Arguments for Regulating Financial Reporting

Arguments for Regulating fiscal reportAcoording to Leuz and Verrecchia (2000) the bill literature presents proof that the feature of method of business relationship system has economical consequences 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 changes as well as soak up homogeneous consequences by stating that the quality of accounting has improved glob tout ensembley since 1990s. Land and Lang (2002) in any case say that the solid ground for the advancement in the quality of accounting is primarily due to globalisation and visualization of international accounting consensus. The argument proposed by the accounting possible proceedingion is that the main aim of pecuniary reportage is to reduce tuition asymmetry between managers and owners and other s showholders contracting with the partnership (Watts, 1977 B e truly last(predicate), 2001). Favouring this nonio n Frankel and Li (2004) states that fiscal inform decreases information asymmetry by disclosing germane(predicate) and timely information. specimen setting is a form of regulation which lays down generally accepted accounting dominions (GAAP) (Scott, 2003, p. 9). Also accounting amounts for listed companies in the European Union ar promulgated by the International Accounting Standards Board (IASB).This report dishs this chief that whether or not we need this kind of regulation of pecuniary insurance coverage.What is monetary Reporting?To answer the report question, first of allly, there is a need to answer the questions like what is financial reporting, who argon the drug users of financial reports and how is financial reporting regulate and what are the bodies responsible for regulating the financial reporting. By answering these questions a better appreciation of financial reporting leave behinding be achieved and which will ultimately aid in answering the repor t questions. pecuniary reporting enables an organization to communicate information or so its performance externally (Atrill et al. 2005). So, financial reports provide summarized information about an organizations transactions over a limited time period to external decision makers. (e.g. Investors).The users of financial reports are employees, switch unions, government, creditors, lenders, customers, shareholders and investment analyst (Elloit et al. 2006). The needs of these various users of financial reports can be completely contrary. However, the main emphasis is put on the most operating(a) statements like poise sheet, income statement and cash flow statement.The Accounting metre boards (ASB) which is responsible for setting and effect accounting standards, the ASB is part of a broader social structure including the Financial Reporting Council, the review panel and the Urgent Issues Task tug (UITF). The Financial reporting Council (FRC) is the body charged with the b road overview of the standard setting outline. Although the FRC oversees the process of producing accounting standards, it has no input into the enlarge rules. Conversely the principle sources of such regulation are The Law and the Accountancy Profession.The Law consists of genuine hazards. Much of the legislation governing the UKs preparation of accounts is personified in the companies Act 1985 and companies Act 1989. They are mainly concerned with the accounts of limited liability companies. These Acts state that all financial statements constructed under the Act must present a honest and fair view. The Act also deals mainly with minimum disclosure requirements and is best concerned with the protection of shareholders and creditors. It provides a framework for general disclosure by requiring that certain financial statements such as the emolument and loss accounts and the balance sheet, should be prepared and presented to the shareholders and requires the specific disclosur e of certain items such as depreciation and so on. These disclosure requirements resolve some of the problems associated with the asymmetry of information between the directors and some user groups. They also enable user groups to comparison the level of their inducements with those received by the other groups. The Act also requires that the directors not only present the financial statements to the shareholders each year but also that independent auditors are appointed to examine the financial statements and report their findings to the shareholders.The law of nature addresses the problem of information asymmetry by requiring the disclosure of certain describe items of interest to user groups. The Accountancy Profession also recommend the similar but in this role as regulator. The accountancy profession is more influential in achieving a significant increase in the equation of financial statements. Whereas the law provides the general framework for what is to be accounted fo r in the financial reports, the accountancy profession provides detailed rules in the form of accounting standards about how items and transactions should be accounted for.The two main restrictive bodies of financial reporting are The Law and the Accounting Profession with the Accounting Standards Board unremarkably known as ASB (Elliot et al. 2008). In UK, most of the legislation related to the produce of accounts is embodied in the Companies Act 1985 and 1989. The Companies Act 1989 is the main frame which the companies and accountants nurture to follow. All the financial statement drawn up under the act 1989 must present a true and fair view and its right is to protect all the users of the financial reports and statements. The second and the most meaning(a) regulatory body is the accounting profession. The standard setters should be aware of the information infallible by all users of financial reports and should know the impact and the outcome of a different accounting met hod on