Posted at 11.02.2018
Discuss why we need a regulatory framework for financial reporting. What are the advantages and disadvantages of earning accounting rules by law as opposed to using IASB benchmarks?
The body of rules which determine how financial accounts will be compiled in virtually any particular situation are known as the Generally Accepted Accounting Ideas (GAAP); these are drawn from a number of sources. The to begin these are legal; the primary sources of these include the Companies Action 2006, as well as European union Law and the rest of the united kingdom common law. The next strand of this includes national and international accounting standard such as the ASB and IASB (International Accounting Expectations Board) requirements, as set by the Accounting Benchmarks Panel and their international equal; they will also work to establish public thoughts and opinions on proposed new benchmarks, and use training seminars to discuss issues within accounting. The 3rd strand is made up of the rules of the Stock Exchanges, though these are only suitable to companies detailed on the LSE or Target.
The major discussion in favour of a regulatory framework is that standardisation is prompted and, through this, we're able to make an accurate assessment of financial health. As Alexander and Britton explain, before the intro of these expectations, "different organizations in similar situations were following different accounting specifications, leading to different and incompatible results" (Alexander and Britton, 2004). Indeed, when takeovers occurred, different valuations considered by accountants could potentially generate vastly different results, given the uncertainty in regards to what to include: this, in turn, was bad fro the reputation of the accounting career. The construction, in the form of both laws and accounting criteria, permits the factor of subjectivity to be lessened. Further features of the current regulatory framework include increasing degree of information for the finish end user, through stipulating minimum amount criteria of disclosure; in addition, the current system benefits through input both from government (in statute, for example), and from the accountancy profession, which probably works to ensure an equilibrium of pursuits.
However, through this, we then face a decision between regulation by statute and rules through accounting criteria, each with their relative merits and demerits. I shall discuss these subsequently.
The first benefits is the fact that accounting standards become a means of lowering the disparate methods where you can create accounts; this, subsequently, makes the profile of greater benefit to the end user, simply because they have a record which is easily much like others of the same kind. Without such a standardisation, there is a risk that different organizations of accountant may have chosen to classify a specific type of advantage or debt in a different way. Alexander and Britton (2004) demonstrates this through the example of property - how is this to be appreciated? We might argue that it will wthhold the value for which it is bought; alternatively, we could say that the worthiness should be this, minus depreciation; or thirdly, we're able to say that the worthiness (given that prices of property will more often than not be growing) ought to be the original price plus an inflationary multiplier. This is just one of these, and bought out a large company, the potential for fluctuations is significant. In an internationalised overall economy, this value is correspondingly increased; Zeff (2007) remarks that the launch of international requirements has resulted in "a very great upsurge in global comparability with regards to what we'd before, namely, every country which consists of own national specifications, which differed noticeably from country to country". Indeed, Haller and Walton (2003) describe this as "the nub of the international accounting problem. How do companies that want to use across countrywide (and therefore usually cultural) boundaries present economic information appropriate for business decisions?"
Secondly, they provide a focal point for issue over what accepted practice should be. At the moment, it has sometimes been argued that accounting expectations are not predicated on any coherent conceptual platform, but rather exist simply as rules in themselves (Alexander and Britton, 2004). The IASB is a body well-poised to improve such a difficulty: thus, in recent years, the IASB has launched a job to "develop a better common conceptual framework that delivers a sound basis for producing future accounting standards". It is difficult to assume Parliament giving the perfect time to such a wide yet arguably essential job.
Thirdly, on quite similar basis, it can be argued that accounting specifications are significantly less rigid than relevant legislation; each change to legislation will require a separate costs to undergo Parliament, in contrast to accounting criteria. Thus, the maintenance of accounting expectations provides a body of guidelines that create standardisation while all together lacking a legalistic rigidity. Furthermore, the "true and fair view" can be used when justifiable to override other accounting expectations which may apply (Fearnley and Hines, 2003).
Fourthly, it can be seen that the launch of accounting expectations have urged companies to make available more information than they usually would have. Samples of this can be seen in, for example, Robins remarks that FRS 3 (on confirming financial performance), demanding companies to spotlight a variety of different financial performance indications (such as the results of carrying on procedures and discontinued functions) which allow a larger degree of information than if simply profit were indicated (Robins, 1999). Through requiring enhanced disclosure of information, it can be argued that accounting requirements create a greater standard of information to the end user, and thus the worthiness of accounting in general.
