Accounting and Society: Perspectives on Protecting Public Interest - Literature review Example

Reflective Portfolio Student’s Name Subject Professor University/Institution Location Date Table of Contents Table of Contents ii 1.0 Introduction 1 2.0 Accounting for Protecting the Public Interest 1 3.0 Regulatory Capture 6 4.0 The Private Interest Perspective 8 5.0 Recommendations for Reducing Potential Adverse Effects 9 6.0 What the Three Perspectives Mean for the Role and Power of Accountants in the Society 11 7.0 Conclusion 12 8.0 References 13 1.0 Introduction The accounting profession is an integral part of the society; it does not only play a major role in the corporate sector but also in the state as Christensen (2005)underscores. As such, it is expected to serve the members of the society or the public. The capacity for the Australian accounting profession of protecting the public interest, economic interests and regulatory capture are considered in the legislation context as well as the standard setting process in accounting perspectives.Jackling (2007) adds that accounting is a social choice; it has essential impacts on the welfare of the society. It has effects on two societal goals of equity and efficiency and therefore corporate reporting must give due and enough consideration of these two goals. There are various acts for regulation and their effects to the accounting profession increase awareness of the perspectives.Regulation is important tool for fostering as well as promoting accountability in organizations (Bratton 2007). This report focuses on three accounting perspectives namely protecting the public interest, regulatory capture and private interest (economic interest). The report discusses how they affect the accounting regulation and their effects to the objective of provision of useful information for the users of financial reports of a company. In addition, this report discusses some recommendations for reducing any potential for adverse impacts. 2.0 Accounting for Protecting the Public Interest Accounting emerged from the society and therefore it is socially constructed as well as socially constructing. This can be taken to mean that accounting influences the society and it is influenced by the society as well. This is a concept was developed by Zeff in 1978; he indicated the impacts on accounting if the standards and practices in accounting were designed to avert potentially adverse economic consequences (Mattli&Büthe 2005).The accounting profession has a commitment and heart of protecting and serving the public interest. This commitment and heart is very important because professionals are placed in the position of trust by the society that they serve. Consequently, in return for the trust, all persons and members of the accounting must therefore act in the best interest of the society.Initially regulatory agencies and bodies are set to protect the public interests but the regulated individual groups, organizations and persons capture them. This happens due to frequent and regular interactions in the process of regulating, the regulatory agencies emphasize with the subjects and therefore compromise they professional code of conduct. As such, the regulatory body ends up making advantageous and favourableregulations, rules, policies and practices in thefavour of the regulated parties. The Australian accounting profession, in its code of conduct, provides several fundamental principles for ensuring professional conduct including the public interest as Croteau&Hoynes (2006) emphasize. The public interest proponents argue that the fundamental principle provide the basis for the code of conducts. As such, knowing how and understanding how to carry out responsibilities and duties in serving the public interest di fundamental to the accounting practice.re are severe consequences for failure to serve the public interest. Therefore, it is very essential to erase any doubt about public interest primacy. The disappearance of the once revered and mighty strong Arthur Anderson within one year of discovery of abuse of public trust at Enron Company should be a good remembrance to persons in the accounting practice. In addition to the severe consequences, Broadbent & Guthrie (2008) argue that failure to serve the public interest threatens the credibility of the accounting profession and perhapsits very existence. This consequently makes the society to lose confidence with the profession and this can make many organizations to collapse as well. The accountant’s code of conduct is the communication tool and medium for the definitions and explanations of public interest. The definitions are similar and therefore the definition of public interest is “the collective well-being of the society as well as the institutions and organizations the members serve”. Accountants understanding and their ability to apply the public interest principle play a major role in protecting the public interest. Generally, this perspective on accounting regulation of viewing it as regulation as being required to protect the public interest is supplied in response to the high demand of the society (Cooper & Robson 2006). This high demand is for correction of the inequitable or inefficient market practices. There is assumption that the regulation is supposed to benefit the society initially as a whole before benefiting the particular vested interest. The Australia accounting standards board (AASB) is vested with the responsibility of regulating and protecting the accounting profession in Australia. The government and the accountants consider the AASB to represent the interests of the society where private