Financial Reporting and Regulation in a World of

Transcript:Financial Reporting and Regulation in a World of:
Financial Reporting and Regulation in a World of Financial Engineering: Accounting and the Global Financial Crisis Shyam Sunder, Yale University Journal of Accounting and Public Policy Conference on Accounting and the World Economic Crisis IE University, June 14, 2013 Segovia, Spain 1/18/2013 1 Sunder: Financial Regulation & Engineering An Overview Great efforts made to write effective regulatory standards—accounting as well as prudential—for financial services industry. Events of the recent decade show that these efforts have largely failed to achieve their stated objectives, both globally as well as in major economies of the world. Why? What can be done? 1/18/2013 2 Sunder: Financial Regulation & Engineering Overview (Contd.) A root cause of these regulatory weaknesses and failures lies in inability of regulation to deal with the challenge presented by financial engineering. Regulators, constrained by governments, business and profession, take years to write the rules and standards. Their labor of love—carefully drafted regulations—is soon rendered ineffective when financial engineers and lawyers design of new instruments, transactions and organizations to bypass the regulations. No amount of wisdom and hard work by regulators, whether located in Basel, Norwalk, or London, has or can overcome this disadvantage. 1/18/2013 3 Sunder: Financial Regulation & Engineering Overview (Contd.) Modern mathematical finance and financial engineering can bypass just about all written regulations without difficulty. Written regulations, as an instrument of regulating financial services industry, do not work. What are the alternatives, and their pros and cons? No easy solutions. 1/18/2013 4 Sunder: Financial Regulation & Engineering Some Maintained Premises of Financial Reporting and Regulation 1/18/2013 5 Sunder: Financial Regulation & Engineering 1. Global Standards General standards of financial reporting and regulation applied across time, economies, industries and corporate size and organizational forms best serve the society (e.g., Basel, IFRS, FAS). Standardization does save costs and effort, (electrical plugs, clothing, cars, street grids, commercial codes) Becomes counterproductive beyond certain limits when environments to which they are applied are diverse How do we know the limit of standardization? Rhetoric of universal accounting standards and universal language (Esperanto?) 1/18/2013 6 Sunder: Financial Regulation & Engineering 2. Written Standards It is fair and efficient to write down the regulatory standards for everyone to know and comply with (e.g., the Code of Hamurabi). Written standards promote our sense of fair play in a democratic society to avoid arbitrariness and partiality But all contingencies cannot be anticipated and written down. Written standards constrain discretion