Regulatory Capture and Financial Reporting

The provided document is a solved assignment that delves into the topic of regulatory capture and its influence on financial reporting. It references various sources, including academic papers and official websites, to discuss the concept of regulatory capture and its implications for accounting standards and practices in different jurisdictions, such as Australia and the UK. The assignment also touches upon the importance of regulatory theory insights and the role of special interest groups in shaping accounting policies.

Running head: CONTEMPORARY ACCOUNTING
Contemporary Accounting
Name of the Student
Name of the University
Author’s Note

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Executive Summary
This report has aimed to discuss various aspects of framework for financial reporting of Australia
and UK. Australian financial reporting system has concern related with relevance and reliability
of financial information in the financial statements of the companies. AASB is the major
decision maker in the financial reporting framework of Australia. In the year 2005, 1 January,
Australia adopted the standards of International Financial Reporting Standard (IFRS). The
financial reporting standard of UK has witnessed major problems on how to respond to the major
development of IFRS.
The companies of UK have the option to select between IFRS and UK and Ireland GAAP in
order to prepare the financial reports of their individual parent companies. The motive behind the
development of the board of both AASB and UK FRC is to provide independence to these bodies
so that they can be beneficial. The adoption of IFRS by Australia and UK has brought
transparency, accountability and efficiency in the financial markets all over the world. The board
of AASB, FRC and IFRS consists of people from different fields like private companies,
regulators, directors and shareholders can be seen as the acting members

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Table of Contents
Introduction......................................................................................................................................3
Part A: Analysis of the Regulatory Framework for Financial Reporting Framework of Australia
and United Kingdom........................................................................................................................3
Australia.......................................................................................................................................3
United Kingdom (UK).................................................................................................................5
Part B: Analysis of the Selected Environments in Relation to Regulatory Capture Theory...........6
Conclusion.....................................................................................................................................10
References......................................................................................................................................12

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Introduction
This report takes an honest attempt towards the analysis of the regulatory framework for
financial reporting of two countries. It can be seen that most of the developed countries all over
the world have their own regulatory framework for financial reporting. For this report, the
regulatory framework for financial reporting of Australia and United Kingdom is taken into
consideration. There are two major parts of this report. The aim of the first part is to analyse and
evaluate the necessary factors related to the financial reporting of the selected countries. The aim
of the second part of this report is to make analysis of the selected financial reporting
environment of the selected countries by relating Regulatory Capture Theory. Lastly, the
conclusion will be developed with the help of a critical analysis on these selected financial
regulatory environments for getting the idea of the extent of capture.
Part A: Analysis of the Regulatory Framework for Financial Reporting Framework of
Australia and United Kingdom
Australia
Australian Accounting Standard Board (AASB) is an Australian government agency
responsible for the development of the necessary standards and principles for financial reporting
(aasb.gov.au, 2018).
Problems: Specific issue can be seen in the standard setting process of AASB. The example of a
specific issue in Australian financial reporting system is the concern related with relevance and
reliability of financial information in the financial statements of the companies. In addition,
another perceived problems is related with the reduction of cost of the process of financial

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reporting. It needs to be mentioned that AASB is currently working on specific projects to
address these problems (aasb.gov.au, 2018).
How it works: As per the earlier discussion, AASB is the major decision maker in the financial
reporting framework of Australia. The main responsibility of AASB is to develop issue and
maintain financial reporting standards. It needs to be mentioned that AASB operates under
Australian Securities and Investments Commission Act 2001 (rba.gov.au, 2018). The Australian
Securities and Investments Commission, commonly known as ASIC, is another major part of the
financial reporting regularity environment of Australia. The major responsibility of ASIC is to
maintain the market integrity and to protect the customers from various frauds in the financial
system. Another major part is the Australian Prudential Regulation Authority (APRA) and it is
responsible for the deposit taking institutes. In this context, the name of the Reserve Bank of
Australia needs to be mentioned as it is responsible for the development of monetary policy and
to bring stability in the Australian financial system (rba.gov.au, 2018).
Progress Towards adoption IFRS: In the year 2005, 1 January, Australia adopted the standards
of International Financial Reporting Standard (IFRS). Over the years, major progress in the
adoption of IFRS by Australia can be observed. Smoothness can be seen in the transition process
of IFRS by Australia. Major success can be seen in the application of IFRS standards for the
financial reporting of not-for-profit Australian companies (iasplus.com, 2018). However, there is
a need for further modification in the areas of quality and cost efficiency of financial reporting.
Most importantly, with the adoption of IFRS across all the sectors, the users and developers have
become able to move between sectors and countries with enough skills and knowledge
(iasplus.com, 2018). In the recent years, one major project of AASB related to IFRS is to review
the adoption of IFRS reporting standards by Australia. The main aim of this review program is

