Special issue on governance and accounting regulation

Excerpt

The accounting scandals that first erupted in 2001 caused a major upheaval. First, Enron’s collapse stunned the world. A shocking series of revelations of accounting irregularities by other major corporations in the USA followed, and this accounting ‘virus’ then metastasized into Europe (witness the Netherland’s Ahold and Italy’s Parmalat cases, for example) and then into Asia (Satyam). The gathering accounting storm of the early millennium pushed lawmakers into action, in the form of numerous regulatory reforms around the world, including the Sarbanes-Oxley Act. Weak corporate governance, lax regulation and gatekeepers that turned from the watchdogs they were supposed to be into lapdogs serving companies rather than their stakeholders were major culprits. As outrageous as these scandals were at the time, they pale in comparison with the financial horrors of today. The current global economic meltdown shines a harsh light on financial reporting systems that are opaque and on regulatory structures that are not up to the job, and which—along with reckless lending policies, cheap money greedily seeking high returns and impenetrable financial instruments—have caused untold suffering around the world. The regulatory impact of accounting standards occupies a prominent place among the causes of this financial unravelling. Consider for example the mark-to-market accounting rule and the chain of events it gave rise to. Indiscriminate application of the rule in the current, illiquid, almost nonexistent market has depressed equity quantification in balance sheets, triggering rating downgrades, collateral demands under contractual clauses, additional capital requirements, and consequently near insolvency. …