Regulation of Financial Accounting

Flashcards covering the regulation of financial accounting, including theories and perspectives on regulation.

What is regulation?

A prescribed rule or authoritative direction designed to control or govern conduct.

What is the 'free-market' perspective on accounting regulation?

Accounting information should be treated like other goods, with demand and supply forces generating an optimal supply.

What are some arguments supporting the 'free-market' perspective?

Private economic-based incentives, 'Market for managers', 'Market for corporate takeovers', 'Market for lemons'.

What is the 'market for managers' argument against regulation?

Managers will do the 'right thing' due to the impact of their performance on future remuneration.

What is the 'market for corporate takeovers' argument?

Underperforming organizations will be taken over, motivating managers to maximize firm value.

What is the 'market for lemons' argument?

No information is viewed as bad information, motivating managers to disclose both good and bad news.

What is the pro-regulation perspective on accounting information?

Accounting information is a public or 'free' good and should be regulated to reduce impacts of market failure.

What is Public interest theory?

Regulation is put in place to benefit society as a whole rather than vested interests

What is capture theory?

The regulated party or industry will seek to take charge of (capture) the regulator

What is economic interest group theory?

Groups will form to protect particular economic interests and will lobby government to put in place legislation which will benefit them at the expense of others

Regulation and wealth distribution

Financial accounting will inevitably be political as it affects wealth distribution within society

Adam Smith and the invisible hand

Without regulatory involvement, as if by an invisible hand, productive resources will find their way to most productive uses