The Development of Accounting and Finance Regulation - Coursework Example

Academic research has no real life relevance and makes no contribution to the development of accounting and/or finance regulation. Introduction: One of the main contemporary questions in accounting and finance is whether academic research has any real life relevance in the development of accounting and finance regulations. This paper attempts to explore this concern and discuss the contemporary issues by providing logical answers based on an analysis of the practical application of theories by scholars. Accounting is a legal framework which consists of laws, regulations and therefore accounting regulations is very important. Accounting regulations are crucial to the functioning of any economy. Main part: Accounting theory is a set of interconnected concepts, propositions and definitions that present a methodical view of the phenomenon by identifying variables for explaining and predicting it. (John Asmus Christensen, Joel S. Demski, 2003). According to (Louis Goldberg, Stewart A. leech, 2001)accounting can be perceived as a historical record which provides a realistic details of the transactions of an entity and managing its promoters’ resources. (1) Accounting theories are being accepted worldwide by practitioners. Various literature reviews conducted on the accounting theory and regulation shed light on the actual position on the matter of the validity of accounting regulations. Regulations create a lot of competitive distortions in the financial sector. “With the current highly competitive and dynamic environment, existing regulations may be too statically oriented or narrowly defined, inviting regulatory arbitrage and potentially causing competitive distortions that prevent a level playing field” (Eisenbeis, et al, 2000, P. 159). In the chapter “comments on financial regulatory structure and the resolution of conflicting goals” the authors provide strong opinion with respect to the relaibility regarding financial regulations and their effect on accounting and finance. I fully agree with this statement because it has creditability. If financial and accounting regulations have been so reliable and valid, then the financial turmoil which had occurred in the recent past would not have happened. Therefore, it can be construed that such financial turmoils and recessions lead to the understanding that academic research in finance and accounting has no significant impact on the real world accounting and finance matters. The importance of academic research is that the academic research is not conducted for a specific client and it is conducted for scholarly purposes. Since it is conducted for scholarly purpose and not client based therefore there are fewer manipulations in academic research and provides a more justified opinion on the subject topic. In order to evaluate the implication of the theory in a practical context, it becomes necessary to asses the effectiveness of regulations, especially in the finance and accounting streams. There are two forms of regulations: direct or indirect regulations. It either stipulates behavior or it seeks to induce the desired behavior (Robert H. Mundheim, Noyes E. Leech, 1986). When there are direct regulations then there is a restriction on the financial risks and undertakings on most of the financial institutions especially banks. The cause of the recent financial crisis has somewhat been blamed on the regulations in the financial and accounting world. “Risk based capital adequacy rules are one example. sooner than prohibiting dangerous activities, they look for to mitigate against risk taking incentives by making risky lending more expensive to fund than safe lending” (Eisenbeis, et al, 2000, P. 61). The most important implications of accounting research are (Robert A. Eisenbeis, Frederick Thomas Furlong, Simon H. , 2000 ): if markets are efficient, then gains from fundamental analysis are severely limited. In other words, accounting does not add value since it is not a timely source of information. Conversely, if security prices react to new accounting information, then accounting information is useful. There has been a pressure on accounting regulators to modify the valuation rules but certain researches oppose the idea of fair value accounting and rely only on the historical regulation practices in accounting and finance. “Regulation is a dynamic, evolving system of guidelines and controls, adapting to changes in the market environments and events-such as scandals and failures-that reveal vulnerabilities in the current setup. When things go wrong, however not everyone believes that more regulation is necessarily the best solution. Opponents of regulation argue that the markets works best when government lets them alone-what is sometimes referred to as laissez faire.” (Morris & Morris, 2010). But fair value accounting is essentially needed in order to prevent