Evaluation of Regulations in Accounting Theory - Example

Accounting Theory Name: Institution: Abstract Evaluation of regulations in accounting theory is relatively complex. The task of undertaking and generalising the theories of regulation, alongside the motivations of the regulators is can only be effective if procedures are established and followed. Therefore, focusing on specific regulation mechanisms as well as evaluation their merits and work is the preferable way of assessing the motivations of regulators in interest theory. The differences in economic agents’ objectives as well as the cost involved in their interaction may effectively ensure that some of these agents are pursuing fundamental to the theories of public interest are the efficient interventions by the governments and market failures. These theories indicate that regulators have the capacity to increase the welfare of the society. The theory of private interest provides an explanation of the regulation from the behaviour of the interest group. Social welfare is decreased through the wealth transfer to interest groups that are more effective. The aim of this study is to highlight the role of regulators in relation to the Deepwater Horizon Oil Spill. Table of Contents Abstract 2 Introduction 3 Literature Review 4 Overview of the Interest Theory 5 Early Accounting Regulation 5 Deep Water Oil Spill 6 Findings 7 Regulations 8 Conclusion 9 Recommendation 10 Reference List 10 Introduction Evaluation of regulations in accounting theory is relatively complex. The task of undertaking and generalising the theories of regulation, alongside the motivations of the regulators is can only be effective if procedures are established and followed. Therefore, focusing on specific regulation mechanisms as well as evaluation their merits and work is the preferable way of assessing the motivations of regulators in interest theory. The differences in economic agents’ objectives as well as the cost involved in their interaction may effectively ensure that some of these agents are pursuing fundamental to the theories of public interest are the efficient interventions by the governments and market failures. This paper explores the two main traditional assumptions in the theories of public regulations and interests and the development of the interest theory over the past years. The paper also assesses the motivations and merits of politicians as the regulators of the interest theory, as supported by the quantitative research findings. Literature Review There exist two main broad traditions in relation to the economic regulation theories. The first assumption is that regulators/politicians possess enough information as well as powers of enforcement to ensure efficacy in the promotion of the interest of the public. Another assumption of this tradition is that politicians are munificent and that their aim is pursuant of the interest of the public (Balleisen & Moss, 2010). The second tradition is that regulators lack adequate information when it comes to quality, demand, cost, as well as other firm’s behaviour dimensions. Therefore, it is prudent to indicate that politicians/regulators lack perfection when it comes to the promotion of the interest of the public especially in controlling the societal or firms’ activities. Within this assumption, this info, monitoring, as well as enforcement cost also have their application to other agents of economics, for instance, the consumers or the voters. It is also commonly assumed that politicians or regulators follow their personal interest that may not incorporate public interest elements (Gaffikin, 2015). It is clear that through these assumptions, we cannot conclude that politicians or regulators will ensure the promotion of the public interest. These interest groups can either be consumers, consumer groups, or firms, regulators/politicians or their staffs, unions, legislators, or more. Overview of the Interest Theory The theory of interest therefore, has common characteristics with various theories in the public choice field and hence turns effectively into political actions theories. Depending on the political process’ efficiency, social welfare can either decrease or increase (Balleisen & Moss, 2010). As the years passes by, many debates and arguments have emerged in relation to regulation necessity. Those with the perception of markets efficacy are against regulation because the forces of market with operate to ensure that the society is served and ensure the optimization of resources’ allocation. However, some politicians and regulators perceive that the operation of the markets is not necessarily serving the societal interest, and this call for the regulation need and this is evident in various facets of the society. For instance, with no restrictions in relation to certain ‘economic’ activities, then people like drug smugglers would not be necessary because the demand for drug would necessitate its supply. There exist numerous examples of how regulators/politicians ensure that the society is being protected against undesirable activities ( Gaffikin, 2015). Early Accounting Regulation In 19th century, the issue of accounting regulation during the Industrial revolution in Britain was a big issue especially following the crash of the economy and this led to the accounting theory and principle search. The main aim of accounting is to ensure that the interested parties are provided with the information that will assist them in coming up with the economic decisions thereby assisting in ensuring information asymmetry, thereby providing a justification for the regulation of accounting. Nevertheless, regulation does widen well afar the information to information preparers commonly called auditors or accountants (Irkin & Asher, 2011). Deep Water Oil Spill The Deep Horizon oil spill also referred to as BP Oil Spill or Gulf of Mexico Oil Spill is presents the largest oil spill of the marine in the history of the US. Although there was an intense debate on the rate at which the oil was released, the present consensus is that the Macondo well released approximately 5 million of oil barrels, finding its way into the Gulf of Mexico waters. The Deepwater Horizon, whose owner was Transocean Ltd, came into a contract with BP Oil Company to ensure the drilling of exploratory well (Houdet & Germaneau, 2011). The government of the US indicated that BP was one of the responsible parties in the oil spill and will cater for the clean-up cost emanating from the oil spill. Despite the fact that BP accepted the responsibility, and catered for the cost of the clean-up, the company lately revealed that both Halliburton and Transocean were partly responsible for the disaster. The loss incurred following the