Economic (Private) Interest Perspective on Accounting Regulation Essay Example

ECONOMIC (PRIVATE) INTEREST PERSPECTIVE ON ACCOUNTING REGULATION

Economic (Private) Interest Perspective on Accounting Regulation

Economic (Private) Interest Perspective on Accounting Regulation

It is important to initially understand what the Economic Interest Theory and Regulation involves so as to understand the private interest theory involves. This theory advocates that the regulations are a set of policies that are driven by the forces of demand and supply [ CITATION Den14 l 1033 ]. In this case, the government is on the supply side whereas the interest groups are on the demand side. The therefore suggests that regulations are established by the industry and the main objective for the establishment of the regulations is to create advantages to the concerned industry.

The Economic Private and group theories, stress on the fact that regulations serve the interests of single or several groups which at times include the regulator .This private interest group, is founded on some assumptions [ CITATION Dee06 l 1033 ]. The assumption is that all the actors that are involved, are rational and self-interested maximizers of utility and this is likely to influence the course of their action, relative to the content and form of regulation. This is different from the public interest theories which is mainly based on the assumptions that the regulator tends to formulate rules and regulations for the sake of the public interest [ CITATION Den14 l 1033 ]. The regulator in this case is seen as an expert operating in a not so interested way to benefit the society.

The private interest group theory assumes that in a market, different entities have the same interests. These similar interests is what will make various entities join together and force the government to formulate certain legislations that will enable them attain economic benefits. In virtual competitive market, there exists conflict between different groups and therefore what is beneficial in one group will probably be a cost to the other group [ CITATION McL01 l 1033 ].

A number of factors can be used to determine the behaviour of various agents on the response of a regulatory action, this can be economic, capture or special interest. For example the capture theory has been used in the accounting literature to determine how accounting as a profession especially for the large accounting firms interact with various regulatory institutions and capture them to ensure the rules formulated in the latter favour them and their interests [ CITATION McL01 l 1033 ]. The capture is always achieved in various ways; one of which is always to influence the agenda of the regulator and to neutralise their enforcements steps.

The economic private interest group argues that in a free market, the accounting information should be treated as other goods and services. This means that the forces of demand and supply should be allowed to freely prevail so as to ensure that there is optimal supply of information and the various entities that are in the market [ CITATION Den14 l 1033 ]. They further argue that even if there was absence of regulation there are incentives for an organization to provide reliable information about its operation and the way it performs to the various parties outside the organization without which the cost of operation would rise.

The public interest theory further argues that regulation is likely to be supplied in response of the demand of the public for the main purpose of correction of inequitable market prices. Regulation should be put to benefit the whole society and not implemented so as to benefit individuals of a particular interest. The specific regulatory body should be a neutral arbiter that aims to represent the society in which it operates in rather lean on the private interests of the regulators [ CITATION Dee06 l 1033 ].

How the Australian Financial Reporting Regulatory Environment Impacts on the Provision of Useful Information for Users

The regulation of financial reporting is mainly designed to increase the Uniformity and quality of the corporate financial reporting. In Australia there are three regulatory bodies that are in charge with the regulation of the financial reports. These bodies are the accounting profession, the corporate legislation and the stock exchange. This is seen as a goal of protecting public interests through the prescribed regulations.

However, it is important to note that this regulation has affected the objective of financial reporting which is to provide useful information for the users and the public in general [ CITATION Hog03 l 1033 ]. Though there are groups that support this initiative thus referred to as “pro-regulations”, there are also other groups of persons that don’t support this initiative because of the disadvantages that come with it such as that stated above.

From the anti-regulation perspective, these regulations have impacted negatively in denying financial users this valuable information. The absence of information about an organization’s operations may lead to other parties, including the firm owners who are not involved in the daily management of the organization to make assumptions that the managers might be operating the business for one’s own benefit [ CITATION Hog03 l 1033 ]. The existence of less information is always likely to lead to higher cost of capital. To maximize the share value, managers are likely to enter into unethical contracts with the shareholders and the creditors of the organization so as to give optimal information about the company’s performance to the owners of the company thus leading to mangers having greater confidence to the shareholders and lenders when in real life, that is not the case [ CITATION McL01 l 1033 ].

This is likely to lead to great conflict between the external owners and the internal managers and the only mitigation to such as a conflict will be an audited financial reporting, better referred to as the private incentive to produce information.

