Far Annual Report Review

Feb 12

(c) why would the ‘free market’ advocates argue that the regulation of financial reporting will lead to an oversupply of accounting rules and standards? Discuss.  

Accounting information is a ‘public good’ because once it is released by a company, it is available to everyone. Although the information may be sold to certain people only, other who did not pay for it cannot be easily excluded from using the information. Since not all users can be charged for the cost of producing the accounting information, companies will have minimal incentive to produce it. Only regulatory intervention can persuade companies to produce the information necessary to meet real demand and to ensure an efficient capital market.

June15

free market opponents that oppose regulation argue that even in the absence of regulation, organizations will provide optimal amounts of accounting information.

Provide two(2) incentives for organizations to produce optimal amounts of accounting information despite the absence of regulation.

There is a view that organisations are best placed to determine what information should be produced. The introduction of accounting standards creates inefficiencies by imposing a ‘one-size-fits-all’ approach on external reporting. Imposing regulation restricting the available set of accounting methods decreases the efficiency of contracting . As example, the organisation might have developed what it considers is the best way to reflect managers performance, but an accounting standards may not allow the use of this accounting technique.

Many of the contracts entered into by the management will be based on accounting information. For example, paying the manager a bonus based on accounting profits. Thus the organisations will be motivated to provide the information to align their interest with that of the other parties.