Regulatory Environment for Contemporary Accounting

This article discusses the importance of a regulatory environment for preparing financial statements and reporting in contemporary accounting. It also explores the differences between capture theory and economic interest theory. The regulatory environment of the UK and Australia are discussed in detail. The article concludes by discussing the benefits and drawbacks of regulatory capture theory.

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

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Table of Contents
Introduction......................................................................................................................................1
Discussion........................................................................................................................................1
Conclusion.......................................................................................................................................1
References........................................................................................................................................1

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Introduction
A regulatory environment for preparing the financial statements and reporting is essential
for ensuring that the needs of the financial statements users or the accountants in the businesses
are met with the least of the information of the transaction. This also enables make sure that all
the information obtained in the relevant economic arena is consistent and comparable. Due to the
global investment and growth in multinational entities, this field is an increasing international
one. Moreover, it increases the confidence of the users in the process of financial reporting and
regulates the company behavior and directors towards their investors (Campbell, 2016). The
standards of financial reporting are not sufficient to achieve the organizational goals and meet
the legal and market-based regulation. There are many elements of regulatory environment of
accounting and reporting that differs from county to country, a basic regulatory structure must be
according to the Market regulations, National law, National financial reporting standards and the
rules of Security exchange.
Discussion
The regulatory environment for accounting and financial reporting varies, according to
Marti & Scherer (2016) a clear description has been given for determining the environment of
U.K. The accounting environment of U.K has its own national financial reporting authority, the
Accounting Standards Board that is a part of the Financial Reporting Council issues the financial
reporting standards. The Companies Act 2006 is the main legislation influencing businesses in
the UK. However, there are also many other regulating body of UK, EU and even US legislation
like the Sarbanes Oxley Act that affect the countries accountability. There are also various
regulatory systems that are industry specific and affects the accounting process in the UK like

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the Financial Services Authority. The Financial Services Authority is a body that aims to obtain
the public accountability of the financial services industry. Moreover, the London Stock
Exchange for companies also provides regulations and provides the criteria for quoting the
values of shares in the share market.
Similarly, the regulatory environment of Australia aims in promoting integrity and
confidence within the investor in the economy, capital markets and corporations. The consistent
financial reports prepared in accordance with legislative requirements of the state (Woolcock
2016). In all Australian states and territories, the same standards of reporting apply. Australian
Businesses are required to report to the Australian Taxation Office (ATO), the Australian
Securities and Investments Commission (ASIC) and/or the Australian Securities Exchange
(ASX).
Financial Regulatory Framework in Australia was introduced on 1st of July 1998 as
recommended by Financial System Inquiry. It consists of three agencies with functional
responsibilities:
 The Australian Prudential Regulation Authority (APRA),
 the Australian Securities and Investments Commission (ASIC),
 the Reserve Bank of Australia (RBA),
The APRA is an integrated prudential regulator that takes care of the banking institutions,
general insurance and superannuation. It develops prudential policies that balance financial
safety and efficiency, competition, contestability and competitive neutrality (Fratianni, Willett &
Wihlborg, 2015).

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The ASIC is a body that administers the range of legislative provisions relating to financial
sector intermediaries, financial markets, and financial products, that includes, insurance
investments, superannuation and deposit-taking activities (Leuz, & Wysocki, 2016). It aims to
protect consumers and markets a from unfair practices, deception, manipulation. It promotes
confidence in participation of the financial system by consumers and investors.
The Reserve Bank of Australia is responsible for monetary policy and for overall stability in
the financial system. It has no obligation to protect bank depositor’s interests or other creditors of
banks. Its task is to deal with threats to financial stability that can manipulate the economic
activity and confidence of investor and consumer.
The basic problem in the regulatory environment in Australia is that the supervisory staff
spend a lot of time on data collection and preparation, and lot of time is wasted to obtain the
usable data. Management cannot get the data it needs when it needs it. Where there are still
manual processes, the potential for human error exists and a risk of data loss exists. The
communication flow with regulated institutions can be unstructured and lacks full traceability.
On the other hand, the bodies that regulate the financial environment of U.K includes for
informative and reliable reporting contributes to this commitment. It includes the implementation
of international accounting standards and international standards on auditing and requires an
ongoing dialogue with UK stakeholders and EU or international regulators on measures to
encourage market stability. It is vital that the UK economy has efficient and effective capital
markets and there is confidence in the corporate framework through greater transparency.

