1.2 The need for a regulatory framework Flashcards
What are some key aims of the regulatory framework? (7 things)
- Ensure financial reporting is regulated through financial reporting standards such as IFRS, UK GAAP & US GAAP
- Ensure objective reporting by providing relevant, reliable & faithfully represented info
- Ensure a minimum level of information in financial statements
- Ensure financial information is comparable & consistent
- Improve transparency and credibility of financial reports, promoting users’ confidence
- Regulate the behavior of companies & directors through the CG framework
- Achieve desired social goals (CSR)
What are the two main approaches to regulatory frameworks?
1 Principle-based system
2 Rules-based system
What is a principles-based (rather than rules-based) regulatory framework?
One which uses a conceptual framework to provide an underlying set of principles (rather than prescriptive rules).
What is the advantage of a rules-based (rather than principles-based) regulatory system?
The exercise of judgement is minimised, which is preferred by auditors.
Give one example of a rules-based regulatory system.
The US GAAP
What is a disadvantage of a rules-based (rather than principles-based) regulatory system?
There needs to be a large number of regulatory measures to cover every eventuality.
What are the main features of a typical regulatory structure? (6 things)
1 National or company law - CA 2006
2 A financial reporting standards body - FRC issues FRS in the UK
3 Market regulations - Sarbanes-Oxley Act (SOX) for US listed cos
4 Industry-specific and securities exchange rules - FCA, LSE
5 Corporate governance frameworks - UK CG Code
6 Environmental & sustainability reporting - integrated reporting
In the UK, which company law is relevant to regulatory accounting?
Companies Act 2006
What is the UK financial reporting standards body?
The Accounting Standards Board (part of the FRC)
Give an example of a market regulation which may affect accountability in the global market.
The US Sarbanes-Oxley (SOX) Act, which affects businesses with a US listing.
What is meant by-industry-specific and securities exchange rules?
Rules set by bodies such as the FCA in the financial services industry and LSE for companies with quoted shares.
What is corporate governance?
The set of internal rules, polices & processes that determine how a company is directed
What is the purpose of a corporate governance framework?
To align the interests of the directors and managers with those of the shareholders in pursuing the success of the company.
What is meant by “integrated reporting”?
A holistic form of reporting explaining how strategy, governance, performance and prospects lead to value creation in the short, medium and long-term.
