Regulatory Frameworks for Financial Reporting

Regulatory Frameworks for Financial ReportingDiscuss the reasons why we need a regulatory framework for pecuniary reporting. What argon the advantages and disadvantages of do history rules by law as opposed to using IASB standards?The personify of rules which determine how financial accounts go out be compiled in any(prenominal) especial(a) situation ar kn birth as the Generally Accepted report Principles (GAAP) these atomic number 18 drawn from a number of sources. The first of these are healthy the main sources of these include the Companies Act 2006, as well as EU Law and the remainder of the UK common law. The second strand of this includes national and external rude(a)s report standard much(prenominal) as the ASB and IASB (International Accounting Standards Board) standards, as couch by the Accounting Standards Board and their international equivalent they will in any font work to establish public opinion on proposed new standards, and engross seminars to demo nstrate issues at heart method of explanation. The third strand is comprised of the rules of the Stock Exchanges, though these are unless applicable to companies listed on the LSE or AIM.The major argument in favour of a regulatory framework is that standardisation is encouraged and, done this, we are able to involve an accurate assessment of financial health. As Alexander and Britton point out, before the debut of these standards, distinguishable firms in exchangeable situations were following diametric chronicle standards, leading to different and incompatible results (Alexander and Britton, 2004). Indeed, when take overs occurred, different valuations taken by accountants could potentially generate vastly different results, habituated the uncertainty as to what to include this, in turn, was bad fro the temper of the accounting profession. The framework, in the shape of two law and accounting standards, stops for the element of subjectiveness to be lessened. Furthe r advantages of the current regulatory framework include benefit level of information for the end user, done with(predicate) stipulating minimum standards of disclosure in addition, the current system benefits through input both from government (in jurisprudence, for example), and from the accountancy profession, which arguably works to ensure a balance of interests.However, within this, we whence face a choice between regulation by statute and regulation through accounting standards, separately with their sexual intercourse merits and demerits. I shall discuss these in turn.The first advantage is that accounting standards act as a way of reducing the disparate methods by which one may pull in accounts this, in turn, makes the account of greater benefit to the end user, given that they swallow a document which is easily comparable to others of the same kind. Without such a standardisation, in that respect is a risk that different firms of accountant may bemuse chosen to classify a special(prenominal) type of as execute or debt in a different way. Alexander and Britton (2004) demonstrates this through the example of piazza how is this to be cling tod? We might argue that it should retain the value for which it is bought alternatively, we could regularise that the value should be this, minus depreciation or thirdly, we could say that the value (given that prices of property will almost always be rising) should be the archetype price plus an inflationary multiplier. This is just one example, and taken over a large company, the potential for fluctuations is substantial. In an internationalised economy, this value is correspondingly change magnitude Zeff (2007) remarks that the introduction of international standards has led to a very great increase in global comparability in relation to what we had before, namely, every area using its profess national standards, which differed aimably from country to country. Indeed, Haller and Walton (2003) describe this as the nub of the international accounting problem. How do companies that want to operate across national (and in that locationfore usually cultural) boundaries convey economic information countenance for business decisions?Secondly, they provide a focal point for debate over what accepted practice should be. At present, it has occasionally been argued that accounting standards are not based on any coherent conceptual framework, but sooner exist simply as rules in themselves (Alexander and Britton, 2004). The IASB is a body well-poised to manufacture such a problem thus, in recent years, the IASB has launched a cypher to develop an improved common conceptual framework that provides a well foundation for developing future accounting standards. It is serious to imagine fan tan giving time to such a broad yet arguably essential task.Thirdly, on much the same basis, it may be argued that accounting standards are much less rigid than relevant legislation each chang e to legislation will require a separate extremum to proceed through Parliament, in subscriber line to accounting standards. Thus, the maintenance of accounting standards provides a body of rules that create standardisation trance simultaneously missing a legalistic rigidity. In addition, the true and fair view can be used when justifiable to override other accounting standards which may go through (Fearnley and Hines, 2003).Fourthly, it can be seen that the introduction of accounting standards hold back encouraged companies to make available more than information than they otherwise would have. Examples of this can be seen in, for example, Robins remarks that federal official 3 (on reporting financial performance), requiring companies to highlight a range of different financial performance indicators (such as the