Week 2

Question 1

Regulation of financial accounting

Answer 1

Regulation involves an authoritative body (an accounting standards board) setting rules (accounting standards) regarding how general purpose financial reports are prepared. Standards generally restrict the accounting choices available to preparers/firms.

Question 2

Regulation of special purpose financial reporting

Answer 2

When we talk about the regulation of financial reporting we are generally talking about the regulation of general purpose financial reporting. There is no need to regulate ‘special purpose financial reporting’ (e.g. a bank loan application).

Question 3

Competing views as to whether regulation is necessary:

Anti-regulation (free market) view:

Answer 3

private economic-based incentives
‘market for managers’
‘market for corporate takeovers’
‘market for lemons’

Question 4

Competing views as to whether regulation is necessary:

Pro-regulation view:

Answer 4

market failure/inefficiency arguments
protection against fraud
enhanced comparability