Introductionto the report:The main aim of this report is to reflect theeconomic meltdown of 2009 global financial crisis, the reasons behind themeltdown, the possible causes, and possible events and most probably thepossible ethical issues associated with these events. Also, the report aims toexplain the whole situation from a financial or accounting perspective,pointing out what went wrong and what could have been done to avoid such aglobal disastrous financial scenario. The primary source of the report is themovie “The Big Short”, which was directed by Adam Mackay. The movie is a screenadaptation of “The Big short: Inside the Doomsday Machine” by Michael Lewiswhich was published in 2010 and explains the financial crisis of 2007-2008which was in turns triggered by the housing-bubble of United States.The report is divided into three sections viz. Part”A”, which explains the scenes and characters who reflect significant ethicalissues.
It also explains these ethical issues from a financial or accountingpoint of view considering the factors which may have led to the globalfinancial crisis and most possible practices which could have been very helpfulin predicting and preventing the doomsday. The second part of the Report i.e.Part “‘B” is mainly research based, in this part an identical financial oraccounting event is examined, analyzed, compared and interpreted which showssimilarities in ethical issues in both of the events. Finally, Part”C”comprises of different recommendations to the Australian Accounting StandardsBoard to improve, strengthen and implement different Australian AccountingStandards that could reduce the risks of another economic collapse, especiallyin Australia. Part”A”:The main storyline of the movie revolves around fourmajor characters, portrayed by Christian Bale (Michael Burry), Steve Carell(Mark Baum based on Steve Eisman), Ryan Gosling (Jared Venett based on GregLippmann) and Bradd Pitt (Ben Rickert based on Ben Hockett) (Tunzelmann, 2018).
There are major scenes duringwhich the characters have shown significant ethical issues, which is discussedbelow.The movie or the entire plotrevolves around Dr. Burry’s realization of the housing bubble in the UnitedStates and his invention of short position against the housing market. Thefirst ethical issue shown in the movie is by the big banks of Wall Street i.
e.Morgan Stanley and Goldman Sachs. When Dr. Burry proposed to short against theseemingly strong and growing housing market, the banks forgot the basics ofethics and accepted the proposal of Dr. Burry. In this particular scene, theexecutives of the big banks forgot the fundamental principles of ethics, i.
e.integrity and objectivity. Moreover, the executives lacked professionalcompetence and due care when they laughed about Dr. Burry’s proposal andaccepted his proposal without a detailed analysis and examination of hisproposal, just to earn fat commissions. Another ethical issue revolving aroundDr.
Burry is his attitude towards investors, i.e. he was not transparent aboutthe funds he had invested in the short position. Although not shown in themovie, Dr. Burry had also invested his private funds in the short position, andwhen he did not have enough funds, he utilized the investor’s fund. Moreover,he did not informed about his intentions to invest in the short position whichwas seemingly foolish at that time (“Review: The Big Short – Seven PillarsInstitute”, 2018).Another major ethical issue shownin the movie is by Steve Carell.
His attitude towards his colleagues and othergeneral people portrayed in the movie is also unethical. His sole decisionmaking attitude (“I say when we sell”), hot-headedness and his negative belieftowards the system and the people in it has also caused serious socialawkwardness for him throughout the movie. Mark Baum- portrayed by Carell hasbeen shown as an ethical egoist who forgot that he relied more on his team andtheir co-operation.Similar ethical issue has beenshown in a scene where the team members of Front Point went on to investigatethe housing market of a suburb in Miami, Florida. Upon their investigation of100 houses, they found out that only 4 of them were habituated, most of thehabitants had left the houses because they could not afford the monthlymortgage fee which was seemingly increasing as the housing market wasexperiencing a boom. A distinct conversation between the investment brokers andthe Front Point team investigators standout in the movie, where the brokersbrag about their ability to sell lot of mortgages to the people without aproper background check.
They approved the mortgage loan to the people with noverifiable income source and mainly to immigrants (according to them, thosepeople don’t know about loan terms and interest rates and the brokers don’tcare about them being homeless). Another scene where the Front Pointinvestigators interview the stripper also exposes the whole system to the fraudof housing bubble. She explains how she has refinanced her 5 houses and a condowith no collateral or verifiable income source. In the above scenes, both thebrokers, and the relative financial institutions have approved the mortgageloan just to secure their commission without proper verification of documentspresented for the loan.Moreover, the rating agencies werealso involved in unethical behavior. On such event shows the unethicalinvolvement of a rating agency (S & P), where the conversation between MarkBaum and Georgia (S & P employee) depicts the unethical practices theratings agencies has played.
