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The need for a regulatory framework - Coggle Diagram
The need for a regulatory framework
Plays a key role in ensuring financial information is reported constantly and objectively to provide reliable, relevant and faithfully presented information that enables shareholders and other stakeholders to make financial decisions
Accounting standards guide the accounting treatment of SOFP items and P&L items
Some content of financial statements is governed by law, laws are inflexible and take a long time to change so the core responsibility had devolved to accounting standards which allows the framework to evolve in a structured way in response to changes in economic conditions and events such as corporate collapses of international companies
The role of regulatory frameworks for the preparation of financial statements is
To ensure financial reporting is regulated through financial reporting standards
To ensure financial information is reported objectively to provide relevant, reliable and faithfully represented information that enables users to make financial decisions
To provide an adequate minimum level of ifnroamtion for users of financial statements
To ensure financial information is a comparable and consistent in the relevant economic arena
To ensure and improve transparency and credibility of financial reports, promoting users' confidence in the financial reporting process
To regulate the behaviour of companies and directors through the corporate governance framework
To achieve desired social goals through environmental and CSR reporting
A principles based system such as IFRS uses a conceptual framework to provide an underlying set of principles within which standards are developed. In the absence of such a framework, rules have to be designed to cover every eventuality
Some local or national GAAPs are considered a more rule based system of accounting
One presumed advantage of rules based systems is that the exercise of judgement is minimised and is preferred by auditors who fear litigation, however they may lead to a large volume of regulatory measures which do not always detect of prevent financial irregularities
It could be argued that a rules based approach is more appropriate for controversial areas in accounting
A typical regulatory structure includes
National or company law
CA2006
financial reporting standards body
Without a single body with overall responsibility for producing financial reporting standards, GAAP would be unable to evolve in a structured way in response to change in economic conditions
Accounting standards are generally produced by independent private sector bodies who are given authority by legislation to set standards
The FRC currently issues FRC is the UK
Market regulations
Legislations from other jurisdictions may affect accountability in the global market
Eg Compliance with the SOX is important to all business with US listings
Industry specific and securities exchange rules
Eg FCA oversees the financial services industry in the UK
Corporate Governance Framework
Seek to enhance financial reporting by providing confidence to the users of accounting information
Aim to align the interests of directors management and shareholders in pursuing the success of the company
Environmental and sustainability reporting
There are national and international standards for social, environmental and sustainability reporting