Fair value accounting and untraceable financial crime

Tiago Cardao-Pito

Journal of Financial Crime, 2024, vol. 32, issue 3, 661-680

Abstract: Purpose - The purpose of this study is to inquire about the structural possibility of “fair value” accounting being used to commit and conceal financial crimes such as fraud, theft, money laundering, tax evasion and corruption. Design/methodology/approach - This study builds on the embezzler test, a recently developed test that examines whether normative architectures are sufficiently well equipped to cope with illicit financial flows that cross the boundaries of organizations and countries. This test was applied to both the entire “fair value” system and the “fair value” accounting that have been gradually introduced in modified historical cost accounting systems. Findings - “Fair value” accounting is formulated in such a manner that it does not provide a means of detecting and penalizing potential criminals. Therefore, owing to the malfunctioning of its normative architecture, evidence of criminal wrongdoing that could be associated with “fair value” accounting systems is difficult to find because of the deprivation of mechanisms for detection and subsequent disciplining. Indeed, rather than reduce financial crime, “fair value” accounting reduces the possibility of finding criminal evidence. Research limitations/implications - A new research field can explore how “fair value” accounting allows financial crimes such as fraud, theft, money laundering, tax evasion and corruption to remain undetected and unpunished. Practical implications - Unless private accounting standard setters as IASB and FASB can solve this fundamental problem regarding financial crime detection and penalizing, the case can be made for the phasing out of “fair value” accounting systems. The return of accounting norms to the government sphere may be a necessary pathway. This can only happen if policymakers produce necessary legislation. Originality/value - To present a new research argument against “fair value” accounting systems, which demonstrates the limitations and fragilities of this accounting system regarding illicit financial flows and other financial crimes that rely on illicit financial flows.

Keywords: Embezzler test; Accounting regulations; Financial crime; “Fair value” accounting; Historical cost accounting; Sustainable development goals (SDGs) (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfcpps:jfc-01-2024-0033

DOI: 10.1108/JFC-01-2024-0033

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