Discuss the Need for Regulation in Financial Reporting

Discuss the Need for Regulation in Financial Reporting

There is a need for regulation in financial reporting because of a

number of reasons. There are several major user groups of financial

reporting, some of which include equity investor groups, employee

groups, analyst adviser group, the government, the public and other

stakeholders. These different stakeholders however, need to be able to

interpret and use financial information in a systematic way in order

to make the necessary financial decisions. If these different user

groups created financial reports, it will be prepared in diverse ways

which would suit their various requirements. If this is the case, then

different groups will interpret different financial reports in

different ways. There are international differences in accounting

practices. Accounting practices differ from country to country and so

do the regulatory frame work and the balance between the public and

private regulation. Over the years, bodies like the EU have been

formed. There is need for accounting regulation as all these different

countries coming together may have different accounting standards,

thus there will be the need for financial reports regulation. In the

UK, the accountancy profession dominates the regulatory framework.

There are at least two main reasons why financial report regulation is

needed both within a country and internationally.

The first reason is that of information asymmetry. Assuming managers

are responsible for preparing financial information. Whereas managers

have access to information about all aspects of the firm’s activities,

other participants do not. Managers therefore, could exploit their

position within the firm to further their own goals at the expense of

others. For instance, some companies might adjust their liability

figures in order to secure a loan or reduce their profit figures in

order to pay less corporate tax. For this reason, there is a need for

financial regulation.

The second reason is that of comparability. Supposing the managers

could be relied upon to provide accounting information on items and

transactions of interest to other participant groups. What is the best

or right way in which the information could be reported? Let us assume

that the managers of B&Q and Homebase decide to buy a motorvan. If the

manager of B&Q decides to depreciate it...

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...riod recognises that profit occurs over the time and can only be

defined as profit depending on the accounting period. Other

conventions include the materiality convention the realisation of

revenue convention and objectivity.

There are several criteria and objectives which are useful when

choosing your accounting method. The choice of accounting method must

always be relevant, reliable, comparable and understandable to all

parties involved. If these are met then the accounting method will be

favourable to all accounting users.

Accounting standards may however have some undesirable consequences.

This may limit the extent to which the preparers of accounts are able

to prepare the financial statements to meet both the needs of

different user groups. It may also discourage the preparers of account

from experimenting new ways of describing accounting transactions.

There is no assurance though that a standard procedure will provide

the information required by the various financial user groups.

Nevertheless there is the need for financial reports being regulated

because it would be comparable and it would save both time and money

adjusting them to a common format.