Overview of Regulatory Environment for Financial Reporting
Question:
Discuss about the Contemporary Accounting for Market Regulations and National Law.
A regulatory environment for preparing the financial statements and reporting is essential for ensuring that the needs of the financial statements users or the accountants in the businesses are met with the least of the information of the transaction. This also enables make sure that all the information obtained in the relevant economic arena is consistent and comparable. Due to the global investment and growth in multinational entities, this field is an increasing international one. Moreover, it increases the confidence of the users in the process of financial reporting and regulates the company behavior and directors towards their investors (Campbell, 2016). The standards of financial reporting are not sufficient to achieve the organizational goals and meet the legal and market-based regulation. There are many elements of regulatory environment of accounting and reporting that differs from county to country, a basic regulatory structure must be according to the Market regulations, National law, National financial reporting standards and the rules of Security exchange.
The regulatory environment for accounting and financial reporting varies, according to Marti & Scherer (2016) a clear description has been given for determining the environment of U.K. The accounting environment of U.K has its own national financial reporting authority, the Accounting Standards Board that is a part of the Financial Reporting Council issues the financial reporting standards. The Companies Act 2006 is the main legislation influencing businesses in the UK. However, there are also many other regulating body of UK, EU and even US legislation like the Sarbanes Oxley Act that affect the countries accountability. There are also various regulatory systems that are industry specific and affects the accounting process in the UK like the Financial Services Authority. The Financial Services Authority is a body that aims to obtain the public accountability of the financial services industry. Moreover, the London Stock Exchange for companies also provides regulations and provides the criteria for quoting the values of shares in the share market.
Similarly, the regulatory environment of Australia aims in promoting integrity and confidence within the investor in the economy, capital markets and corporations. The consistent financial reports prepared in accordance with legislative requirements of the state (Woolcock 2016). In all Australian states and territories, the same standards of reporting apply. Australian Businesses are required to report to the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC) and/or the Australian Securities Exchange (ASX).
Financial Regulatory Framework in Australia was introduced on 1st of July 1998 as recommended by Financial System Inquiry. It consists of three agencies with functional responsibilities:
- The Australian Prudential Regulation Authority (APRA),
- the Australian Securities and Investments Commission (ASIC),
- the Reserve Bank of Australia (RBA),
The APRA is an integrated prudential regulator that takes care of the banking institutions, general insurance and superannuation. It develops prudential policies that balance financial safety and efficiency, competition, contestability and competitive neutrality (Fratianni, Willett & Wihlborg, 2015).
The ASIC is a body that administers the range of legislative provisions relating to financial sector intermediaries, financial markets, and financial products, that includes, insurance investments, superannuation and deposit-taking activities (Leuz, & Wysocki, 2016). It aims to protect consumers and markets a from unfair practices, deception, manipulation. It promotes confidence in participation of the financial system by consumers and investors.
Regulatory Environment in the UK
The Reserve Bank of Australia is responsible for monetary policy and for overall stability in the financial system. It has no obligation to protect bank depositor’s interests or other creditors of banks. Its task is to deal with threats to financial stability that can manipulate the economic activity and confidence of investor and consumer.
The basic problem in the regulatory environment in Australia is that the supervisory staff spend a lot of time on data collection and preparation, and lot of time is wasted to obtain the usable data. Management cannot get the data it needs when it needs it. Where there are still manual processes, the potential for human error exists and a risk of data loss exists. The communication flow with regulated institutions can be unstructured and lacks full traceability.
On the other hand, the bodies that regulate the financial environment of U.K includes for informative and reliable reporting contributes to this commitment. It includes the implementation of international accounting standards and international standards on auditing and requires an ongoing dialogue with UK stakeholders and EU or international regulators on measures to encourage market stability. It is vital that the UK economy has efficient and effective capital markets and there is confidence in the corporate framework through greater transparency.
On pointing out the issues faced by the accounting regulations in U.K., it can be said that the alternative solutions are neglected. Moreover, there are more than one regulatory body that can create conflicts and confusion.
IFRS stands for International Financial Reporting Standards. It is an internationally accepted accounting framework the accountants organize and report financial information. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP (Cohen & Sundararajan, 2015). In Australia the Australian Accounting Standards Board (AASB) has published the acceptance of Adoption of International Financial Standards in Australia’ that finds that Australia’s adoption of IFRSs has been relatively smooth for most Australian business entities. In 1 January 2005, IFRS was adopted in Australia and in 2015; the AASB commenced a review of the adoption to assess the ongoing relevance of IFRSs to Australian profit and non-profit enterprise enterprises. The key reason for IFRS adaptation in U.K is that the process is smooth for most sectors and it is an appropriate basis for setting the standards developed by the AASB, however, further modifications are needed to as regards the quality and the cost-efficiency of reporting. In U.K, the European Union adopted the IFRS in June 2002 as an IAS Regulation required by European companies listed in the U.K securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRS.
The Regulatory capture theory was proposed by a Nobel laureate economist George Stigler, which states the method in which regulatory agencies eventually come to be dominated by the industries who are charged with regulating. Regulatory capture theory takes place when an agency of regulation is formed to act in the public’s interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public.
The theory states that regulations are influenced to fit the requirements of those affected by them. It suggests that in a given period of time regulations serve the interests of the industries concerned. The advantage of the theory is that it explains the main intentions of designing regulations. The individuals to be affected by the regulations are directly involved in the formulation of these regulations (Christensen, et al., 2015). Therefore, there is adequate representation of the politicians as well as the interest groups since the regulations are drawn for their needs (Christensen, Lee, Walker, & Zeng, 2015). However,
Capture theory lacks in clarity as to how an industry can subject an agency to its interests but cannot resist its formation. Regulations seem to favor the consumers rather than the industry.
