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THE REGULATION OF FINANCIAL ACCOUNTING - Coggle Diagram
THE REGULATION OF FINANCIAL ACCOUNTING
DEFINITION
The Oxford English Dictionary defines a regulation as: a rule or principle governing behaviour or practice especially such a directive established and maintained by an authority.
The Oxford English Dictionary defines a regulator as: an official or agency responsible for the control and supervision of a particular industry, business activity, area of public interest.
The free market perspective
Market-related incentives
Market for manager
Market for corporate takeover
Definition
Accounting information should be treated like other goods, demand and supply forces should be allowed to freely operate so as to generate an optimal supply of information about an entity
The pro-regulation perspective
One of the most simple of arguments is that if somebody really desired information about an organization they would be prepared to pay for it and the forces of supply and demand should operate to ensure an optimal amount of information is produced
Capture Theory
Definition
The regulated parties or industries will seek to take charge of (capture) the regulator with the intention of ensuring that the regulations subsequently released by the regulator (post capture) will be advantageous to their industry
Five ways industry will be able to capture a regulatory body
Capture is said to occur if the regulated interest controls the regulation and the regulated agency
If the regulated parties succeed in coordinating the regulatory body's activities with their activities so that their private interest is satisfied
If the regulated party somehow manages to neutralise or ensure non-performance by the regulating body
If in a subtle process of interaction with the regulators the regulated party succeeds in co-opting the regulators into seeing things from their own perspectives and thus giving them the regulation they want
The basic structure of the reward system leads neither venal nor incompetent regulators inevitably to a community of interests with the regulated party
Accounting regulation as an output of a political process
If we accept that accounting standard-setting is a political process, then the view that financial accounting should be objective, neutral and apolitical is something that can be easily challenged
Economic and social impacts of accounting regulation
It is neccessary to establish whether accounting regulations can and do have a social or economic impact on the interests of preparers or users of accounts
Lobbying and the economic interest group theory of regulation
The economic interest group theory of regulation assumes that group will form to protect particular economic interest.
Public interest theory
Holds that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices