The Role of Financial Regulation in Australia - Essay Example

The role of Financial Regulation in Australia Name Course Instructor Institution Location The role of Financial Regulation in Australia Financial regulation: Financial regulation refers to a form of collective management supervision that subjects the financial institutions and its entities to a number of requirements, guidelines and restrictions. The regulation is aimed at maintaining the integrity of the entire financial system. The financial regulation may be spearheaded by the government or a number of non-government organisations with proper authorization from the government. The concept of financial regulation has greatly influenced the entire structure of the banking sector. One way it has accomplished this is by decreasing the costs involved in the borrowing process and has also facilitated the increase in a number of financial products offered to the clients by these banks. The financial regulators have the following primary objectives in the application of the various regulation techniques. They are aimed at building confidence in the markets geared at maintaining a streamlined financial system. The financial regulations are also geared to offering the necessary protection and enhancement regarding the stability of the entire financial system. Financial regulations are also aimed at securing an appropriate degree of protection for the consumers. This is referred to as consumer protection in the business world. The financial regulations also ensure that a given business entity does not get involved in unnecessary financial crimes. It will entail reducing the extent to which a given business under regulation gets involved in acts that will lead to violation of the rules followed in doing business. The numerous acts brought forth by the government will empower the organisations and the non-government organisations in monitoring their activities and those of the other businesses in a bid to come up with proper actions for enforcement. This can be done through a number of setups and combinations that comply with the global financial regulatory structure. A series of Acts like the exchange works which ensures that the trading in the exchange market is conducted in a proper and efficient manner. The most equivocal application of this act is in the pricing process, the execution and settlement of trades. It is also applied in the direct and efficient monitoring of trade and commerce on a national and global scale. The financial regulators will always make it a point to ensure that the companies that are always listed comply with the numerous financial regulations stipulated in the various trading acts. These trading acts will always ensure that demands that are listed companies publish their regular financial reports, the directors’ dealings and the ad hoc notifications. Whereas these various participants in the market are required to publish their major shareholder notifications, this monitoring compliance has a primary objective. The objective is to ensure that all the various listed companies are in line with the disclosure requirements ensure that the investors have full access to the essential and the adequate information. This information is very vital as it will be useful in making a properly informed assessment of the listed companies together with the securities that these companies hold. In most cases and scenarios, there exist particular authorities that ensure that each of the sectors in the finance industry especially those to do with securities, banking, pension markets and insurance are regulated. A case in point is the system in the Australia in which the Australian Prudential Regulation Authority abbreviated as APRA does supervision of all the banks in the country and insurers as well. Similarly, the Australian Securities and investment commission abbreviated as ASIC is responsible for enforcing the numerous financial services and corporate laws. Some think tanks for instance the world pension’s council abbreviated as WPC have always argued that most of the governments in Europe pushed the adoption of the Basel II recommendations in a dogmatic manner. These recommendations adopted in 2005 that transposed in the European Union were passed through the capital requirements directive form 2008.These recommendations forced the banks in Europe and most notably the European central bank to ensure that they rely more than ever before on standardized assessments of the credit risks. These standardized market risks were those published by two private US-based agencies, Moody and S&P. These standardized assessments are used when gauging the solvency of the EU-based financial institutions (Firzil 2012). History of Financial Regulation in Australia In the year 1946, the Institute of Chartered Accountants in Australia abbreviated as ICAA produced a number of recommendations regarding the principals of accounting to be adopted in Australia. These recommendations mainly based on the documents that were released by ICAEW.A number of recommendations were released later on in 1956 by the Australian Society of Accountants. Later on these two bodies issued joint statements through the Australian Accounting Research Foundation abbreviated as AARF. The AARF worked with the Australian Accounting Standards Board abbreviated as AASB in the development of mandatory standards. AARF was consequently removed from the standard setting process accompanied by the adoption of the IAS/IFRS, and most of the current standard setting processes have been passed through the IASB. Thus, the accounting standards that are used in Australia currently are largely controlled by the IASB, which has its headquarters in London. However, there exist a number of efforts by the IASB in conjunction with the United States Financial Accounting Standards to unite the respective accounting standards in the two countries (Deegan 2009). In the year 1996, the Australian government put in place the financial system inquiry. The investigation followed an epoch of financial deregulation that commenced in the early 1980s.The inquiry was under the chairmanship of a prominent Australian businessman called Stan Wallis. The investigation found that the best structure that could be feasibility adopted in Australia at that, time would involve at least two regulators. One of the regulators would be responsible for the prudential regulation of all the entities that were in need of prudential regulation. The other regulator was responsible for the market disclosure regulation of any given financial products that were being offered to the consumers in Australia at that time. It is, however, worth noting that the changes in the different principles of accounting standards usually affect the numbers on the financial statements of the profits and net assets of any given business entity. Mainly because the numbers or financial figures are put to use in a number of ways varying from the community. Thus, the changes and alteration sin the accounting standards will have the potential of creating substantial economic and social concerns (Deegan 2009). Financial accounting in Australia a case study of “Financial Regulation” by Craig Deegan Craig Degeen in his article, the Financial Accounting in Australia argues that financial accounting is a “process that involves the collection and processing” of given information of financial nature. Decisions that could as well be made by the parties are external to a given organization (Deegan 2009). The users possess different information needs making it impossible to come up with the reports that meet the various needs of the users. These users include the following: The present and potential investors, the lenders, the suppliers of given items. It further consists of the customers or consumers of given items, the government or any other party that could be performing an oversight function lastly the media (Craig 1990). The accounting firms are also entitled to make a number of submissions regarding their accounting standard setting process. Thus, if the interest theory regulation were applied in such scenarios, one would argue that all these submissions could be adequately explained. These can be explained using a number of efforts that are aimed at protecting the numerous interests of the professional accountants. The auditors will perhaps be in favour of using and utilizing those rules that will reduce the risks that would be incurred in the auditing process. The primary reason for this is that more standardization accompanied by less judgment will reduce the risk of an audit, which will in the end reduce the potential for the very costly laws suits. Deegan, Stokes and Morris also support this narrative. The audit firms are more likely to porch in favour of some accounting methods. Especially if the sought of methods have been previously in use by a significant number of their clients (Craig 1990) In relation to the role of financial accounting, some particular industry groups may also negotiate with the regulator to just accept or reject a given standard method of accounting. For instance, in Australia a given accounting standard that relates to the general activities of the public insurers was brought forth in the year 1990.One of the requirements for this standard that seemed utterly unpopular with many of the insurance firms was mainly that their investments meant to be valued at a net market value. Any profits obtained were supposed to be treated directly to the profit and loss account. Rationale for Regulation Degeen writes that the rationale for regulation first was introduced and put to the test after the great depression in the 19th century. He argues that the problems associated with the accounting process were responsible for the poor and uninformed investment decisions that were undertaken before this depression. A number of competing views have been brought forward to explain whether regulation is necessary for a given setting or not. There exist two schools of thought concerning this subject that include the pro-regulation advocates and the anti-regulation advocates also known as the free market advocates. The arguments that are in favour of the regulation contend that the market information is not sufficient for proper functioning of the business. On average these markets efficiency ignore the rights of the individuals over the scarce resources. Whereas those with limited power and influence are, in general, unable to obtain secure information without necessary regulation even when the regulation on a given organization may have a profound impact regarding their existence. These proponents further contend that the investors needed the regulation to be protected from a number of fraudulent organizations that could be producing very erroneous and misleading information. The regulation will help these unsuspecting investors make proper and informed decisions before the investment of their money in a given business entity or setting. The regulation also leads to equitable and uniform distribution of the method of investment and ways of doing business that will in the end help in enhancing the comparability. On the other hand, the argument against regulation is mainly cantered on the belief that regulation will make people pay for information to an extent and extreme that it is put to use. This school of thought argues that the capital markets act in a way aimed at punishing the organizations that will fail to provide the necessary information regarding their operation. Thus, regulation will lead to a huge supply of information to the consumers who seem not to be bearing any cost regarding the supply of this information. In the end, this will lead to an overstating of the individuals’ needs. Most of the information provided to the consumers or the users will be redundant. It will be redundant, as it may never be put to use by the individuals it is intended to. The opponents of regulation further claim that it imposes a restriction on the methods of accounting that are used in the world of business. Thus, the organizations will be restricted from employing certain methods that could best describe their given level of performance and position. The opponents of regulation further claim that this will have profound implications for the efficiency with which the firms can inform their markets about how it does its activities. Financial regulation is mainly split largely into the Australian Securities and Investment Commission abbreviated as ASIC and the Australian Prudential Regulatory Authority abbreviated as APRA.ASIC has a primary responsibility of maintaining market integrity and proper consumer protection mechanisms and undertakings. It involves the regulation banks and the finance companies and institutions. APRA, on the other hand, has a major responsibility for licensing and prudential supervision of the authorized deposit-taking institutions like the banks. The life and general insurance companies and lastly the superannuation funds in that respect. Central to the regulation principals is the concept of a financial product. Under the law of Australia, this term is defined widely as the cover of a number of facilities through which an individual involved in financial investments manages all the financial risks that he might encounter. There also exist a number of other financial products that are now regarded as the financial products, for instance, the various credit facilities. Financial regulation in Australia comprises of a number of elements whose combination defines the entire regulation levels in Australia. These components have a role to play regarding the whole system of regulation in Australia. For instance, the Auditing and Assurance Standards Board”: This is an independent statutory agency responsible for developing the standards and the necessary rules. Standards to do with proper guidance to the auditors and all the players in that field. Theories to describe the benefits of regulation in relation to Australia There are three basic principles used to give an explanation of the significant benefits of financial regulation. These principles do not only apply to Australia but are also applicable to a number of other countries and economic settings or entities in Europe and other parts of the world. The three basic theories include the public interest theory that completely ignores the self-interest. The Regulatory capture theory assumes and acknowledges some bit of selfishness as part of the story but not always. Lastly, the private interest theory deeply recognizes the self-interest of the parties involved. Each of these theories builds on the foundation laid by the other theory in its explanation of financial regulation. Public interest theory of regulation "Public interest theory of regulation" is a theory of economics that was propounded by Arthur Cecil Pigou (Pigou 1932). This theory holds that any regulation should always be supplied in response to the various demands of the public. Public interest theory of regulation asserts that this public demand is mainly aimed at correcting the inefficient, efficient, and inequitable practices in the market setting. The regulation as propounded by this theory is always assumed to be beneficial to a given society as a whole, not the particular interests. The regulatory body of a perceived regulatory undertaking is thus considered to represent the numerous interests of the society in which the regulatory body works and embodies. It is not laid basing on the various interests of the individuals. Public interest theory of regulation is put on a number of basic assumptions in its explanation of financial regulation. Public interest theory of regulation assumes that the individual markets and settings are very fragile and volatile. It assumes that these sensitive markets are apt to operate in a very inefficient and inequitable manner if they are left to be left alone without any regulation. The markets will tend to favour some individual units of the business community at the expense of others if left without the necessary intervention of any regulation. A number of criticisms have been raised regarding the Public interest theory of regulation. Most of these arguments and criticisms are anchored on the purported differences between this theory and yet another theory called the public choice theory of regulation. Thus, the public interest theory is particularly contrasted with the public choice theory in a number of ways, in a comparative analysis of the two to identify the flaws in the Public interest theory. The public choice theory is more cynical concerning the behaviour of the government. It does this in relation to its motives in the financial regulation. The public choice theory sees the Public interest theory as being inefficient on a social basis. In fact Stigler in his article entitled the “The Theory of Economic Regulation” argues that regulation can only be captured by a given firm majorly to protect the competitive market from the entry of others potential competitors (Stigler 1972).A number of critics as far as this theory will only be valid if the all the basic demands of the public are considered before the proper formulation of the financial regulation theory. These public demand and interests should be considered if the theory is to archive proper and efficient allocation of the resources in a proper and efficient manner in any business environment. Critics believe that this theory does not possess the basic assumptions regarding the outcomes of all its undertakings in any given financial entity. Based on this, these critics claim that this theory is not valid enough to be applied in the regulation process. Capture theory of regulation Capture theory of regulation was propounded by George Stigler, a laureate economist. Capture theory of regulation is simply a process of regulation that involves the regulatory agencies eventually coming to be dominated by the industries that are being targeted by the regulations. Capture theory of regulation works in situations where an agency in charge of regulation acts in the interest of the general public domain. All the public interest organizations that come to be regulated or controlled by under Capture theory of regulation come to be known as the captured industries in the language of the regulation. The paradigm of regulatory capture is just an example of the gamekeeper who, in the end, turns into a poacher. Thus under the Capture theory of regulation, all the numerous interests that a given agency sets out in order to protect themselves are just ignored in favour of the those presented by the industry under regulation. Thus under Capture theory of regulation, the regulators mainly set out to protect the interests of the public. However, these regulators may also end up being captured by the parties that they intend to regulate. Commonly, this arises because of the interaction that typically appears during the process of regulation. The regulatory agencies many at times empathise with the companies that they intend to regulate during the regulation process making the subsequent regulations advantageous to the parties that they are directed at during the process of regulation. Under the Capture theory of regulation, the primary reason as to why the firms in the end capture the regulatory process is simply because each of the individual firms under regulation has a lot at stake with respect to regulation. While the public may also have a lot of stake as a whole, any one individual who possess only a very small stake and thus will have less incentive to invest his or her resources thus affecting the regulatory process. The public choice theorists argue that regulatory capture under the Capture theory of regulation mainly occurs because the individuals or groups that possess higher stakes of interest regarding the outcome of the of the regulatory policies and decisions are expected to primarily focus on their personal resources and the various energies that also make an attempt to gain the proper policy outcomes that they need (Laffont & Tirole 1991). The concept of regulatory capture is closely related to another branch of economics ce called the economics of regulation (Huntington 1952). The economists who specialise in this branch of economics are very critical at conceptualisation of the regulatory interventions brought forward by the government ass a motivation for the protection of the public good (Bernstein 1955). Private interest theory of regulation Private interest theory of regulation acknowledges that the individuals in a given entity from groups that they will use in the pursuit of their self-interests as a group. This theory proposes that all the private interests of the individuals in the group dominate the entire process of regulation rather than the public interests in the regulatory process. The regulatory outcomes, in this case, will be a representation of the various interests of the most powerful of all the groups (Stigler 1972). This theory has been used extensively to provide an explanation of the corporate laws that are put in place in number of countries like the United States. However, no one has attempted to use this theory to provide an explanation for the auditor law reform in Australia so far. The most important and crucial element of this theory is the theory’s integration regarding the analysis of the political behaviour in line with the larger body of economic analysis (Sam 1989).The private interest theory will always assume that these groups will always come up with a major aim of protecting some particular economic interests. These different groups are viewed as often conflicting with themselves. From these conflicts, some of the groups will in the end lobby the government to put in place some sound legislation that wills in the end foster some of their economic interests (Craig 1990). An example of this is when the consumers lobby the government to offer them price protection from the profit-hungry businesspersons. The producers through their groups can also lobby the government to provide them tariff protection. This theoretical perspective does not seem to adopt any notion of public interest. It rather considers the private concerns of the individuals in the group as these are considered since they will dominate the legislative process (Craig 2001).The regulatory outcomes from this lobbying from legislation from the government will entirely reflect the power of the groups (Sam 1989). Review of “The purification process” in Financial Accounting by Kath Walters and John Stensholt: The article Purification process by Kath Walters and John Stensholt that was published in the 29th August 2002 publication of News and Features publication. In this article, the businesses and accounting sectors were confident that they would be allowed to adopt a self-regulation mechanism. These businesspersons and accountants were pushing for the governments’ publication of a paper on auditor independence in Australia, corporate governance the roles of corporate disclosure. These company executives were very pleased that their long wait was soon to get over as the government was set to publish these guidelines within weeks regarding their self-regulation. To support their case further; these business executives took an initiative on reform. It involved the introduction of a number of policies and principals that were specially designed to strengthen their understanding of the self-regulatory mechanisms and independence that they wanted. The primary goal was to show the public that especially the shareholders that they were ethical, independent