The Regulation of Financial Regulation Accounting in Australia - Essay Example

Accounting and Society s Accounting and society Introduction There exists regulation in nearly all spheres of human activity including construction, businesses, the environment, hiring policy, information disclosure, health and safety standards, wage levels, product pricing, and hours worked. Christensen (2010) affirms that regulation is considered as the major function of the state. It represents the attempt of the government to formulate limits to the extent of private activities In relation to financial reporting, for the majority of the 20th century, the government has designed, administered and enforced formal regulations, even though the private actors have played a similar role in this process. The lobbying and politic that originate from private interest is considered to be very much more powerful as compared to the initial efforts that were aimed at protecting public interest. This has made direct state regulation to be viewed as inflexible, expensive, poorly enforced, inadequately designed, and vulnerable to special interests. The past decade has witnessed the Australian governments re-evaluate its regulatory strategy due to failure of the regulations to protect public interest. The paper will examine the factors that adversely affect public interest in accounting regulation as argued by the regulatory capture and economic or private interest. Discussion The regulation of financial regulation accounting in Australia began in the 20th century. The regulation came as a result of separation of ownership and management. The reasons for financial regulation practice consist of the following: market for information is usually not adequate. In that respect, devoid of any rule, the sub-optimal quantities of information will be disseminated; investors also require protection from fraudulent firms that may be producing misleading information; lastly, the Australian regulations usually emphasizes on uniformity, thus enabling comparison of financial information. In that perspective, the issues of private interests and regulatory capture adversely affects the aim of provision of useful information for the users of public company financial reports. The Australian accounting profession via its code of conduct lays down several principles of trained conduct, for instance, public interest. Consequently, having an understanding of public interest and knowledge of performing one’s roles in performing public interest is regarded as the basis to the practice of accounting profession. Failure to serve public interest is a threat to the credibility of the accounting profession. Studies have shown that public interest needs to be sheltered from failures in the market that is brought about by fraud in fiscal information. The Australian accounting rules and regulations are very close to the state government or have some political ideologies in its setting. The major purpose of state being involved in formulating accounting procedures is as a result of market failure (Brown & Tarca, 2001, p.269). The government argues that it is engaged in regulating the Australian accounting regulation so as to offer protection to the public interest. On the contrary, lobbying and politic that usually emanate from the private interest are a bit influential as compared to the initial attempts to offer protection to the public interest. McLeay and Riccaboni (2008, p. 83) argue that the aspect of public interest in accounting regulation can also be described in relation to consumers and producers, the former being the users of financial information while the latter being the prepares. Accounting regulation by the promulgation of accounting standards is a method whereby the consumers can be assured quality of the information. The public interest theory Most Australian companies experience an array of detailed accounting set of laws. Since the introduction of limited liability form of company, regulation has been in place in order to offer protection to these consumers, which was initially thought to only protect creditors and investors. It can be asserted that consumers of accounting information require similar protection as the consumers of other commodities. On the contrary, as in other spheres of regulation, public interest is regarded as incorporating efficiency. Under certain conditions, the public can have impact on the regulatory principles (Berry, 1984, p. 524). According to the public interest theory, regulation needs to be established so as to protect the public interests. These include investors as well as other users of financial information. It also points out that the body that is tasked with regulation is regarded as a neutral intermediary of the public interest. In Australia, the state government is the neutral negotiator of public interest and it usually actually does not permit its own self-centredness affect on the process of coming up with laws. The intervention of the Australian government in markets is in the public interest as result of inadequate market practices. In the year 1984, the state made interventions in accounting regulation due to failure of the market by companies with clean audit bills, for example, Corporation Holdings, Bell Group, Linter, Qintes, State Bank of Victoria, Adsteam, and State Bank of South Australia, and also lack of information coming from information asymmetrics. Protection of public interest is appropriately served with a legally applicable as well as regulations that have been imposed by the government as compared to the self-governing accounting profession. Aikins (2009) argues that the power to come up with accounting rules has historically been rested nearly exclusively with the chartered accounting profession. The rules and regulations that are usually developed favours the self-interests of this subset of accountants over the public interest. Dissemination of timely and accurate information by companies to the investors is very important requirement for efficient allocation of capital. The investors need comprehensive information on the past and present financial status of the