The paper "The Three Theories of Regulation" is a perfect example of a finance and accounting assignment. Over the years, arguments and debates have been made in regard to the significance of regulation. On the one hand, non-supporters of regulation belief in the stability of markets to operate on their own to best serve society, utilizing the allocation of resources. On the other hand, supporters of regulation argue against the stability of markets which they emphasize that do not often operate within the best interests of societies. In this case, some protective mechanisms in the form of regulation are perceived to be necessary to control the market as a way of ensuring that the best interest of societies is protected.
Regulation can protect societies from the many instances of undesirable activities in the market. Due to the economic crash of the 1920-30s which caused the need for having accounting principles and theories described below, accounting and accountants are currently subject to different forms of regulation. For example, laws have been put in place which governs the operation of organizations, particularly those involving the disclosure of any financial information (Gaffikin, 2005). The Three Theories of Regulation Public interest theory The theory advocates for the need to use regulation as a means to protect the public.
The assumption of this theory is that regulation body which in most cases it is the government, exists as a neutral arbitral of specifically the ‘ public interest’ , and thus cannot allow its own self-interest affect its rule-making processes. Therefore, the rationale for the public interest theory is to provide protection in the circumstances of an inefficient market. The regulation made based on this theory is aimed at providing equal benefit to all people or the society at large rather than certain interests.
It should be noted that the regulatory body is required to represent the interests of the entire society instead of protecting the private interests of the regulators. Capture theory The capture theory of argues that albeit using regulation to protect the public, the mechanisms used are subsequently captured or controlled purposely to secure the interests of a given self-interested group in society. Therefore, the justification for this theory is that the regulated often develop a tendency of capturing the regulator.
It means that the regulated endeavour to capture the regulator, making the rules subsequently required of the parties subject to regulation to follow more advantageous. Initially, the regulating body was expected to protect the public interest but now it has become difficult for the regulator to continue executing its mandate as an independent body. Economic Interest Group Theory (Private Interest Theory) With the economic interest theory of regulation, it is assumed that each and every person acts in his or her own self-interest, and thus both regulators and individuals that are regulated activities in their own self-interest.
The rationale for this theory, therefore, is that regulators will focus only on favouring the outcome the will specifically benefit them, for instance, re-electing them in the office for the positions they hold in an organization. Basically, the theory assumes that groups will unite to protect specific economic interests yet groups conflict with each other. As a result, the government may be required to pass legislation through which a group will benefit at the expense of others.
The idea of public interest is not addressed in this theory, and thus both regulators and all other parties seem to be motivated by their own self-interest (Deegan & Rankin, 2006).
Deegan, C & Rankin, M., (2006). Financial Accounting Theory: Chapter 3: The Regulation of Financial Accounting. McGraw-Hill Australia Pty Ltd.
Deegan, C., (2011). Chapter 5: Normative Theories of Accounting 1:The Case of Accounting for Changing Prices and Asset Values, pp.157-203.
Godfreyô, M.J & Langfield-Smith, A.I.,(2005). Regulatory capture in the globalization of accounting standards. Environment and Planning 37, pp.1975 -1993.
Gaffikin, M., (2005). Regulation as Accounting Theory. Research Online. University of Wollongong.
Lunt, H., (2009). Fundamentals of Financial Accounting, CIMA official learning system. Elsevier.
Ryan, B.J., (2001). Measurement in financial accounting: critical support for historical cost. Research Online. University of Wollongong.