Theme

The world has witnessed several financial crises; among them are the 1930s Great Depression and the 1997 Asian Crisis. While the 1997 Asian Crisis is still fresh in our memory, we are currently facing yet another crisis, starting with the default of US sub-prime mortgages. Still, every downturn has an expected upturn. So, the theme of this conference is designated to prepare us for the coming economic upturn.

Financial Downturns

Although the experiences of surviving previous crises would indeed provide insights into ways to deal with the current one, yet the circumstances are far different. Let us take a short review of those crises.

The 1930s Great Depression

The Great Depression occurred in the 1930’s. There are several factors believed to be the source of the Depression. Historians point to structural weaknesses, such as massive bank failures and the stock market crash, while some economists point to Britain's decision to return to the Gold Standard at pre-World War I parities.

The Depression affected virtually every country. It cut international trade significantly, which inevitably slashed personal income, tax revenues, prices and profits. Cities all around the world, especially those dependent on heavy industry, suffered since construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell significantly due to decrease in demand.

Workforce mobilization following the outbreak of World War II fueled the industry and finally ended unemployment, which then led to the recovery of the economic situation.

The 1997 Asian Crisis

It started with financial turmoil in several Asian countries in 1997. The turmoil resulted from overdependence on foreign financing. Then, shifts in market expectation and confidence of domestic and international investors followed.

As a result, Asian countries’ economies were damaged. A decline in the confidence of foreign investors weakened the exchange rate, which had a negative effect on the balance sheets of corporations overloaded with debt denominated in foreign currency. As firms’ balance sheets worsened, their viability to obtain credit also declined and they were forced to curtail spending. At the same time, many governments employed tight monetary policies so that higher interest rates further declined spending and led to a recession, a further decline in confidence, and further depreciation. Then, the downward spiral continued.

The crisis was countered by many parties in many ways, such as: debt restructuring for companies overloaded with debt denominated in foreign currency; strategic alliances, mergers and acquisitions especially in the banking sector; good entrepreneurship in small and medium enterprises; adoption of international accounting standards in financial instruments and derivatives; and some stimulus in term of monetary and fiscal policies.

Current Crisis

We are now facing another crisis that was started by the incidence of 9/11, dotcom bubble, and accounting scandals in the United States. The low interest rate that was meant to be an economy stimulus was used by bankers to lend money to high-risk borrowers who wanted to buy houses (sub-prime mortgages). Bankers then securitized the loan and sold bonds collateralized by this loan in the secondary market. When the housing market reached saturation, housing prices fell and borrowers defaulted. The default of the underlying assets caused bond prices to fall and, as a result, investors suffered and many major financial institutions collapsed. This situation started in developed countries, but due to a more global economy, this crisis had a significant domino effect.

Companies in developing countries that rely on exports are affected by the crisis and many had to close down. This in turn has lowered investors’ confidence in the capital market, which was marked by the drop of stock and bond prices, as well as the plunge on stock indices. The entire situation led to an increase in unemployment in many industrial sectors.

The crisis has affected many countries and people in many aspects of life. What can we learn from the history of the previous crises? Since the causes as well as the conditions are different from previous ones, it is important for affected parties to analyze the current crisis thoroughly so that they can survive from this difficult situation.

There is, however a silver lining to this situation. It has brought opportunities to all businesses in the world to improve their performance. This is the right time to create a comprehensive strategy to beat many problems. Only companies with the right strategies will get out of the crisis successfully. These companies should have greater abilities to survive in the following periods due to their experiences in difficult times.

Comprehensive strategy includes all related aspects of the business, both financial and nonfinancial ones. The financial aspect concerns with stock or operating performance, capitalization, and growth. It is vital to know how to create innovative product or service attributes which can boost sales, how to get public attention to increase market capitalization, and how to set growth targets that motivate all levels of managers.

The nonfinancial aspect concerns with human resources, intangibles, business processes, and IT systems. It is necessary to know how to attract and retain talented employees, how to maintain and enlarge valuable intangibles for the prospective future, how to improve critical business processes for higher quality of products or services, and how to develop information technology to support the workforce and to link to customers and suppliers. These nonfinancial aspects are crucial to boost the financial aspects. Finally, the strategy must be executed by the right man in the right place at the right time with the right action.

Another important issue is the linkage of the recent crisis with environmental and social problems. The world faces several environmental problems such as climate change that stems from global warming, inadequate energy supplies because of fossil fuel shortages, and various kinds of pollution caused by industrialization. These environmental issues are affected negatively by the recent crisis and will subsequently cause further social problems, such as a very low quality of human life in this world. We have to overcome these problems simultaneously.

Other than these issues, we also need to analyze on how e-commerce can help us in getting through this financial crisis. Will we see more online retailers in the future, or will the current e-tailers go bankrupt one by one? Will the transactions through online shopping rise as the number of internet users in the world is increasing, or will it be stagnant? Will e-commerce absorb more workforce, or will it be the opposite? Do government regulation on the internet and electronic transactions support the growth of e-commerce?

At the macro level, the crisis has influenced the economy of every country and even the world as a whole. Companies must be careful about the effect this worsened economic condition has on them. It can provide good opportunities if companies know how to manage it properly. However, it can become threats if companies fail to adapt to the crisis. The Indonesian Government has already made and implemented many stimuli policies to improve the economic condition. The government supports business interests because of the importance of the business sector’s role in the country’s economy.

While waiting for the government’s stimuli policies to take effect, companies can start restructuring their internal structures in order to survive from the financial crisis. In today’s difficult situation, those who can survive are those who are able to manage their resources effectively and efficiently, and turn threats into opportunities. In this case, companies need various accounting and business factors as supporting environment. Those factors are:

• Accounting and auditing standard improvement in order to enhance enterprise accountability and transparency in all industries, related to the implementation of good corporate governance.
• Accounting information systems implementation based on enterprise risk management and control activities.
• Accounting management practices as tools for strategic management and risk minimizing in the enterprise.
• Exercise of prudence practices and conservatism principle in daily business activities and record keeping.
• Business combination practices to increase the effectiveness, efficiency, and economization of resources consumption.
• Financial distress recovery initiatives through proper cash flow management to avoid business failures and bankruptcies.
• Sound business ethics practices by professional managers and accountants.
• The implementation of various economic policies such as interest rates policies, bailout packages, government guarantees, outright nationalization, and regional cooperation.

In response to the current situation and preparing for the future, the Accounting Department of the Faculty of Economics of Parahyangan Catholic University cordially invites academic societies, practitioners, business leaders, and interested parties to participate in the 2nd Parahyangan International Accounting and Business Conference (PIABC) on the topic of Accounting and Business Challenges in Getting Ready for the Economic Upturn. The participation can come in the forms of submitting papers on this topic, becoming this event’s sponsors, providing other contributions, or any combination of them.