Group 10 TAK

Summary Chapter 3:
1. Natasya Emerald – 1806213150
Applying Theory to 2. Helen Novita – 1806134285
Accounting Regulation 3. Sofia Dwifa Wirahadi – 1806134575

LO 1 - The Theories of Regulation Relevant to Accounting & Auditing

1. Theory of efficient markets

 The forces of supply and demand influence market behavior and help keep markets efficient
 This applies to the market for accounting information and should determine what accounting
data should be supplied and what accounting practices should be used to prepare it
 The market for accounting data is not efficient
 The “free-rider” problem distorts the market
 Users cannot agree on what they want
 Accountants cannot agree on procedures
 Firms must produce comparable data
 The government must therefore intervene
2. Agency theory: welfare of one person (owner) is entrusted to the agent (manager)
 Demand for Accounting Information; for stewardship and decision making
 Because of imbalance between data suppliers and data users, uncertainty and risk exist
 Resources and Risk are likely to be misallocated between the parties
 To the extent the market mechanism is inefficient, accounting regulation is required to reduce
inefficient and inequitable outcomes
3. Theories of regulation
 Public Interest Theory: Government regulation is required in the ‘public interest’ whenever
there is market failure (inefficiency) due to lack of competition, barriers to entry, information
asymmetry, public-good products
 Regulatory Capture Theory: the public interest is not protected because those being regulated
come to control or dominate the regulator (professional accounting bodies or the corporate
sector seek to control the setting of accounting standards)
 Private Interest Theory: Governments are not independent arbiters, but are rationally self-
interested (governance have power to coerce)

LO 2 - How the Theories of Regulation Apply to Accounting and Auditing Practice

1. Application of Public Interest Theory
 Public interest theory says that governments would intervene in the regulation of financial
reporting in response to market failure and 'in the public interest'.
 Public interest theory framework suggests that government intervention in the accounting
standard setting process is to rectify failures in the market for accounting information
 Public interest theory generally ignores the findings of many research which indicate that the
managers of business entities have strong incentives to “correct” market failure perceptions about
their business.
  This correction achieved through the release of extensive voluntary disclosures of information
which protects the users of financial information.
2. Application of Capture Theory
 Accounting profession needed to legitimize accounting standards (that is, ensure compliance
with the standards) which could be achieved only by standards that had the “force of law” by
ensuring that accounting standards were backed by legislation.
 Under the capture view, regulatory intervention in the accounting standard setting process was
designed, as with the public interest theory framework, to protect the public interest.
3. Application of Private Interest Theory
 By the theory, the accounting profession did not “capture” the standard setting process but
organized by some groups that have capabilities to handle it.
 For example there was considerable representation of company executives on the board was
devised, presumably, to help secure the interests of that group of regulated parties.
4. Standard setting as a political process: it is a political process because it can affect many
conflicting and self-interested groups.

LO 3 - The Regulatory Framework for Financial Reporting

Four elements of regulatory framework
 Statutory Requirements: The companies should voluntarily providing financial information to
public that has to be audited by independent parties.
 Corporate Governance: Regulatory framework may contain corporate governance guidance
and rules, comes from private sector voluntary recommendations and stock exchange listing
rules.
 Auditors and Oversight: Has an important function in providing assurance about the quality of
information provided by companies in their financial statement.
 Independent Enforcement Bodies: The bodies has such role as to promote compliance with the
regulations governing the production of financial statements, which are contained in law, and
accounting standards.

LO 4 - The Institutional Structure for Setting Accounting & Auditing Standards

Accounting standards for the public sector:
 Individual countries must decide the extent to which IASB standards will be followed by public
sector entities
 Australia has pursued one set of standards that can be used by both public and private sector
entities

International auditing standards:

 Historically auditing was self-regulated : best auditing practice has become enshrined in
auditing standards
 Governments have become involved due to market failure