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Slide AKT 405 Teori Akuntansi 3 Godfrey
Slide AKT 405 Teori Akuntansi 3 Godfrey
HODGSON
HOLMES
TARCA
CHAPTER 3
APPLYING THEORY TO
ACCOUNTING REGULATION
The theories of regulation relevant
to accounting and auditing
• Managers have incentives to voluntarily
provide accounting information, so why do we
observe the regulation of financial reporting?
• Explanations are provided by:
– theory of efficient markets
– agency theory
– theories of regulation
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Theory of efficient markets
• The forces of supply and demand influence
market behaviour 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
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Theory of efficient markets
• 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
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Agency theory
• The demand for accounting information:
– for stewardship purposes
– for decision-making purposes
• A framework in which to study the
relationship between those who provide
accounting information - e.g. a manager - and
those who use it – e.g. a shareholder or
creditor
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Agency theory
• Because of imbalances between data suppliers
and data users, uncertainty and risk exist
• Resources and risk are likely to be mis-
allocated between the parties
• To the extent the market mechanism is
inefficient, accounting regulation is required
to reduce inefficient and inequitable
outcomes
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Theories of regulation
• There are three theories of regulation:
– public interest theory
– regulatory capture theory
– private interest theory
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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
8
Public interest theory
• Governments intervene:
– to get votes
– because public interest groups demand
intervention
– because they are neutral arbiters
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Regulatory capture theory
• The public interest is not protected because
those being regulated come to control or
dominate the regulator
• The regulated protect or increase their wealth
• Assumes the regulator has no independent
role to play but is simply an arbiter between
battling interest groups
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Regulatory capture theory
• Professional accounting bodies or the
corporate sector seek to control the setting of
accounting standards
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Private interest theory
• Governments are not independent arbiters,
but are rationally self-interested
• They seek re-election
• They will ‘sell’ their power to coerce or
transfer wealth to those most likely to achieve
their re-election (if they are elected officials)
or increase their wealth (if they are appointed
officials) or both
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Application of public interest
theory
• The Sarbanes-Oxley Act (US, 2002)
• Accounting Standards Review Board (AUS,
1984)
• But:
– Managers have incentives to voluntarily correct
market failure perceptions about their firms
13
Application of capture theory
• Was the ASRB captured by the accounting
profession?
• Is international harmonisation evidence of
capture by large companies, the ASX and the
accounting profession?
• Has the IASB been captured by the FASB?
14
Application of private interest
theory
• The private interest theory could be applied to
the establishment of the ASRB
15
Standard setting as a political
process
• Standard setting is a political process because
it can affect many conflicting and self-
interested groups
• The regulator must make a political choice
• The regulator must have a mandate to make
social choices
• The recognition of doubtful debts can affect
entities differently
16
Financial instruments
• The adoption of IAS 39 Financial Instruments –
Recognition and Measurement in the EU has
been a highly political process
17
Intangible assets
• The adoption of IAS 38 Intangible Assets in
Australia illustrates the role of politics in the
standard setting process
18
Regulatory framework for
financial reporting
• A financial reporting environment is made up
of:
– legal setting
– economic setting
– political setting
– social setting
19
Regulatory framework for
financial reporting
• The elements of a regulatory framework are :
– statutory requirements
– corporate governance
– auditors and oversight
– independent enforcement bodies
20
Statutory requirements
• Company law
• Securities market law
• Accounting standards
– force of law
• Taxation law
21
Corporate governance
• ‘The structures, processes and institutions
within and around organisations that allocate
power and resource control among
participants.’ Davis
22
Auditors and oversight
• Both auditors and auditing are usually
regulated
– statutory regulation
– self-regulation
23
Independent enforcement
bodies
• Independent enforcement bodies
– EU
• Securities market regulators
– SEC
– ASIC
• The need for consistent enforcement across
countries
24
Institutional structure for setting
accounting and auditing standards
• Formation of IASC – 1973
• Aimed to develop 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 1 January 2005
25
The IASB and FASB convergence
program
• Convergence program commenced in 2002
– Norwalk agreement
• Convergence is a complicated process
26
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
27
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
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Summary
In this chapter:
we reviewed theories proposed to explain the
practice and regulation of financial reporting and
auditing
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Key terms and concepts
• Efficient markets
• Agency relationships
• Public interest
• Regulatory capture
• Private interest
• Political process
• Regulatory framework
• Accounting and auditing standards
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