Regulation Of Financial Reporting And Ethical And Professional Issues

Question 1

What is regulation

Answer 1

-> rule or principle governing behaviour or practice; especially such a directive established and maintained by an authority

Question 2

Who is a regulator

Answer 2

-> regulator is an official or agency established responsible for the control and supervision of a particular industry business activity

1. Financial reporting council
2. Financial condition authority
3. Prudence regulation authority
4. Office of communications (Ofcom)
5. Office of Gas and Electricity Market (Ofgem)

Question 3

Regulation of financial reporting

Answer 3

Rules that have been developed by an independent authoritative body that has been given the power to govern how financial statements are prepared. The actions of the authoritative body will have the effect of restricting the accounting operations that would otherwise be available.

Question 4

Sources of accounting regulation (IMPORTANT)

Answer 4

1. The accountancy profession
2. Companies legislation
3. Stock exchange requirements

Question 5

Is accounting regulation necessary

Answer 5

-heavily regulated
-several legislations and accounting standards in force which requires reporting entities to disclose some set info in prescribed manner
-chaotic if entities could report whatever they want

Question 6

Free market perspective

Answer 6

-> suggests that accounting info should be treated like goods for the forces of demand and supply to determine optimal supply of information about an entity
-> absence of regulation there are private incentives to provide credible info. This is because provision of credible info allows parties to monitor organisation, and monitoring reduces the risks associated with investing in an organisation
-> argued that managers are best placed to determine what info should be produced to increase the confidence of external stakeholders
-> mandatory disclosures may be costly to the organisation if they enable competitors to take advantage of certain proprietary information

Question 7

Pro regulation perspective

Answer 7

-> suggests that accounting info is usually feee from the users of financial statements
-> public good
-> economic theory suggests that in the presence of free riding, true demand for a good is underestimated because people know they can get it for free
-> this provides a disincentive for the producers of the good which in turn leads to underproduction of information by reporting entities
->It ensures everyone gets access to the same level of financial information to create a level playing field for users. May disadvantage people with limited resources who need info from organisations to make their decision, if not regulated

Question 8

Five fundamental principles

Answer 8

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

Question 9

Integrity

Answer 9

-> straightforward and honest. Not knowingly be associated with misleading information.

Professional accountant should not be associated with info they believe
1. Contains materially false or misleading statement
2. Contains statements or information furnished recklessly
3. Omits or obscures info required to be included where such omission or obscurity would be misleading

Question 10

Objectivity

Answer 10

-> not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others

Question 11

Professional competence and due care

Answer 11

-> to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service

Professional competence may be divided into two separate phases
1. Attainment of professional competence (initial professional development)
2. Maintenance of professional competence (continuing professional development)

Question 12

Confidentiality

Answer 12

-> respect the confidentiality of info acquired as a result of professional and business relationships.

Exceptions to this principle are when professional accountant is permitted by law to due to a right to disclose to breach confidentiality:
1. Quality review undertaken by a professional body
2. In order to respond to an investigation by a professional or regulatory body
3. During legal proceedings against the accountant
4. To comply with technical and professional standard
5. Disclosure is required by law

Question 13

Professional behaviour

Answer 13

-> to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession

Question 14

Threats (IMPORTANT)

Answer 14

1. Self interest
   ->may have financial or other interest and may nit act with independence
2. Self review
   -> review judgement made themselves, objectivity and independence
3. Advocacy
   ->expected to defend or justify position of client, threatens objectivity and independence
4. Familiarity
   -> threat that due to a long or close relationship with client or employer, a professional accountant will be too sympathetic to their interests or be too accepting of their work
5. Intimidation
   -> threats that a professional accountant will be deterred from acting objectively and independently

Question 15

Define safeguards (IMPORTANT)

Answer 15

-> are actions that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level