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APPLYING THEORY TO ACCOUNTING REGULATION - Coggle Diagram
APPLYING THEORY TO ACCOUNTING REGULATION
Theories of Regulation
Agency Theory
Atkinson and Feltham
states that it considers mainly the stewardship demand for information. It relates to the desire to: a) Motivate the agent. b) distribute risk efficiently.
Concentrates on the relationship in which the welfare of one person is entrusted to another
(eg: the owner to a manager)
.
Theories of regulation
Capture Theory
Occurred in any one of 4 situations
Control the regulation ad the regulatory agency.
Succeed in coordinating the regulatory body's activities with their activities so that their private interest is satisfied.
Manage to neutralize or insure nonperformance by regulating body.
In a subtle process of interaction with the regulators they succeed in cooping the regulators in mutually shared perspective thus giving them the regulation they sought.
Proposed to understand regulation of financial reporting is capture theory.
Private Interest Theory
Emerged in response to dissatisfaction with explanations provided by both the public interest and the capture theories.
Assumption:
Regulation comes into existence as a result of government response to public demands to rectify inefficient or inequitable practices by individuals and organisations..
Public Interest Theory
Regulation is intended by legislatures to protect consumer interests by securing improved economic performance compared with an unregulated situation.
Theory of Efficient Markets
A fundamental assumption underlying a '
free market'
perspective to accounting regulation is that accounting information should be treated like their goods, demand and supply forces should be allowed to freely operate so as to generate an optima supply of information about an entity.
Applications To Accounting and Auditing Practice
Public Interest Theory
Government regulation in required in the
"public interest"
whenever there is market failure/ inefficiency.
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 powers to achieve their desired wealth distribution.
Private Interest Theory
A systematic review of he Board's organisation and functions indicated that the Board was dependent on susceptible to influence from several interest groups.
Regulatory Framework for Financial Reporting
Statutory Requirements
Key participants in the production of financial reports are
corporate directors
and
independent auditors
.
A primary influence on directors and auditors is the need to fulfil statutory reporting requirements, as contained in company law.
Corporate Governance
Davis states that it refers to '
the structures, processes and institutions within and around organizations that allocate power and resource control among participants'.
Auditors and Oversight
The regulations of the profession is limiting membership to persons with particular qualifications and experience and requiring registration to practise.
Another forms of regulation involve requiring membership of a professional body and commitment to an ethical code of conduct.
Independent Enforcement Bodies
To promote compliance with the regulations governing the production of financial statements, which are contained in law and accounting standards.
Institutional Structure for Setting Accounting and Auditing Standards
Accounting Standards for the Public Sector
Different standards could apply to the public sector, given that public sector entities may have different goals and objectives and different stakeholders compared with private sector entities.
International Auditing Standards
Audits were demanded to meet the needs of financial statement users and contracting parties and the legislation requiring audit merely codified the best existing practice.