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the strategy of AASB to modify the standards of IFRS for the financial reporting of not-for-profit
business entities. Moreover, another aim is to bring simplification and clarification in the process
of financial reporting (iasplus.com, 2018).
United Kingdom (UK)
Problems: The presence of some specific problems can in the financial reporting regulatory
environment of UK. The financial reporting standard of UK has witnessed major problems on
how to respond to the major development of IFRS (icaew.com, 2018). It needs to be mentioned
that the companies of UK have to incur high cost along with major complexities in the adoption
of the standards and principles of IFRS. This is the greatest problem faced by UK financial
reporting regulatory environment. Apart from this, the UK financial reporting standard has been
facing major issues related with the specific reporting needs for the charities (icaew.com, 2018).
These are the major problems.
How It Works: In the financial reporting regulatory environment of UK, the presence of two
financial reporting frameworks can be seen. They are IFRS; and UK and Ireland GAAP
(Generally Accepted Accounting Principles). It is required for the public listed companies of UK
to adopt the standards and principles of IFRS in order to prepare the financial reports of their
group (frc.org.uk, 2018). However, the companies also have the option to select between IFRS
and UK and Ireland GAAP in order to prepare the financial reports of their individual parent
companies. In this context, FRS 100 Application of Financial Reporting Requirements provides
the whole framework of financial reporting. The major legislative requirements of UK financial
reporting are FRS 102 (frc.org.uk, 2018). The Financial Reporting Standard applicable in the UK
and Republic of Ireland, FRS 101 Reduced Disclosure Framework and FRS 105 the Financial
Reporting Standard applicable to the Micro-entities Regime (frc.org.uk, 2018).

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Progress towards Adopting IFRS: It can be observed that IFRS has been the part of the financial
reporting regulatory environment of UK since 2005 as per the EC regulation. Over these years,
major progress can be observed in the adopting of IFRS by UK (aasb.gov.au, 2018). As per IFRS
standards, it is required for all the domestic companies of UK trading their securities in the
regulated market are required to use IFRS standards for financial reporting as per EU. It implies
that these companies are required to comply with the standards of IFRS for the preparation of
their financial statements. However, exception can be seen in case of foreign companies. In case
of SMEs, they have the option to use the standards of IFRS with some further modifications
(aasb.gov.au, 2018).
Based on the above discussion, it can be observed that both Australia and UK uses
different standards for the purpose of their financial reporting as Australia follow AASB and UK
follows UK and Ireland GAAP (frc.org.uk, 2018). However, it can be observed that both the
countries have done major progress towards adopting the standards and principles of IFRA. In
the presence of IFRS standards and principles, it has become possible for establishing accurate
process of financial reporting for the companies.
Part B: Analysis of the Selected Environments in Relation to Regulatory Capture Theory
Regulatory Capture Theory: In the year 1971, George Strigler introduced this Regulatory
Capture Theory (Carpenter & Moss, 2013). This particular theory states that a firm or an industry
can become beneficial from different relevant legislations if they capture the related regulatory
body. According to this theory, manipulations are done in the regulations for fulfilling the
requirements of the parties having interest in them. Apart from this, this theory also states that

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after a specific period of time, the regulations serve the interest of their concerned industries
(Carpenter & Moss, 2013).
Usefulness: The main advantage of this theory is that it helps in providing the explanation of the
main intentions of the regulations. The development of these regulations involves the individuals
and companies affected by them Young, 2012). For this reason, this particular theory helps in the
adequate representation of policies and interest groups for the betterment of the companies and
the industries. With the help of this theory, the companies and the industries become able to
capture the negative intentions of the regulators for the betterment of their own interests (Young,
2012).
Characteristics: In the Regulatory Capture Theory, George Strigler has mentioned about three
major characteristics or three major assumptions that indicate that a particular regulatory
environment is captured. According to the first characteristic, a regulatory environment will be
considered as captured when there will be greed among the regulatory agency, regulatory party
and customers; and their intention will be to maximize their own interest. Thus, in the presence
of the intention of the maximization of own interest, the regulatory environment will be
considered as captured (Chalmers, Godfrey & Lynch, 2012).
According to the second characteristic, the regulatory environment will be considered as
captured when all the interested parties in the regulatory environment have rational expectation
for the other parties (Boyer & Ponce, 2012).
According to the third characteristic, a regulatory environment will be considered as
captured when the industries or the companies take huge time and effort for capturing the
regulator (Portman, 2014). It is the responsibility of the regulators to set regulations in such a