The rating agency has not downgraded the subprimebonds, but the underlying subprime loans had been downgraded as well as thedefaults on the mortgage payments were the highest. Upon questioning Georgia,she simply replied that if the rating agency didn’t give the banks theirpreferred ratings, they would simply go next doors i.e. to their competitors(Moody’s).
Also, at the American SecuritizationForum, Las Vegas, Front Point investigators found out that the SEC (SecuritiesAnd Exchange Commission) had not been investigating the subprime mortgageseffectively and efficiently (conversation between Jamie and his brother’sex-girlfriend). Finally, the media had also shown unethical behavior duringthis whole period of housing boom. At Wall Street Journal’s office, upon beingexplained that the banks were selling CDO’s (Collateralized Debt Obligation) tothe unsuspected investors and later they will devalue such CDO’s and eventuallyshort such securities so that they can make profits off it, the journalistremains reluctant to investigate the matter. Safeguards that could have produced more positive outcome:The practices that could haveprevented the economic crisis of 2009 are summarized and listed below:· Mortgage brokers: Themortgage brokers should have thought more than their own interests. Instead ofthinking about more compensation of the subprime loan rather than theconventional loan. Furthermore, to resolve their conflict of interest, theyshould have fully disclosed their financial interests in generating thesubprime loan (Schoen, E.
J. J Bus Ethics, 2017).· Subprime mortgagelenders: Mortgage lenders didn’t fully disclose the risks involved in subprimelending and the borrower’s ability to repay the loans and assigned suchmortgage loans to banks that securitized the mortgages.
The act of deception tothe borrowers is deemed immoral under both Kant’s categorical imperative andRawls’ Equal Liberty principle (Schoen, E.J. J Bus Ethics, 2017). Had they beenless deceptive, the information would have been provided to the borrowersregarding the risks associated and could have prevented the borrowers fromobtaining such high-risk subprime mortgage.· Securitization of Mortgages:The banks packaged different CDOs which contained less performing subprimemortgages and given new improved ratings by the rating agencies and presentedto the investors.
Since banks were unable to disclose the information aboutinscrutable mortgage and collateralized debt obligations to he investors sothat they can make informed investment decision, those banks flunk Kant’s”means only” principle and Rawls’ Equal Liberty principle and “veil ofignorance” test, and hence acted unethically (Schoen, E.J. J Bus Ethics, 2017).· Rating Firms: The moviedepicts the interest of interest between rating agency (Standard and Poor) andthe investment banks due to the compensation arrangements. Had the ratingagencies avoided the conflict of interest and done their work properly, thefinancial debacle could have been minimized or avoided (“The FinancialCrisis and the Collapse of Ethical Behavior – The Big Picture”, 2018).
Part”B”:TheEnron Case:There have been major financial scandals in thefinancial environment, but the case of Enron also known as Enron scandal shookthe financial market and challenged the basics of Wall Street. It has beendeemed as the largest bankruptcy as well s the biggest audit failure inAmerican history (“The Case Analysis of the Scandal of Enron”, 2010).Enron was founded in 1985 and was declared bankrupt in late 2001. Enron revisedits financial reports for 5 previous years and found out that it had $586million in losses.According to Kirk Hanson, the executive director ofthe Markkula Centre for Applied Ethics, the lack of truthfulness by themanagement regarding the overall health of the company was one of the causes ofEnron’s fall. Also, the CEO of the company Mr.
Jeffrey Skilling hid the sale ofhis stocks to the shareholders and also to his employees; he hence breached theordinary director and officer disclosure requirement (The Conference Board,Inc., 845). Another issue in the case was conflict of interest between theroles played by Arthur Andersen (Accounting and Audit Partnership).
It wasaccused of alleged accounting errors, audit failures and hence lead theinvestors to revise their beliefs regarding Andersen’s reputation (Nelson KK,Price RA, Rountree BR, 2008).Moreover, Enron was also involved in accountingfraud; it used mark to market and Special Purpose Entity tools to commit thosefrauds. In order to show the investors that the company was in continuousprofit, Enron traders were pressurizedto forecast high future cash flows and low discount rate on long-term contractwith Enron and hence the projection of the long-term income was overly inflatedand optimistic (“The Case Analysis of the Scandal of Enron”, 2010).Also, Enron used the SPE (Special Purpose Entity) to hide its debts; it usedthe SPEs as collateral to borrow large sums of money and this money was used tobalance Enron’s overvalued contracts. However, the assets and debts purchasedby the use of SPE were not reported on Enron’s financial report. TheHIH case:HIH Group was the second largest general insurer inAustralia prior to its collapse in 2001 (“HIH Insurance – Home Page”,2018). It has been regarded as the Australia’s largest corporate collapse todate. According to Mark Godfrey, Senior Manager for the Australian PrudentialRegulation Authority, the downfall of HIH is attributed to following keyattributes:· Under-pricing for quick market share· Under-writing losses accumulated overthe time· Flawed systems and false accounts usedto hide losses· Policy of thin capitalization· Increasing cash flow pressureMoreover, the Royal Commission Report suggests thatthe losses were not because of fraud scandal or theft but because of theabsence of the capital at the first place (Godfrey, 2016).