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On pointing out the issues faced by the accounting regulations in U.K., it can be said that
the alternative solutions are neglected. Moreover, there are more than one regulatory body that
can create conflicts and confusion.
IFRS stands for International Financial Reporting Standards. It is an internationally
accepted accounting framework the accountants organize and report financial information. IFRS
focuses more on general principles than GAAP, which makes the IFRS body of work much
smaller, cleaner, and easier to understand than GAAP (Cohen & Sundararajan, 2015). In
Australia the Australian Accounting Standards Board (AASB) has published the acceptance of
Adoption of International Financial Standards in Australia' that finds that Australia’s adoption of
IFRSs has been relatively smooth for most Australian business entities. In 1 January 2005, IFRS
was adopted in Australia and in 2015; the AASB commenced a review of the adoption to assess
the ongoing relevance of IFRSs to Australian profit and non-profit enterprise enterprises. The
key reason for IFRS adaptation in U.K is that the process is smooth for most sectors and it is an
appropriate basis for setting the standards developed by the AASB, however, further
modifications are needed to as regards the quality and the cost-efficiency of reporting. In U.K,
the European Union adopted the IFRS in June 2002 as an IAS Regulation required by European
companies listed in the U.K securities market, including banks and insurance companies, to
prepare their consolidated financial statements in accordance with IFRS.
The capture theory and its benefits
The Regulatory capture theory was proposed by a Nobel laureate economist George
Stigler, which states the method in which regulatory agencies eventually come to be dominated
by the industries who are charged with regulating. Regulatory capture theory takes place when

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an agency of regulation is formed to act in the public's interest, eventually acts in ways that
benefit the industry it is supposed to be regulating, rather than the public.
The theory states that regulations are influenced to fit the requirements of those affected by them.
It suggests that in a given period of time regulations serve the interests of the industries
concerned. The advantage of the theory is that it explains the main intentions of designing
regulations. The individuals to be affected by the regulations are directly involved in the
formulation of these regulations (Christensen, et al., 2015). Therefore, there is adequate
representation of the politicians as well as the interest groups since the regulations are drawn for
their needs (Christensen, Lee, Walker, & Zeng, 2015). However,
Capture theory lacks in clarity as to how an industry can subject an agency to its interests but
cannot resist its formation. Regulations seem to favor the consumers rather than the industry.
Regulatory capture is a form of government failure. Government failure or non-market
failure is the imperfection in performance of the government (Grubel, 2014). It is a seeking of
rent for acquiring a larger part of a total market’s wealth without creating any additional wealth
for that market. When it exists, the interest of political groups or companies become more
important than those of the public, which leads to a net loss to society. According to prof.
Postner “Regulation is not about the public interest at all, but is a process, by which interest
groups seek to promote their private interest… Over time, regulatory agencies come to be
dominated by the industries regulated.”
There are two types of capture:
Materialist capture or financial capture, in which the captured regulator's motive is based on its
material self-interest. This can result from bribery, revolving doors, political donations, or the

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regulator's desire to maintain its government funding. These forms of capture often amount
to political corruption.
Non-materialist capture, or cognitive capture or cultural capture, in which the regulator begins
to think like the regulated industry. This can result from interest-group lobbying by the industry
(Black, 2017).
Regulation is generally defined as legislation imposed by a government on individuals
and private sector firms in order to regulate and modify economic behaviors. Conflict can occur
between public services and commercial procedures, the interests of the people using these
services and also the interests of those not directly involved in transactions governments,
therefore, have some form of control or regulation to manage these possible conflicts. The ideal
goal of economic regulation is to ensure the delivery of a safe and appropriate service, while not
discouraging the effective functioning and development of businesses (Philippon, 2015).
Regulation can have several elements:
 Public statutes, standards, or statements of expectations.
 A registration or licensing process to approve and permit the operation of a service,
usually by a named organization or person.
The theory does not provide a significant difference from the public interest theory. The
theory suggests that the public interest is the beginning of regulations. This is a similar
suggestion postulated by the public interest theory. Capture theory does not explain clearly how
an industry can subject an agency to its interests but cannot resist its formation.
Regulations seem to favor the consumers rather than the industry (Levin &

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Lo, 2015). The industries under regulations are required to offer services
beyond their capacity. Excess regulations reduce the profits that
industries make. For example, regulations on environment, labor, and
many others make companies to reduce profitability.
Differences between capture theory economic interest theory and capture theory is that,
the capture theory suggests that regulations are designed to fit the demands of those affected by
them. On the other hand, the economic theory suggests that regulations are generated from the
forces of supply and demand. The government is assumed as the supplier while the interest
groups are assumed to be on the demand side of the argument.
The government should consider the interest of the individuals and organizations to be affected
by the regulations. These groups should be involved in the decision-making concerning the
formulation of the regulations (Li, Sougiannis & Wang, 2017). Regulations are designed to
benefit those who are affected by them. The benefits may be negative or positive. The
politicians as well as the interest groups benefit from the regulations. The theory is more
inclusive since it ensures that all the stakeholders are involved in the designing of the
regulations.
Conclusion
A regulatory environment for preparing the financial statements and reporting is essential
for ensuring that the needs of the financial statements users or the accountants in the businesses
are met with the least of the information of the transaction.The Regulatory capture is a form of
government failure. Government failure or non-market failure is the imperfection in performance
of the government. It is a seeking of rent for acquiring a larger part of a total market’s wealth

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without creating any additional wealth for that market. When it exists, the interest of political
groups or companies become more important than those of the public, which leads to a net loss
to society. Differences between capture theory economic interest theory and capture theory is
that, the capture theory suggests that regulations are designed to fit the demands of those affected
by them.

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