Subprime mortgage crisis occurred during the great global recession. It was characterized by an increase in subprime mortgages. These are loans given to people who may lack the power to repay accordingly. Subprime mortgages are also characterized by high interest rates and less favorable terms that are used to compensate for higher credit risks involved. It extends credit to people who may not have access to the credit market (Goodman, 2008).
Role of the Accounting Profession
The accounting profession was responsible for determining the real and fair value of the mortgages and property assets that may have been secured when obtaining mortgages (Shiller, 2008). Accounting professionals were also responsible for determining, assessing and evaluating the products which were to be distributed and the risks that were involved in provision of such subprime mortgages.
However, the profession failed to provide relevant information relating to such transactions and thus posed an immoral financial vulnerability and exposure in the credit industry. Accountants failed to assess the borrowers’ ability to repay the loans. There were inaccurate credit ratings of borrowers.
Accounts did not undertake professional mortgage underwriting as a preparatory measure towards the crisis. Some accounting professionals also breached accounting ethics. Most accounting activities lacked professional regulation. Additionally, most of the accounting industry players were acting recklessly (Catelani, 2010). It was also responsible for the mortgage fraud and other financial crimes that led to the crisis, for instance, non-compliance to tax regulations. The introduction of Adjustable Rate Mortgages (ARM) lured borrowers to take more mortgages beyond their capabilities.
What Could Have Been Done
As financial industry think-tanks, accounting professionals could have worked closely together with other policy makers in order to enable full recognition of the vital role played by financial institutions such as investment banks in credit industry (West, 2003). In my opinion, all accounting firms, lenders and financial institutions could have been subjected to the stringent regulations.
Accountants would have presented good financial reports on the real value of the houses, mortgages and interest rate costs. They would have presented normalized balance sheets that reflect the true and fair value of the properties and other financial products used in lending of mortgages (Jeffrey, 2011). Accounting professionals could advice and assist lenders in practicing sound risk management techniques that would help them avoid undertaking too risky transactions.
Similarly, financial institutions in conjunction with accounting professionals could have devised less complex and transparent financial products. Accounting professionals would have formulated and advocated for relevant, fundamental changes in the financial sector that would have helped ease crisis. Last but not least, it would offer professional advice with respect to credit and loan recovery.