Regulation of Financial Accounting Being Political in Nature - Assignment Example

REGULATION OF FINANCIAL ACCOUNTING Name: Course: Professor’s Name University Name City, State Date due Part A Argument for regulation of financial accounting being political in nature The European Union entered into an agreement to adopt unified accounting standards that would help boost investments in the European Union countries. The commission announced the move to standardize and regulate the International accounting standards (IAS). Reliability, transparency and comparison were the main reasons as to why the Union proposed the unification of reporting through the regulation of the IAS. However, it is not possible for a given market to control itself, thus the government and other regulatory bodies have to be central in regulating the market. The European Union was a body that was created by a number of countries that were colonized by Britain. Nevertheless, it is important to note that there is more than reliability, transparency and comparison in the setting up of the IASs. Since the regulations are mostly set by those by bodies that are given power by those in authorities, the IASs thus have a hidden political and legal agenda. Similarly, before the regulations and standards are enacted into accounting laws, they require to be approved by those in authority. Where those in authority have the opinion that the new standards will be disadvantageous to them in most cases fail to approve them into laws. According to Nobes and Parker, (2004), in most cases, the European union fails to endorse advanced reglations that are usually advanced frequently by the international bodies without having them to be in control of the issues. It simply means that the the European union is unwilling to given the accounting body the approval to make new standards if they are not available to consider the details provided by the new IFRSs [Nob04]. The regulation of financial accounting standards have been politicised as argued by Ball, (2006) in the move by the European Union to set up a committee of eleven members who comment on each of the new standards before they are approved [Bal06]. Whether the adoption of Internal Financial Reporting Standards (IFRS) in different countries are necessary for the generation of ‘reliable’ and ‘comparable’ financial information. As the world increasingly becomes a global village, there has been an increased need to provide international financial and reporting standards that are acceptable and reliable all across the world. With an increase in cross board investments, there has been an increased demand for accounting standards to be regulated to suit all the practices. Most countries that have been recently industrialized have been using the international accounting standards as part of their national requirements. These countries have had a growing need for reliable financial statements and information that meets the all the requirements of the ends users for the domestic and international providers of capital [Cha07]. Continuous research has over the years been conducted on by the financial accounting standards board staff, the IAS setting board and the foreign national to ensure that the standards provided by the study are credible, reliable and comparable by all users around the world. For this reason, Irvine (2008, p. 127) argues that the emerging economies need to adopt the IFRS standards and western accounting technologies in order to gain credence in the global capital markets. Given the process that is involved in developing the accounting standards, all possible shortcomings in the standards are eliminated to make them reliable and comparable as provided by the European commission’s statement in 2002. The constituents involved in the European Union drafting of standards provide their submissions on exposure drafts so that they can have their reports unified so as to harmonize the accounting practices around the world [Irv081]. Benefits that flow from the adoption of the international Financial Reporting Standards (IFRS) on a country Since the European Union has set these standards to be adopted and used globally to provide financial information to the end users, its adoption in any given country will ensure that the results provided by each of the countries are similar and understandable by all the end users. Since most of the investors are foreigners, the unification of the standards ensures that the reporting is done in ways that they understand and that the reports reflect a true and fair value of the different companies in such a country. Having achieved this, the investors can make rational decisions on the investments that they should undertake. The adoption of the accounting standards facilitates the achievement of efficiency and flexibility in reporting and in usage. Financial reports are prepared the same across all the organizations. It offers the end users such as the investors an opportunity to compare the financial results of different companies for decision making purposes. With the advancements in technology, software have been developed to provide companies with simplifies means through which they can prepare and present their financial reports and in ways that are in agreement with the IFRSs regulations. Financial reports prepared in this manner can be used by anyone all around the world. Better decisions are made on where to invest and where not to invest as the investors have a better understanding of the performance of the organization. Perceived disadvantages of the adoption of International Financial Reporting Standards (IFRS) on a country The major undoing of the International Financial Reporting Standards is the high cost of adoption of the standards. In as much as developing personal standards could be hard for a given country; the adoption of the International Financial Reporting Standards signifies a large cost that is incurred by the adopting country. It is most possible