Advanced Accounting Theory and

Practice

A Warm Welcome

Advanced Accounting Theory and

Practice

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 Teaching of the Unit
Lectures
1 X2 hours lecture per week
Tuesday 3pm-5pm (COBHAM)
1 X 1 hour seminar per week
2pm-3pm Monday (P402)
3pm-4pm Monday (P405)
6pm-7pm Monday (F204)

9am-10am Tuesday (P410)

10am-11am Tuesday (TA131)

9am-10am Wednesday (F204)

12 noon-1pm Wednesday (F111)
If you miss your seminar class and you have a Very Good reason you
can to attend the next one available.
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 Where to find Unit material

All electronic material relating to the Unit can be found on myBU as follows:

Lecture Slides - Lecture Slides folder under Unit Materials

Additional lecture articles - Lecture Slides folder under Unit Materials

Seminar Questions & Solutions - Seminar Questions & Solutions folder

under Unit Materials

Lecturer details including surgery hours - Contacts

Electronic version of the Unit Guide - Unit information

Electronic version of the Assignment - Assessment
Past examination papers & available solutions - Assessment

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 Assessment of the Unit

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 Lecture 1
Introduction & Accounting Regulation
Objectives

• Examine the nature of accounting theory and practice

• Explain the nature of accounting regulation

• Discuss the arguments for accounting regulation

• Examine the arguments against accounting regulation

• Identify and discuss accounting regulation theories

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 Accounting Theory and Practice

Accounting Theory

•A description, explanation or prediction (of accounting

practice) based on observations and /or logical reasoning

•Logical reasoning in the form of set of broad principles that:

(1) provide a general framework of reference by which

accounting practice can be evaluated and

(2) guide the development of new practices and procedures

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 Accounting Theory and Practice

Accounting Practice
•A firm's accounting practice refers to the method by
which its accounting policies are implemented and
adhered to on a routine basis, typically by an
accountant and/or auditor or a team of accounting
professionals.

•The normal, practical application of accounting policies

that occurs within a business.

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 Accounting Theory and Practice

Quiz

1.Where can you find or read about accounting

theories? Give one example of accounting theory.

2.Where can you find accounting practices? How can

you evaluate whether such practices are good
or bad?

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 Nature of Accounting Regulation

Definition
Accounting regulation is the policing of accounting
information production and dissemination, according to rules,
by an entity not directly party to or involved in the activity.

Elements of regulation:
• An intention to intervene
• Restriction on choice to achieve certain goals
• Exercise of control by a party at least nominally
independent of those directly involved in the activity

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 Nature of Accounting Regulation

Reflection

1. Which body regulates accounting in the UK?

2. How does the body intervene if the companies do not

comply with the accounting regulatory framework?

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 Arguments for accounting regulation

1. Increased efficiency in allocating capital

•Information is needed to ensure efficient allocation of

capital. Perfect competition requires sufficient information.

•In the absence of compulsory disclosure, some companies

may conceal or misrepresent information relevant to
decision making.

•Mandatory disclosure should increase quantity of

information communicated.

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 Arguments for accounting regulation

2. Cheaper production of information

•Mandatory disclosure reduces the redundant production
of information (by users) because without it, users must
produce their own information.

•If several users produce the same information, too much

has been produced.

•Mandatory disclosure also reduces the search costs of

users because they know where to find information and
should understand the form in which it is supplied.
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 Arguments for accounting regulation

3. Check on management perks

•In the absence of mandatory disclosure, underwriting
costs and management salaries (including perks) may be
excessive.

4. Public confidence
•Mandatory disclosure increases public confidence
because it:
(i) substantially limits an organisation’s ability to remain
silent
(ii) controls the time, place and manner of disclosure.

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 Arguments for accounting regulation

5.Standardisation
•Regulation will result in the standardisation of accounting,
which will reduce ambiguity in accounting reports.

•With standardisation users will be able to make

comparison among reporting entities.

•Without regulation, incentives do not exist for preparers to

confirm to any particular model of accounting.

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 Arguments against accounting
regulation

1. Accounting regulation is problematic because:

• It can benefit some stakeholders to the detriment of

others, those with interest in financial reporting are likely
to lobby standard setters, an exercise that can be costly

• When regulated companies collapse without warning

(e.g. Enron in 2008) regulators are seen to be failures
hence lose prestige and legitimacy.

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 Arguments against accounting
regulation

2.Determining optimal quantity of information is problematic

•The rationale for regulation is to provide optimal (sufficient)
information for markets to function. However, it is not
possible to determine at what point such regulation will lead
to information overload that is detrimental to the users.

3. Communication is restricted
•By reducing ambiguity, regulation also reduces the means of
communicating information as well as stifling innovation in
ways of presenting financial information.

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 Arguments against accounting
regulation

4. Reporting entities are different

•Regulation of financial reporting on a standardised basis
forces different cases into the same mould: regulation does
not allow for differences among entities. The extension of
accounting standards to the public and not-for profit sectors
illustrate the difficulties some reporting entities have with
some standards

5. The existence of contracts means that regulation is

unnecessary
•Because users can write contracts with management
stipulating the provision of information to them, regulation is
not needed.
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 Arguments for & against accounting
regulation

Reflection Question
‘Accounting should not be regulated’.

Required:
Citing both practical and theoretical evidence, discuss
whether accounting should be regulated.

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 Accounting regulation theories

Signalling theory
• The theory holds that an entity can increase its value
through financial reporting.
• In a competitive market the companies that perform
above-average have the motivation to disclose more
information to show that they are better than ‘other’
companies.
• The ‘other’ companies are then perceived by the market
to be of even poor quality causing them to wish to better
their reputation by disclosing more information.
Therefore, according to the signalling theory there is no
need for accounting regulation.

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 Accounting regulation theories

Public interest theory

• Signalling theory relies on the function of a perfect
market. However, markets are not perfect.

• Therefore public interest theory holds that regulation

is supplied in response to demands of the public for
the correction of these inefficient or inequitable
market practices.

• This theory is about why accounting should be

regulated.
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 Accounting regulation theories

‘Bush’ fire theory

• The theory holds that accounting regulation tend to
arise from crises such as the collapse of Enron,
World Com etc which result in media attention.
• Media attention results in solutions that are not
necessarily of any use to solve perceived crisis but
are understandable to the lay person (bush fire
fighting).
• According to Watts and Zimmerman (1978), the
resulting rules are designed to gain media exposure
so that politicians and their bureaucrats are more
likely to gain re-election.

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 Accounting regulation theories

‘Capture theory’
• The notion that a regulatory agency is established
to regulate an industry (e.g. accounting profession)
for the benefit of society (users) acts instead for the
benefit of the industry (accounting profession).

• In effect, the regulatory agency is "captured" by the

industry (accounting profession) it is regulating.

• This theory is about why accounting is not useful

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 Accounting regulation theories

Quiz
Explain whether theories are useful for our
understanding of accounting regulation.

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