and . very honest. By their actions, these groups hoped that the government would bring in possible actions and proper stringent regulations to govern them in their activities (Firzil 2012). However, the prime minister sharply warned that corporate Australia should take heed regarding the issue of self-regulation. He argued that no one was supposed to underestimate the real depth of the public unease that would come in the entire country regarding the problems that would arise as a consequence of corporate excess. The following were some of the recommendations brought forth for review regarding the issue of auditor independence (Stensholt 2002). Private Interest theory can extensively be used to give an explanation of the demands that these auditors were seeking from the government as presented in this article. This theory can be used extensively to provide an explanation of the corporate laws that are put in place in number of countries like the United States. Mainly because it always assumes that, the conflicting groups will always come up with a major aim of protecting themselves against certain conditions. Since they do not possess the proper backing to do so, they will lobby the government to offer them the necessary protection they need. The article described above merely demonstrates how the auditors pressed the government to come up with regulations that would foster their proper working (Firzil 2012). According to Firzil (2012), one of the proper solution that would help in fixing the tarnished image of the auditors in Australia would be to improve the quality of the service they had in the offing other than seeking for deregulation from the government. The improvement sought of would have been aiming at improving the quality of service to the customers. In light of the reforms that were envisioned by the auditors in their plea of deregulation from the government, it is probable that these auditors were worried that the service that they were offering to the public was not satisfactory. They were afraid the public would complain and later on tarnish their image in regards to their services. With a lot of self-interest, these auditors though that one of the ingenious ways to circumvent these fears was putting a blame on the government for their inadequacy and insufficiency. Through lobbying the government in a bid to alter its regulation regarding their operation, the auditors were certain that this would improve their popularity index in the eyes of the public. This approach was adopted probably because making the necessary reforms in regards to their services would take a long time would as well be expensive to accomplish on their own satisfactorily without deregulations (Misham 1969). The other way to explain these observed phenomena of demands from the auditors for deregulation was that they wanted the government to loosen their regulation and make it possible for these auditors to regulate themselves through the relevant auditor bodies they sought of. Proof of this was when they presented a number of recommendations that would streamline their operation. The conflicts within the auditor body initiated a series of proposals regarding reform in their services and terms of operation. These self-initiated reforms that usurped those of the government would, in the long run, facilitate the efficiency of these auditors in the country and would help to make them a model in the entire region as far as accounting and auditing are concerned (Green 2011). Faced with a wide range of challenges mostly originating from within the grievances that they faced within themselves, these auditor and accountants wanted to come up with their rules and regulations to protect themselves. The accounting standards of any sort in play are always in regards to the production of proper serviceable information regarding accounting and ensuring that the accountants and auditors successfully execute their duties. Through the private Interest theory, the sought over regulation and would be crucial and beneficial towards improving these services. Since as it is contained in the real gist of this theory, the arguments within themselves would compel these auditors come up with proper and effective self-regulatory rules to help keep them a bay with the much-needed reforms within themselves (Misham 1969). The listed companies were supposed to come up with an appropriately established and independent auditing committee that would exclude the management and could have up to a number of three directors. The auditors were supposed to be banned from the act of providing some the audit services that are unstipulated. They were also supposed to disclose the nonprofits services that they rendered out in their financial statements by category and the fees that they received for these services (Green 2011). They were to create an independent auditors’ supervisory board that would to the work of monitoring the disclosure of all the non-audit undertakings by the various auditors together with the other issues regarding independence. This board was to be paid for by the professional bodies. Another recommendation was for the numerous audit partners to be changed after every seven years of service. They also recommended an amendment to the corporate act that would entail making annual statements regarding the independence of the audit body (Misham 1969). The previous members and other partners of the audit body were directly involved in the auditing to be barred from the body’s membership for a period of years from the time they resign from these positions. Lastly, it was recommended that some specified employment, financial relations, and businesses relationships that existed between the clients and the auditors were supposed to be banned. All these were aiming at improving the proper functioning of these Auditors without the necessary intervention of the government (Sam 1989). References Read More