and public organizations operate. Individuals and private organizations or institutions cannot be vested with the responsibility of regulating and representing as well as ensuring the protection of the public interest. The government is the sole regulator for ensuring protection of accounting for public interest. As such, the government creates institutions and professional bodies to ensure regulation and protection of the public interest in the accounting profession. The government regulates the banks and other crucial market players in facilitating efficient functioning of the accounting profession for the public interest purposes (Soderstrom& Sun 2007).The banking system is one of the established and complex examples of where there is pure application of the accounting practices and therefore its regulation would protect the interests of the public as well as ensure efficiency in the service to the society. There is necessity for regulation in protecting the public interest. It ensures efficacy of markets and therefore that the necessary market forces operate to serve the society in the best way possible as well as optimize allocation of resources in an equitable way. There is need for regulation to protect the public interest because the markets do not always operate to the best interest of the society indicating that there is need for some form of interventions by way of regulation to protect the interests of the public. The regulation for protecting the public interest avoids “chaos in the road since drivers would not observe the road rules”. This means that the protection is not only for ensuring the best service and interest of the society but also to ensure that all the market players observe and adhere to the rules and requirements of the accounting profession (Jackling 2007).Moreover, regulation is necessary for coordination and rationalization of economic activities in order to organize the market behaviors and industries efficiently.A good example of such regulation is regulating the reporting of financial statements of different organizations by one reporting entity.This indicates the need for central planning and control of financial reporting in order to ensure that all organizations consider and take in to account the interests of all the users of the financial statements. There are instances where the members of the society bear more costs than others in looking for services in the accounting profession. In such cases the accounting perspective of regulation as being protecting the public interest comes in to play. It comes to ensure there is equitable bearing of costs and balance the costs borne by the different persons in the accounting profession.Therefore, the purpose of the protecting the public interest in accounting regulation is to achieve publicly desired results that would not be possible it there is no such regulation for protectionBartov et al., (2005). Although it may not be a main reason for protecting the public interest, protecting the public interest responds to demands emanating from the society concerning the correction of the market inefficiencies such as accounting inconsistencies among organizations. It is not easy to achieve demand from all persons competing between the same resources. This is because the regulator does not acknowledge the competition among the persons creating the demand.The Australian accounting profession has the capacity to serve as well as protect the interests of the public as Brüggen, Vergauwen& Dao (2009) indicates. The Australian government intervened in the accounting regulation late in the 1984 due to the market failures experienced at that particular time. There were many failed companies with clean audit bills. There was also lack of clear information due to information asymmetry in the market. In addition, the existing theories were based on unrealistic assumptions.The government contemplated to intervene in the regulation of accounting profession in order to avoid such market failures. The politicians helped the investors by supplying them with information about the market and the market performance so that they are in a position to make good judgement.There should be public interest groups and other similar agents for genuinely seeking regulation in the interest of the public as Feintuck& Varney (2006) recommends .The government does not and it is not supposed to have independent role in the development of regulation but it should remain neutral arbiter. This would also remove the politician’sself-interestand interest of the government officials. This would prevent and protect the regulation of financial reporting din Australia. 3.0 Regulatory Capture According to Boyer & Ponce (2012), it is the process by which accounting regulatory agencies come to be dominated by the industries and organizations they were supposed to regulate and were charged with regulation. This occurs when a regulatory agency such as the Australia accounting standards board (AASB), mandated to act in the best interests of the society or the public, ultimately acts in a manner that benefits the industry that it is charged to regulate, rather than the public. The agencies that are mandated to act for public interestbut come to be controlled by the respective industry they are supposed to regulate are known as captured agencies. These organizations ignore the public interest to the favour of regulated industry interests. Dal Bó, E. (2006) indicates that the issues of regulatory capture affect the objective of the provision of useful information for the users of financial statements of a public company reports. Regulatory capture is a political