financial scams and instances of bankruptcies. There has been an increase in the mandatory reporting requirements in finance and accounting. All the registrants to the US Securities and Exchange Commission (SEC) should disclose all material information and facts before share trading in the US. “The SEC launched a widespread investigation of mutual funds in 2004 after revelations about market timing wrongs and followed the investigations and the prosecutions with a new batch of rules. The commission recently launched a far-flung investigation to find out what happened to auction-rate notes, how they were sold and whether the laws were violated” (Mitchell & Wilmarth, 2010). While academic research has stated the importance of financial ratios through the research process, it has been discovered that the ratios calculated using financial statements have become less effective in preventing bankruptcies. Thus, this calls for an assessment of the validity and reliability of the financial statements. It has been a controversial topic whether accounting rules should be rules based or principles based. “In response to heightened interest in off balance sheet entities post ENRON, the SEC issued financial release (FR) no. 61, which reinforced the need to follow existing SEC guidelines on disclosures of liability and capital resources information in the MD & A section of the annual report” (Previts, 2008, P. 225). Interpretations for several accounting and financial topics have changed from time to time and this ensures that there is a development from the historical accounting concepts. There have also been some controversies in accounting as to whether the current operating profit should be treated as distributable or sustainable income. This calls for a research to investigate the effects of treating current operating profit as distributable or sustainable income. “As a first step toward correcting some of the limitations of historical cost accounting, the securities and exchange commission cited replacement cost as the mandatory method of disclosure for large corporations” (Riahi-Belkaoui, 2004, P. 502). Financial accounting theories have little relevance on accounting practices because most of the times accounting theories are also molded according to the changing head in the government. “Government regulation creates incentives for individuals to lobby on proposed accounting procedures, and accounting theories are useful justifications in the political lobbying. Further, government intervention produces a demand for a variety of theories, because each group affected by an accounting change demands a theory that supports its position” (Watts, & Zimmerman, 1979). Accounting theories should be in public interest rather than self interest of the parties concerned. The accounting theories that have been propounded so far call for another question which is ‘does regulatory competition act as a replica for writing and executing corporate financial values?’ The rise and fall of WorldCom was impressive and states the importance as well as the limitations of regulations in finance and accounting. WorldComs expansion was impressive as its revenue, earnings and operating profitability increased. The company entered the NASDAC in 1989 and it recorded investor return more than 50 per cent annually. The WorldCom saga was a great financial development but after this phase, even though there was a sharp increase in the revenues, the operating costs also rose and the company could not shoulder a large percentage of the allocated cost, which prevented it from meeting its financial obligations. Then there was a financial scam and the firm hid its expenses and inflated its cash flow by above US$3.8 billion more than five quarters, which brought about the collapse of the firm in 2002. The investors of WorldCom expected high and realistic return, which the firm could not provide and there were challenges of the existing accounting regulation theories. In order to protect its own interest, the firm took risky and aggressive steps and thus bankruptcy occurred in WorldCom. The objective of the Accounting Research such as journals is to provide a helpful opportunity for the exchange of ideas between professionals and academics on the custom of accounting, finance, and auditing disciplines. “The findings from this study suggest that other than for a very few journals, accounting journals receive largely indifferent use, and individuals appear to have very little general relevance to accounting academics as a whole” (Milne, 2001, P.2). Journals are secondary sources of information and thus are bound to have limitations with respect to facts which are stated. The other limitations with respect to journals relate to the time in which these are released. Accounting regulations have been changing from time to time and thus academic research will not always serve as updated information. Academic research provide