The pros and cons of regulating corporate reporting: a critical review of the arguments Robert Bushman and Wayne R. Landsman*
Abstract — In this paper, we distil essential insights about the regulation of financial reporting from the academic literature. The key objective is to synthesise extant theory to provide a basis for evaluating implications of pressures on the regulation of financial accounting following the recent financial crisis. We succinctly lay out arguments put forth both for and against the regulation of corporate disclosure and standard-setting. We then examine current developments suggesting that accounting standard-setting is at risk of becoming entangled in a web of political forces with potentially significant consequences. The crisis has brought into sharp focus the reality that the regulation of corporate reporting is just one piece of a larger regulatory configuration, and that forces are at play that would subjugate accounting standard-setting to broader regulatory demands. Recent actions by the European Commission relating to IFRS 9 and proposed legislation in the US Congress to create a systemic risk council serve to illustrate this point. We conclude by discussing in detail the recent fair value debate as a case study of the way in which bank regulatory policy and accounting standard-setting decisions were jointly determined as a potentially socially optimal means to mitigate the effects of the financial crisis. Keywords: regulation; corporate reporting; politics
History attests to the influence of crisis and scandals as an impetus for regulatory intervention by politicians (Banner, 1997; Reinhart and Rogoff, 2008). After a series of scandals in the UK in the 1990s culminating in the collapse of Barings Bank, there was a dramatic shift in the structure of ñnancial regulation that consolidated regulation responsibilities under the auspices of the Financial Services Authority. A wave of financial scandals epitomised by the Enron debacle catalysed swift and sweeping ciianges to US securities regulations with the passage of the Sarbanes Oxley Act of 2002. Today, in the aftermath of the financial crisis of 2007-2009, financial accounting standard-setting finds itself drawn into the orbit of complex political processes focused on restructuring the regulation of the world's financial markets. The crisis has ignited woddwide debate on issues of systemic risk and the role played by financial regulation in creating and exacerbating the crisis. Proposals abound for how regulation of financial markets and financial institutions should be changed to mitigate the potential •The authors are at Kenan-Flagler Business School, University of North Carolina. This paper has been prepared for presentation and discussion at the Information for Better Markets Conference, sponsored by the Institute of Chartered Accountants of England and Wales, 14-15 December 2009. We thank Dan Amiram, Mary Barth, Elieia Cowins, Martien Lubberink, Brian Singleton-Green and Steve Zeff for helpful comments. Correspondence should be addressed to: Professor Robert Bushman, Kenan-Flagler Business School, The Unversity of North Carolina, CB #3490, Chapel Hill, NC 27599-3490, USA. E-mail: Bushman@unc.edu.
for such large-scale financial meltdowns in the fixture. The scope of regulatory issues under debate spans many aspects of the financial system, including the alleged role played by financial accounting standards in deepening the trajectory of the crisis. The crisis has energised politicians, regulators, and economists to scrutinise financial accounting standards as never before, creating significant pressure for change (see, e.g. G-20, 2009). Given mounting momentum for potentially far reaching regulatory change, this is an opportune moment to step back and carefiilly consider how to organise the analysis...