Regulation Theories - Public Interest Theory and Private Interest Theory - Coursework Example

Name: Professor’s Name: Course: Date: Regulation Theories There have been a lot of debates and arguments over the years surrounding regulation. The few individuals who believe in the markets efficacy believe that market regulation is not a necessity because the market forces function to best serve the society and ensure optimal resource allocation. However, there are some markets that do not operate in the society’s best interest at heart, in order to ensure that these markets operate in the society's best interest there needs to be an intervention by the government in the form of regulation. Regulations help to protect the society from the markets objectionable activities. Accounting and accountants are now subjected to various forms of regulations. Laws have been set to govern the functions of organizations which includes disclosure of the financial information. There are also taxation laws influencing the making and functioning of professional organizations. Regulations have become a part of the 21st century. This section describes and evaluates three regulation theories, namely: Public Interest Theory This is an economic theory developed by Arthur Cecil Pigou, it maintains that the supply of regulation is a reply to the public demand for correction of inefficient market prices. The advocates of this theory views its purpose as that of attaining certain publicly wanted results which, if trusted upon the market to achieve then the results would not be obtained. The assumptions that underlie the motivation of this theory include: The markets are to an extreme degree friable and apt to function inequitably if left alone, here the government is presumed as the neutral arbiter. Another assumption is that the theory maintains that the government controls banks to facilitate them to operate efficiently by improving market failures for the broader civil society benefit. Determining the definition of public interest is considered a normative question and they supporters of positive theories would definitely disagree with this approach on the foundation that it is impossible to establish the objective aims of regulation. The public interest theory intervenes in case of monopolies, provision of public goods, externalities and imperfect information. Private Interest Theory (Capture Theory) This regulation theory was created as an option to the public interest theory, when many empirical facts supported and aided that regulation was practised in goodwill of the regulated organizations, with no regard to public interest. According to Beaver (Beaver, 164) the capture theory can be explained as a situation where the main beneficiaries of the regulation are the organizations being regulated instead of the public. In other words the regulatory agency instead of controlling the organizations, it is controlled by the organizations. Being a positive theory, it makes an assumption that regulators or the political actors maximize the utilities. Even though the utility is not indicated it seems to refer to securing and upholding political power. In order for this to happen the political actors and regulators require resources that are provided by the organizations affected by the regulatory laws. This leads to the regulatory body being used by individuals to further their own private goals instead of public interests. The capture theory relies on neo-classical economic adoption of self-interest to foresee the regulators behaviour because many politicians formulate policies that guarantees their continuance in office. Criticism of this theory is that it does not provide a reason as to why regulated organizations are able to only capture already established agencies instead of procuring the creation of the agency and there is no reason implying that the regulated organizations are the only interest group capable of influencing the regulator. Interest Group Theory The interest group theory is an extension of the public interest theory. Therefore, regulation is looked at as the product of the link between the distinct groups and between the state and such groups. Supporters of this theory disagree with public interest theorists because they believe regulation is more about competition for power preferably than exclusively for the public interest. In this theory the regulatory body’s decisions are influenced by the various interest groups that require regulation in one way or another. The regulating body's decisions are made in short, based on equalizing the demands of these interest groups. The interest groups which are more efficient are awarded with more good regulation in their opinions. In this theory, the main goal of legislators and regulators is to maintain themselves in power. In order to keep themselves in power, they design regulations in a way that addresses the requirements of the interest group that practises more relative pressure on them. However, the designed regulations do not address the best interests of investors and the public because gains trading can still occur (Gaffikin, 8). Normative Measurement Theories Normative theories try to explain what people or constituencies should do from a theoretical principle. In other words, they try to prescribe rules about how the process of financial accounting should be undertaken. Normative theories are not exclusively assessed by predictive value, but are also assessed by their logical consistency of ways in which reasoning individuals are supposed to behave. Normative accounting is a deductive process which starts with the theoretical part and deduces to explicit policies. Normative accounting theory uses formulas to calculate income not based on cost but value. These normative theories were important of historical cost accounting, however they did not provide useful information, and they lay emphasis on conservatism and assumed a constant value of money. The dominant normative theories include: Current-cost accounting, Deprival-value accounting and exit-price accounting. Littleton’s theory (1953) Littleton’s work of the 1950s differs from his earlier