Synopsis

The Dow Jones Industrial Average plunged from 14,043 in October 2007 to 6,594 in March 2009, losing more than 2,000 points in September 2008 alone. Within two years, the U.S. unemployment rate doubled from 4.4 percent to 8.9 percent. The U.S. Senate Permanent Subcommittee on Investigations blamed the crisis on mortgage originators who issued high-fee loans to unqualified borrowers, government regulators who failed to reign in predatory lending practices, credit rating agencies that awarded AAA ratings to high-risk mortgage-backed securities, and investment bankers who created complicated financial derivative instruments few people understood. The resulting Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposed significant changes on the financial services industry.

Discussion Questions

1. What provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act directly affected American auditing and financial reporting?
2. According to American bankers, how did fair-value accounting contribute to the global financial crisis?
3. What changes did FASB adopt in the wake of the financial crisis?
4. How were auditors affected by the bankruptcies of their financial institution clients?

Additional Sources

The Global Financial Crisis Explained Jonathan Jarvis explains how financial leverage, subprime lending, and mortgage-backed securities caused the global financial crisis of 2008 (11:10 minutes).

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. U.S. Senate Permanent Subcommittee on Investigations, 2011.

The Financial Crisis: Inquiry Report. National Commission on the Causes of the Financial and Economic Crisis in the United States, 2011.

Auditors: Market Concentration and their Role. U.K. House of Lords Economic Affairs Committee, 2011.