Without interfering with established international accounting standards, i think the prudent thing would be a change of frequency of disclosure/reporting by affected companies. The rest is a question of the value system in the country and how people respond to crises. The Basel II rules have been contested but many argued for them as the best option during crisis.

Why should we not interfere? Do standards respond to risk assessment needs? Standards weak-points may be the very reason of company failure on a systemic level. Basel II is just for banking, it does not cover insurance, pension funds, investment funds, and other financial institutions, and has nothing related to non-financial institutions. Standards should be questioned, subject of criticism in order to improve.

Bolos you have a sound argument. But it is hard to create new rules during a crisis since the contestation is high. The benchmark remains existing systems and rules. New ideas may work but sometimes they remain experimental and very fluid. Not many people want to operate in an unpredictable environment. Innovative approaches that build on existing frameworks are usually easy to understand and accept unlike the radicalism that comes from critics when there is a crisis.

True, changing the rules most likely will trigger opposition. However, considering the cost in terms of misdirected investments because of risk factors being concealed, or ignored, considering government costs to support "too big to fail" failures, considering inflation triggered by quantitative easing, it is obvious that rules have to change, and now is the time to change them.

Even "simple" adjustments for high inflation rates are relevant and yet tricky to grasp by some international firms. Maybe we simply need a better global insolvency practice?

dear Drago,

A better insolvency practice is a huge task, but i would be glad to see some online content regarding insolvency cases, especially the reports of the insolvency specialist. It would be a great start for many many researches.

For external reporting, assuming a set of robust generally accepted accounting principles is in place, crisis accounting should not differ significantly from normal practice. For example, once management determines that it is not a "going concern," assets (current and long-term) should be written down to their expected market price (exit value), in accordance with the general principle that asset values should not exceed their "recovery" value. Should the revised asset values exceed liabilities (which may or may not be revalued, depending on several factors), the company may be able to use a bankruptcy form to reorganize and recapitalize the company. For example, some debt holders may be issued some form of stock in exchange for the debt. Many other issues must be addressed in event of liquidation.

Internal reporting is entirely different. Cash recovery from receivables and sale of marketable assets becomes critical, along with real-time reporting of cash flows. Rationalization of products and/or services must be handled logically so that those that contribute anything to overhead (i.e., a positive margin results once variable costs are deducted from revenues) are not eliminated. Cost-cutting should never be "across the board." Instead, costs should be examined for their ties to revenue generation and ability to sustain revenue. For example, cutting quality costs might lead to dire consequences should customers be harmed. Daily and sometimes hourly reporting of critical factors is required. Because crisis operation is so different from regular operating patterns, most firms in this position need outside assistance from a "turnaround" specialist. A sound business plan is essential both for internal management direction and to obtain "bridge" financing if a company hopes to emerge from bankruptcy.

Dear Charlene,

I am focused on researching contagion in economics. There is such a thing as industrial or commercial network contagion, i admit is much less known than financial contagion, but it works in a similar way. One of the issues i have encountered is the missing data required on building an exposure matrix. As companies work in a networked systems,it is very important to be able to predict to at least some extent the impact of crisis on networks. Networks can be researched using graph theory and related mathematics, however at this point i see no way to gather data required both for node centrality and flow size.

I admit my interest on financial statements is based on that, but it also raised a question that may be even more important for future income of companies, thus for stock value. In my opinion companies success and results are just as linked to upstream and downstream connections and their strengths as they are connected to both assets and capital, and even more so. So, in order to be able to determine threats to continuity (principle of continuity) business, network stability should be measured somehow, especially during crisis times.

Best regards,

Bradut

Ths is a much bigger problem (macro) than the one to which I was responding (micro), Bradut. I will think about it.

CB

I have thought about this issue. While I applaud your objective of researching contagion, the data you require to perform such a task is not available in external financial statements. Companies must identify "significant" customers, but typically provide only very general supplier information. (Exception: In the U.S., suppliers of "conflict minerals" must be reported beginning January 1, 2013.)

Even if you had access to all customer and supplier identification, your company model would be missing some very important variables. Due to international interrelatedness, I believe your model would have to include country economic and regulatory information for all countries impacting a company's customers or suppliers. Further, the company's competitive environment should be included. The skill and experience of the company's management also would seem to be relevant. Then, suppliers of the company's suppliers should be included, along with the customers of the company's customers. Thus far, I have only addressed the data needs for a single company's network. This company's network also most likely would be impacted by the networks of other companies.

In spite of all the barriers, I hope your will continue with this line of research. Public companies now must file financial data in XBRL format, that more easily can be downloaded and analyzed. Availability of all data is increasing exponentially and software to analyze massive data banks already is available and undoubtedly will improve over time. Good luck!

Dear Charlene,

You made a great description of the complexity of the problem. That's why i find-it interesting. There is enough work there for me, my future PhD students and their own PhD students and hundreds of researchers in the future.

I have ideas about how to get the data, at least as much as required to identify at least one repetitive"economic disease" and test the methodology enough to make-it work. The greatest challenge at this point is to get the funding i need.

Best regards

Bradut Bolos

Btw timing of disclosures and strategic signalling by CEO/CFO may be also relevant factor.

On financial markets contagion works really weird. Overreaction as well as complete disinterest are just as probable.

Hi Bradut,

I find the topic of your research very interesting. Suppose you gather data and form a network of companies' interaction. How would that help you in predicting financial/economic crisis? What would the structure of the network or its topology tell you about its characteristics and behaviors?

Dear Abdol,

If the crisis transmission works based on a contagion assumption, network links are the transmission pathways. Using the available data on those links there is no way to map the contagion and thus contain-it, either trough prevention or trough subsidies to critical nodes.

I am not sure macro-stabilization measures work on a contagion outbreak. Perhaps micro-management would be far less invasive and more adequate. We have two approaches based on macro-view, the American one and the European one. Both seem to have little or no impact on crisis containment and do just as much harm as they do good.

I attempt to do a epidemiological approach on economic contagion, at micro-level. I do require the data in order to properly define the outbreak.

Hi Bradut,

If I understand you correctly you are implicitly stating that changes in links of a weighted direct network of inter-enterprise transactions would enable you to detect contagion. If this interpretation of your research plan is correct, I am not sure (1) how you could tell a "normal" change from a crisis change, and (2) where you are going to get such a refined data.

I believe your best bet even if you completely specify the model is to use inter-industry transactions data from input-out tables. I have used inter-industry transaction tables for modeling innovation in the past.

In any event, you still need to answer the following question:: How would a network topology affect its behavior?

I hope you find these comments helpful.

Dear Abdol,

This is a ongoing long term research topic.

The Leontieff model (matrix) was done in past time before computers.New financial statements, and general use of something like XBRL will enable the construction of a more detailed Leontieff matrix, thus business network mapping. This, i believe is the future of shock modeling, as recorded events would permit usage of epidemiological (like) tools to determine nodes resilience to shock and the degree of exposure required for shocks to propagate, and the cases of abnormality contagion.

So, input-output tables are the key, as you noticed immediately, however, those tables can be done in enough detail just if financial statements are changed to allow such data to be built. Until that time, only panel design research can provide some preliminary insights.

Thank you,

Bradut

Hi,

You may benefit from this paper:

. Risk Disclosure Preceding Negative Outcomes: The Effects of Reporting Critical Audit Matters on Judgments of Auditor Liability.

By: Brasel, Kelsey; Doxey, Marcus M.; Grenier, Jonathan H.; Reffett, Andrew. Accounting Review. Sep2016, Vol. 91 Issue 5, p1345-1362. 18p.

Best regards