corruption, advancing the interest of the industry players rather than the public interest for commercial gains or for special favour. This produces and presents an opportunity for firms in the industry to behave sin an injurious manner to the members of the public. Firms in a regulatory capture produce negative externalities and they are very dangerous to the public (Baxter 2011). Although regulatory capture is a very rare occurrence in Australia, there have been cases of captured agencies where groups of individuals with considerable stake in outcomes of standards and policies as well as regulatory decisions channel their energies and resources in attempts of manipulating the outcomes of the policy and regulatory decisions in their interest at the expense of the members of the public interest who have tiny stake. This indicates that it is very important to control and prevent captured agencies and regulatory capture at all costs. It is a risk that expose he respective agencies by their very nature. As such, it is important also to protect regulatory agency from outside influence as much as possible. Economists are critical of conceptualizations of government regulatory mechanism and mechanism being motivated to protecting the public interest.May (2007) assert that captured agencies are worse than absence for no regulation and therefore creation of such agencies should be stopped and the existing ones dissolved.One of the best ways of preventing denting agencies to be captured agencies dis increased transparency; this does not only prevent capturing agencies but also mitigates the effects.Much effortis needed because there is corruption even with mature democracies, high media freedom, and high transparency, more complex and extensive regulatory environments. Liberals favour the regulations as public will and common good expressions as well as a way of protecting the interest of the public. Regulatory capture allows organizations and firms to use irregular accounting practices to conceal significant amount of information to the public wand users of the financial reports (Godfrey &Langfield-Smith 2005). As such firms can conceal their real level of debts and losses. Instances that encourage regulatory capture or diluting regulation are such as special interest group composing regulation agencies, forming weaken enforcements, gaming regulators (by switching regulations to new jurisdictions to suit special interest of group of members) and noncompliance to the established regulation. Regulatory capture leads to problems because it is the same as free market approach which posed several problems during the economic downturn and the financial crisis. The effects of the regulatory capture are that it furthers the interests of the individual groups at the expense of the weaker public. 4.0 The Private Interest Perspective This perspective acknowledges that individuals form in to groups in order to pursue their self-interests. Accountants and economists claim that the private interest is more in application than the regulatory capture. In addition, they claim that this perspective dominates the regulatory framework and process rather than the public interest perspective. For instance, the politicians are not neutral arbiters but they seek reelection and therefore they are “bought”, this indicates furtherance of private interest. In his book “politicization of accounting”, Professor David Solomons argues that accounting might be used to achieve other purposes other than the pureregulatory and measurement functions. He continues to assert that this move would destroy faith just as faith in speedometers would be destroyed once it were realized they were subject to falsification for the purposes of influencing driving habits. This indicates how the accounting profession and the accounting regulation scan or will lose faith, the members of the society and the general public will lose confidence with regulation of accounting due to such interests as furtherance of private interests. The accounting regulatory bodies do not design and formulate accounting practices and standards for benefiting private interests and private persons and individuals abut rather for benefiting the public interest and the members of the society. In addition, there are best accounting rules and practices for every occasion. Notably, the accounting standards are economically neutral and therefore regulatory agencies do not select standards and practices due to their economic impact but rather because of the best interest of the public, this overrides the private interest. This perspective is informed by assumptions that actors are rational self-interested maximisers of utility and therefore this determines the course of action concerning the form as well as content of the regulation process. 