works of the 1940s in that it primly adopts the inductive method. The scope of his 1950s work addresses a few philosophical problems like the nature of cost accounting theory and the relationship between accounting theory and practise among others. He observes the nature of accounting and tries to obtain accounting principles through the inductive process. He developed a scheme that have five basic assumptions namely: businesses are there to provide economic services, a business initiative is an economic entity that is cohesive in nature, the business initiative is a going concern, a commercial enterprise activity occur in a cyclic pattern and lastly, the highly crucial data to all parties sharing in the net profits of the business initiative are the facts that articulate the businesses' efforts and fulfilments over a period. The assumptions form the basis of deriving the main purpose of accounting and the wanted attribute in accounting to be measured. The main intention is the organizing theme in the scheme. The main intention is to figure out the periodic income by matching costs (efforts) and revenue (accomplishments). This notion is the core of accounting and a benchmarking tool. Therefore, the income statement is of primary importance while the balance sheet is of secondary importance. The income statement shows the costs and revenues of the business during a particular period. The business becomes a going concern as it continues to create employment opportunities while supplying goods and services. In order to know how the business is fairing the owners would require data that relates to costs and revenues. In Littleton’s scheme assets are counted as unexpired costs. Littleton continuous to argue that regardless of reporting property values in the balance sheet, it would not be relevant because property values can only be important during liquidation. The correlation between nominal and real accounts and the resulting correlation between the balance sheet and the income statement, according to Littleton, is the most differentiating feature of the double entry system of bookkeeping (Littleton, 25-225). Chambers theory (1966) The main subject in the Chambers composition of ideas is adaptation. The underlying supposition is that an entity wants to adapt to the predominant market condition by engrossing in trading. In order for the entity to know its stock capable of being severed, the stock must be expressed in monetary units, because the money obtained from the sale of assets ascertains and restricts the action scope of the entity in the market. The role of accounting is to provide contemporaneous financial information that may perform as a future action guide. The whole of Chamber’s scheme ponders on the adaptation idea. Chamber’s lays emphasis on the balance sheet compared to the income statement and looks at the balance sheet as a statement of financial position. According to Chamber assets should be described at their realizable or resale value and liabilities should be described at their current value. Nevertheless, Chambers insisted on recording payable, bonds at their face worth and securities and marketable bonds at market value stored as an investment. Therefore, assets and liabilities are given asymmetrical treatment. According to Chambers, the price alterations should be included in the financial position determination because fluctuations in the overall price level and comparative prices of assets modify the monetary equality of durable goods and therefore interfere with the enterprise's ability to adapt. The calculation of income is done after the adjustment of the initial financial position for fluctuations in the overall price level (Chambers, 81-342). Ijiri Theory (1975) He was an Inductivist. He theorized the conventional historical cost accounting and he was a historical cost principle advocate. He developed three axioms that can according to him, can be used to derive the conventional accounting practise. The axioms are; axiom of control, axiom of quantities and the axiom of exchanges. According to Ijiri, the three axioms are similar to the five Euclidean geometry axioms from which all Euclidean geometry theorems can be derived. Once the three decisions represented by the axioms (quality, control and exchange) are made, what remains in accounting are entirely procedures of computation. If a business initiative wants to adapt to the predominant market conditions, the only relevant option is the knowledge of the means of an entity being severed expressed in monetary terms. Liabilities and assets should be noted at their present cash equivalent. The realization principle is rejected by Ijiri. The foundation of cost allocation between resources unused and consumed is the quantity measure capacity determined for each collection of resources. Ijiri inductively obtains the objective implied in the present accounting practise and uses the objective to imply an advancement in practice. Through instigating the objective, he lays an emphasis on the fact that accounting notes and records each transaction. The reasoning behind this practice is that the individual responsible for every transaction is the accountee. He continued to say that managers keep accounting records, purposely for use by investors who want to invest or have already invested in the organization. Ijiri recommended that businesses should switch from the current accounting practice to commitment accounting because unlike in the current accounting practice where only one part of the contracts that have been performed are recorded, executory contracts are recorded in commitment accounting (Ijiri, 74). Works Cited Beaver, W. H. "Financial Reporting: An Accounting Revolution. 3th Prentice Hall International." (1998). Chambers, Raymond J. "Accounting." Evaluation and Economic Behavior (Prentice-Hall, 1966) (1966). Gaffikin, Michael J. "Accounting theory: Research, regulation and accounting practice." (2008): 1. Ijiri, Yuji. Theory of accounting measurement. No. 10. American Accounting Association, 1975. Littleton, Ananias Charles. Structure of accounting theory. No. 5. Amer Accounting Assn, 1953. Read More