Objectives
Define general purpose financial reporting in the
context of regulation;
Evaluate the arguments for and against the
existence of accounting regulation;
Evaluate the various theoretical perspectives
explaining why regulation is introduced;
Evaluate the claim that accountants are
powerful; and
Evaluate the claim that accounting can be
neutral and unbiased
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Financial accounting defined
A process involving the
collection and
processing of
information of a
financial nature for
the purpose of
assisting various
decisions to be made
by parties external to
the organisation.
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Users of financial reports
Users have different information
needs so not possible to
generate reports to meet
individual needs
Users include:
present and potential
investors;
lenders;
suppliers;
employees;
customers;
government and other parties
performing a review or
oversight function;
media
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Accounting knowledge required or
expected by users
Changes to accounting standards or new
standards affect the numbers within financial
reports (profits, net assets).
Users should ideally have sufficient knowledge
to assess effect of changes to regulations.
GPFRs designed for users who exercise due
diligence and who possess the proficiency
necessary to comprehend the significance of
contemporary accounting practices.
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Rationale for regulating financial
accounting practice
Initially introduced following the Great
Depression
argued that problems with accounting information
led to poor and uninformed investment decisions.
Competing views as to whether regulation is
necessary.
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Arguments in favour of regulation
Markets for information not efficient.
‘on average’ market efficiency arguments
ignore the rights of individuals.
Those able to demand information can
often do so as a result of power over
scarce resources, while those with limited
power are generally unable to secure
information without regulation (even though
the organisation may impact their
existence).
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Arguments in favour of regulation –
continued
Investors need protection from
fraudulent organisations producing
misleading information.
Regulation leads to uniform methods
thus enhancing comparability.
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Arguments against regulation
People will be prepared to pay for information to
the extent that it has use.
Capital markets act to punish organisations that
fail to provide information
no news deemed to imply bad news
Regulation will lead to oversupply of information as
users who do not bear the cost of supply tend to
overstate their needs.
Regulation restricts the accounting methods able
to be used so organisations may be prohibited
from using methods which best reflect their
particular performance and position.
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Theories used to describe the
motivations of regulators
Public-interest theory of regulation
regulation introduced to protect the public
Capture theory of regulation
although regulation introduced to protect the
public, regulatory mechanisms often
controlled by groups most affected by
regulation
Private interest theory of regulation
government not neutral arbiter and will
regulate based upon impacts to key voters
and campaign finances
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The power of accountants
Output of the accounting process impacts many
decisions about wealth transfers so the judgement of
accountants affect various parties’ wealth
The provision of accounting information leads to power
of knowledge for others
Accountants can give legitimacy to organisations which
may not otherwise be deemed legitimate (eg.
emphasising profits)
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The power of accountants –
continued
Profit measures ignore many social and
environmental externalities caused by
the reporting entity
eg. major adverse social consequences of a
cigarette manufacturer
Accounting does not objectively reflect a
particular entity – it creates it.
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Accounting regulation as an output
of a political process
The view that financial accounting should be
objective, neutral and apolitical can be challenged
will inevitably be political as it affects wealth
distribution within society
standard-setters encourage affected parties to
make submissions on drafts of proposed
standards
If standard-setters give consideration to views in
submissions, accounting standards and therefore
financial reports are the result of various social and
economic considerations
tied to the values, norms and expectations of the society
in which standards are developed
questionable whether financial accounting can claim to be
neutral and objective
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Regulation as an output
of a political process – continued
Compliance with accounting standards
usually seen to indicate financial
statements are ‘true and fair’
can accounts based upon standards
determined from various economic and
social consequences be deemed to be
‘true’?
Users may not be aware that financial
reports are the outcome of various
political pressures
should regulators consider preparers’
views given that standards are designed
to limit what preparers do?
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The role of professional judgement in
financial reporting
While the accounting treatment of many
transactions and events is regulated,
many others are unregulated.
Accountants expected to be objective
and free from bias.
Information generated should faithfully
represent underlying transactions and
be neutral and verifiable.
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The role of professional judgement –
continued
The consideration of economic and social
implications of possible accounting standards
implies bias in their development and
implementation
standard setters face a ‘dilemma which requires a
delicate balancing of accounting and non-accounting
variables’ (Zeff 1978, p. 62)
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