ACCOUNTING THEORY 1 Essay Example

Accounting Theory

The idea of having regulations to control economic activities in the society has been debated over for many years. Those who argue against have a strong believe that market forces operate for the best interest of the society. On the other hand, the supporters of the idea point out that markets do not always work for the best interest of the society and therefore, some form of intervention in form of regulations is necessary (Gaffikin, 2009). According to Deegan (2009), regulation is defined as the prescribed rule or authoritative direction that determines how activities are carried out.

There is wide range of forms of regulations available for the accounting profession as well as the accountants. They include laws that govern the disclosure of financial information of an organization, taxation laws, and those that determine how professional associations are created and operated (Gaffikin, 2009). In evaluating various reasons for the development of regulations of economic activities over the last forty years and their impact on the financial accounting practice, the paper first discusses the various forms of regulations in the profession, reasons for the changing role of the accounting profession, standard setters and regulators over this period. It goes further to evaluate the various models of financial regulation and finally analyses the role of conceptual framework on regulatory development.

According to ICA (n.d), the regulation of the accountancy profession is necessary in protecting the public in situations that seem too complex with an aim of keeping their interests in balance. The regulatory regime within the accounting profession involves the government, oversight mechanisms and the profession itself (self regulation). In the UK for instance, the government controls the accountancy regulatory framework that it had put in place. It also delegated some statutory powers to the Financial Reporting Council (FRC — which acts as an advisor to the government on important legislative changes) to ensure effectiveness in the systems, as part of their responsibility.

Self regulation of the accountancy profession in the UK is done through various CCAB bodies such as ICAEW. These bodies have the primary regulatory responsibility of supervising their members who act in their professional capacity in maintaining professional standards of accountancy (ICA, n.d). They also act as professional regulators in relation to audit to ensure that their members comply with the legislative requirements. Specifically, the ICAEW has a direct responsibility for: education and entry requirements, professional conduct requirements, eligibility to participate in public practice, eligibility to perform reserved activities, and dealing with professional misconducts by their members.

The oversight mechanism role in the UK is carried out by the Professional Oversight Board (POB) which is an organ of the Financial Reporting Council (FRC). According to (ICA, n.d), it has three main roles in audit and accountancy: overseeing how professional accountancy bodies exercise their regulatory duties and responsibilities over their members; overseeing the supervision of the recognized supervisory bodies (ICAS, ICAI, ICAEW, ACCA and AAPA), recognizing these accountancy bodies and offering audit qualifications; and have the statutory power to monitor the quality of auditing function in relation to various entities through the Audit Inspection Unit (AIU). In addition, however on non-audit areas, the POB has the responsibility to give recommendations on training, education, continued professional development, professional conduct as well as discipline.

According to Deegan (2009), there has been emerging trends in the accountancy profession due to the increased business complexity and increasing regulations imposed on the organizations. For instance, there is an increasing demand for technical skills since the technically specialized roles in the accountancy profession are becoming common (ACCA, 2007). The demand for finance professionals specializing in financial analysis and risk management has been high due to the increased competition between across the corporate and public sectors. Besides, the increasing value-for-money initiatives over the past have driven businesses into a better understanding of the complexity of the financial activities and processes. Financial reporting has, therefore became more specialized to cover the technically diverse areas such as compliance with pensions solvency, financial reporting standards and corporate governance legislation in order to satisfy the greater demand for public transparency and accountability (ACCA, 2007).. The traditional auditing services had expanded into various areas and thus requiring specialized finance professionals to deal with risk management and tax planning issues as well as tax implications involved in cross border and international trade activities.

Such major changes in the profession have led to accountants being transformed into from being information processors into strategic business advisors in order to achieve market differentiation rather merely seeking closure. Gaffikin (2009) argues that senior levels in the organization require greater levels of entrepreneurial flair and commercial instinct from financial professionals and thus accountants are moving out of their traditional domain of finance and becoming more actively engaged in strategic decision making, but still using their financial skills.

The accountancy profession has also changed due to rise in information technology and change in the economic environment (Deegan, 2009). Rise in technology, for instance, has led to the emergence of a knowledge-based economy from a manufacturing one and changed how the businesses are carried. Businesses started relying more on technology since it provided more tools that increased efficiency in various businesses. Gray & Hamilton (2006) propose that the traditional accounting jobs such as taxation, bookkeeping and auditing became minimized and the accountancy profession has expanded into using accounting software to do the accounting work. The traditional paper work financial reporting has been abandoned and computers have been used to generate reports and help accountants in both tax and auditing decision making.

