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Accounting Regulation and Politics Topic 5b * * Objectives Define general purpose financial reporting in the context of regulation; Evaluate the arguments for and against the existence of accounting...

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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
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*
‘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’
    
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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*
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
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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
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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?
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*
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
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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
Answered Same Day Apr 24, 2020

Solution

Aarti J answered on May 02 2020
143 Votes
Accounting Analysis – Part A
Introduction
Steinhoff International is an international South African company which deals with different household products. The company has its operations across the globe. It operates in different countries like Europe, Africa, Asia, United States, Australia and New Zealand.
Story and News:
The company has recently been caught for the accounting scandal. The company has published a news stating that the accounting and the financial information of the company cannot be relied on needs to be restated. The company’s audited results for the year 2017 is put on hold and the investigation on the reports and the accounting process is being done on the “accounting i
egularities” of the company. The company has been following i
egularities since 2014. All the financial information of the company from the year 2014 has been said to be inco
ect.
The company has its operations on more than 40 retailing
ands in more than 30 countries and has been positioned as one of the largest companies in the terms of the market value and market capitalization. The company was valued at more than R300 billion which made it in the top 10 companies. With its global existence, the company attracted the prominent investors. The company has successfully tripled its shares from2012 to 2016.
With the news of the accounting i
egularities, the company’s shares dropped by 90% on December 5’ 2017 which eroded R180 billion of market capitalization of the company. The company is facing several issues in different countries like Europe and South Africa and different investors has led to the all possible lawsuits on the company. (Cronje, 2018)
Accounting implications
The scandal points out serious gaps between the checks and the balances in the investment space. The company has the stated that it has the inco
ect valuation of the 6 billion euros worth of assets on the balance sheet of operations in its Europe division. The report as per JP Morgan Chase stated that the company lacks pivotal information that from where has the company generated the revenues and why the company has focused on tax
eaks instead of focusing on actual business. (John Bowker, Renee Bonorchis and Franz Wild, 2018)
The company has lost more than 11.3 billion euros, or more than 90% of the market value of the company. The bonds of the company also blew out to more than 14% and yhe credit rating of the company slashed badly.
The banks and the lenders of the company has suspended their credit of line. The company’s revenues and profits of the last three years needs to be restated. The company has outstanding debt of 10.7 billion Euros as on December 14 of which 4.8 billion relates to the European operations.
Story from the news
With the news of the accounting i
egularities, the company’s shares dropped by 90% on December 5’ 2017 which eroded R180 billion of market capitalization of the company. The company is facing several issues in different countries like Europe and South Africa and different investors has led to the all possible lawsuits on the company. (Cronje, 2018)
“The internal review of the accounting i
egularities by the management team and the PwC investigation are progressing and, whilst all involved are working as expeditiously as possible, the timeline for completion remains uncertain. The group is mindful of its obligations to keep the market and other interested parties informed of any material developments arising out of and the results of the review when in a position to do so. In the meantime, the group continues to work with its external...
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