Regulation as Accounting Theory

Topics: Economics, Public Company Accounting Oversight Board, Rational choice theory Pages: 25 (8957 words) Published: April 5, 2011
University of Wollongong

Research Online
Faculty of Commerce - Accounting & Finance Working Papers 2005 Faculty of Commerce

Regulation as Accounting Theory
M. Gaffikin
University of Wollongong,

Recommended Citation
Gaffikin, M., Regulation as Accounting Theory, School of Accounting & Finance, University of Wollongong, Working Paper 9, 2005.

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University of Wollongong
School of Accounting & Finance

Regulation as Accounting Theory

Working Papers Series

M J R Gaffikin

School of Accounting & Finance University of Wollongong Wollongong NSW 2522 Australia Tel +61 (2) 4221 3718 Fax +61 (2) 4221 4297 eMail

Regulation as Accounting Theory
Michael Gaffikin Theories of regulation are discussed and compared. Some important issues relating to regulation as a substitute for research in creating theory as discussed.

Over the years there have been many arguments and debates over the necessity for regulation. Those who believe in the efficacy of markets argue that regulation is not necessary as market forces will operate to best serve society and optimise the allocation of resources. However, there are many who point out that markets do not always operate in the best interests of societies so some form of intervention in the form of regulation is necessary. This is obvious in many aspects of society. For example, if there were no road rules for drivers chaos would result on the roads. If there were no restrictions on some “economic” activities then there would not be any need of drug smugglers as the market would indicate the need (demand) for drugs which would subsequently be supplied. These are obviously extreme examples but it is not hard to realise that there are many instances were regulations protect societies from undesirable activities. In 19th century Britain there was considerable optimism over the benefits brought by the Industrial Revolution and it was deemed undesirable for governments to “interfere” with the operation of “pure capitalism”. Governments, therefore, pursued a policy of what was known as laissez-faire (from the French “let be”, or leave alone). However, people soon came to realise that this created many social ills and some of these are reflected in the novels of Charles Dickens, such as Oliver Twist, and the writings and work of other artists and social commentators. Working conditions were often dangerous and inhumane, such as making use of child labour and extraordinarily long working hours which led to considerable poverty and misery. Governments soon intervened and imposed the regulations on economic activity that were considered socially desirable. The issue of the regulation of accounting also became an issue, especially after the economic crash of the 1920-30s which, amongst other things, led to the search for accounting principles and theory described. A major objective of accounting is to provide information to interested parties who may not have access to complete (or the necessary) information to make economic decisions – they are at an information disadvantage so there is information asymmetry. This information asymmetry is often used to justify the need for accounting regulation. However, the regulation extends well beyond the information to the preparers of information. That is, the professional competence of those calling themselves accountants or auditors and generally believed to be the most able to provide and/or supervise the provision of financial information. Accounting and accountants are now subject to wide range of forms of regulation. There are laws governing the operation of corporations many of which involve the disclosure of financial information. In addition,...
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