The second issue relates to the “market related incentives for the marketing managers.” The managers’ performance in the past will impact on how much remuneration he or she is likely to command in the future periods and regardless from the present employer or any other employer [ CITATION Den14 l 1033 ]. Even in the absence of regulations, managers are likely to adopt strategies that will tend to maximize the value of the organization which they run. To highlight their performance, optimum amount of financial information is likely to be delivered.

The third argument is the managerial cost and benefit. Whereas the disclosure of financial information is always a major interest of the shareholders, it is likely to be the interest of the managers due to the regulation environment and thus there will be an organization of interests. Even with absence of regulations regarding reporting of the financial information, organizations will likely be motivated to disclose both the bad and good news about their financial positions. Managers are likely to incur reputational costs if they don’t disclose the bad news about the organization within the appropriate time [ CITATION Dee06 l 1033 ].

Finally, it is also important to understand that financial accounting affects the distribution of wealth in the society. Therefore, if the due process is not followed and the views of the various parties that are involved are not taken into consideration, then consequences might be that the very existence of the regulatory body will be challenged. The set accounting standards are always as a result of various economic and social considerations thus are strongly tied to the norms, values and the expectations of the society in which the very standards are developed [ CITATION McL01 l 1033 ].

Recommendations that would reduce the adverse effects

The best recommendation that would solve all these issue that relate to financial regulation is to let the market forces the type of information that should supplied which one is not to be supplied, this will significantly reduce the conflict of interests that mainly arise as a result of regulations.

Role and Power of Accountants in Society

According to the Economic Interest groups, accountants play a crucial role in the running of every industrial organization and hence the society, since they hold the key to make or break the organization, hence putting the society in balance. Without an accountant, an organization cannot work effectively [ CITATION Dee06 l 1033 ]. The accountants and the accounting systems that provide service to the society can be broadly grouped into two groups and that is accountants in the public practice and accountants in employment.

Accountants in the public practice refer to the accountants who offer their services for the main purpose of conducting financial costing, auditing, designing the accounting system and rendering other related professional services for a fee. Accounts in employment on the other hand refer to accountants that are employed in business or non-business entities. Non-business entities refer to those institutions or organizations that work for non- profit motive or for the benefit of the society [ CITATION McL01 l 1033 ]. The accountants mainly provide information on Tax returns, performance evaluation, investment decisions and financial reporting.

There are four major roles of accountants in industrial organizations and these are; maintenance of books of accounts, Auditing accounts, taxation and Financial service.

Maintenance of Books of Accounts

In this case, the accountant is involved in the systematic record keeping of records of the transaction carried out by an organization, in the normal course of its operations. An institution cannot operate effectively without recording all the transactions. Every management wants to determine the profit or loss of a particular year. Knowledge of the financial position of the organization is also crucial for the future planning of the organization. Some of the advantages that are associated with proper book keeping are; it enhances planning, improves decision making, co-ordination, communication, controlling and comparative study [ CITATION Dee06 l 1033 ].

Auditing of Accounts

An accountant can at times also play the role of an auditor in an institution. Auditing mainly involves inspecting the accounting data so as to determine the accuracy and reliability of the accounting statements and report [ CITATION Hog03 l 1033 ]. Auditing can be of two types, and these are statutory Audit and Internal Audit. Statutory audit, refers to that audit that is compulsory for any institution where as Internal audit is applicable in large institution.

Taxation

This is the third role of an accountant and that the accountant has the proper knowledge of the state of the client’s account. Given the fact that the accountant is able to present his or her case effectively before the tax authorities, then the client is also able to assist the client in tax reductions by helping the institution make proper and effective tax plans [ CITATION Dee06 l 1033 ].

Financial Services

This is the final role of the accountant, having understood all the other roles, the accountant is in a position of properly advising the management on matters regarding financial matters. He or she can advise on areas that regard the most suitable source of finance and where it is right for the institution to invest [ CITATION Den14 l 1033 ].

References

Hoggett, J., Edwards, L. & Medlin, J., 2003. Accounting in Australia. Milton, Qld: John Wiley & Sons Australia.

McLeay, S. & Riccaboni, A., 2001. Contemporary Issues in Accounting Regulation. Boston: Springer.

Deegan, C. M., 2006. Financial Accounting theory. North Ryde: McGraw Hill Australia.

Dennis, I., 2014. The nature of accounting regulation. New York: Taylor & Francis Group.

Hansen, T. . B., 2011. Lobbying of the IASB: An Empirical Investigation. JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH, 10(2), pp. 58-75.