Regulation of Financial Accounting and Reporting: the Pro-Regulation Perspective
Regulation is defined as a set of rules that is designed to control and govern conduct by authority (Deegan 2009, p.59). On the basis of this definition, Deegan (2009, p.59) has defined regulations relating to financial accounting as rules that are developed by independent authoritative body to govern the preparation of financial statements which are accounting standards. Since decades ago, there have been arguments for and against the existence of accounting regulations. With a stance of pro-regulation, this essay is going to examine the reasons that financial accounting and reporting should be regulated and the merits of accounting regulations.
Firstly, financial reports are normally prepared by the management of the company who are not the owners but are involved in managing the company. They possess more information than the shareholders and stakeholders so information asymmetry arises between them. Without regulation, even though management might disclose relevant accounting information voluntarily in order to get funding, the degree of credibility and completeness of information is unclear. According to the analysis of Lang and Lundholm, the accounting disclosures specifically for firms that make equity offerings has a significant increase within the six months before the offering occurs particularly in those categories the firm has discretion (cited in Healy and Palepu 2001, p.421). It shows that the business might not disclose all relevant information to users or is withholding information unless the disclosures is for their benefits, which posts a question of the reliability of voluntary disclosures. Furthermore, the existence of asymmetric information will lead to inequality of opportunity and returns among investors. According to Schroeder (cited in Lee, Rosenthal and Gleason 2004, p.79), before Regulation Fair Disclosure imposed in America, Wall Street brokerage companies and their best customers managed to reap trading profits before most investors
Firstly, financial reports are normally prepared by the management of the company who are not the owners but are involved in managing the company. They possess more information than the shareholders and stakeholders so information asymmetry arises between them. Without regulation, even though management might disclose relevant accounting information voluntarily in order to get funding, the degree of credibility and completeness of information is unclear. According to the analysis of Lang and Lundholm, the accounting disclosures specifically for firms that make equity offerings has a significant increase within the six months before the offering occurs particularly in those categories the firm has discretion (cited in Healy and Palepu 2001, p.421). It shows that the business might not disclose all relevant information to users or is withholding information unless the disclosures is for their benefits, which posts a question of the reliability of voluntary disclosures. Furthermore, the existence of asymmetric information will lead to inequality of opportunity and returns among investors. According to Schroeder (cited in Lee, Rosenthal and Gleason 2004, p.79), before Regulation Fair Disclosure imposed in America, Wall Street brokerage companies and their best customers managed to reap trading profits before most investors
References: Deegan, C 2009, Financial Accounting Theory, 3rd edition, McGraw Hill, Australia. Godfrey, J, Hodgson, A, Holmes, S & Tarca, A 2006, Accounting theory, 6th edn, John Wiley & Sons Australia, Milton, Queensland. Healy, PM & Palepu, KG 2001, ‘Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature’, Journal of Accounting and Economics, vol.31, nos.1-3, pp.405-440, viewed 13 August 2009, . Hendriksen, ES & Breda, MFV 1992, Accounting theory, 5th edn, McGraw-Hill, United States of America. Lee, C, Rosenthal, L & Gleason, K 2004, ‘Effect of regulation FD on asymmetric information’, Financial Analysts Journal, Vol.60, No.3, pp.79-89, viewed 12 August 2009,