firm, as well s the expected profitability of the companies so as to make informed investment choices. On the contrary, provision of the information raises costs both for the investors and the firm. These costs include search costs and processing costs (Easterbrook & Fischel, 2006). These information costs result to drawbacks in the operational efficiency of the capital markets if there are no intermediaries. First, when the cost of information is very big, it discourages the investors from participating in the market. Secondly, the investors cannot be able to establish between low and high quality investments. Capture theory It outlines that even though the regulation has been put in place so as to protect the interests of the public, the approaches for regulation are usually captured in order to offer protection to the interests of certain egocentric groups that are within the society, especially those whose activities are often impacted by the regulation. Considering that the regulatory agency emphasises with the entities that are regulated, successive regulations are beneficial to the entities that are being regulated. Therefore, this implies that the regulated tends to capture the regulator. In Australia’s regulation environment, lobbying and politic that usually emanate from private interest is more powerful as compared to the state’s attempts to offer protection to public interest. As a result, these private interests and regulatory capture adversely have a negative on the aim of provision of useful information for the users of public company financial reports. For instance in Australia, the factors that affected the market were actually viewed as a result of low levels of compliance with accounting standards as well as inappropriate accounting standards that are publicized by the accounting profession resulted to the establishment of the Accounting Standards Review Board (ASRB) in 1984. This Board was tasked with the authority of promulgating the accounting standards with the rule of law (Chalmers, Godfrey, & Lynch, 2012). For example, in relation to the regulatory capture in financial reporting domain, Walker (1993) argues that the government initially created the ASRB so as to protect the public interest. Afterwards, ASRB actually captured the interests of the groups it was intended to regulate. The ASRB was formed by the Australian government as an self-regulating body to protect the interest of the public amidst concerns over low compliance levels by the accountants with the standards of the accountancy profession. The Board was tasked with approving legally enforceable accounting standards originating from any source. Nonetheless, Walker claims that the ASRB was effectively captured by the accounting occupation, whose members were obliged to hold on to the standards that have been formulated by the Board. This resulted to the accounting standards being set by the accounting profession and legitimized by the state. In its short life, it was found out that only one accounting standard was got from outside the accounting profession. The professional bodies consequently managed to capture the ASRB agency (Chalmers, Godfrey, & Lynch, 2012, p. 13). According to Bernstein (1999, p. 45-49), another factor that adversely affects public interest comes in the form of regulatory capture. It is described as a type of political corruption that usually takes place when a regulatory body that was formed to serve the interest of the public, goes ahead and advances the commercial concerns of certain interest groups that dictate the sector it is tasked with regulating. This capture is regarded government failure to protect public interest. As a result, there is creation of an opening for firms to act in a manner that is deleterious to the public such as producing negative externalities. Economic or private interest group theory Financial regulation and its reporting are influenced by the egotism of the persons that are concerned. These people usually come up with groups to make it easier for them attain their objectives. The economic theory argues that governments comprise of individuals who are typically self-interested and will come up with regulations that are more likely to lead to their re-election. In this context, in deciding on a particular regulation, these individuals will take into consideration the firms that they are involved in. Private interest does not necessarily serve a broader public interest. Mahoney, McGahan and Pitelis (2009, p. 1034) argues that the ill-defined public interests can favour certain firms and people whose interest would actually not be favoured is if all the community members are equally represented. The private interests are usually created by the international collective goods that are often described as non-excludable across generations and borders as well as population groups. Chalmers, Godfrey and Lynch (2012, p. 11) assert that the public interests are adversely affected since those parties have a higher probability of being severely affected by legislation put forth political influence and lobby for outcomes that will be beneficial to them. The choice to lobby on a proposed financial accounting regulation relies on a lobbyists effect of the accounting change on their interests and the cost/benefit assessment. For instance, the researchers affirm that in the last four years there have been lobbying for groups. In relation to water accounting, it has been found out that the utmost evidence of the private interest is that there are individual jurisdictions which have been lobbying for the implementation of systems that are being applied so as to reduce costs like systems, implementation and training costs. Additionally, the private interests are also lobbying for reduced reporting requirements (Chalmers, Godfrey, & Lynch, 2012). As result, this adversely affects the dissemination of water accounting information to the general public. Private interests are usually the instruments, initiators and the aims of public policy. Public interests are hard to protect due to the interaction between the private as well the interest of the public. As cited by