please refer the attached documents
Accounting Regulation and Politics Topic 5b * * 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 * * ‘Free market’ perspective Accounting information should be treated like other goods, with demand and supply forces allowed to operate to generate an optimal supply Private economic based incentives ‘market for managers’ ‘market for corporate takeovers’ ‘market for lemons’ * * Private economic based incentives assumed that managers will operate business for own benefit and this is expected by shareholders and debtholders therefore in interests of management to enter contracts with shareholders and debtholders to constrain managers’ actions contracts often based on accounting information organisations not producing information will be penalised by higher costs of capital * * Private economic based incentives (cont.) Organisations best placed to determine what information should be produced dependant on parties involved and assets in place imposing regulation restricting available set of accounting methods decreases efficiency of contracting also assumed auditing will take place in absence of regulation - reduces risk to external stakeholders * * Problems in presence of many different parties May be too many parties for contracting to be feasible prohibitive cost of negotiation if different investors want different information costly to negotiate single contract with all investors as they need to agree information provided * * Market for managers argument Managers’ previous performance impacts on remuneration they can command in future in absence of regulation assumed managers encouraged to adopt strategies to maximise value of firm (provides favourable view of own performance) includes providing optimal amount of accounting information * * Assumptions underlying market for managers argument Managerial labour market operates efficiently information about past performance known by prospective employers and will be impounded in future salaries capital market is efficient effective managerial strategies reflected in positive share price movements * * Market for corporate takeovers argument Under-performing organisations will be taken over by another entity with the existing management team subsequently replaced therefore managers motivated to maximise firm value information produced to minimise cost of capital thereby increasing firm value assumes managers know marginal cost and marginal benefits of information * * Market for lemons argument No information viewed in the same light as bad information market may make the assessment that silence implies the organisation has bad news to disclose therefore managers motivated to disclose both good and bad news evidence that both good and bad news disclosed voluntarily - Skinner (1994) Assumes the market knows that managers have news to disclose may not always be a realistic assumption if knowledge of non-disclosure subsequently becomes available market expected to react at that stage * * Pro-regulation perspective Accounting information is a public or ‘free’ good in the presence of free-riders true demand is understated pricing system does not function properly leads to underproduction of information regulation necessary to reduce impacts of market failure * * Should supply of ‘free’ goods be regulated Some argue free goods often overproduced as a result of regulation public, knowing they do not have to pay, will overstate their need for the good or service eg. investment analysts could lead to accounting standards overload * * Role of Adam Smith’s ‘invisible hand ‘Invisible hand’ notion used as argument in favour of free market without regulatory involvement, as if by an invisible hand, productive resources will find their way to most productive uses some went on to argue that leaving activities to the control of market mechanisms will protect market participants Free market argument ignores market failures and uneven distribution of power Smith was concerned where monopolistic powers were created by government intervention BUT Smith advocated regulatory intervention in some instances where in the public interest to protect the more vulnerable * * * Why was Smiths work misrepresented In the interests of many businesses that regulatory interference be reduced the work of acclaimed economists used as ‘propaganda’ to support their position Theories to explain regulation Public interest theory Capture theory Economic interest group theory (private interest theory) * * Public interest theory Regulation put in place to benefit society as a whole rather than vested interests regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators assumes that government is a neutral arbiter * * Criticisms of public interest theory Critics question assumptions that economic markets operate inefficiently if unregulated question the assumption that regulation is virtually costless others question assumption of government neutrality argue that government will only legislate and groups will only lobby for regulation if it will increase their own wealth * * Capture theory The regulated seeks to take charge (capture) the regulator seek to ensure rules subsequently released are advantageous to the parties subject to regulation although regulating initially in the public interest, difficult for regulator to remain independent * * Capture of accounting standard-setting Walker (1987) analysed capture of Australian standard-setting through the ASRB. Argued that: the accounting profession lobbied before the board established to ensure no independent research capability, no academic as chair, to receive admin officer not a research director priorities only set after consultation with AARF ASRB fast-tracked AARF submissions but not others majority of board membership were members of the accounting profession * * Criticisms of capture theory No reason to suggest that regulated industry the only interest group able to influence the regulator no reason why regulated industries only able to capture existing agencies rather than procure the creation of an agency no reason why regulated couldn’t prevent creation of the regulatory agency * * Economic interest group theory Assumes groups will form to protect particular economic interests groups are often in conflict with each other and will lobby government to put in place legislation which will benefit them at the expense of others no notion of public interest inherent in the theory regulators (and all other individuals) deemed to be motivated by self interest The regulator is not a neutral arbiter but is seen as an interest group itself regulator motivated to ensure re-election or maintenance of its position of power regulation serves the private interests of politically effective groups those groups with insufficient power will not be able to effectively lobby for regulation to protect its own interests * * Examples of application to accounting standard-setting Industry groups may lobby to accept or reject a particular accounting standard eg. insurance industry and AASB 1023 large politically sensitive firms found to lobby in favour of general price level accounting in US (led to reduced profits) accounting firms lobbying to protect their own interests * * 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 * * 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? * * Objectives - recap 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 * * 24/04/2018 Untitled Document http://interact.csu.edu.au/sakai-msi-tool/content/bbv.html?subjectView=true&siteId=ACC341_201830_SM_I 5/10 For this assessment you are required to use APA referencing to acknowledge the sources that you have used in preparing your assessment. Please refer to the CSU referencing guide http://student.csu.edu.au/study/referencing-at-csu. In addition a very useful tool for you to use that demonstrates how to correctly use in text referencing and the correct way to cite the reference in your reference list can be found at https://apps.csu.edu.au/reftool/apa-6 Assessment item 2 Assignment 2 Value: 20% Due date: 02-May-2018 Return date: 23-May-2018 Length: 2,000 words Submission method options Alternative submission method Task Content assessed: Accounting regulation and topics(s) that your research is related to. Key generic skills: Research, critical thinking and written communication. Question 1 (10 marks, 1,000 words) Find a newspaper article or web page report of an item of accounting news, i.e. it refers to a current event, consideration, comment or decision that has been published after January 2017. Your article could also come from one of the professional journals. The article should not come from an academic journal. Academic journals generally do not contain news articles or articles of less than one page and are usually only published 2 or 4 times a year. If you are having a problem ensuring that your article is from an appropriate source contact your subject lecturer. Explain the article that you have found in your own words and clearly relate the concepts, ideas and facts within the article to one or more of the theories or topics that you have studied this session. For example, this from the Sydney Morning Herald in April 2016 could be linked to accounting regulation, ethics and measurement (and perhaps others). Provide a copy of the article or web page, with details of the source, date and page number with your question answer. Question 2 (10 marks, 1,000 words) Find an exposure draft or proposal for a new accounting standard which has been opened for public comments. These can be found on the websites of most standard-setting organisations, such as the IASB, AASB and FASB. (Hint: These websites can be quite difficult to navigate, so as a first step try typing “IASB exposure draft and comment letters”/”FASB exposure draft and comment letters” into Google or other search engine of your choice). Read a sample of the comments from a range of respondents. Select four respondents, for example, from accounting bodies, industry, companies or corporate bodies. If you are having a problem finding suitable comment letters then contact your subject Lecturer. Include copies of the comment letters you wish to discuss and complete the following tasks: a) Describe in your own words the issues that the exposure draft/proposal and comment letters are dealing with. b) Is there agreement among the various groups? Describe the issues where there is agreement/disagreement and provide examples. c) Can any of the comment letters be interpreted as being for or against regulation? Justify your answer with appropriate examples. d) In your opinion, which of the three theories of regulation (e.g., public interest, private interest or capture theory) best explains the comment letters? Justify your answer. Please note: you