Similarly, thereport explained how HIH had no enough capital to absorb large losses. Also,the management, senior managers, auditors and regulators ignored or concealedthe deteriorating financial position of the company, not only that but alsothey failed to read the early warning signs or suggest remedies or report theproblems faced by the company. Finally, Justice Owen had called for theamendment of the Corporations Act 2001 which will require the companies todisclose all non-audit services provided by the audit firm, which will solvethe problem of independency and transparency (Mirshekary, Yaftian & Cross,2005).
To conclude both of the cases, itcan be said that both of the companies suffered subsequent losses and finallycollapse due to false representation of their financial health and illaccounting and auditing practices. To prevent such economic disaster which willaffect millions of commoners, we will discuss some recommendations in the nextpart of the report. Part”C”:The major economic collapse of 2008-2009 has been aneye-opener for many of us around the world, but still such outcomes cannot bepredicted and can only be prevented. The Australian Accounting Standards Boards(AASB) makes Accounting Standards that each business entity should follow whilereporting their financial performance. Some key standards that could bestrengthened so that an economic catastrophe can be prevented are discussedbelow:· AASB 1034 “Financial Report Presentationand Disclosures” which is prepared under section 334 of the Corporate Law needsto be strengthened and should be in accordance with the AASB 1001 “AccountingPolicies”. The entity should also disclose its relations with the auditor insubparagraph 5.3 (b) and it should also disclose financial information for thepreceding reporting period as stated in subparagraph 7 (“Financial ReportPresentation and Disclosures”, 2018).
Therefore, AASB 1034 must beimplemented and each entity must comply with it and must report their financialperformance under the guidelines of AASB 1034.· APES 110 “Code of Ethics forProfessional Accountants” which is issued by Accounting Professional andEthical Standards Board Limited should also be strengthened and all the membersshould also comply with its standards while performing professional services.Section 110 explains integrity that must be followed by the members and section120 “objectivity” which imposes an obligation on all members not to compromisetheir professional judgment because of bias, conflict of interest or undueinfluence of others. Also members should comply with the section 130″Professional Competence and Due Care” and also the main section is section 140″Confidentiality” (“APES 110 Code of Ethics for ProfessionalAccountants”, 2018).· The involvement of the auditors in theeconomic collapse and also the downfall of two major companies Enron and HIHInsurance can also be attributed to negligence by the independent auditors likeArthur Andersen. In order to minimize the negative impact of the auditors, theauditing standard ASA 580 must be strengthened. ASA 580 explains if themanagement is reluctant in providing written representations, the auditor shalldiscuss the matter with management, revaluate the integrity of management andalso interpret the reliability of representation and audit evidence in general (“Jul13 Compiled Auditing Standard ASA 580”, 2018). Also, Auditing Standard ASA102 “Compliance with Ethical Requirement when Performing Audits, Reviews andOther Assurance Engagements” should also be strengthened, which is largelybased in APES 110 and ASA 220.
It explains how he conceptual framework shouldbe applied in different specific situation. It also provides examples ofsafeguards that may be useful to minimize the threats and also examples wherethe safeguards are not available to address the threats (“Jul 13 CompiledAuditing Standard ASA 102”, 2018). Conclusion:After watching the movie and going through otherresearch articles, it can be concluded that the global economic crash down of2007-2008 had some distinct key players. The first players were the greedy bigbanks of Wall Street, who saw huge profits over the ethical issues surroundingthe use of MBS (Mortgage Backed Securities) and CDOs (Collateralized Debt Obligation).Other players include mortgage brokers, mortgage lenders and securitizingbanks.
Also, the key player in the downfall were rating agencies who forgottheir moral and ethical values and acted in accordance to the will of banks toobtain favorable ratings of the subprime bonds. Moreover, such economiccatastrophe can be prevented only if all the people involved act according tothe norms and ethics of finance and accounting. The regulatory bodies shouldalso be more predictive and precautionary to avoid such events from repeatingitself.