How and to what extent the accounting should be regulated?

Introduction:

There is a need for regulation in financial reporting because of a number of reasons. There are

several major user groups of financial reporting, some of which include equity investor groups,

employee groups, analyst adviser group, the government, the public and other stakeholders.

These different stakeholders however, need to be able to interpret and use financial information

in a systematic way in order to make the necessary financial decisions.

Explanation:

Active regulatory oversight of many of these elements, such as registrants' financial reporting,

private sector standard-setting processes and self-regulatory activities undertaken by the

accounting profession. Each of these elements is essential to the success of a high quality

financial reporting framework. This oversight reinforces the development of high quality

accounting and auditing standards and focuses them on the needs of investors. It provides

unbiased third party scrutiny of self-regulatory activities. Regulatory oversight also reinforces

the application of accounting standards by registrants and their auditors in a rigorous and

consistent manner and assists in ensuring a high quality audit function.

Main Accounting regulatory bodies are:

1. International Accounting Standards Board (IASB).

“Our mission is to develop, in the public interest, a single set of high quality,

understandable and international financial reporting standards.

2. Security and Exchange Commission (SEC).

Securities and Exchange Commission is to protect investors, maintain fair, orderly, and

efficient markets, and facilitate capital formation. SEC’s job to interpret the laws that

congress passes and assist companies in implementing these laws. While Congress makes

modifications to laws it is this companies job to also make all companies aware of these

changes and help them to make a smooth transition into using the newly amended law.

3. Financial Accounting Standards Board (FASB).

The FASB was designed with the purpose of creating financial accounting and reporting

standards for the public. FASB in which they are to protect the public from fraud and

misleading information from the company.

4. Financial Reporting Council (FRC).

Financial Reporting Council (FRC) responsible for promoting high quality corporate

governance and reporting.

Summary:

Arguments in favour and against accounting regulation:

Against Argument:

 It's costly for businesses.

Regulation creates increased compliance costs for the business with the need to

engage expensive specifically trained personnel to regularly interpret and apply

the regulations to the financial affairs of a business

 It's anti-value creation for the business.

 Regulation can divert the focus of some of the most valuable business resources.

 It can be politically charged.

Regulations can be coloured or be bias towards a particular prevailing political

point of view

 Enforcement is both difficult and costly.

Regulations are of limited value if they are not capable of being enforced. It could

be argued that these resources could be better invested in value-adding activities

for our societies.

 It doesn't always value accounts appropriately.

Regulation takes a one-size-fits-all approach which sometimes limits the ability of

exception-case business from reporting the real value of its business activities or

specific accounts.

Argument in favour:

 It allows for greater comparability.

Businesses using similar standards to prepare financial statements can more

accurately compare with each other.

 It is beneficial to new and small investors.

 Help new and small investors by making reporting standards to have better quality

and become simpler, putting these investors in a similar position with professional

investors

 It creates more flexibility.

Using a philosophy that is based on principles, instead of rules, this set of

standards will have the goal of arriving at a reasonable valuation with various

ways to accomplish tasks.

References:

http://www.markedbyteachers.com/gcse/business-studies/discuss-the-need-for-regulation-in-

financial-reporting-1.html

http://www.123helpme.com/accounting-regulatory-bodies-paper-view.asp?id=163531

https://www.icaew.com/about-icaew/what-is-chartered-accountancy/regulation-of-the-

accountancy-profession

https://www.sec.gov/rules/concept/34-42430.htm

https://www.quora.com/What-are-the-arguments-against-accounting-regulation
http://connectusfund.org/6-advantages-and-disadvantages-of-adopting-ifrs