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(Topic 3: The Regulation of Financial Accounting) - Coggle Diagram
Topic 3:
The Regulation of Financial Accounting
What is regulation?
Designed to control or govern conduct
'prescribed rule' or 'authoritative direction"
FREE MARKET PERSPECTIVE
do not need regulation
arguments
Private economic based incentives
contracts based on accounting information
management bonus scheme
debt covenants
managers will operate for their own benefits
market for managers
even there is no regulation, managers will still do the right things
market for corporate takeovers
motivates manager to do the right things
information produced to minimise cost
market for lemons
market knows managers have news to disclose
good news
bad news
should be treated as the same as other goods
PRO-REGULATION PERSPECTIVE
accounting information is public
should not be treated as the same as other goods
theories
public interest theory
assumes government is neutral arbiter
regulation that benefits society as a whole
capture theory
industry will take charge of the regulator
subsequent rules gives advantage to the parties that are subjected to the regulation
economic interest group theory
private interest theory
assumes to be motivated by self interest
groups will form to protect particular economic interest
groups with insufficient power will not be able to protect their own
interest
accounting standard settings
new and revised standard has consequences
accounting firm lobbying to protect their own interest
accept or reject the standard
output of political process
standards-setter encourage parties to make submission
considerations
social
environments
indicates financial statements true and fair