Accounting Regulation And Conceptual Frameworks

Topics: Balance sheet, Asset, Intangible asset Pages: 8 (5291 words) Published: March 7, 2015
Accounting Regulation and Conceptual Frameworks,
Traditional Arguments for Accounting Regulation – 1) Prevention of fraud – Enron 2) Comparability 3) Asymmetrical information – big institutional investors have more information than small retail investors. Beaver (1981), strongly believes in pro market lobby, market solutions are always the best, we should never regulate. – Very influential academic – Highly reputable Traditional Arguments against accounting regulation 1) Capture theory – person who is meant to be regulating is really on the side of the company they should be regulating. Leads to industries regulating themselves. 2) Public interest – Accounting is not just a purely economic metric it deals with people and therefore should be a political process. 3) Self Interest – Regulators, politicians should in the interest of the public good but in practice other influences may reduce or prevent this. Economic Arguments For Accounting Regulation – 1) Particularly applicable during ‘free market’ breakdown, when certain individuals receive the ‘benefit’ and others receive the ‘cost’individuals can receive the good without paying, thus price system cannot function, ‘Public good’ arises when there is an externality, an instance of market failure, in public goods – 3 consequences arise during externalities, 1 Free riders, the people who use the information but have not necessarily paid for the information. 2 Moral Hazard, people not fully disclosing the true amount of information you need or someone who says they need all the information. Producing information is expensive so an economic argument for accounting regulation. 3 Too much or too little information may lead to incorrect investments which results in an inefficient solution to economic gross across the market. So where we don’t have markets working efficiently a solution to that is regulation. Beaver understood and accepted they were economic reasons for accounting regulation. Economic Reasons against Accounting Regulation- 1) Let the market decide, it is up to the investor, Beaver (1981), strongly believes in pro market lobby, market solutions are always the best, we should never regulate. – Very influential academic – Highly reputable. – Says there is no need to regulate because the private sector can deal with issues far better. Also in terms of fraud, he says you are always going to get fraud and that it is expensive, but then on the other hand so is regulation. 2) Supply and demand with determine how much information, in terms of asymmetrical information is exposed to the market. 3) Market mechanisms ‘free market’ argument. Even if there is no regulation, the economic forces operate to motivate managers to provide information to investors. 4) People will pay for the information according to their circumstances 5) Mimic market leaders – if a large firm trades on an informed basis small investors could copy their investments in the knowledge that they had paid for information and had the company’s board into the office to discuss the future. 6) Take a long term view, also known as a buy and hold strategy as historically shares have outperformed other asset classes. Conceptual Frameworks

A CF is a theory of accounting prepared by a standard setting body against which problems can be tested objectively. A CF deals with fundamental financial reporting issues such as the objectives and uses of Financial Statements. The FASB definition: A conceptual framework is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to constituent standards and that prescribes the nature, function and limits of financial statements. The CF covers items such as; users, what are assets and liabilities, key definitions, key financial statements, who should prepare them, who are the users. Pros – Reduces political influence helps provide defences against political pressure. – Standard setters more accountable and widens the debate, everything is...
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