A dominant role of capitalist society and neoliberal thought characterizes the economic and financial processes in the contemporary Western world. The 2008 financial crisis demonstrated a devastating disruption of the system’s functioning which was significantly reliant on banking loans. Large financial corporations bankrupt, leading to the collapse of the banking system and causing a global recession, which was characterized by a high level of unemployment and other adverse social implications. Despite the differences in the approaches to explaining the causes of the financial crisis, its emergence defined a collapse of neoliberalism as a functional economic framework. This paper is designed to argue that the financial crisis of 2008 was predetermined by the neoliberal attitudes toward accounting, which enabled runaway market processes.
When discussing the causes of the financial crisis that occurred in 2008, one should define the economic, financial, and business environment that prevailed at the time. In particular, the advancement of large business corporations with international capital and market presence dominated the global financial world (Sikka, 2009). Large corporations are functioning as capitalist entities performing in the market by accumulating loans and investments to anticipate future returns (Cooper, 2015). More specifically, “incubated by the financialization of Western economies, most notably the US economy, which created an abundance of credit and encouraged excessive risk-taking through complex financial instruments” (Sikka, 2009, p. 868). Thus, the adherence of the US and other global economies to such a system undermined the financial system’s stability and ultimately disrupted it.
Corporations obtained large banking loans and relied on long-term benefits, which were not guaranteed or validated by any external body. Indeed, under such a neo-liberal system of financial performance, technologies of corporation financialization were normalized and perceived as inevitable and allowed (Cooper, 2015). Such a state of affairs implies that all the parties in the neoliberal economy are interested in future returns on investment without generating value at present. Under such circumstances, the longevity of such a system was doubted and ultimately led to the crisis. Given the presented background, neoliberalism became the main reason for the financial collapse of 2008, with the decisive role of accounting and auditing as a significant contributing factor within the larger system.
Indeed, accountants’ role in financial system failure was conditioned by the automated nature of the neoliberal market. In general, external accounting procedures and audit measures designate the regulating aspect of the financial system. According to Sikka (2009), “external audit is promoted as an engendering trust technology (Power, 1999) to persuade the public that capitalist corporations and management are not corrupt and that companies and their directors are made accountable” (p. 868). In other words, the accountants and auditors checking the accountability and financial liquidity of large corporations and financial organizations are expected to inspect, detect, and report possible economic flaws, inaccuracies, or unreliable information.
In such a manner, the financial performance of audited organizations might be properly monitored to prevent severe adverse events. However, the accounting and auditing system within the neoliberal economic paradigm normalizes loans and fictitious assets (Cooper, 2015). When corporations’ checks and balances and solvency were reviewed, organizations’ loans and financial reliance on fictitious assets were perceived as normal. In such a manner, the corporations operating on the ground of non-existing assets with the expectations of future returns were reinforced for further performance by auditors who failed to recognize the failure risks and regulate the market externally. However, Cooper (2008) justifies the complicity of accounting in the financial crisis of 2008 by admitting the exertion of dominating the neoliberal system’s power on accounting institutions. From such a perspective, it is implied that accounting organizations and auditing entities are not to be held responsible for the crisis.
While such a position seems reasonable, the overall adherence of the financial system, including accounting and auditing, contributed to the crisis due to the unbearable level of loans and fictitious assets dominating the business. The fault of auditing organizations in the severity of the problem and its inevitability is proven by the active involvement of such entities in the capitalistic financial system with their direct monetary interest. Indeed, “auditing firms are capitalist enterprises and are dependent upon companies and their directors for income; the fee dependency impairs claims of independence and can silence auditors” (Sikka, 2009, p. 872). Thus, the overall system involved corporations, banking organizations, and auditing companies, which mindlessly utilized the benefits of a capitalistic economy, strongly relying on loans and investments.
The defenders of capitalism and neoliberalism as its manifestation promulgate the idea of self-regulating markets. Indeed, as Sikka (2009) notes, capitalists argue for the use of fictitious assets based on the importance of market growth. The increase of assets through loans allows for using non-existing finances to enlarge the scope of operations and market presence. In particular, the importance of loans and shares in the capitalistic economy is defined by the necessity of investing money into newly created companies for future income generation. According to Cooper (2015), “shares are forms of fictitious capital that played an essential role in the early growth of capitalism, which, to rapidly expand, had to be liberated from the constraints” (p. 66). From such a perspective, when family firms or start-ups are launched, it is easier for them to start successfully and grow into income-generating corporations using loans or shares. On a larger scale, such a system of financialization contributes to market and economic growth in general, driving businesses toward innovative solutions.
On the other hand, the opponents of the neoliberal views on the reasons for the financial crisis of 2008 state that the introduction of financialization on the basis of loans and investment is flawed and does not allow for achieving realistic financial goals. The most reasonable and well-grounded framework justifying such a perspective is the Marxist theory. According to this approach, capitalist economies are ineffective in the long-term perspective (Cooper, 2015). Since fictitious assets are non-existent at the moment of their use, they do not generate immediate value. The value they rely on is believed to be generated in the future when the firm makes an actual profit (Cooper, 2015). Thus, a growing debt is an inevitable feature of the neoliberal economy due to the extensive reliance on fictitious assets in the form of loans, shares, and investments. Moreover, the Marxist theory holds that labor is the only source of value that could drive the economy (Cooper, 2015). For that matter, standard procedures of generating value by means of direct labor have been jeopardized by capitalist economies, which ultimately led to their failure, as demonstrated by the 2008 financial crisis.
Given the consideration of the Marxist theory opposing the neoliberal approach to economic growth, the role of auditing companies in the financial recession becomes clearer. Indeed, being directly dependent on their clients, auditors failed to apply objective and critical measures to regulate market processes and ensure the financial obligations of the served corporations. Instead, they complied with the imposed rules within the neoliberal environment, motivated by monetary interest (Sikka, 2009). Prior to the crisis, “auditing firms have shown increasing willingness to violate laws, regulations and assist their clients in publishing flattering financial statements” to ensure the general public of the reliability of the capitalistic economy (Sikka, 2009, p. 872). Thus, the ultimate effect of the auditor’s decision-making was the deception of the public and the creation of non-realistic perspectives on the opportunities of the economy. Due to the unforeseeable failure of the whole economic system caused by unlawfully performing auditors, societies across the world suffered from devastating socio-economic outcomes.
In summation, as the discussion presented in this paper has demonstrated, the financial crisis of 2008 was a failure of the neoliberal economic framework that reached beyond stock markets and impacted social life at large. The prevalence of capitalistic norms in the business world allowed corporations to grow exponentially by using loans and shares as fictitious assets. Nonetheless, since the debts complicated the functioning of the system and the external auditing firms complied with their clients for profit and concealed objective information about corporations’ solvency, the system failed. The Marxist theory allows for strengthening the argument validating auditors’ pivotal role in the 2008 crisis by emphasizing the essential role of value generated by labor and not fictitious assets oriented at future returns.
References
Cooper, C. (2015). Accounting for the fictitious: A Marxist contribution to understanding accounting’s roles in the financial crisis. Critical Perspectives on Accounting, 30, 63-82.
Sikka, P. (2009). The financial crisis and the silence of the auditors. Accounting, Organizations and Society, 34(6-7), 868-873.