The paper 'Theories of Financial Accounting' is a great example of a Finance and Accounting Assignment. Dennis (2003) defines regulation as the imposition of limitations upon the preparation, form, and of external reports by bodies other than the report preparers or the individuals or the organizations for which reports are prepared. Based on this definition, regulation can be carried out by different bodies. There are three major theories of regulation. Public-Interest Theory The public-interest theory (PIT) promotes regulation as being created to protect the public interest. According to Mourik and Walton (2004), PIT proposes that regulation, supplied in reaction to public demand for the correction of inequitable and inefficient market practices is designed to benefit and protect society as a whole instead of certain vested interests.
Beikaoui (2004) supports this assertion by indicating that the PIT is supplied in reaction to the demand of the public for the correction of inequitable and inefficient market prices. The new regulation is usually developed in reaction to high profile accounting failures where it is contended that such regulation would help in preventing a repeat of accounting malfunctions and protect members of the public who have suffered a financial loss from such malfunctions.
Under the PIT, the regulatory body is presumed as a neutral intermediary that represents the interests of the public, one which does not allow own self-interest or self-interest of given groups or individuals subject to regulation to influence the rule-making. The rationale behind PIT is that government regulation is principally a re-distributive social welfare mechanism that seeks to correct the misallocations emanating from the failure of the market or political crisis. The regulatory process facilitates the promotion of price competition, for instance, the removal of restricted trade practices linked to abuse of power monopoly.
PIT views regulators as neutral and independent arbitrators reacting to the demands of the public to rectify inequitable or inefficient market prices. The tents of the PIT assume that markets are apposite to operate in an inequitable and inefficient manner if they are not regulated. The theory also assumes that regulation is costless and politicians perceive that the advantages linked to intervention counteract the detrimental effects (Mourik and Walton 2004). However, opponents of PIT assert that the theory fails as a strong theoretical blueprint because it does consider economic realities and does not appreciate that governments comprise of self-motivated interest groups.
The PIT underestimates the impacts of political and economic power influences on regulation. Private Interest Theory With respect to the private interest theory, regulatory agencies tend to be possessed by the groups that government intervention is initially created to regulate. The private interest theory maintains that regulatory intervention is a product of powerful interest groups mounting pressure on regulators to capture rents at the expense of diversified groups.
Akin to public interest theory, the private interest theory contends that regulatory bodies and their enacted regulations are originally established to protect the interests of the public in response to systemic failures (Mourik & Walton, 2004). However, the theory is different from public interest theory in that it unwinds the assumption that regulators are unprejudiced and envisages that regulatory mechanisms are in due course controlled by regulated parties. According to Belkaoui (2004), the private interest theory maintains that regulation is supplied in reaction to the demands of certain interest groups to maximize the income of their members.
The theory assumes that regulation emerges from individual or group actions that are motivated to maxims self-interests.
Belkaoui, A.(2004). Accounting theory. UK: Cengage Learning.
Bush, R., & Hunt, S.(2011). Marketing theory: Philosophy of science perspectives. USA: Marketing Classics Press.
Dennis, I.(2003). The nature of accounting regulation. UK: Routledge.
Masoom, K.(2013). The entrepreneur’s dictionary of business and financial terms’. USA: Trafford Publishing.
Mourik, C., & Walton, P.(2013). The Routledge companion to accounting, reporting and regulation. UK: Routledge.
Staubus, G.(2013). The decision usefulness theory of accounting: A limited history. UK: Routledge.