results of continuing operations and discontinued operations) which allow a greater level of information than if simply profit were indicated (Robins, 1999). by me ans of requiring enhanced disclosure of information, it can be argued that accounting standards create a greater standard of information to the end user, and thus the value of accounting in general.Fifthly, it may be viewed as an advantage that the guidelines are created by people with a strong connection to the industry that is, overlord accountants. Statutes such as the Companies Act are inevitably subject to party semipolitical pressures and, in despite their best intentions, Members of Parliament are un plausibly to have the same level of expertise as people with vast escort in their field. A further point is that when Parliament drafts legislation, it will determine for it to be applied by the courts it would therefore be more laborious to create comprehensive standards in such a way than it would be to do so through a body comprised of accountants, creating standards for accountants. We may settle that a system based on professional considerations is more likely to prov ide an accurate assessment of an institution.On the other hand, there are a number of corresponding criticisms. Firstly, requiring additional information, and for institutions to comply with certain standards, will inevitably lead to an increase in costs checking that a set of accounts adheres to a particular set of standards will be require more work than simply taking an ad hoc rise. In addition, each new set of standards will entail its own costs for example, in re-training accountants who had commence used to different standards. Secondly, it may be argued that these guidelines are increasing in volume and complexity. Indeed, a letter from the International Corporate Governance earnings to the IASB asked whether some instruments are so complex and unstable that not only is portraying things by one number insufficient, but the users of accounts and stakeholders would be come apart served by the recognition that there may not an answer. Thus in certain areas, complexity will firstly make the standards more difficult to follow through, but also perhaps create inappropriate results, as they are inappropriate to the particular context. This is a particularly strong criticism if we consider that the economic case for the regulatory framework is perhaps unproven The case for uniformity in accounting is not based on any settled body of evidence, or literature (Bell, 2005).Thirdly, the fact that the guidelines are both set and disciplined by the accounting profession means that there may be no effective method of enforcing the standards this is in contrast to any statutory system, which will be enforceable through the courts. Where professional accountants are involved, the only sanction for breach of these guidelines would appear to be through professional bodies, which have been slow to do so (Lewis and Pendrill, 2003). This is a particular problem, considering that (as seen above), part of the argument for accounting standards is in fact to uphold the rep utation of the profession. In addition (and as Lewis and Pendrill point out), many accounting standards pot with issues which in a egalitarian society, should arguably be subject to democratic controls the example given is that of FRS 17 (Retirement Benefits), which stated that deficits in a company pensions scheme were to be treated as expenses on the profit and loss account. This is an issue of national importance.Finally, requiring further standardisation means that there will be a trend towards rigidity in financial reporting it has long been feared that this will lead to accounting becoming a process of rote learning of rules, without searching for any meaning within them. (Baxter, 1962) Thus, although there will be a standardised system, this will not necessarily be one in which these rules have principled bases at the same time, such standards remove any opportunity for individual astuteness or discretion.. In addition, a rigid set of standards will not be appropriate in e very situation to which they might be applied for example, the property industry protested the application of SSAP 12 to property since its introduction (Andrew and Pitt, 2006 SSAP19 was later introduced to cover this). It may even be that an emphasis on rules over judgment distorts the realities of a given situation the experience of FRS5 has shown that judgement-based accounting can operate successfully to report economic reality in a situation where previously there had been an over-reliance on rules (ICAS, 2006).In conclusion, while there is a clear value in standardisation (in that accounts, through being created from the same standards, are more reliably comparable), it would appear that there are certain conflicts. The first is between expertise and control to what finish should Parliament allow standards boards to create their own rules, benefitting from their own experience, and to what extent should their own political persuasions have a role? The same problem applies in enforcement allowing the accounting industry the opportunity to enforce their own rules gives them the independence to enforce them using their own expertise, but otherwise could lead to charges of indifference to their own wrongdoing. Secondly, there is a conflict between standardisation and complexity though the aim of standardisation would perhaps be best served by standards cover charge every possible eventuality, these would be so lengthy and comprehensive as to be unworkable to some extent, we must rely on broader principles. The relative merits of each of the relevant methods will therefore depend on the approach we take towards each of these conflicts.