Academic research has no real life relevance and makes no contribution to the

development of accounting and/or finance regulation.

Academic research has always been a great support in finance and accounting .specifically if we
talk about finance a great number of research papers have been published to make
improvement in various regulations established in finance and accounting. These regulations
play a major role in controlling and maintain the fluctuations in financial market. In any
organization every finance based activity is regulated by those regulators who maintain the
integrity of financial processes carried out within an organization involving local and
international transactions we believe that most of the academic research conducted in this
regard have not sufficiently helped improving the finance and accounting regulations and it
does not play a major role in making necessary amendment to reduce the number of
discrepancies that exist in financial matters. In order to further justify our opinion we have
conducted a survey research in major organizations having a well established finance
department and we interviewed the prominent personnel’s working there .we have selected
the topic of rate of return regulations in which we have checked that a firm's product prices are
restricted by the requirement that investors do not earn more than a permissible return on the
firm's assets .In order to check that regulation we have visited many organizations where
consumer goods are being manufactured and visited their finance department .we asked
several questions that covered major areas like asset management , scheduling the
depreciation in assets, costs and prices during investments for the sake of expansion, managing
the return on investment keeping the prices stable. All the points were focused in the questions
which were included in face to face interviews in order to check the applicability of rate of
return regulations. It was found that overall efficiency of rate of return regulation depends
upon how well the depreciation schedule of assets coincides with the productivity pattern. Due
to rate of return regulation prices are set in such a way that companies attain a target value of
return on investment which not only cover the operating cost but also other expenses. The
main reason behind that is prices tend to be increased by the time along with the increase in
productivity due to increase in operating expense and rate of return regulations have been
inefficient in regulating the price and quantities against marginal cost pricing .when an
investment is made it is decided by the help of rate of return regulators that how much asset is
being depreciated within a specified period of time and what would be the depreciation pattern
if we further expand the production by additional investment ,major flaw in this case is that
regulatory agencies apply straight line method of depreciation to determine the long run
marginal cost in case of overlapping investments. It is considered that the historical cost should
meet the long run cost of investment but there may be a possibility that by the passage of time
the requirement of assets may not be the same as it is before or may be the asset requirement
may get change or the operating equipments whose depreciation has been calculated for next
ten years may not be applicable and being replaced by new equipment .in that case the overall
design of cost management and price setting gets worthless. There is another possibility that
growth rate in market in the next ten years may not be the same as calculated upon which the
whole plan of investment and costs were calculated and prices were stabilized according to
those costs ,if the market growth rate has declined so firm has to make extra investments to
build the market and a contingent plan is required in place of rate of return regulations in order
to stabilize the cost with price because in that case company might be in a condition that could
be said below breakeven stage. So company has to increase prices to achieve break even.
According to our respondents interviewed, under these circumstances company has to deviate
against the regulations of finance in order to maintain their integrity in the market and keep
existence. Braeutigam and Panzer(1993) conclude that the US evidence supports the view that
price regulation ‘is an effective means of controlling the prices of dominant firms when the
control of their earnings is left to the competitive marketplace’ and is ‘probably most effective
as a transient step on the course toward total deregulation and full competition.’ (Braeutigam
and Panzer 1993: 197). Certainly, price regulation is increasingly replacing rate-of-return
regulation, While it is clear that price regulation is better for industries where it may only be
needed in the changeover to deregulation, it is less clear that stable price regulation with
periodic reviews is better for major companies domination like water, gas and electric
distribution, balancing the better incentives of price regulation against the minor professed
investor risk and cost of capital .in rate of return regulation. Price regulation is better because it
covers the serious issues of profit maximization. It deals with providing benefit to company as
well as to customer by a win-win situation. As major companies who are exclusively providing
any product may set high prices due to deregulation and get maximum profit but price
regulation enables them to maximize profit but within a confined limit of pricing to which they
can get maximum profit but not extremely high .in that way they are given leverage to change
their price in response to a change in market situation or increased production due to further
investment. The whole process of regulation cannot be applicable to real life because it follows
certain ideal conditions which are not applicable to real life .it involves steps like Costs are
review, Unnecessary costs are eliminated ,ROR on certain costs determined to be fair,Price is
determined. Many creative plan have been projected (surveyed in Train 1993; Laffont and
Tirole1993; Armstrong, Cowan, and Vickers 1994; Wilson 1993), particularly those in which
utilities are given a set of choices of substitute regulatory method, or those which amend the
regulation (Vogelsang and Finsinger 1979, Sappington and Sibley 1988). Few of these articles
sufficiently deal with the practical matter that regulation is a recurring game with intermittent
analysis, and the need for regulatory assurance, constancy, plainness, strength, proof against
management, and public satisfactoriness. According to above statement we can say that
regulation does not mean that once we have designed a specific pattern for setting costs
against price then we have to follow that rule of thumb for an ongoing period of time but it
need persistent amendment and improvement but unfortunately what we propose in theory or
research it cannot be implemented in practical field. May be the regulatory bodies are obliged
to follow the lines of policies assigned to make finance regulations, due to which they are
unable to make any kind of change according to the change in situations in market .that’s what
we heard from the people whim we interviewed that what so ever is published in research
papers and whatever are the rules assigned for specific financial matters cannot be exactly
applied to real life because every company needs profit and if it does not make moderation in
financial regulation it would be extremely company to resist or survive in the market. Due to
the changes in economic situation company inventory price also increase which result in an
increase in overall cost of asset and it makes an impact on total cost of operations. If under
these conditions it would still abide by the regulations assigned under rate of return, it would
soon be in condition when it gets failed to achieve any notable position in the market because
regulations are just a matter of idealism keeping everything constant under specific
circumstances that’s entirely opposite to real field

References
David M Newbery, Department of Applied Economics, Cambridge (1997). “Rate-of-return regulation
versus price regulation for public utilities”

Alexander Nezlobin and Madhav V. Rajan and Stefan Reichelstein, School of Business, Stanford
University (2011). “Dynamics of Rate-of-Return Regulation”