Group Ass AFA
There are essentially two views regarding the regulation of accounting information:
The ‘free-market’ perspective and the ‘pro-regulation’ perspective. Discuss each of
These viewpoints, providing at least three points of argument for each standpoint.
Why is there a need for the regulation of accounting information?
Accounting Information is the pearl of any organization. It is how a business provides its investors as well as other stakeholder parties’ direction towards a healthy economic decision in favor of the business. Regulation of these information and standardizing the process would lead to that organization solving the problem of ‘information asymmetry’. (Watts & Zimmerman, 1978)
The Free-Market perspective
The free market perspective to accounting regulation replicates the nature of a product in a market, where ‘demand’ and ‘supply’ plays significant roles. Accounting information is treated as any other normal good, where there is a level of demand from various users of accounting information such as stakeholders and supply by the companies and managers. These market forces result in organizations to decide on what level of quality is required in preparing their accounting information as well as the exact information required, by the demand (users). Three arguments relative to the free-market theory are as follows.
‘Market for managers’
The manager’s prior performance and experiences would influence the remuneration package he/she would demand in future at the given company or in a different place. When a regulation methods do not exist, it is believed that the managers will implement strategies and figure new approaches to create value for the organization. “Management’s self-interest on accounting standards is congruent with that of shareholder’s” (Watts & Zimmerman, 1978). This indicates the sheer performance ability of an individual manager. Hence information is believed to be of complete nature. Watts & Zimmerman also states that the marketplace would
The ‘free-market’ perspective and the ‘pro-regulation’ perspective. Discuss each of
These viewpoints, providing at least three points of argument for each standpoint.
Why is there a need for the regulation of accounting information?
Accounting Information is the pearl of any organization. It is how a business provides its investors as well as other stakeholder parties’ direction towards a healthy economic decision in favor of the business. Regulation of these information and standardizing the process would lead to that organization solving the problem of ‘information asymmetry’. (Watts & Zimmerman, 1978)
The Free-Market perspective
The free market perspective to accounting regulation replicates the nature of a product in a market, where ‘demand’ and ‘supply’ plays significant roles. Accounting information is treated as any other normal good, where there is a level of demand from various users of accounting information such as stakeholders and supply by the companies and managers. These market forces result in organizations to decide on what level of quality is required in preparing their accounting information as well as the exact information required, by the demand (users). Three arguments relative to the free-market theory are as follows.
‘Market for managers’
The manager’s prior performance and experiences would influence the remuneration package he/she would demand in future at the given company or in a different place. When a regulation methods do not exist, it is believed that the managers will implement strategies and figure new approaches to create value for the organization. “Management’s self-interest on accounting standards is congruent with that of shareholder’s” (Watts & Zimmerman, 1978). This indicates the sheer performance ability of an individual manager. Hence information is believed to be of complete nature. Watts & Zimmerman also states that the marketplace would
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