information only on the basis of past performance. “No single source provides principles for handling all transactions and events. Over time, conventional rules have developed that continue to be relevant. Additionally, groups have been authorized to establish accounting standards. The Financial Accounting Standards Board (FASB) assumed responsibility for accounting standards and principles in 1973” (Henson, 2006). Securities and Exchange Commission is the primary federal regulatory agency for the securities industry. The responsibility of SEC is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities market. “The balance between expertise and accountability in the making of federal securities policy is determined by three factors that define the resources, or cloud of the sec in dealing with its legislative committees, other elected officials and regulated interests. These factors are (1) the technical and uncertain nature of securities policy; (2) the diversity of interests regulated by the sec and (3) degree to which Congress (and to some extend, the president) is sensitive to policies that affect constituents and the public: SEC enforcement activities” (Khademian, 1992). The SEC was a great step in regulating accounting principles and regulations but its principles were also sometimes challenged. “As if the SEC’s interest group opposition were not enough, its difficulties were compounded by the strict budget controls the Eisenhower administration implemented in the 1950’s” (Skeel, 2003). Conclusion: From the above, it can be concluded that academic research in finance and accounting has no real impact on the real world. Since academic research is mainly for scholarly purpose therefore the author has the freedom to express his own data findings on the research. It simply serves the theoretical purpose and does not have practical relevance otherwise the recent financial crisis, the bankruptcy of some major companies like WorldCom could not have happened. Academic research is a collection of several scholarly articles which their validity may not even being tested as mentioned above. Reference List Eisenbeis, RA. et al., 2000. Financial modernization and regulation: a special issue of the Journal of financial services research. [Online] Springer, P.61 Available at: http://books.google.co.in/books?id=PPrM3Y3xgjgC&pg=PA57&dq=definition+of+%22regulation%22+in+finance+and+accounting&hl=en#v=onepage&q=definition%20of%20%22regulation%22%20in%20finance%20and%20accounting&f=false [Accessed 26 April 2011]. Henson, W., 2006. What is accounting and general accounting principles and functions. [Online] free article: tutorial. Available at: http://e-articles.info/e/a/title/What-is-accounting-and-general-accounting-principles-and-functions/ [Accessed 28 April 2011]. Khademian, AM., 1992. The SEC and Capital Market Regulation: The Politics of Expertise. [Online] University of Pittsburgh Pre Available at: http://books.google.com/books?id=be3PmxU- gQEC&printsec=frontcover&dq=sec&hl=en# [Accessed 26 April 2011]. Morris, V B. & Morris, K M., 2010. Guide to Money. [Online] Light bulb Press, Inc. Available at: http://books.google.com/books?id=TUYGliPkDCMC&pg=PA10&dq=sec+as+regulator&hl=en#v=onepage&q=sec%20as%20regulator&f=false [Accessed 27 April 2011]. Milne, MJ., 2001. Debating accounting research journal rankings: Empirical issues from a citation-based analysis and Theoretical dilemmas from economics. [Online] University of Otago. Available at: http://www.acis.canterbury.ac.nz/documents/Markus_Milne_Research_Programmes/Debating_Accounting_Research_Journal_Rankings.pdf [Accessed 26 April 2011]. Mitchell, LE. & Wilmarth, AE., 2010. The Panic of 2008: Causes, Consequences and Implications for Reform. [Online] Edward Elgar Publishing. Available at: http://books.google.com/books?id=4luyHQPgd50C&pg=PA231&dq=sec+as+regulator&hl=en#v=onepage&q=sec%20as%20regulator&f=false [Accessed 27 April 2011]. Previts, G., 2008. Research in Accounting Regulation, Volume 20. [Online] Elsevier, P.225 Available at: http://books.google.co.in/books?id=fqXogU3Ke-0C&pg=PA251&dq=Do+accounting+bodies+employee+academics+to+help+them&hl=en#v=onepage&q&f=false [Accessed 26 April 2011]. Riahi-Belkaoui, A., 2004. Accounting theory. [Online] Cengage Learning EMEA, P.502 Available at: http://books.google.co.in/books?id=fE9STcvKw-QC&pg=PA502&dq=Do+we+have+accounting+theory+to+assist+with+regulation?&hl=en#v=onepage&q&f=false [Accessed 26 April 2011]. Skeel, DA., 2003. Debts Dominion: A History of Bankruptcy Law in America. [Online] Princeton University Press Available at: http://books.google.com/books?id=30P1ETv_sesC&pg=PA170&dq=sec+as+regulator&hl=en#v=onepage&q=sec%20as%20regulator&f=false [Accessed 27 April 2011]. Watts, RL. & Zimmerman, JL., 1979. The demand for and Supply of Accounting Theories: the Market for Excuses. [Online] JSTOR. Available at: http://www.jstor.org/pss/245516 [Accessed 26 April 2011]. Read More