Do you believe that imposing more financial regulations could prevent Lehman-like accounting scandals to happen again in the future? Back your answer with appropriate theories’
Regulation of financial accounting practice was introduced after the Great Depression on account that, problems linked to accounting information resulted in uninformed and poor investment decisions (Arrunada 2000). The issue of whether to regulate accounting standards should be regulated has draws mixed reactions in the profession with some arguing against the regulation of accounting while others taking a pro-regulation approach (Doost 1990). From a personal point of view, more financial regulations will play a pivotal role in preventing further accounting frauds in the future. This essay adopts a pro-regulation point of view and considers accounting information as a free/public good although it should be view and treated in a manner similar to other goods. Eddie & Peter (2007) points out that more financial regulation is required to help contain the impacts associated with market failures. In a scenario where there are little or no financial regulation and that accounting information is considered to be an economic good, Geiger (2002) points out that e a free-riders problem is likely to occur and that corporations are likely to lack incentive to provide the necessary accounting information, which offers an opportunity that they can exploit to initiate accounting frauds. A further rational for the need for more financial regulation is that market failure is normal and exists; therefore, more financial regulations is needed to help in the achievement of social goals. According to the views of Gerard (2009), investors should be protected from unregulated disclosure and potentially deceptive information, which is a clear indicator of the need to adopt more strict financial regulation measures.
Financial regulations are often implemented at the behest of the public interest (Gibson 2010). In line with the public interest theory, financial regulation acts as a response to the demand by the public for the correction of inequitable and inefficient market practices; as a result, putting in place more financial regulations will benefit the society as large instead of benefiting just vested interested (Higson 2003). Similarly, the capture theory argues that regulations are initially established to serve public interests but are ultimately controlled by the regulated entities.
Overall, the need for more financial regulations draws from the fact that markets for information is inefficient; market efficiency arguments (accounting as an economic good) tends to disregard the rights of individuals; and that those who are able to demand accounting information can frequently do so because of the power they have over scarce resources whereas those having limited power are generally not able to access accounting information in the absence of financial regulations (Wells 2009). In addition, the need for more financial regulations can be justified by the fact that investors should be protected from fraudulent firms offering misleading information, and that more financial regulation results in uniform accounting methods, which enhances comparability. Personally, I believe that more financial regulations could prevent accounting scandals in the future. More financial regulations will place constraints on accounting professionals and ensure that their accounting practices matches the established standards
References List
Arrunada, B 2000, ‘Audit quality: attributes, private safeguards and the role of regulation’, The European Accounting Review, vol 9, no. 2, pp. 205-224.
Doost, R 1990, ‘Accounting Irregularities and Computer Fraud’, The National Public Accountant, vol 35, no. 5, pp. 36-39.
Eddie, M & Peter, A 2007, Accounting: An Introduction, Financial Times Prentice Hall, New York.
Geiger, M 2002, ‘Auditor Tenure and Audit Reporting failures’, Auditing: a journal of practise and theory, pp. 67-78.
Gerard, Z 2009, Fair Value Accounting Fraud: New Global Risks and Detection Techniques, John Wiley and Sons, New York.
Gibson, C 2010, Financial Reporting & Analysis: Using Financial Accounting Information, Cengage Learning, New York.
Higson, A 2003, Corporate financial reporting: theory and practice, Sage, London.
McKenna, F 2011, Accountants And Fraud: Can You Teach Them To Prevent, Catch, And Stop Committing It?, viewed 8 April 2013, < http://www.forbes.com/sites/francinemckenna/2011/06/07/accountants-and-fraud-can-you-teach-them-to-prevent-catch-and-stop-doing-it/ >.
Wells, J 2009, Computer Fraud Casebook: The Bytes that Bite, John Wiley and Sons, New York.
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