Fifthly, it could be viewed as an advantage that the guidelines are manufactured by people who have a strong connection to the industry; that is, professional accountants. Statutes including the Companies Work are inevitably subject to party political stresses: and, in despite their finest intentions, Associates of Parliament are unlikely to have the same degree of expertise as people with vast experience in their field. An additional point is that when Parliament drafts legislation, it will intend for this to be employed by the courts; it would therefore become more difficult to create thorough standards in such a way than it might be to take action by way of a body comprised of accountants, creating expectations for accountants. We might conclude that a system based on professional things to consider is much more likely to offer an accurate assessment associated with an institution.
On the other hand, there are a number of equivalent criticisms. Firstly, demanding additional information, and for institutions to adhere to certain standards, will undoubtedly lead to a rise in costs; verifying that a group of accounts adheres to a particular set of specifications will be require more work than simply taking an ad hoc approach. Furthermore, each new set of benchmarks will entail its costs - for example, in re-training accountants who experienced become used to different criteria. Secondly, it may be argued these suggestions are increasing in quantity and complexity. Indeed, a letter from the International Corporate Governance Network to the IASB asked "whether some devices are so complex and unstable that not only is portraying things by one amount insufficient, but the users of accounts and stakeholders would be better offered by the acceptance that there might not exactly a remedy. " Thus using areas, complexity will first of all make the benchmarks more challenging to enforce, but also perhaps create incorrect results, as they are inappropriate to the particular context. This is an especially strong criticism if we consider that the monetary circumstance for the regulatory platform is perhaps unproven: "The truth for uniformity in accounting is not predicated on any settled body of evidence, or literature" (Bell, 2005).
Thirdly, the fact that the rules are both placed and disciplined by the accounting occupation means that there may be no effective approach to enforcing the criteria - this is in contrast to any statutory system, which will be enforceable through the courts. Where professional accountants are involved, the only real sanction for breach of these guidelines would appear to be through professional systems, which have been slow to do so (Lewis and Pendrill, 2003). This is a particular problem, due to the fact (as seen above), area of the discussion for accounting expectations is actually to uphold the reputation of the profession. In addition (as Lewis and Pendrill explain), many accounting specifications deal with issues which in a democratic culture, should arguably be subject to democratic controls: the example given is that of FRS 17 (Pension Benefits), which mentioned that deficits in a firm pensions design were to be cured as expenditures on the earnings and loss accounts. This is a concern of national importance.
Finally, necessitating further standardisation means that you will see a trend towards rigidity in financial reporting; it has long been feared that this will lead to accounting becoming a procedure for rote learning of guidelines, without searching for any meaning within them. (Baxter, 1962) Thus, although you will see a standardised system, this will not actually be one in which these rules have principled bases; at the same time, such benchmarks remove any chance of individual judgment or discretion. . Furthermore, a rigid group of standards will never be appropriate atlanta divorce attorneys situation to which they might be employed; for example, the house industry protested the application of SSAP 12 to property since its launch (Andrew and Pitt, 2006; SSAP19 was later created to cover this). It may even be that an emphasis on rules over view distorts the realities of a given situation - "the knowledge of FRS5. . . shows that judgement-based accounting can operate successfully to report financial reality in a situation where recently there have been an over-reliance on rules" (ICAS, 2006).
In conclusion, while there is a clear value in standardisation (for the reason that accounts, through being produced from the same specifications, are usually more reliably similar), it would appear that there are certain conflicts. The first is between competence and control: to what amount should Parliament allow standards boards to build their own guidelines, benefitting using their own experience, and what scope should their own political persuasions have a job? Exactly the same problem applies in enforcement - allowing the accounting industry the opportunity to enforce their own guidelines gives them the self-reliance to enforce them utilizing their own competence, but otherwise may lead to charges of indifference with their own wrongdoing. Subsequently, there's a conflict between standardisation and complexity; though the aim of standardisation would perhaps be best dished up by criteria covering every possible eventuality, these would be so prolonged and comprehensive as to be unworkable; somewhat, we must count on broader ideas. The comparative merits of each of the relevant methods will therefore rely upon the strategy we take towards each one of these conflicts.