Ratings agencies such as Moody's and Standard & Poor's rate securities to give investors an independent grading of the risks involved in financial transactions. A few years ago, both Moody's and S&P reported large increases in profits due to the increased volume of securities being issued and the consequent need for their services.
Shortly after these earnings announcements, financial markets plunged because of the collapse of a popular security, called mortgage-backed bonds, which both companies had rated fairly highly. Apparently, neither ratings agency had properly assessed the risks associated with these securities.

INSTRUCTIONS:
a. What do you think happened to the demand for the services provided by Moody's and S&P? Why?
b. Where on their financial statements was this reflected?
c. Assume that the two companies were held responsible for their inaccurate ratings on the mortgage-backed securities. What possible entries might appear on future income statements?