Accounting Regulation and Politics
Topic 5
*
*
Objectives
Define general purpose financial reporting in the context of regulation;
Evaluate the arguments for and against the existence of accounting regulation;
Evaluate the various theoretical perspectives explaining why regulation is introduced;
Evaluate the claim that accountants are powerful; and
Evaluate the claim that accounting can be neutral and unbiased
*
*
‘Free market’ perspective
Accounting information should be treated like other goods, with demand and supply forces allowed to operate to generate an optimal supply
Private economic based incentives
‘market for managers’
‘market for corporate takeovers’
‘market for lemons’
*
*
Private economic based incentives
assumed that managers will operate business for own benefit and this is expected by shareholders and debtholders
therefore in interests of management to enter contracts with shareholders and debtholders to constrain managers’ actions
contracts often based on accounting information
organisations not producing information will be penalised by higher costs of capital
*
*
Private economic based incentives (cont.)
Organisations best placed to determine what information should be produced
dependant on parties involved and assets in place
imposing regulation restricting available set of accounting methods decreases efficiency of contracting
also assumed auditing will take place in absence of regulation - reduces risk to external stakeholders
*
*
Problems in presence of
many different parties
May be too many parties for contracting to be feasible
prohibitive cost of negotiation if different investors want different information
costly to negotiate single contract with all investors as they need to agree information provided
*
*
Market for managers argument
Managers’ previous performance impacts on remuneration they can command in future
in absence of regulation assumed managers encouraged to adopt strategies to maximise value of firm (provides favourable view of own performance)
includes providing optimal amount of accounting information
*
*
Assumptions underlying market for managers argument
Managerial labour market operates efficiently
information about past performance known by prospective employers and will be impounded in future salaries
capital market is efficient
effective managerial strategies reflected in positive share price movements
*
*
Market for corporate
takeovers argument
Under-performing organisations will be taken over by another entity with the existing management team subsequently replaced
therefore managers motivated to maximise firm value
information produced to minimise cost of capital thereby increasing firm value
assumes managers know marginal cost and marginal benefits of information
*
*
Market for lemons argument
No information viewed in the same light as bad information
market may make the assessment that silence implies the organisation has bad news to disclose
therefore managers motivated to disclose both good and bad news
evidence that both good and bad news disclosed voluntarily - Skinner (1994)
Assumes the market knows that managers have news to disclose
may not always be a realistic assumption
if knowledge of non-disclosure subsequently becomes available market expected to react at that stage
*
*
Pro-regulation perspective
Accounting information is a public or ‘free’ good
in the presence of free-riders true demand is understated
pricing system does not function properly
leads to underproduction of information
regulation necessary to reduce impacts of market failure
*
*
Should supply of ‘free’ goods be regulated
Some argue free goods often overproduced as a result of regulation
public, knowing they do not have to pay, will overstate their need for the good or service
eg. investment analysts
could lead to accounting standards overload
*
*
Role of Adam Smith’s
‘invisible hand
‘Invisible hand’ notion used as argument in favour of free market
without regulatory involvement, as if by an invisible hand, productive resources will find their way to most productive uses
some went on to argue that leaving activities to the control of market mechanisms will protect market participants
Free market argument ignores market failures and uneven distribution of powe
Smith was concerned where monopolistic powers were created by government intervention
BUT Smith advocated regulatory intervention in some instances
where in the public interest to protect the more vulnerable
*
*
*
Why was Smiths work misrepresented
In the interests of many businesses that regulatory interference be reduced
the work of acclaimed economists used as ‘propaganda’ to support their position
Theories to explain regulation
Public interest theory
Capture theory
Economic interest group theory (private interest theory)
*
*
Public interest theory
Regulation put in place to benefit society as a whole rather than vested interests
regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators
assumes that government is a neutral a
iter
*
*
Criticisms of public interest theory
Critics question assumptions that economic markets operate inefficiently if unregulated
question the assumption that regulation is virtually costless
others question assumption of government neutrality
argue that government will only legislate and groups will only lo
y for regulation if it will increase their own wealth
*
*
Capture theory
The regulated seeks to take charge (capture) the regulato
seek to ensure rules subsequently released are advantageous to the parties subject to regulation
although regulating initially in the public interest, difficult for regulator to remain independent
*
*
Capture of accounting standard-setting
Walker XXXXXXXXXXanalysed capture of Australian standard-setting through the ASRB. Argued that:
the accounting profession lo
ied before the board established to ensure no independent research capability, no academic as chair, to receive admin officer not a research directo
priorities only set after consultation with AARF
ASRB fast-tracked AARF submissions but not others
majority of board membership were members of the accounting profession
*
*
Criticisms of capture theory
No reason to suggest that regulated industry the only interest group able to influence the regulato
