Standards are a source of rule and order and generate consistency. In failing to plan, we plan to fail. Lack of rule and order begets chaos and destruction.
The more consistently various organizations can line up their financial transactions with those of other organizations and reach the same data on the same format, the more efficiently commerce can flow and grow.
If you have 7 companies and each has a different format and a different set of data to be kept, and no two keeps the same categories of data, much less the in the same format, then they will have great headaches in attempting to do business together. This is the reason for standard bookkeeping practices, standard software and standard documentation. It is why courts have a standard for their operations, and it is why every business should have a stated standard for all its transactions and should attempt to arrange it to comply with the standards of its clients, customers, rivals, suppliers, vendors and affiliates.
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Where there are no standards, no form of consistency exists between different company records hence no comparisons can be made by potential investors. Investors have a right to access information about the companies they wish to invest in and it is simply unfair for them if they have to pay to get this information.
The International Accounting Standards Committee (IASC) was established in 1973 to bring in uniformity in the accounting standards. In 1997 the IASC was reformed as the International Standard Setting Board (IASB). The reform established a partnership between the IASB and the national standard setting bodies to strengthen the development of an internationally accepted set of accounting standards. Another reason why there has been such development in the uniform accounting standards globally is due to the corporate collapses such as Worldcom, Enron, HIH, Parmalet, One. Tel etc. This has placed the accounting profession under extensive scrutiny. It has also been proposed that the Global Financial Crisis of 2008/09 was also caused by the ineffective accounting standards for complex financial instruments. This triggered strict regulations in terms of the development of the Securities and Exchange Control Act (SEC). In a bid to restore credibility to accounting and the important financial reporting and audit processes, we can observe a number of moves that have been undertaken by governments and the profession, both nationally and internationally.
Absence of uniform accounting standards will also have problems for the auditors as there will be non compliance to certain mandatory disclosures which the companies has to make in their financial statements. Currently the increased focus is on the Corporate Social Responsibility (CSR) reporting. In absence of the accounting standards, these disclosures will not be made by the companies in their financial statements. As discussed earlier, the accounting profession has been blamed for the corporate collapses and Global Financial Crisis. In order to avoid this, various measures have been taken by the respective bodies and professions to protect the image of the accounting profession. The development of International Financial Reporting Standards (IFRS), IFRIC and IFRS for SME's is a live example of the harmonization of the accounting standards. In terms of our Fiji Institute of Accountants, they have adopted the above reporting standards and the various companies have to comply with it.
Hence, I strongly disagree with this viewpoint.
Prepare a report outlining the need for regulation in accounting and why a free market for accounting information is not ideal.
The need for accounting regulation
In considering the need for accounting regulation, many factors need to be considered such as economic, socio-political, professional and cultural factors.
1. Economic and market considerations
Accounting rules are needed to regulate the economic consequences of resource allocation and information provision in the market. In an ideal and perfect situation, market efficiency ensures the availability of accounting information under the right costs. However, there are factors provoking the failure of ideal perfectly competitive markets (information asymmetry, tax rates, etc.). This provides reasons for expecting some type of 'extra-market' regulation (Cohen and Cyret, 1965).
Overcoming difficulties attributed to market imperfection and the lack of well-functioning markets for accounting information and achieving the most efficient allocation of resources are reasons highlighted by several other writers, such as May and Sundem (1976), Bromwich (1985) and Taylor and Turley (1986).
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Bromwich (1985: 57) argued that "these problems of market imperfections and the lack of complete markets seem to plague the provision of external accounting information". He added, "such problems may not require regulation. For this to be the case necessitates that the results of such regulation are demonstrably better than the results of a more freely functioning, but imperfect market mechanism".
2.Â Â Â Â Â Â Socio-political considerations
Considerable attention has been given to the application of economic ideas to the provision of accounting information (Bromwich, 1985). The economic perspective has been focusing primarily on accounting policy making as a vehicle for achieving the most efficient allocation of resources. However, it fails to take into consideration the non-economic criteria, such as social, psychological and political factors, which in their turn exert major influence on accounting regulation and need explanation. Therefore, another focus must be considered to incorporate the social view, in particular, the income and wealth of different social interests, and to indicate the best form of regulation for achieving the welfare of the society.
Tower (1993) highlighted two important societal, intermediate goals for accounting as a social choice function (efficiency and equity) and argued that corporate reporting should consider these criteria explicitly. He stated that regulation is an important tool to promote accountability and proposed the provision of a greater amount of data in corporate reports and the inclusion of a wider representation by stakeholders, including producers, in order to increase 'the acceptability of accounting rules' and consequently promote compliance with accounting regulations.
3.Â Â Â Â Â Professional considerations
Being a professional form of social regulation, accounting has also developed in response to the rise of professionalism. Professional integrity and expertise, business opportunities and lobbying behaviours are some of the factors that emphasis the need for regulations. Tower (1993), Richardson (1997), Broadbent and Laughlin (1999) and several others have highlighted the importance of these elements. They argued that accounting regulations are important to promote a high level of professional practice in the public interest and maintain the professional status and integrity.
Beside this need for accountants to compete for professional integrity, Richardson (1997) argued that accounting operates as a profession in two domains. One of these is the regulatory domain of the standard setters and one is the market place. The first domain is concerned with the development and protection of professional knowledge and access to the professional community and the efforts to distance other groups by language and expertise; the other concern is with the market opportunities. These two domains are interrelated "as the availability of market opportunities rests on the existence of the professional knowledge and the restriction to access it" (Broadbent and Laughlin, 1999: 6).
In addition to the above points, there is also a need for creation of opportunities in the market. However, the creation of these opportunities is influenced by competition. Armstrong (1985) noted that the issue of professional rivalry is an important aspect of the dynamics of professional development. This issue of professional rivalry, together with the need for the creation of new market opportunities are best described by Broadbent and Laughlin (1999). They noted that in the context of the discussion of the Private Finance Initiative in the UK, competition between accounting and other professionals, such as lawyers, actuaries, bankers is very obvious, "hence in order to maintain their market opportunities, accountants must engage actively in the promotion of the market for servicesâ€¦ However, as the profession also has to operate on the level of regulation, it cannot ignore the need to develop a robust set of regulations" (p. 9).
4.Â Â Â Â Â Other considerations
Accounting standards aim to promote comparability, consistency and transparency in the interests of users of financial statements. Experience shows that, in the absence of regulation, companies reports may not give the information that users need to make informed assessments of companies. Therefore, great emphasis is placed on to the role of regulations in raising the quality of accounts and achieving the objectives for corporate reporting. These objectives were highlighted by Baxter (1978: 25). He stated that "standards raise the quality of accounts, make company reports more intelligible and foster comparability; they dispel doubts and - we hope - soon bring harmony of principle. In a world made safe enough by standards, accounting will be plagued by few scandals and our noisy defamers will have to hunt elsewhere for quarry". Moreover, one central focus of accounting is the measurement of business performance. A good set of accounting regulations can protect stakeholders by making the profession more accountable to external interests. Fair accounting standards can ensure public confidence in the impartiality and effectiveness of professional regulations and discipline.
A free market for accounting information is not ideal
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A free market for accounting information means that organizations only reveal the information they wish to to potential investors and interested parties. This means that an investor will get different forms of information from different companies and as a result they will lack consistency and comparability.
In the absence of regulation there will be private incentives to produce accounting information. Organizations that do not produce information will be penalised by higher cost of capital.
Finally, regulation could lead to uniform methods and so enhancing comparability and protect from misleading information