Mahoney, McGahan and Pitelis (2009, p. 1046), in the global sustainable value-creation, innovation costs and benefits are basically hinged to the interests of both the private and public parties within nationally and internationally. In public areas, private interests need to be restrained. This is attributed to the fact some public resources can not be replenished or are depleted temporarily. As a result, regulation is needed. In business entities, sustainable competitive advantages often do not act in the interests of the state. However, if companies attain competitive advantages via practices that are restrictive, they might weaken the sustainability of countrywide value-creation through limiting innovation, competition and learning (Mahoney, McGahan and Pitelis, 2009, p. 1043). The market forces in urban economics may be described in terms of supply and demand. (Adolphson, 2004) argues that the urban land use is determined by the actors’ demands, needs, and competitiveness. The actors that represent the private interests include landlords, occupiers of housing, estate agents, and developers. On the other hand, housing, jobs, shopping and Other activities comprise of the needs. In land competition, the actor that outbids the others will get the site and thereby determine how the land will be used. In that respect, the pubic interest is adversely affected. Private interest argues that the regulatory process is dominated by private interests rather than the public’s interests. The outcomes of the rules and regulation usually show the interests of the mainly influential group. Besides, political class is usually not predictable because they design regulations to their own benefit. As a result, the public interest is not protected since the politicians can suppress certain groups in the decision making process, thus discouraging proper decisions in relation to the financial regulatory measures to be adopted (Boehm, 2007). Moreover, politicians adversely affect protection of public interest because they seek for political support from groups that they favoured in the decision making process. This may be attributed to the fact that most political actors are not neutral negotiators, since they hunt for a re-election as well as being ‘bought.’ This implies that the groups that are mostly interested are situated on the demand side whilst the government is usually put on the supply region. Posner (2010) affirms that the industry comes up with the regulations that are beneficial to its members. As a result, the public interests are adversely affected. This is attributed to the fact the producers can readily organize themselves as compared to the consumers. Even though the government’s role is to enforce the regulations designed by the industry, the idea of making use of representative groups to regulate the financial industry in the nation favours some groups than others. This adversely affects the interests of the public. For instance, a firm or business entity with little profit margins can actually invest in lobbying in order to secure some benefits from the regulatory action. The public interest perspective affirms that disinterested and trustworthy regulators intervene in the economy so as to further public objectives. However, the theory of private interest recognizes the interest of the entities that are involved. The auditors, sell audits to firms and that the products they produce is designed in way that it meets the demands of their clients. However, there is a problem where public interest is compromised where the auditors are hired and also paid by the audited firm’s managers. As a consequence, the auditor will have an incentive to meeting their client’s demands by coming up with a favourable audit. This incentive is aggravated when there exists other opportunities for profitable connections between the firm and the auditor. This leads to under-provision of accurate financial information (Green & Hrab, 2003). Prevalence of secrets in a consensus usually short circuits the process thus creating a likelihood that the outcomes will result to a greater divergence of the losers and winners (Stiglitz, 1988, p. 14).Agencies are at higher risk of misconduct where firms or individual work units have sole responsibility for providing a service. Aikins (2009) notes that in circumstances where firms where companies have the authority to limit competition or fix prices, consumers are without the information required to formulate choices on the best products, and the marketplace exchanges influence the individuals that are not party to the transaction, the public interests are adversely affected in such a situation. Rosenbluth and Schaap (2003) note that various electoral rules will have an effect on the level upon which bank set of laws favor some manufactures over the consumers of monetary services. Consequently, from the regulatory capture’s standpoint, this circumstance might be a mirror image of the outlook in the shared aims and interests of the financial institution and the regulators, thus affecting the protection of public interests. Creative accounting Disclosure of accounting information may be benefiting to one user group, while hurting the interests of the other group. Studies have shown that public interest is usually formed from a wide range of interests. Therefore, in the regulatory process, the interests of both the preparers and consumers of accounting information need to be taken into consideration. For instance, the composition as well as the voting powers of the regulatory agency’s members should reflect their constituents. Furthermore, the inputs to the process of regulation should be made by both users and preparers. Misconduct is likely to take place when an official exercising power misuses discretion in circumstances where transparency and accountability are ineffective, absent, or avoided (Grabosky & Braithwaite, 1986). When corporates collapsed such as the one that was witnessed in 1980 through firms like Bond Corporation Holdings, Bell Group, Linter, Qintes, State Bank of Victoria, Adsteam, and Metrogrowth, accounting and auditing professions were critised for hiding true