With regard to the relationship between financial accounting and the subprime-lending crisis, the needs of the capital markets will be served, one way or another.

Capital markets cannot be managed through accounting policy choices and political pressure on standard setters. Yes, recent events show that markets can be duped, but not for long and not very well, and with inevitable disastrous consequences.

With regard to the subprime-lending crisis, attempts to place blame on accounting standards are not valid. Rather, other factors created it, primarily actors in the complex intermediation chain, including:

• Borrowers who sought credit beyond their reach.
• Investment bankers who earned fees for bundling and selling vaporous bonds without adequately disclosing their inherent risk.
• Institutional investors who sought high returns without understanding the risk and real value of the assets they invested in.

In addition, housing markets collapsed, eliminating the backstop provided by collateral. Thus, claims that accounting standards fomented or worsened this crisis lack credibility.

This article has been excerpted from the Journal of Accountancy. Read the full article here.