the needs of those users. The standard setters should also be able to resolve the conflicts which exist between the needs of different users. So, they have to find an alternative way which best satisfy user needs and this could be achieved by choosing the improvement of the social welfare kind of of welfare of individuals.We know that Accounting Standards Board is the main accounting standard setter. Because the ASB is composed of professional accountants, they may be unfamiliar with the user needs. So , when there is a need for a change in accounting standard the ASB prepare and publish a draft standard called the FRED (Financial Reporting Exposure Draft). After the publishing of these drafts the comments from the earth is invited and in the light of these comments the FRED is changed (or unchanged). instantaneously the FREDs are issued as FRS (Financial Reporting Standard). The main disadvantage of this system is the ASB members are unfamiliar with the different user nee ds and the comments from the general public may not be equally represented.There are four amours that standards in financial reporting supply people using it. The first one is Comparability financial statements must allow people to discriminate one participation with another one and evaluate the managements performance without outgo time and money adjusting them to a common format and common accounting treatments. It is essential that users of financial reports or investment decision makers be supplied with relevant and standard financial reports which have been regulated and hence exchangeable. The second affaire that standards and regulations supply is called Credibility. Because all this standards and regulations exist accountants have to treat every company in the same way. If the accountancy profession permitted companies experiencing similar events to produce financial reports that disclosed markedly different results simply because of a freedom to get different accoun ting policies they would lose all of their credibility. So, the standards should be composed of unshakable rules and should not be broken.The third thing is Influence that means, setting up the standards has encouraged a constructive appraisal of the policies being proposed for individual reporting problems and has been a stimulus for the development of a conceptual framework. The last thing that the standards have to supply is discipline. Companies left to their own devises without the need to obey standards will eventually be disciplined by the financial markets. But in the short run investors in such companies may suffer loss. The Financial Reporting Council is aware of the need to impose discipline because most of the company failures in recent years are because of obscure financial reporting. why should the Accounting Standards set? As we argued before, an important role of the regulations is to increase the compare of accounts by limiting the choice of alternative accounting methods and to supply standardized accounts. This standardization can be achieved only by uniform accounting practice. If all accounting methods were standardized, two organizations which began the year with same balance sheets and which make the same transactions during the year, they would report the same balance sheets and the same profit and loss account at the end of the year. In addition to these advantages of regulations in financial reporting, there are also some more effectual functions. Regulations can help to reduce the influence of personal biases and political pressures on accounting rulings. They can increase the level of user confidence in, and understanding of, financial reporting by clarifying the basis on which all accounts are prepared and presented. Finally, they can provide a frame of annexe for resolving accounting problems which are not mentioned in legislation or accounting standards. As we argued earlier although the regulations in financial reports have very advantages it has many disadvantages too One if these disadvantages is the Adverse Allocative Effects, this could occur if the ASB did not retort into account of the economic consequences of the new standard or regulation they have issued. For example, additional costs could be imposed on preparers of accounts and suboptimal managerial decisions dexterity be taken to avoid any reduction in earning or net assets. Consensus-seeking can be another disadvantage and this means the issuing of standards that are over-influenced by those with easiest access to the standard-setters. Most of the time this could happen with intricate subjects. Standard Overload is composed of a number of statements which creates the most important disadvantages of standards. Some of them are1. There is more than one standard-setter body so, as well as it becomes more difficult to follow the new changes, the accountants are becoming so regulated that it becomes very difficult to use his/her accounting profession, to make judgments.2. There are too many standards and regulations, so in the long run, they restrict the development of accounting profession by deter the accountants from experimenting new ways of recording transactions.3. Some points are too detailed and some of them are not sufficiently detailed so, makes it hard to obey.4. Standards are for general-purpose and sometimes they fail to respond to users and the firms needs.For example, a company which wants to move in investment finance can not make the necessary judgment of how much information is necessary and what form it need take so, it couldnt take the actions necessary to attract investors and may bankrupt. Some of the standards are lack of a conceptual framework this means they havent got a clear defensible system of logic and the rules tend to be rather arbitrary. This causes the standards to lose its credibility and acceptability.