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REGULATORY APPROACH OF AN ACCOUNTING THEORY - Coggle Diagram
REGULATORY APPROACH OF AN ACCOUNTING THEORY
Perspectives of Regulation of Financial Accounting
The Pro-Regulation Perspective
As it is 'public good' it is unrealistic to rely on the forces of supply and demand because users of financial information can obtain the information at zero cost
Argues that accounting information should not be treated like other goods
The Free-Market Perspective
This approach argues that there are private economic incentives for organizations to produce accounting information voluntarily, and imposing accounting regulation leads to costly inefficiencies
The free market advocates rely upon private contracting to reduce agency cost
Free-Market is an anti- regulation approach
Accounting regulation as an output of a political process
The view of the financial accounting should be objective, neutral and apolitical
Political behavior =Public Choice Theory of Regulation= The political process means of pursuing individual or group self interest
Any consideration of possible economic consequences necessarily involve a trade-off between the various consequences
These group attempt to influence the introduction of regulation and different group affected differently by accounting regulation
Theories of Regulation
Private Interest Theory
Assumes that the groups will form to protect particular economic
interests.
Different groups, with incompatible or mutually exclusive interest and objectives, are viewed as often being in conflict with each other and each will lobby government or other regulators to put in place legislation that economically benefits them.
Particular industry groups may lobby the regulator to accept or reject a
particular accounting standard.
Public Interest Theory
Regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practice
The enactment of legislation is considered a balancing act between the social benefit and the social cost of regulation
Proponents of the economic based assumption of 'self interest' would argue against accepting that any legislation put place by particular parties because they believed that was in public interest
Economic and Social impacts of Account Regulation
Establish whether accounting regulations can and do have a social and
economic impact on the interest of preparers or users of accounts.
Capture Theory
Government has no independent role to play in the regulatory process and that interest groups imply seek to battle for control of the government’s coercive
All members of society economically rational/self interested
Origin of regulation is to protect the public interest but the purpose not achieved because in the process of regulation, the regulatee comes to control or dominate the regulator
The regulated entities as prevailing in the struggle to influence legislation and its predict a regular sequence in which the original purposes of a regulatory program
What is Regulation?
A rule and principle governing behavior or practice, such a directive established and maintained by an authority.
An official or agency responsible for the supervision of a particular industry, business activity, area of public interest, etc.