oil spill cannot be clearly estimated. Godfrey (2010) indicated that various factors determined the crucial exposure and they included the amount of the discharged oil, the amount of time utilized in the activities of clean-up, as well as the nature, amount, and number of claims that eventually arise. It is not easy to quantify the economic as well as the ecological impacts brought about by the Deep Horizon Oil Spill. Findings Approximately 20 different categories of valuable services of ecosystem in the Gulf of Mexico have been affected, leading to almost a complete closure of Louisiana commercial fishery that attracts approximately $2.5 billion per annum (Jones, 2015). The damage also led to a reduction of approximately 10 to 50% of the ecosystem services offered by the Delta owing to the oil spill. This led to a loss of approximately $1.2 to 23.5 billion per annum until the recovery of the ecology. However, the government through its trustees could not approximately measure the lost services and goods of the ecosystem (Godfrey, 2010). The approach of resource replacement has been the focus of many agencies and the aim is to ensure the replacement of the lost ecological and economic wealth through restoration. However, it is not possible to ensure the prediction of all the biological and physical damages and according to Irkin and Asher (2011), there are cases where physical damages are sometimes underestimated given the difficulty of signifying the effects that are casually related. The role of the politicians is clear in the case of the Deepwater Horizon Oil Spill because through the incident, more strict regulations of the activities of gas and oil within both the US as well as other parts of the globe have been put in place especially in relation to the health, safety, as well as environmental protection control. Other role of the regulators is on the drilling operations’ oversight and accessing new areas of drilling. The oil spill also calls for consistent environmental accounting as well as reporting practices if we are to achieve a more corporate performance of the environment (Gaffikin, 2015). The regulators are more so important in facilitating this move especially when it comes to putting together the social, environmental, and the financial information in a meaningful manner and this would help in enhancing the integrated performance disclosure of the companies to the shareholders. As such, it is important to encourage the systematic disclosure of the information especially in the annual reports. Given the firm’s deteriorating image especially in relation to the biological diversity footprint, it is important for the company to aim at regaining the trust of the shareholders especially those related to the retailing and mining industry (Houdet & Germaneau, 2011). Regulations Important changes have been witnessed in the various sectors such as mining and transport. Enterprise privatization is one of the roles played by the regulators and this has given rise to the other control forms. Initially, most of the industries were controlled as well as regulated by the state. The form of regulation developed for the various networks are impetus especially for the regulatory reform in the US. There exist laws that provide governance of the corporation’s operations and majority of them involves the financial information disclosure. Apart from that, there exists taxation law as well as laws that have an effect on the creation as well as the operations of various professional organizations, which in turn react by ensuring the imposition of regulations towards their members. Therefore, regulations form part of the daily life but there exist disagreement when it comes to the degree of the regulation intervention in terms of “free” goods’ and ideas’ some individuals contend that the situations of strong efficiency of the markets calls for the regulation of the regulation of information flow especially in relation to the securities’ operations (Godfrey, 2010). Amongst the methods that can be utilized to ensure the achievement of efficiency in the resources’ allocation following the identification of the market is the government regulation. In the early period of developing the theory of public interest, there was a general assumption that a failure by the market calls for an action by the government to come up with the various regulations. This explains the intervention of the US government in relation to the Deepwater Horizon Oil Spill whereby various regulations were put in place. However, the interest theory has faced criticism especially in relation to its Nirwana Approach, providing an implication that the theoretical institutions of efficiency could be perceived to ensure efficacy in correcting or replacing institutions of the real world and such a criticism resulted into the emergence of effective interest theory (Irkin & Asher, 2011). Conclusion It is clear to argue that the most effective institution that would help in dealing with market failures is the government regulation. For instance, in relation to the utilities of the public for instance the marine life, it is important for the government to enact measures that would ensure the protection of the environment. Apart from that, it would be prudent to argue that social regulation is an essential institution to help in dealing with the pollution of the environment. By focusing on the restoration cost as the main method of measuring damages can result into the under and over-deterrent, and this is dependent on the link of restoration cost to the physical damage’s true social cost. Recommendation In future, it is important for the regulators/politicians not to beset by the information market failure and they can easily ensure the bundling of the information to decide on the point in which the marginal intervention cost balance the marginal social benefits. The interest theory assumes that there exist market failure and therefore, regulation is an essential institution. In addition, it is important for the regulators to facilitate the development of effective institutions that would help in the deregulation. Reference List Balleisen, E. J., & Moss, D. A. (2010). Government and markets: Toward a new theory of regulation. Cambridge U.K.: Cambridge University Press. Gaffikin, M. (2015). Regulatory accounting theory. University of Wollongong. Godfrey, J. M. (2010). Accounting theory. Milton, Qld: John Wiley. Houdet, J & Germaneau C. (2011). The financial impact of BP’s response to the Deepwater Horizon Oil Spill. Irkin, D. M., & Asher, J. J. (2011). Deepwater Horizon oil spill and related issues. New York, NY: Nova Science Publishers. Jones, S. (2015). The Routledge companion to financial accounting theory. Read More