that before the adoption of the new International Financial Reporting Standards, that given country has its own accounting and reporting standards. The adoption of the new standards would thus force the organizations to seek training on how to report using the new standards and incur extra costs of adoption of the new accounting technologies [IFR13]. Another disadvantage perceived from the adoption of International Financial Reporting Standards is that the United States has not adopted the standards. Instead, the United States still places its reliance on the accounting standards that were issued and documented by the FASB. The major problem that comes as a result of this difference is that the United States represents a significant share of the world capital market, thus its lack of involvement the of International Financial Reporting Standards limits the global acceptance to the standards [IFR13]. Part B Public interest theory perspective The public interest theory entails the regulations that have been put in place to benefit the society as a whole rather than benefiting the individuals in the society. The private interests of the regulators are not take into consideration in this case, rather, the regulators considers the interests of the society as they set the regulations. The public interest theory was adopted due to public demand on grounds that the markets could regulate themselves. In this case, the regulators who are the government come in to regulate the market and to correct the inefficiencies that exist in the market. it should however be understood that the regulators interventions should be done in the best interest of the public [Bak05]. In most cases, the companies that operate within a given society have an internal cell of responsibilities that they have placed upon themselves as controls meant for the betterment of the environment. The controls popularly known as corporate social responsibility ensures that the companies do not undertake activities that harm the environment. Such regulations usually place emphasis on the steps that are taken to control the harm made to the environment as well as improving it but rarely identify the adverse effects that their activities have on the environment. The public interest theory thus seeks to place disclosures on such matters and instil a proper sense of responsibility by the organization. Although the new regulations placed could bring protests within the business, their long term effects are good on the environment. Capture theory perspective The capture theory is a theory that seeks to capture or to take charge of the regulators. It reduces the undue advantage of the regulators as they make rules and ensures that the rules released pose an advantage those all those who are subject to the new regulation. The capture theory perspective was advanced since the public interest theory had begun to receive challenges arguing that the regulations were not working for the interest of the society. The capture theory was thus advanced for those being regulated to take charge of the regulators as the citizens sought to play a part in the economic and market regulation processes [Hel06]. According to Clarke, et al., (2003) the government and the companies had begun to cooperate to satisfy their own interest at the expense of the society. The government through the coalitions with the companies would receive contributions for their campaigns while the companies would capture the regulations and thus their interest would be achieved and the public would end up losing. In the short run, the environment would be continuously improved and thus the public would be on the gaining end from the activities of the companies. However, after the capture theory sets in, in the long run, the regulations will stop being effected and the regulated would end up losing. Collusion between the regulators and the regulated would have the companies continue with their activities without consideration of the corporate social responsibilities that they have set [Cla03]. Economic interest group perspective The economic theory was first advanced by Stigler in an article in 1971 as was then regarded as the positive theory of regulation. The thinking was later improved by his student, Peltzman into the economic theory it is today. The theory assumes that the regulators who are in most cases the political actors in a given society are the utility maximizers. The economic interest group works in contrast with the capture theory. Unlike the capture theory which suggests that regulations should be done by a narrow interest group to enhance monopoly, the economic interest theory suggests that competition should be open for a number of groups to compete for the monopoly. The economic theory thus encourages positive competition among the interest groups which in turn makes it serve the interests of the private sector for politically effective groups. The theory works on the assumption that the economic interest groups are usually formed for the protection of the economic interests. According to Morgenstern, et al., (2002) the companies continue to focus on their financial success as the environmental and social accountability are neglected. Initially, the legislations set will work for the best interest of the environment and the public as a whole. In the long run, when the regulators and the companies collude, the environmental performance is reduced. The end result of such activities are pollution of the environment, bending of the regulations set, neglecting the corporate social responsibility and reduced observations of the safety standards, thus the company’s accountability will not be improved on [Mor02]. REFERENCES Nob04: , (Nobes & Parker, 2004), Bal06: , (Ball, 2006), Cha07: , (Chand & White, 2007), Irv081: , (Irvine, 2008), IFR13: , (IFRS Foundation, 2013), Bak05: , (Baker, 2005), Hel06: , (Helm, 2006), Cla03: , (Clarke, et al., 2003), Mor02: , (Morgenstern, et al., 2002), Read More