Similarly, the accounting standard setting and regulations have been affected by competing economic interests. Albrecht (2010) argues that the economic consequences have affected the regulatory landscape bringing adverse effects on the accounting standards. The affected parties lobbied the Financial Accounting Standards Board (FASB) to consider their interests. Pitt (2002) argues that the standard setters and regulators such as the Securities Exchange Commission (SEC) and FASB are there to protect the interest of the public, and thus, they should change their default position in search for the best accounting standards. To solve numerous corporate scandals in the US, for instance, the Sorbenes Oxley Act of 2002 was enacted to bring changes on how corporate governance and financial practice are regulated. The role of regulators and standard setters therefore changed to incorporate deterring and punishing of individuals or corporations engaged in corrupt practices.

Various models of financial regulations have been put in place to organize financial firms and their activities in the financial industry. According to (Herring & Litan, 1995), there are two models in the world markets that can be adopted for financial regulations: functional regulation and institutional regulation. Functional regulation involves the use of separate regulators to oversee various types of financial companies. However, many countries have moved away from this model due to the fact that financial markets are mostly interlinked and companies are becoming more promiscuous and thus, cannot work more effectively. The model depends on the kind of business the firm does and is more common in the United States. According to (Herring & Litan, 1995), functional regulation is more specialized and therefore seen to be more sensitive to specific features of a given business and thus posing lower barriers to new entrants. He argues that the new entrants serve as a good source of innovation and thus may contribute to the dynamic efficiency of financial system.

On the other hand, unitary model involves an institution regulating its own finance sector. This model is also termed as institutional approach since an institution performs some of the functions of a banking firm and they are subject to bank regulations (Herring & Litan, 1995). The approach is more common in the United Kingdom, Japan, German and South Korea. Institutional and functional approaches contrast and thus creating substantial competitive market tensions between various countries. This demands for international harmonization of the regulations in order level the international playing ground.

Due to various problems associated with standard setting, conceptual framework and accounting theory was developed to correct and provide better ways of setting standards, increasing the confidence in financial reporting as well as the understanding of financial statements (Deegan, 2009). Riahi-Belkaoui (2004) regards it as a constitution for standard setting process. This guide helps in resolving various disputes as they arise in the process of setting standards by narrowing down the question as to whether specific standards are in line with the conceptual framework or not. The conceptual framework instituted by FASB would guide the Board in establishing accounting standards; determine the bounds of judgement in preparing financial statements; provide a frame of reference for resolving accounting issues in the absence of specific promulgated standards; and enhance comparability by decreasing the number of alternative accounting methods (Riahi-Belkaoui, 2004). According to Allen & Ramanna (2010) the IASB version, Framework for the Preparation and Presentation of Financial Statements belonged to a family of conceptual frameworks in countries where accounting standards are set by various bodies in the private sector. The conceptual framework confers legitimacy on private sector standard setters who lack the legal authority. They argue that the conceptual frameworks were basically developed by accounting standard setters to identify ‘good practice’ from which various principles can be derived inductively while adhering to conceptual coherence.

References

ACCA. (2007). A changing profession? The evolution of accounting roles, skills and career aspirations. ACCA Insight Series. Retrieved from http://www2.accaglobal.com/documents/changing_profession.pdf

Albrecht, D. (2010, January 6). Economic consequences and the political nature of accounting standard setting. The Summa. Retrieved from http://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/

Allen, A. & Ramanna, K. (2010). Are Democrats conservative? Towards a theory of the role of standard setters in standard setting. Working Paper 10-105. Harvard Business School.

Deegan, C. (2009). Financial accounting theory (3rd ed). Sydney: McGraw Hill.

Gaffikin, M. (2009). Regulation as accounting theory. Working Papers Series. Australia: Wollongong.

Gray, J. & Hamilton, J. (2006). Implementing financial regulation: Theory and practice. New York: John Wiley and Sons.

Herring, R. & Litan, R. (1995). Financial regulation in the global economy. London: Brookings Institution Press.

ICA (n.d). Structure and regulation of the accountancy profession. Business and Finance, 315-338. Retrieved from http://financial.kaplan.co.uk/Documents/ICAEW/Chapter_11.pdf

Pitt, H. (2002). Public Statement by SEC Chairman: Regulation of the Accounting Profession. US Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/speech/spch535.htm

Riahi-Belkaoui, A. (2004). Accounting theory. Mason, OH: Cengage Learning.

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