no reason why regulated industries only able to capture existing agencies rather than procure the creation of an agency
no reason why regulated couldn’t prevent creation of the regulatory agency
*
*
Economic interest group theory
Assumes groups will form to protect particular economic interests
groups are often in conflict with each other and will lo
y government to put in place legislation which will benefit them at the expense of others
no notion of public interest inherent in the theory
regulators (and all other individuals) deemed to be motivated by self interest
The regulator is not a neutral a
iter but is seen as an interest group itself
regulator motivated to ensure re-election or maintenance of its position of powe
regulation serves the private interests of politically effective groups
those groups with insufficient power will not be able to effectively lo
y for regulation to protect its own interests
*
*
Examples of application to accounting standard-setting
Industry groups may lo
y to accept or reject a particular accounting standard
eg. insurance industry and AASB 1023
large politically sensitive firms found to lo
y in favour of general price level accounting in US (led to reduced profits)
accounting firms lo
ying to protect their own interests
*
*
Accounting regulation as an output of a political process
The view that financial accounting should be objective, neutral and apolitical can be challenged
will inevitably be political as it affects wealth distribution within society
standard-setters encourage affected parties to make submissions on drafts of proposed standards
If standard-setters give consideration to views in submissions, accounting standards and therefore financial reports are the result of various social and economic considerations
tied to the values, norms and expectations of the society in which standards are developed
questionable whether financial accounting can claim to be neutral and objective
*
*
Regulation as an output
of a political process - continued
Compliance with accounting standards usually seen to indicate financial statements are ‘true and fair’
can accounts based upon standards determined from various economic and social consequences be deemed to be ‘true’?
Users may not be aware that financial reports are the outcome of various political pressures
should regulators consider preparers’ views given that standards are designed to limit what preparers do?
*
*
Objectives - recap
Define general purpose financial reporting in the context of regulation;
Evaluate the arguments for and against the existence of accounting regulation;
Evaluate the various theoretical perspectives explaining why regulation is introduced;
Evaluate the claim that accountants are powerful; and
Evaluate the claim that accounting can be neutral and unbiased
*
*
24/04/2018 Untitled Document
http:
interact.csu.edu.au/sakai-msi-tool/content
v.html?subjectView=true&siteId=ACC341_201830_SM_I 5/10
For this assessment you are required to use APA referencing to acknowledge the sources that you
have used in preparing your assessment. Please refer to the CSU referencing guide
http:
student.csu.edu.au/study
eferencing-at-csu. In addition a very useful tool for you to use that
demonstrates how to co
ectly use in text referencing and the co
ect way to cite the reference in you
eference list can be found at https:
apps.csu.edu.au
eftool/apa-6
Assessment item 2
Assignment 2
Value: 20%
Due date: 02-May-2018
Return date: 23-May-2018
Length: 2,000 words
Submission method options
Alternative submission method
Task
Content assessed: Accounting regulation and topics(s) that your research is related to.
Key generic skills: Research, critical thinking and written communication.
Question 1 (10 marks, 1,000 words)
Find a newspaper article or web page report of an item of accounting news, i.e. it refers to a cu
ent
event, consideration, comment or decision that has been published after January 2017. Your article
could also come from one of the professional journals. The article should not come from an academic
journal. Academic journals generally do not contain news articles or articles of less than one page and
are usually only published 2 or 4 times a year. If you are having a problem ensuring that your article is
from an appropriate source contact your subject lecturer.
Explain the article that you have found in your own words and clearly relate the concepts, ideas and
facts within the article to one or more of the theories or topics that you have studied this session. Fo
example, this from the Sydney Morning Herald in April 2016 could be linked to accounting regulation,
ethics and measurement (and perhaps others). Provide a copy of the article or web page, with details
of the source, date and page number with your question answer.
Question 2 (10 marks, 1,000 words)
Find an exposure draft or proposal for a new accounting standard which has been opened for public
comments. These can be found on the websites of most standard-setting organisations, such as the
IASB, AASB and FASB. (Hint: These websites can be quite difficult to navigate, so as a first step try
typing “IASB exposure draft and comment letters”/”FASB exposure draft and comment letters” into
Google or other search engine of your choice). Read a sample of the comments from a range of
espondents. Select four respondents, for example, from accounting bodies, industry, companies o
corporate bodies. If you are having a problem finding suitable comment letters then contact you
subject Lecturer. Include copies of the comment letters you wish to discuss and complete the following
tasks:
a) Describe in your own words the issues that the exposure draft/proposal and comment letters are
dealing with.
) Is there agreement among the various groups? Describe the issues where there is
agreement/disagreement and provide examples.
c) Can any of the comment letters be interpreted as being for or against regulation? Justify you
answer with appropriate examples.
d) In your opinion, which of the three theories of regulation (e.g., public interest, private interest o
capture theory) best explains the comment letters? Justify your answer.
Please note: you