Do we need to regulate financial reporting? Essay

Acoording to Leuz and Verrecchia ( 2000 ) the accounting literature presents cogent evidence that the quality of accounting has economic effects for e.g. costs of capital, efficiency of capital assignment ( Bushman et al. 2006 ) etc. Land and Lang ( 2002 ) in their research mentioned that economic alterations besides have homogenous effects by saying that the quality of accounting has improved globally since 1990s. Land and Lang ( 2002 ) besides say that the ground for the promotion in the quality of accounting is chiefly due to globalization and visual image of international accounting consensus. The statement proposed by the accounting theory is that the chief purpose of fiscal coverage is to cut down information dissymmetry between directors and proprietors and other stakeholders undertaking with the company ( Watts, 1977 ; Ball, 2001 ) . Favoring this impression Frankel and Li ( 2004 ) states that fiscal coverage decreases information dissymmetry by unwraping relevant and timely information.

Standard scene is ‘a signifier of ordinance which lays down by and large recognized accounting rules ( GAAP ) ‘ ( Scott, 2003, p. 9 ) . Besides accounting criterions for listed companies in the European Union are promulgated by the International Accounting Standards Board ( IASB ) .

This study answers this inquiry that whether or non we need this sort of ordinance of fiscal coverage.

What is Fiscal Reporting?

To reply the study inquiry, foremost, there is a demand to reply the inquiries like what is fiscal coverage, who are the users of fiscal studies and how is fiscal coverage regulated and what are the organic structures responsible for modulating the fiscal coverage. By replying these inquiries a better apprehension of fiscal coverage will be achieved and which will finally help in replying the study inquiries.

Fiscal coverage enables an organisation to pass on information about its public presentation externally ( Atrill et al. 2005 ) . So, fiscal studies provide summarized information about an organisation ‘s minutess over a specific clip period to external determination shapers. ( e.g. Investors ) .

The users of fiscal studies are employees, trade brotherhoods, authorities, creditors, loaners, clients, stockholders and investing analyst ( Elloit et al. 2006 ) . The demands of these assorted users of fiscal studies can be wholly different. However, the chief accent is put on the most useable statements like balance sheet, income statement and hard currency flow statement.

The Accounting criterion boards ( ASB ) which is responsible for puting and publishing accounting criterions, the ASB is portion of a broader construction including the Financial Reporting Council, the reappraisal panel and the Urgent Issues Task Force ( UITF ) . The Financial coverage Council ( FRC ) is the organic structure charged with the wide overview of the criterion puting system. Although the FRC oversees the procedure of bring forthing accounting criterions, it has no input into the elaborate regulations. Conversely the rule beginnings of such ordinance are The Law and the Accountancy Profession.

The Law consists of certain Acts. Much of the statute law regulating the UK ‘s readying of histories is personified in the companies Act 1985 and companies Act 1989. They are chiefly concerned with the histories of limited liability companies. These Acts province that all fiscal statements constructed under the Act must show a true and just position. The Act besides deals chiefly with minimal revelation demands and is foremost concerned with the protection of stockholders and creditors. It provides a model for general revelation by necessitating that certain fiscal statements such as the net income and loss histories and the balance sheet, should be prepared and presented to the stockholders and requires the specific revelation of certain points such as depreciation and so on. These revelation demands resolve some of the jobs associated with the dissymmetry of information between the managers and some user groups. They besides enable user groups to compare the degree of their incentives with those received by the other groups. The Act besides requires that the managers non merely show the fiscal statements to the stockholders each twelvemonth but besides that independent hearers are appointed to analyze the fiscal statements and describe their findings to the stockholders.

The jurisprudence addresses the job of information dissymmetry by necessitating the revelation of certain cardinal points of involvement to user groups. The Accountancy Profession besides recommend the same but in this function as regulator. The accounting profession is more influential in accomplishing a important addition in the comparison of fiscal statements. Whereas the jurisprudence provides the general model for what is to be accounted for in the fiscal studies, the accounting profession provides elaborate regulations in the signifier of accounting criterions about how points and minutess should be accounted for.

The two chief regulative organic structures of fiscal coverage are “ The Law ” and the “ Accounting Profession ” with the Accounting Standards Board normally known as ASB ( Elliot et al. 2008 ) . In UK, most of the statute law related to the publication of histories is embodied in the Companies Act 1985 and 1989. The Companies Act 1989 is the chief frame which the companies and comptrollers have to follow. All the fiscal statement drawn up under the act 1989 must show a true and just position and its map is to protect all the users of the fiscal studies and statements. The 2nd and the most of import regulative organic structure is the accounting profession. The standard compositors should be cognizant of the information needed by all users of fiscal studies and should cognize the impact and the result of a different accounting method on the demands of those users. The standard compositors should besides be able to decide the struggles which exist between the demands of different users. So, they have to happen an alternate manner which best satisfy user demands and this could be achieved by taking the betterment of the “ societal public assistance ” alternatively of public assistance of persons.

