What The 2008 Financial Crisis Can Teach The Future CA(SA)
2 Min Read
The year 2008 remains the ultimate masterclass in what happens when professional skepticism takes a holiday.
It was an era where the world of finance counted chickens that had not even been laid by hens that did not exist. This period of turmoil created a unique brand of gallows humor among professionals.
One popular quip suggests the difference between an investment banker and a pigeon is that a pigeon can still make a deposit on a new Ferrari. Beneath the levity, the global economy faced its most significant threat since the Great Depression
The Subprime House of Cards
The disaster began with lenders granting mortgages to borrowers with poor credit scores and high debt. These risky loans were bundled into complex Mortgage-Backed Securities.
Rating agencies assigned high ratings to these products, making them appear as safe as government bonds. This fueled an unprecedented housing bubble which. Following these terrible decisions, the Lehman Brothers bankruptcy in September 2008 triggered a global banking crisis.
The Accounting Reset: IFRS 9
The crash exposed a critical flaw in the old IAS 39 standard. Its "incurred loss" model only allowed banks to record losses after clear evidence of a default appeared. This was "too little, too late". IFRS 9 replaced this with the Expected Credit Loss (ECL) model.
This forward-looking approach requires entities to prepare for potential future losses from the moment a loan is originated. It uses the formula:
ECL = PD x LGD x EAD
ECL - Expected Credit Loss
PD - Probability of Default
LGD - Loss Given Default
EAD - Exposure at Default
Banks now adjust their balance sheets in real-time and bring an umbrella before the rain begins to fall.
The Bottom Line
This history proves that clients count on us to be the voice of reason. A CA(SA) must maintain professional skepticism and a questioning mind.
Never accept a management explanation at face value without seeking evidence. Logic is our first tool. When logic fails, humor helps us cope.
Until next week,
The Journal Entry Team
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