Regulation is a process of monitoring activities in a given sector through restrictions and guidance. In accounting, regulation is necessary so as to maintain sanity and order in the economy. In the absence of regulation, accounting would be haphazard and the outcome would be devastating for the government and the other business players involved. In essence, accounting is a regulatory tool by itself as it keeps a record of transactions that a particular entity has engaged in. However, there have been many challenges with most economists fighting hard to have the return of free markets. These entail dependence on the market forces monitoring the economy. The importance of regulation was first seen in Britain during the Industrial Revolution when the adoption of the policy ‘laissez faire’ caused a series of social and economic ills that resulted in its abolition.
Bryer (2005) states that just like the rest of the world, regulation of accounting in Australia mainly came into place following the economic depression of the 1920s and 1930s with countries formulating cautionary policies to safeguard their economies. Since then, it has been necessary for interested parties in a business deal to provide adequate information in record before the final economic decision was made. Regulation of accounting was used to create a level of information asymmetry and aid the parties that may be disadvantaged as a result of lack of sufficient economic knowledge of their partners in business. Regulation was also used to instill professionalism in the economy sector.
There are several theories which have been formulated to explain accounting regulation and its importance. They include the public interest theory, the theory of economic interest group, and the interest group theory. Suffice it to note, these theories have been in application for quite a long period of time and are majorly the source of the laid down principles of accounting regulation (Gaffikin 2005).
The public interest theory outlines the purpose of regulation of accounting as to help the public in making business decisions. This theory was first formulated by Arthur Cecil Pigou. It implies that regulation is a response to the public demand for the establishment of efficient and equitable market practices. In this theory, society, rather than private and individual vested interests, is the main party of interest and the main beneficiary. It theorizes that the government is charged with the responsibility of setting up a national regulatory body to monitor the market practices to the benefit of its nationals. The set regulatory body acts as a neutral arbiter solving any conflicts and complaints that may be brought before it by business parties. The body is also charged with administrative and legislative functions such as tax laws and the creation of subsidies. The public interest theory has been criticized for creating a bad business environment for the entry of competitors. In addition, there are no validated outcomes to prove that this theory actually has any positive impact on the market.
The capture theory is opposite to the public interest theory. It was formulated by Richard Posner and propagated by welfare state liberals, Marxists, and free market economists. This theory espouses that the importance of regulation is to respond to demands of interest groups working together in order to increase the incomes of their members (Dagwell 2007). Richard Posner argued that given time, these interest groups in the industry being regulated end up forming regulatory agencies. In a way, this theory is similar to the ideas of Milton Friedman of the School of Economics of Chicago. Together with his colleagues, Friedman argued that free trade, market deregulation, and the abolition of state intervention were central to the success of the economy. They supported the existence of a competitive system regulated by the interplay of internal and external forces of the market.
In practice, the capture theory explains that in the long run, the regulators are captured by the regulated. In this practice, it is possible that entities in the industry end up being charged with regulating their illegal practices (Botzem 2002). The regulator group may be auditors, the police, accountants, lawyers, watch dog authorities, and scientists. The regulated group may be major corporations, political associations, community groups, and major industries among others. In Australia, accounting regulatory agencies include Auditing and Assurance Standards Board, Australian Accounting Standards Board, Australian Securities and Investments Commission, Standard Business Reporting, Financial Reporting Council, and Financial Reporting Panel among others. The state governments also have regulatory bodies for industries within their jurisdictions. Internationally, the World Trade Organization has set up rules of engagement in bilateral trade agreements between countries. The capture theory exposes a weakness in the government as it allows firms and industries to produce negative externalities.
It is important to apply enforcement strategies in order to ensure the efficiency of accounting regulation. There are several basic strategies that most regulators employ (Gaffikin 2008). They include self-regulation, command and control, disclosure regulation, and incentive- based regulation. Command and control entails the regulators’ stating acceptable and non-acceptable activities. Self-regulation involves the development of rules and principles by professional bodies to guard and guide their members. Incentive-based regulation involves the raising or lowering of taxes towards certain activities in the industry as a regulatory tool.
As an accountant, it is essential to be conversant with all the above stated theories and principles. This is important because regulation acts as a guide to how professionals operate and outlines societal expectations. A good accountant will be able to understand that although aggressiveness is important, caution is essential in as much as regulation of the profession and the industry is concerned to avoid being blacklisted or even going to jail for economic crimes (Brown 2013). There are many laws which have been formulated requiring the disclosure of financial information of corporations engaging in business with both the government and private citizens. It is, therefore, of utmost importance that accountants ensure that they have all the information required about the corporations they represent.
In conclusion, it is important to note that in as far as the theory of public interest and capture theory have been there, it has not all been a smooth ride. There have been many debates over which way the economy should follow as far as government control and regulation is concerned. The questions of the extent of market freedom and the implications of regulation on the market forces have been raised. All in all, regulation must not be seen purely in negative terms, but rather as a tool of offsetting market inefficiencies and creating a level playing field for all the parties involved in the market.
Botzem, S 2002, The politics of accounting regulation: organizing transnational standard, Edward Edger Publishing, New York.
Brown, P 2013, Financial accounting and equity markets: selected essays of Philip Brown, Routledge, New York.
Bryer, R 2005, The regulation of financial accounting: an introduction, Coventry, Warwick Business School, West Midlands.
Dagwell, R 2007, Corporate accounting in Australia, University of New South Wales Press,
New South Wales.
Gaffikin, M 2005, Regulation as accounting theory, University of Wollongong, Wollongong.