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manner that the industries or the companies do not take much time to understand them. It can be
seen that there are many instances where the financial regulators failed to implement correct
financial regulations for the companies and the industries (Livermore & Revesz, 2012).
Analysis: From the above discussion, it can be seen that there are three major assumptions in the
regulatory capture theory. In case of the financial reporting regulatory environment of both
Australia and UK, there is a need to analyse the above-discussed characteristic of regulatory
capture theory in respect of these environments. In this context, it needs to be mentioned that
both the Australia and UK have some major history related with the development of accounting
policies and standards (Agrell & Gautier, 2012). Apart from this, there are some major cases
where the regulatory environment was captured. In this context, the example of ASRB can be
provided here. At the time of the discussion of the establishment of ASRB, the professional
accountant members did lobby by ensuring the fact that the board would not have any
independent capability; there would not be any independent chairperson and there would only be
administrative officer in place of research director. Apart from this, the members of ASRB stated
that the industries are required to set priorities after the discussions with the board. From this, It
can be seen that ASRB considered the fulfilment of their interest above all. Most importantly, it
can be observed that the members of ASRB were only accounting professional that shows the
lack of independence of the board (Chalmers, Godfrey & Lynch, 2012).
However, at present, the situation is very different in case of the financial reporting
regulatory environment of Australia and UK. The motive behind the development of the board of
both AASB and UK FRC is to provide independence to these bodies so that they can be
beneficial. The 11 board members of AASB have come from different background like

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accounting, audit, public sector, finance and others. The same aspect can be seen in case of FRC.
This aspect provides independence to these regulatory bodies (Baldwin, Cave & Lodge, 2012).
Apart from this, there is not any presence of lobbying in the development of the
objectives of these accounting standards. It needs to be mentioned that the main aim of the
financial regulatory boards of Australia is to provide the users with required financial
information of the companies by establishing correct financial reporting standards (ifrs.org,
2018). Thus, it can be observed that the main priority of these boards is the development of
single accounting standard for all the companies. Most importantly, the adoption of IFRS by
Australia and UK has brought transparency, accountability and efficiency in the financial
markets all over the world (ifrs.org, 2018).
In this context, it needs to be mentioned that all of these financial regulators have
established standards and principles that are easy for the companies and industries to capture. It
can be noticed that there is not any rational expectations among the parties. It needs to be
mentioned that there is another major aim of the development of FRC. With the implementation
of FRC, it has become possible for the stakeholders of the companies to have a say in the
accounting standard-setting process. More importantly, in the board of AASB, FRC and IFRS,
people from different fields like private companies, regulators, directors and shareholders can be
seen as the acting members (ifrs.org, 2018).
There have been many debates related with the adoption of IFRS by Australia and UK.
Many people have argued that regulatory environments of Australia and UK can be captured due
to the adoption of the policies of IFRS as the standards setters are lobbying to fulfil their own
interest in the presence of a single accounting standard. However, it needs to be mentioned that

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there is not any strong point in this argument, as there has not been anything bad happened in the
presence of IFRS (ifrs.org, 2018). Thus, based on the above discussion, it can be said that there is
less possibilities for these standards to be captured in the presence of all these aspects.
Conclusion
From the whole discussion, it can be observed that this report has aimed to discuss
various aspects of framework for financial reporting of Australia and UK. At the same time, the
report has also attempted to evaluate the framework for financial reporting of these two countries
with the help of the various components of regulatory capture theory. It needs to be mentioned
that the report has analyzed and evaluate all the necessary aspects of the framework for financial
reporting of these selected countries with the regulatory capture theory. The following discussion
shows the critical analysis of the framework for financial reporting of Australia and UK in
relation to regulatory capture theory.
In case of the framework for financial reporting of Australia, it can be seen that relevance
and reliability are the major issues in the financial reporting of Australia. The above discussion
also states that AASB is majorly responsible for the development of financial standards and
policies for financial reporting. Some of the other major bodies are APRA, ASIC and others. It
can also be observed that Australia has adopted all the standards and principles of IFRS in order
to bring accuracy in the financial reporting process. After applying the assumptions of regulatory
capture theory, it can be observed that there is not any area in the framework for financial
reporting in Australia that can be captured. The above discussion shows that there is enough
independence in the body of AASB and IFRS as members from different area can be seen. After
that, from the major activities of AASB, it is clear that there is not any lobbying in this body to

