomena krisis nilai tukar di sebagian negara Asia, termasuk Indonesia yang dimulai pada tahun 1997. Industri yang bergantung kuat pada bahan baku impor sangat terpengaruh dengan kondisi ini. Nilai impor bahan baku dalam mata uang domestik -- dalam hal ini rupiah -- meningkat tajam. Industri yang bergantung kuat pada bahan baku dan sumber daya domestik mengalami hal yang sebaliknya. Penjualan barang ke luar negeri menjadi sangat menguntungkan jika dinilai dalam mata uang domestik. Penetapan harga jual baru di pasar domestik dan luar negeri menjadi tidak sesederhana sebelum terjadi krisis.

Perkembangan selanjutnya di Indonesia juga menunjukkan fenomena yang menarik. Menguatnya rupiah terhadap mata uang asing, meskipun tidak kembali pada kurs nilai tukar sebelum krisis terjadi, membuat para eksportir mulai mengeluh karena pendapatannya turun jika dinilai dalam mata uang domestik. Sebaliknya terjadi bagi para importir. Menguatnya mata uang domestik -- katakanlah rupiah -- dan melemahnya mata uang asing -- katakanlah dollar Amerika Serikat -- membuat kewajiban para importir membayar dalam mata uang asing kepada produsen di negara asing menjadi lebih murah dinilai dari mata uang domestik.

Akuntansi sebagai penyedia informasi bagi pengambilan keputusan yang bersifat ekonomi juga dipengaruhi oleh lingkungan bisnis yang terus menerus berubah karena adanya globalisasi, baik lingkungan bisnis yang bertumbuh bagus, dalam keadaan stagnasi maupun depresi. Adanya transaksi antar negara dan prinsip-prinsip akuntansi yang berbeda antar negara mengakibatkan munculnya kebutuhan akan harmonisasi standar akuntansi di seluruh dunia.

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