We know that Accounting Standards Board is the chief accounting criterion compositor. Because the ASB is composed of professional comptrollers, they may be unfamiliar with the user needs. So, when there is a demand for a alteration in accounting standard the ASB prepare and print a bill of exchange criterion called the FRED ( Financial Reporting Exposure Draft ) . After the publication of these bill of exchanges the remarks from the populace is invited and in the visible radiation of these remarks the FRED is changed ( or unchanged ) . Now the FREDs are issued as FRS ( Financial Reporting Standard ) . The chief disadvantage of this system is the ASB members are unfamiliar with the different user demands and the remarks from the general populace may non be every bit represented.

There are four things that criterions in fiscal coverage supply people utilizing it. The first 1 is “ Comparability ” ; fiscal statements must let people to compare one company with another one and measure the direction ‘s public presentation without disbursement clip and money seting them to a common format and common accounting interventions. It is indispensable that users of fiscal studies or investing determination shapers be supplied with relevant and standard fiscal studies which have been regulated and therefore standardized. The 2nd thing that criterions and ordinances supply is called “ Credibility ” . Because all this criterions and ordinances exist comptrollers have to handle every company in the same manner. If the accounting profession permitted companies sing similar events to bring forth fiscal studies that disclosed markedly different consequences merely because of a freedom to choose different accounting policies they would lose all of their credibleness. So, the criterions should be composed of stiff regulations and should non be broken. The 3rd thing is “ Influence ” that means, puting up the criterions has encouraged a constructive assessment of the policies being proposed for single coverage jobs and has been a stimulation for the development of a conceptual model. The last thing that the criterions have to provide is “ discipline ” . Companies left to their ain devises without the demand to obey criterions will finally be disciplined by the fiscal markets. But in the short tally investors in such companies may endure loss. The Financial Reporting Council is cognizant of the demand to enforce subject because most of the company failures in recent old ages are because of vague fiscal coverage. Why should the Accounting Standards put? As we argued earlier, an of import function of the ordinances is to increase the comparison of histories by restricting the pick of alternate accounting methods and to provide standardised histories. This standardisation can be achieved merely by unvarying accounting pattern. If all accounting methods were standardized, two organisations which began the twelvemonth with same balance sheets and which made the same minutess during the twelvemonth, they would describe the same balance sheets and the same net income and loss history at the terminal of the twelvemonth. In add-on to these advantages of ordinances in fiscal coverage, there are besides some more utile maps. Regulations can assist to cut down the influence of personal prejudices and political force per unit areas on accounting judgements. They can increase the degree of user assurance in, and apprehension of, fiscal coverage by clear uping the footing on which all histories are prepared and presented. Finally, they can supply a frame of mention for deciding accounting jobs which are non mentioned in statute law or accounting criterions. As we argued earlier although the ordinances in fiscal studies have really advantages it has many disadvantages excessively ; One if these disadvantages is the “ Adverse Allocative Effects ” , this could happen if the ASB did non take into history of the economic effects of the new criterion or ordinance they have issued. For illustration, extra costs could be imposed on preparers of histories and suboptimal managerial determinations might be taken to avoid any decrease in gaining or net assets. “ Consensus-seeking ” can be another disadvantage and this means the issue of criterions that are over-influenced by those with easy entree to the standard-setters. Most of the clip this could go on with complex topics. “ Standard Overload ” is composed of a figure of statements which creates the most of import disadvantages of criterions. Some of them are ; 1. There is more than one standard-setter organic structure so, every bit good as it becomes more hard to follow the new alterations, the comptrollers are going so regulated that it becomes really hard to utilize his/her accounting profession, to do judgements. 2. There are excessively many criterions and ordinances, so in the long tally, they restrict the development of accounting profession by detering the comptrollers from experimenting new ways of entering minutess. 3. Some points are excessively elaborate and some of them are non sufficiently detailed so, makes it difficult to obey. 4. Standards are for all-purpose and sometimes they fail to react to user ‘s and the house ‘s demands. For illustration, a company which wants to pull investing finance can non do the necessary judgement of how much information is necessary and what organize it need take so, it could n’t take the actions necessary to pull investors and may ruin. Some of the criterions are deficiency of a conceptual model this means they have n’t got a clear defendable logic and the regulations tend to be instead arbitrary. This causes the criterions to lose its credibleness and acceptableness.

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