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fulfill the self-needs of the body members as the main aim of AASB is provide the users with
necessary financial information by improving the quality of financial reporting. Thus, based on
the above discussion, it can be conclude that all these aspects diminish the possibility of
regulatory capture for the framework for financial reporting in Australia.
Almost same concept can be seen in case of the framework for financial reporting in UK.
The above discussion states that framework for financial reporting of UK faces major problem in
the adoption of various principles and standards of IFRS. It can be observed that there are two
major frameworks for financial reporting available in UK; they are IFRS and UK and Ireland
GAAP. At the same time, FRC also has to play an important part in financial reporting. It can
also be observed that UK has adopted all the standards and principles of IFRS. In case of the
application of regulatory capture theory, it can be observed that there is not any significant factor
contributed towards the capturing of framework for financial reporting. Same as Australia, the
board of FRC consists of members from different area. Apart from this, it can also be seen there
is not any place for lobbying in the board members. Thus, based on the above discussion, it can
be conclude that all these aspects diminish the possibility of regulatory capture for the
framework for financial reporting in UK.

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References
AASB Board . (2018). Aasb.gov.au. Retrieved 31 March 2018, from
http://www.aasb.gov.au/AASB-Board.aspx
AASB RESEARCH REPORT NO 4: REVIEW OF ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS IN AUSTRALIA. (2018). Aasb.gov.au.
Retrieved 31 March 2018, from
http://www.aasb.gov.au/admin/file/content102/c3/AASB_Review_of_IFRS_research_rep
ort_03-17.pdf
About the AASB . (2018). Aasb.gov.au. Retrieved 31 March 2018, from
http://www.aasb.gov.au/About-the-AASB.aspx
Agrell, P. J., & Gautier, A. (2012). 14. Rethinking regulatory capture. Recent advances in the
analysis of competition policy and regulation, 286.
Australia's Financial Regulatory Framework | Council of Financial Regulators Annual Report –
2002 | RBA. (2018). Reserve Bank of Australia. Retrieved 31 March 2018, from
https://www.rba.gov.au/publications/annual-reports/cfr/2002/aus-fin-reg-frmwk.html
Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: theory, strategy, and
practice. Oxford University Press on Demand
Boyer, P. C., & Ponce, J. (2012). Regulatory capture and banking supervision reform. Journal of
Financial Stability, 8(3), 206-217.

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Carpenter, D., & Moss, D. A. (Eds.). (2013). Preventing regulatory capture: Special interest
influence and how to limit it. Cambridge University Press.
Chalmers, K., Godfrey, J. M., & Lynch, B. (2012). Regulatory theory insights into the past,
present and future of general purpose water accounting standard setting. Accounting,
Auditing & Accountability Journal, 25(6), 1001-1024.
Chalmers, K., Godfrey, J. M., & Lynch, B. (2012). Regulatory theory insights into the past,
present and future of general purpose water accounting standard setting. Accounting,
Auditing & Accountability Journal, 25(6), 1001-1024.
Financial Reporting Council . (2018). Frc.org.uk. Retrieved 31 March 2018, from
https://www.frc.org.uk/frc-for-you/frc-mission
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standards/standards-in-issue
IFRS adoption in Australia was relatively smooth. (2018). Iasplus.com. Retrieved 31 March
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https://www.iasplus.com/en-gb/standards/ifrs-in-the-uk-1
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world/use-of-ifrs-standards-by-jurisdiction/united-kingdom/
IFRS . (2018). Ifrs.org. Retrieved 31 March 2018, from http://www.ifrs.org/about-us/

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Knowledge guide to UK accounting standards. (2018). Icaew.com. Retrieved 31 March 2018,
from https://www.icaew.com/library/subject-gateways/accounting-standards/knowledge-
guide-to-uk-accounting-standards
Livermore, M. A., & Revesz, R. L. (2012). Regulatory review, capture, and agency
inaction. Geo. LJ, 101, 1337.
Overview of the financial reporting framework. (2018). Frc.org.uk. Retrieved 31 March 2018,
from https://www.frc.org.uk/getattachment/baa79d97-8bf1-49e3-af14-f0dfd7f1fdfc/
Overview-WEB-READY.pdf
Portman, M. E. (2014). Regulatory capture by default: Offshore exploratory drilling for oil and
gas. Energy Policy, 65, 37-47.
The standard-setting process . (2018). Aasb.gov.au. Retrieved 31 March 2018, from
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Young, K. L. (2012). Transnational regulatory capture? An empirical examination of the
transnational lobbying of the Basel Committee on Banking Supervision. Review of
International Political Economy, 19(4), 663-688.

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