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Accounting, Governance and the Crisis: Is Risk the Missing Link?

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  • Michel Magnan
  • Garen Markarian

Abstract

The period 2007-2010 marked one of the most severe economic and financial crises in living memory. In this paper, we focus on two of accounting's key functions within organisations and markets, financial reporting and governance. In this respect, we find that accounting exhibited shortcomings in its structural foundation and in its application. Salient is its failure to account for uncertainty and to adequately capture, measure and disclose the impact of risk-taking on the financial statements, thus undermining their reliability and, potentially, their relevance as indicators of economic performance. Consequently, boards were provided with misleading numbers, and compensation was based on paper profits that did not materialise. As such, accounting carried undesirable elements that interacted with other malicious market characteristics such as excessive risk-taking by bankers, and failure in regulatory and market oversight, thus potentially contributing to deteriorating economic conditions. The paper concludes with suggestions for further research in this area. Guns don't kill people, but they sure help. (Exchange between Clive Owen and Paul Giamatti, Shoot 'Em Up, 2007)

Suggested Citation

  • Michel Magnan & Garen Markarian, 2011. "Accounting, Governance and the Crisis: Is Risk the Missing Link?," European Accounting Review, Taylor & Francis Journals, vol. 20(2), pages 215-231.
  • Handle: RePEc:taf:euract:v:20:y:2011:i:2:p:215-231 DOI: 10.1080/09638180.2011.580943
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    Cited by:

    1. Akbar, Saeed & Kharabsheh, Buthiena & Poletti-Hughes, Jannine & Shah, Syed Zulfiqar Ali, 2017. "Board structure and corporate risk taking in the UK financial sector," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 101-110.
    2. Emil Inauen & Margit Osterloh & Bruno Frey & Fabian Homberg, 2015. "How a multiple orientation of control reduces governance failures: a focus on monastic auditing," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 763-796, November.

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