Faculty Scholarship 1994 - Present

A Review of the Standards on Accounting for Investments: Time for a Change?

Financial markets worldwide have faced severe downturns in the last year and this has been particularly pronounced in the U.S. Some of the blame for the current financial crisis in the U.S. has been attributed to the use of fair values in accounting for investments. In this paper we examine the current accounting rules for investments and argue that the standards need to be altered. Recognizing the unrealized holding gains or losses for investments in the net income at the end of the accounting period creates volatility in the reported income. This results in lowering the predictive ability of income and also gives incentives to the managers to manipulate reported earnings by not properly classifying investments or mismanaging the investment portfolios, both to the detriment of the investors.