financial information on the firms. Conflicts of interest ensue when a person’s professional responsibilities usually diverge from their personal interests. According to Walker (1993:89), creative accounting has been found to be done through concealed losses, understated debt, conjuring up profits from paper transactions, and balance sheets that have been window dressed. Auditors carry out creative accounting due to the fact they do not maintain their independence. In this perspective, auditors are required maintain utmost professional and ethical standards so as to ensure their independence. Lack of ethical standards adversely affects protection of public interest since the public interest relies on the professional conduct of accountants and auditors (Fulop, 2013, p. 29). Recommendations to reduce any potential for adverse effects Accounting is a tool that may be utilised to attain a social goal. Since the accounting structure of one state is different from other nation, it is recommended that it should be designed in a way that it suitable to that country. Another recommendation is that the accounting standards be developed in way that it affects wealth distribution in the society. Financial reporting needs to offer useful information to the users for making informed decisions and evaluations in relation to allocation of scarce resources (Deign, 2003, p.32). Since most companies perform economic and social transactions, the financial reporting needs to cover the social responsibility of companies. The auditors need to maintain their independence so as to avoid creative accounting. Firms also need to enlist the services of an external auditor so as to offer an independent opinion if the firm has put in order its financial statements in agreement with the standards of Australian regulations on accounting standards in addition to other requirements that are stipulated in the regulation. Accountants and auditors need to have knowledge in ethics so as to assist them to overcome ethical dilemmas, by making the right choices for the benefit of the public. Accountants and auditors need to have integrity, confidentiality, objectivity, professional competence, and exhibit good professional behaviour (Fulop, 2013, p. 33). It is also recommended that accountants need to maintain confidentiality as well as reporting to a third party such as any regulatory body, and violations that occur aligned with the “public interest” persuaded by either the employer or client. The regulatory agencies need to avoid being captured by special concerns of certain interest groups by working within their mandate. The Australian accounting profession needs to have a self-regulatory system, which will be periodically improved in order to maintain public trust and confidence in the reliability and integrity in the process of financial reporting that are in the interest of the general public. This will be attained through designing and enforcing auditing, accounting and behavioural standards, coordinated state regulatory statutes, and a mandatory peer review process. Role and power of accountants in the society The role of accountants in the society is very crucial. The accounting profession protects public interest through self-regulation of the accounting profession. This means that the accounting regulations were formulated and implemented so as offer protection to the public interest. Consequently, public interest principle is considered as not being window dressing, but it acts as guide to the moral values. According to (Fulop, 2013), the profession of accounting is essential in approximating and regulating the production and exchange of financial information. It is also very crucial in serving the public interest. As a consequence of the type of the activities that are performed by the accountants and auditors, it needs a high level of professional ethics including the human condition from the perspective of moral principles and value, and their involvement in social life, all the rules of appropriate moral conduct. Conclusion There is public interest in accountability and transparency, in good decision making by public bodies, in securing best utilisation of public resources, and promoting public understanding and safeguarding the democratic process. The government needs to fully participate in financial regulation so as to offer protection to the public interest. This due to the fact that devoid of rules and regulations, minimal quantities of information will be disseminated. Additionally, parties with some degree of restricted power will not be able to access information regarding the company and investors will be recipients of misleading information. However, in some instances, politicians or groups with public interest genuinely seek regulation in the public interest. It is considered to be in the public interest to make reviews and enhance the accounting profession’s self-regulation in order to maintain public trust as well as confidence in the reliability and integrity of the process of fiscal reporting by means of improving the quality of independent audits of financial statements of issuers. Creative accounting also needs to be discouraged by making sure that the accountants and auditors follow ethical standards, since the users of financial information will not get accurate information with regard to the firm’s financial performance. Creative accounting may be done through concealed losses, understated debt, conjuring up profits from paper transactions, and balance sheets that have been window dressed. References Adolphson, M. (2004). New Urban Settlements in a Perspective of Public and Private Interests. Stockholm.: Department of Infrastructure/Urban Studies. Aikins, S. (2009). Global Financial Crisis and Government Intervention: A Case for Effective Regulatory Governance. International Public Management Review , 10 (2), 1-21. Bernstein, M. 1999. Regulating Business by Independent Commission. Princeton: Princeton University Press. Berry, W. D. (1984). An Alternative to the Capture tTeory of Regulation: The case of State Public Utility Commisions. 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