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APPLYING THEORY TO ACCOUNTING REGULATION - Coggle Diagram
APPLYING THEORY TO ACCOUNTING REGULATION
THEORY OF EFFICIENT MARKET
Aim to assist market development and promote economic growth
Free markets force can determine the type of accounting data to provide and the necessary standards that underlie.
Seen as an information industry where demand and supply forces should operate.
Market mechanisms will not be able to achieve a socially ideal equilibrium price for accounting information.
-a) Accounting information cannot be considered in the same way as other product as it is a 'public' good
-b) 'Free-rider' problem
Regulatory board is needed. -a) users are unable to agree on what they want -b) An accountant will not agree on the procedures to derive the desired information
AGENCY THEORY
Stewardship
Atkinson and Feltham relates to the desire to
:1. motivate the agent. 2. distribute risk efficiency
Decision-making
Relates to the role of information in statistical decision theory.
information improves the allocation of resources and risks in the economy.
UNCERTAINTY IN AGENCY THEORY
Ex ante
Before the event, exists at the time a decision is made. Example: uncertainty about controllable events that will affect production.
Ex post
After the event, exists after the decision has been made and the result realized.
Can be reduced by ex-post reports on what actually happened
Focuses on the impact of alternative ex post reports that affect ex post uncertainty
THEORIES OF REGULATION
Public interest theory
Market central is the central economic reason for government intervention in the operation of various markets in the 'public interest'.
Potential market failure occurs when there is a failure of one of the conditions necessary for the best operation of a competitive market.
-lack of competition ( monopoly, oligopoly)
-barriers to entry
-imperfect information gaps between buyers and sellers
-the 'public-good' nature of some product
The assumption that economics markets are subject to a series of market imperfection:
-the interest of consumers is translated into legislative action through the operation of the internal marketplace.
-there are agents who will seek regulation on behalf of the 'public interest'.
-the government has no independent role to play in the development of regulations.
Regulatory capture theory
1.Assumes that all members of society are economically rational.
the government has no independent role to play in the regulatory process.
3.Interest groups battle for control of the government's coercive powers to achieve their desired wealth distribution.
Occurs in any one of the four situations: - control the regulation and the regulatory agency
-succeed in coordinating the regulatory body's activities with their activities so that the interest is satisfied.
-neutralize or ensure non- performance by the regulating body
-in a subtle process of interaction with the regulators, succeed in co-opting the regulators into a mutually shred perceptive.
Involves capture of administration, implementation and evaluation of the effects of the policy process within any regulated area.
Pronounced with the following preconditions apply:
-there is a small number of client entities
-individuals within the regulatory agency have regular contact with a common set of individuals within the regulated entities and have either a regulated industry background or a potential for future employment opportunities.
-the regulated industry controls the information needed for regulation.
-there is complexity of information and product.
-the regulatory agency has minimal resources in comparison to the industry it is regulating.
The main reason that regulatory decisions usually have major effects on the interest of regulated industries.
Private interest theory
Believe that there is market for regulation with similar supply and demand forces operating as in the capital market.
only one group will be successful
Ability to bid due to two major cost factors:
the costs of an organization
information costs
APPLICATION TO ACCOUNTING AND AUDITING PRACTICE
Public interest
The governments intervene in the regulation of financial reporting in response to market failure and in the publics interest
Sarbanes-Oxley Act 2002
Accounting Standards Revie Boards (ASRB)
Capture theory
Walker believes that capture theory more applicable in explaining the events.
Needed to legitimate accounting standards which could be achieved only by standards that had the 'force of law' by ensuring that accounting standards were backed by legislation.
Australia's and Europe's decisions to adopt international standards and the IASB's mission to have its standards adopted in all countries throughout the world.
Private interest theory
To understand the behavior of parties with an incentive to influence the regulation of financial reporting
Rahman sought to apply the private interest theory of Stigler, Posner and Peltzman to the establishment of the ARSB.
Not mutally exclusive.
Standard setting as a political process
Viewed as a political process because of its potential to significantly affect the wellbeing of a wide variety of interests group
Used by Watts and Zimmerman to argue that the political process is simply a means of pursuing individual or group self-interest.
THE REGULATORY FRAMEWORK FOR FINANCIAL REPORTING
Statutory requirements
The production of financial reports are corporate directors and independent auditors.
Incentive to produce financial statements and have them audited
A primary influence on directors and auditors is needed to fulfil statutory reporting requirements.
Additional financial reporting requirements are derived from specific accounting standards and in many jurisdictions these standards have the force of law.
Taxation law
Corporate governance
Davis states that it refers to the 'structures, processes and institutions within and around organization that allocate power and resource control among participants.
Some corporate governance practices are derived from laws
May take the form of voluntary best practice reccomendation which encourages directors to adopt appropriate governance mechanisms to best suit the situation of their individual company.
Governance requirements relating to financial reporting can be enforced by the stock exchanges or the government body responsible for enforcement of financial reporting requirements,
Auditors and oversight
The most basic form of regulation of the profession is limiting of membership to persons with particular qualifications and experience and requiring registrations to practice.
Requiring membership of a professional body and commitment to an ethical code of conduct.
Auditors perform a vitally important function in providing assurance about the quality of information provided by companies in their financial statements.
Independent enforcement bodies
The FEE includes an independent enforcement body as part of the overall system for enforcement of financial reporting requirements.
Is to promote compliance with the regulations governing the production of financial statements which are contained in law and accounting standards.
A securities market regulator is the most commonly observed form
INSTITUTIONAL STRUCTURE FOR SETTING ACCOUNTIGNAND AUDITING STANDARDS
Background
Began formally with the formation of the International Accounting Standards Committee (IASC) which aims is to develop accounting standards for the private sector suitable for use in countries throughout the world.
The IASB and FASB convergence program
FASB was formed in 1973 and is highly regarded throughout the world as a leading standard setter
Has power delegated by the SEC to develop standards for financial reporting for listed companies.
The SEC issued a concept release in 2000 which outlined its views about desirable attributes of the financial reporting framework
Has generated considerable work for both Boards.
Complicated the process of producing the 'stable platform' of standard for 2005 as the IASB was working to this aim while at the same time considering the extent to which standards could be revised to converge with US GAAP
Require both boards to identify differences between their respective standards, to review available solutions and to adopt the better treatment
Accounting standards for the public sector
IASB set standards for the private sector.
Different standards could apply to the public sector as the public sector entities have different goals and objectives and different stakeholders compared with private sector entities.
Individual countries must decide the extent to which IASB standards will be followed by public sector entities.
International auditing standards.
The IAASB operates under the auspices of the IFAC.
The IFAC's members are accounting organizations and most members of the IAASB have been practicing auditors.
The IFAC establishes the Public Interest Oversight Board (PIOB) in 2005 with the objective of increasing confidence in the standards issued by the IAASB and other IFAC bodies.
Aims is to ensure that standards are set in a transparent manner that reflects the public intertest with input by the public and regulations and to facilitate audit regulation.