Regulation Accounting
Financial accounting is quite heavily regulated in many countries, the level of regulation generally increasing the aftermath of the recent sub-prime banking crisis and high-profile alleged accounting failures at Lehman Brothers, Enron, WorldCom and other companies, it is nevertheless interesting to consider argument for and against the continued existence of regulation. It is useful to definition the regulation before consider various theories of regulation. The definition of regulation is a rule or principle governing behaviour or practice. Therefore, regulation is designed to control or govern conduct. There are two type of views, which are the free market perspective and the pro-regulation perspective.
A fundamental assumption underlying a ‘free-market’ perspective to accounting regulation is that accounting information should be treated like other goods, and demand and supply forces should be allowed to freely operate so as to generate an optimal supply of information about an entity. Watts and Zimmerman(1978) states there are private economics-based incentives for the organization to provide credible information about its operations and performance to certain parties outside the organization, otherwise the costs of the organization’s operations will arise. More specifically, the owners of the firm will assume that the managers might be operating the business for their own personal benefit rather than maximizing the value of the organization if absence of information about the organization’s operations. In the other hand, potential lenders are assumed to expect managers to undertake opportunistic actions with the funds the lenders might advance, and therefore in the absence of safeguards the lenders will charge the organization a higher price for their funds. Hence, the cost of attracting capital will increase and this will have negative implications for the value of the organization.
A fundamental assumption underlying a ‘free-market’ perspective to accounting regulation is that accounting information should be treated like other goods, and demand and supply forces should be allowed to freely operate so as to generate an optimal supply of information about an entity. Watts and Zimmerman(1978) states there are private economics-based incentives for the organization to provide credible information about its operations and performance to certain parties outside the organization, otherwise the costs of the organization’s operations will arise. More specifically, the owners of the firm will assume that the managers might be operating the business for their own personal benefit rather than maximizing the value of the organization if absence of information about the organization’s operations. In the other hand, potential lenders are assumed to expect managers to undertake opportunistic actions with the funds the lenders might advance, and therefore in the absence of safeguards the lenders will charge the organization a higher price for their funds. Hence, the cost of attracting capital will increase and this will have negative implications for the value of the organization.