Remuneration Policy

Topics: Principal-agent problem, Regulation, Information asymmetry Pages: 5 (1474 words) Published: March 26, 2013
‘There is too much accounting regulation’. In order to address this comment, this essay will focus on how theories of regulation apply to accounting practices and the necessity of accounting regulation.

First of all, according to Oxford Dictionaries, accounting means ‘the process or work of keeping financial accounts’. While regulation is ‘a rule or directive made and maintained by an authority’. (Oxford Dictionaries 2013) Since long ago the necessity of accounting regulation has been keep questioning. Efficient markets theory claim that accounting regulation is not necessary since the forces of supply and demand will help to maintain markets efficient by serving the society to the best and enhance the allocation of resources. Then, by applying this theory to the market of accounting information, the users will demand for accounting information and companies tend to supply such information, that’s why the market is always instantaneously getting relevant information. Plus, the free-market forces can determine the right accounting data to be supplied and suitable accounting practice to be used. However, this theory is rather unrealistic, when the accounting information is treated as public product and it is available to everyone. Further on, ‘free-rider’ problem such as ‘certain people getting benefit from something that paid by other people ‘will distorts the market. More problems coming up when users cannot decide on what they need and accountants not satisfy on procedures. All this causes inefficiency in accounting information market. At this point, government intervention is needed. Through regulating the procedure of accounting, they can help to resolve the outcomes and improve the market conditions. (Gaffikin 2005)

According to agency theory, the connection between owners and managers are known as principal-agent relationship. The manager as the agent will acts on behalf of the owner (principal) to achieve the principal’s goals. Atkinson and Feltham explain that agency theory considers mainly the stewardship demand for information. (Atkinson and Feltham 1982, 260) Accounting plays a vital role in providing useful information to interested parties for economic decisions making purpose. However, (Jensen and Meckling 1976, 305) argue that “agency problems deriving from conflicts of interest are general to virtually all cooperative activity among individuals, whether or not they occur in the hierarchical fashion suggested by the principal-agent analogy”. When there is self-interest issues, the information supplies by the agent might be inadequacies due to act of fraud and can lead to information asymmetries. Therefore, regulation in the form of accounting standards is needed to address the problem. Information asymmetry is frequently used to vindicate the need for accounting regulation. (Gaffikin 2005)

In addition, accounting regulation helps to identify the social, political and economic factors that related with the progress of accounting rules and also inspected the events that formed the different international regulatory frameworks. Under theories of regulation, public interest theory assumes that economic markets are imperfections and lack of well-functioning, which, if left uncorrected, may cause inequitable outcomes. Meanwhile market failure usually happens due to barriers to entry, information asymmetry, lack of competition or public-good products problem. These so-called market failures causing the price mechanism that regulates supply and demand broke down and then forcing government to take action. (Theories of Economic Regulation 2013) According to (Taylor and Turley 1986), “accounting regulation is necessary to ensure this market efficiency”. So, this theory suggested that government intervention in the accounting standard setting process is necessary when the markets are unable to regulate themselves. From this point of view, government intervention in marketplaces is essential,...
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