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BXY207 Reading 8: How financial regulation evolves - Coggle Diagram
BXY207
Reading 8: How financial
regulation evolves
Concerned with how
public financial statements are prepared, audited and used
It is the supply of information to the
international capital markets
A key issue:
Reporting rules are not exactly the same in any two countries
Information for investors
In the 19th century, much of the infrastructure of
financial reporting as we now know it was laid down
The Industrial Revolution called for large investments in high-risk projects,
initially such as building canals and railways and then, later, factories
Joint stock limited liability company were introduced:
Many investors could be brought together to share the risks, and their liability was limited to their investment.
Capital market function of financial reporting: providing
information about the company’s economic performance to the financial
markets
The French gov required all businesses to
make an annual inventory, (a balance sheet) using current market
values, to assess the health of their business
The difference in net worth
from one year end to the next showed whether the business was profitable
or not.
They wanted to re-build
confidence by weeding out the weaker businesses
Borrowed Finery
The Savary Ordonnance spread
The German state of Prussia used the Savary
Ordonnance in the 18th century.
This was adapted into Napoleon’s first Commercial Code (1807)
When the new country of Germany was founded in 1870, it built on the
Prussian base and developed that into a similar code
Germany developed another corporate vehicle for small business, the GmbH
The same idea was taken up in
other European countries and back to the UK
The UK remained largely outside the European exchanges of
accounting technology until it entered the European Union
Because
the UK and the USA have always exerted a strong influence on each other.
There are two ‘families’ of
financial reporting, the US/UK one ( Anglo-Saxon reporting) and the continental European one (sometimes referred to as commercial code
accounting)
Imperialism
Influence of colonial tradition and of trade relations
The UK and France, transferred their accounting rules to their colonies
These links have led to countries adopting rules that have not evolved in their own economy and are not
well adapted to that economy
Taxation
Another function of accounting is to provide the basis on which tax is measured
The link between taxation and financial is typically much more pronounced in the accounting of owner-managed business than multinational groups
In the UK, income tax rules
were first introduced at the end of the 18th century