5.0 Recommendations for Reducing Potential Adverse Effects The lack of accountability and transparency in the regulation framework leads to the belief that financial reports are the solution as Godfrey et al., (2010) points out. While this is far from the truth, the financial reports do not indicate regulation. It is very important for regulatory bodies and the regulated bodies as well to value accountability and transparency.They should be a source of confidence in order to distant other interest groups. The presence of accountability and recognition in the accounting regulation would have enough power by itself to provide enough threat to local collusion; they are a powerful weapon for countering the collusion of any kind in accounting regulation. Transparency is only a problem when people believe in perfecting it, when people act as if all there is to accountability is transparency, that transparency is sufficient and adequate as a form of accountability asHutter (2005) indicates.Regulatory agencies and other institutions should advocate for public accountability. This is in addition to the need for reporting financial information that is credible and true to all stakeholders of an organisation. As such I recommend that total accountability and transparency for reducing the potential adverse impacts. Another recommendation is that there should not be application of accounting logic in determination, measurement and regulation of accounting as Brüggen, Vergauwen& Dao (2009) recommends.There are high expectations of financial measurement based primarily on accounting logic. This provides opportunities to the interested groups to advance their own personal interests. There should be total determination of the contents and information in the financial reports as well as measurement of inputs and outputs in order to enhance transparency as well as lead to changes in the structure, activities and actions that entities prepare accounting statements and reports in accordance to relevant and appropriate standards. This would also include true and fair representation of the appropriate reflections of an entity’s financial activities sand as such the use and application of AASB standards and practices. Nobes& Parker (2008) adds that it would also prevent private interest, regulatory capture and any other threat to accounting regulation of protecting the public interest. In addition, the use of critical outlook of using the transparency reinforces the confidence of the members of the public. People develop faith and trust among the accountants and other accounting professionals in the management, regulation and preparation of accounting information and statements (Ahmed & Falk 2006). 6.0 What the Three Perspectives Mean for the Role and Power of Accountants in the Society There is increase in calls for more regulation and accounting information e1very time there are concerns about lack of transparency and accountability. The accounting profession guides the process of determining as well as changing the accounting rules; they guide the any interventions by institutions or by state.Lack of accountant’s involvement in the process of regulation as well as setting of standards has severe consequences. The three perspectives mean that the accountants have a very important role and power in regulation of accounting. Their experience and qualifications make them stand out as the most important agents in the accounting regulation (Christensen 2005). These three perspectives mean many things for the role and power of accountants in the society. First, they mean that the accountants have the capacity and power to change the regulation of accounting. While the duty of regulation rests with the regulatory authority such as the AASB and the Australian taxation office (ATO), the accountants play the biggest part in ensuring regulation and compliance to the regulatory framework.This is because, it 3is the responsibility of the accountants to prepare, present and disclose the financial reports of an organIsation. As such, they may decide to hind and conceal some information concerning the operations and activities of an organisation. This is about transparency and accountability that accountants should always observe in the accounting profession (Croteau&Hoynes 2006). Second, accountants have a duty of care to the users of the financial statements. They must provide information as it happened and not what the users expect. They are in a position to manipulate the financial reports. Thirdly, accountants are professionals in the accounting profession. They are guided by the accountants code of professional conduct in the process of carrying out their duties and responsibilities of preparing and presenting the financial reports. It is important to correct efficiency and equity imbalances by mandating distribution of information that is consistent with the theme and goal of public accountability. Professional self-regulation is inadequate to serve accounting regulation. There is need for inclusion and constituent support in setting accounting standards; this is because the dynamic political activity is biased. As such, there needs to be other bodies and stakeholders for regulating the same. Some of the regulatory features to include are such as professional expertise, use of the coercive power of the state and the permission of a numerous non-accountant representation(Bratton 2007). There is great need for bridging the gap in information. The occurrence and existence of information asymmetry does not help in accounting regulation, in fact, it creates an equity problem. Onthe other side the nature of public good accounting cases inefficient underproductionof information sin environments without regulation.As Mattli&Büthe (2005) points out, these two issues are a concern and they are detrimental to reporting mechanism that regulation needs for public accountability. As such, it is important to provide information and to make all the users of financial statements to have the appr3opriate and relevant information. 7.0 Conclusion There is need for increased accounting regulation for the overall good and interest of the public. The regulation mechanism should thwart any efforts channeled towards belittling and diverting the purpose of accounting regulation in Australia. This report have discussed in detail, the three accounting perspectives and their effects on protecting the public interest. 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