Regulatory Environment in Australia
Regulatory capture is a form of government failure. Government failure or non-market failure is the imperfection in performance of the government (Grubel, 2014). It is a seeking of rent for acquiring a larger part of a total market’s wealth without creating any additional wealth for that market. When it exists, the interest of political groups or companies become more important than those of the public, which leads to a net loss to society. According to prof. Postner “Regulation is not about the public interest at all, but is a process, by which interest groups seek to promote their private interest… Over time, regulatory agencies come to be dominated by the industries regulated.”
Materialist capture or financial capture, in which the captured regulator’s motive is based on its material self-interest. This can result from bribery, revolving doors, political donations, or the regulator’s desire to maintain its government funding. These forms of capture often amount to political corruption.
Non-materialist capture, or cognitive capture or cultural capture, in which the regulator begins to think like the regulated industry. This can result from interest-group lobbying by the industry (Black, 2017).
Regulation is generally defined as legislation imposed by a government on individuals and private sector firms in order to regulate and modify economic behaviors. Conflict can occur between public services and commercial procedures, the interests of the people using these services and also the interests of those not directly involved in transactions governments, therefore, have some form of control or regulation to manage these possible conflicts. The ideal goal of economic regulation is to ensure the delivery of a safe and appropriate service, while not discouraging the effective functioning and development of businesses (Philippon, 2015).
Regulation can have several elements:
- Public statutes, standards, or statements of expectations.
- A registration or licensing process to approve and permit the operation of a service, usually by a named organization or person.
The theory does not provide a significant difference from the public interest theory. The theory suggests that the public interest is the beginning of regulations. This is a similar suggestion postulated by the public interest theory. Capture theory does not explain clearly how an industry can subject an agency to its interests but cannot resist its formation. Regulations seem to favor the consumers rather than the industry (Levin & Lo, 2015). The industries under regulations are required to offer services beyond their capacity. Excess regulations reduce the profits that industries make. For example, regulations on environment, labor, and many others make companies to reduce profitability.
Differences between capture theory economic interest theory and capture theory is that, the capture theory suggests that regulations are designed to fit the demands of those affected by them. On the other hand, the economic theory suggests that regulations are generated from the forces of supply and demand. The government is assumed as the supplier while the interest groups are assumed to be on the demand side of the argument.
The government should consider the interest of the individuals and organizations to be affected by the regulations. These groups should be involved in the decision-making concerning the formulation of the regulations (Li, Sougiannis & Wang, 2017). Regulations are designed to benefit those who are affected by them. The benefits may be negative or positive. The politicians as well as the interest groups benefit from the regulations. The theory is more inclusive since it ensures that all the stakeholders are involved in the designing of the regulations.
Conclusion
A regulatory environment for preparing the financial statements and reporting is essential for ensuring that the needs of the financial statements users or the accountants in the businesses are met with the least of the information of the transaction.The Regulatory capture is a form of government failure. Government failure or non-market failure is the imperfection in performance of the government. It is a seeking of rent for acquiring a larger part of a total market’s wealth without creating any additional wealth for that market. When it exists, the interest of political groups or companies become more important than those of the public, which leads to a net loss to society. Differences between capture theory economic interest theory and capture theory is that, the capture theory suggests that regulations are designed to fit the demands of those affected by them.
References
Campbell, J. Y. (2016). Restoring rational choice: The challenge of consumer financial regulation. American Economic Review, 106(5), 1-30.
Marti, E., & Scherer, A. G. (2016). Financial regulation and social welfare: The critical contribution of management theory. Academy of Management Review, 41(2), 298-323.
Woolcock, S. (2016). European Union economic diplomacy: the role of the EU in external economic relations. Routledge.
Fratianni, M., Willett, T. D., & Wihlborg, C. G. (Eds.). (2015). Financial regulation and monetary arrangements after 1992(Vol. 204). Elsevier.
Leuz, C., & Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), 525-622.
Levin, S. A., & Lo, A. W. (2015). Opinion: A new approach to financial regulation. Proceedings of the National Academy of Sciences, 112(41), 12543-12544.
Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), 31-61.
Li, S., Sougiannis, T., & Wang, I. (2017). Mandatory IFRS Adoption and the Usefulness of Accounting Information in Predicting Future Earnings and Cash Flows.
Gordon, E. A., Henry, E., Jorgensen, B. N., & Linthicum, C. L. (2017). Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), 839-872.
DeFond, M. L., Hung, M., Li, S., & Li, Y. (2014). Does mandatory IFRS adoption affect crash risk?. The Accounting Review, 90(1), 265-299.
De George, E. T., Li, X., & Shivakumar, L. (2016). A review of the IFRS adoption literature. Review of Accounting Studies, 21(3), 898-1004
Philippon, T. (2015). Has the US finance industry become less efficient? On the theory and measurement of financial intermediation. American Economic Review, 105(4), 1408-38.
Grubel, H. G. (2014). A theory of multinational banking. PSL Quarterly Review, 30(123).
Black, J. (2017). Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.
Doyran, M. A. (2016). Financial crisis management and the pursuit of power: American pre-eminence and the credit crunch. Routledge.
Cohen, M., & Sundararajan, A. (2015). Self-regulation and innovation in the peer-to-peer sharing economy. U. Chi. L. Rev. Dialogue, 82, 116.
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