SUMMARY SESSION 3: CH 3 - APPLYING THEORY TO ACCOUNTING REGULATION

GROUP 11
Syskia Anelis - 1806234464
Kevin Aurelio - 1806212892
Goldaredo Megri - 1806213402

LO 1 - The Theories of Regulation that are Relevant to Accounting and Auditing

Theories relevant to understanding the regulation of financial reporting (preparing, auditing, &
supply of accounting info):
1. Theory of Efficient Market
Accounting → information industry → producing accounting information
⇒ demand: by users
⇒ supply: from companies (financial statements)
⇒ An equilibrium price can theoretically be found for accounting info
Critics: won’t be able to achieve a socially equilibrium price for accounting info because:
- Accounting info =/= other product ⇒ acct info → public good
- Free rider (ie. financial analyst, investors) → minimal incentive for supplier to produce it
→ need regulatory intervention
2. Agency Theory
Welfare of one person (owner) is entrusted to agent (manager)
Uncertainty in agency theory → uncertainty exists at:
- Ex ante (before the event) → the same time a decision is to be made
- Ex post (after the event) → after the decision has been made and the result realised
⇒ impact of alternative ex post reports that affect ex post uncertainty
3. Theories of Regulation
a. Public Interest Theory → economic markets are subject to series of market
imperfections or transaction failures, which, if left uncorrected, will result in both
inefficient and inequitable outcome
b. Regulatory Capture Theory → The public interest is not protected because those being
regulated come to control or dominate the regulator
c. Private Interest Theory → regulation doesn’t arise as a result of a government’s
response to public demand, instead, regulation is sought by the ‘producer’ private
interest group and is designed and operated mainly for its benefit

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

1. Application of Public Interest Theory
● Sarbanes-Oxley Act (2002) → because of the argument that market mechanisms
have failed and government needs to take action, following the Enron and Arthur
Andersen case.
● Australia’s Accounting Standards Review Boards (ASRB) in 1984 → Seen as
justification for market failures for accounting information.
Public interest theory was made because of the information produced by corporate
entities are lack of quality information that are necessary for investment decisions and
 optimal resource allocation info, so government needs to interfere with regulations to
protect public interest
2. Application of Capture Theory
Basically capture theory is collaboration between accountant profession and the
government to make the policy, for example the AARF(founded by profession in AUS)
was “capturing” ASRB (founded by AUS gov) so that they could make the standards
together, because the profession wants to include economic interest in the standards,
not only public interest.
3. Application of Private Interest Theory
Arisen because there are some beliefs that there were interest from company’s
corporate manager in ASRB, this is important because the corporate managers and
directors that supposed to comply with the standards. So the managers and directors
became the representative in the board.
4. Standard Setting as A Political Process
Standard that being made will have to consider the effect to many parties not only one
parties, so the regulatory didn’t become burdensome to others
5. Financial Instruments
Adoption of IAS 39 in europe → include unrealised gain or losses, before that they use
historical cost.
6. Intangible Assets
adoption of IAS 38 in Australia → intangible asset that generated in the company can’t
be recognised and if there are no identical counter parts of that asset, it can’t be
revalued

LO 3 - The Regulatory Framework for Financial Reporting

The elements of the regulatory framework:
1. Statutory Requirements
Additional financial reporting requirements are derived from specific accounting
standards and in many jurisdictions these standards have the force of law.
2. Corporate Governance
The structures, processes and institutions within and around organizations that allocate
power and resource control among participants.
3. Auditors and Oversight
The location of responsibility for auditor oversight with a statutory body, rather than
allowing self-regulation, provides for more independent regulation.
4. Independent Enforcement Bodies
The role of such a body in the regulation of financial reporting is 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 and Auditing Standards

1. Background
● Formation of IASC
● Developing accounting standards for use throughout the world
 ● IOSCO’s support for a set of core standards
● IASC not independent so restructured in 2001 into the IASB
● In 2002 the EC decided to adopt IASB standards in 2005 in the EU
● Australia adopted IFRS on 2005
2. The IASB & FASB Convergence Program
● Convergence program commenced in 2002
● Convergence is a complicated process
3. 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
4. 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