perfectly proper for measurements to be selected with particular political ends if it is made clear to users of the measurement what

is being done.’ However, is it

realistic or practical to assume that users of financial statements would be able or prepared to accept that financial accounting necessarily needs to accommodate
political considerations? Further, could or would users rely on financial statements if they had such knowledge? Would there be a reduction of confidence in
capital markets?
The argument that economic consequences need to be taken into account before new rules are introduced (or existing rules are changed) also assumes that in
the first instance (before any amendments are to be made) there was some sort of equity that did not need addressing or rebalancing. As Collett (1995, p. 27)
states:
The claim that all affected parties such as the preparers of reports are entitled to have their interest taken into account in deciding on a standard, and not only dependent
users, assumes that the position immediately prior to implementing the standard was equitable. If, however, users were being misled prior to the standard—for example,
because certain liabilities were being kept off the balance sheet—then the argument that the interests of preparers of reports were being neglected in the standard-setting
process would lose its force.

This was the case at Enron, where substantial liabilities were ‘hidden’ from users of the financial accounts through complex financial arrangements which
resulted in these liabilities ‘being kept off the balance sheet’. As Unerman and O’Dwyer (2004) explain, the false image portrayed by Enron’s financial statements
led many people, including Enron’s employees, to lose money which they would probably not have invested if they had been aware of the true extent of Enron’s
liabilities. The senior
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executives ultimately responsible for preparing Enron’s financial statements appear to have provided misleading information, which resulted in the economic
resources of external parties being allocated in a highly inefficient manner—but a manner that might have been perceived at the time by Enron’s senior executives
as being in their own personal interests. Perhaps, the absence of adequate regulation had very real and significant economic consequences in this case, which
potentially demonstrates that regulation might be needed in some instances to protect the interests of less powerful stakeholders.
As a further related issue for readers to ponder, is it appropriate for regulators to consider the views of financial statement preparers when developing
accounting standards, given that accounting standards are put in place to limit what preparers are allowed to do, that is, to regulate their behaviour in the public
interest? As we can see, regulating accounting practice requires many difficult assessments.

CHAPTER SUMMARY
This chapter considered various arguments that either supported or opposed the regulation of financial accounting. Advocates of the ‘free-market’ (anti-
regulation) approach argue that there are private economic incentives for organisations to produce accounting information voluntarily, and imposing
accounting regulation leads to costly inefficiencies. To support their argument for a reduction in financial accounting regulation, the ‘free-market’ advocates
rely on such mechanisms as private contracting (to reduce agency costs), the market for managers and the market for corporate takeovers.
By contrast, advocates of the ‘pro-regulation’ perspective argue that accounting information should not be treated like other goods. As it is a ‘public
good’, it is unrealistic to rely on the forces of supply and demand. Because users of financial information can obtain the information at zero cost (they can be
‘free riders’), producers will tend to produce a lower amount of information than might be socially optimal (which in itself is obviously difficult to determine).
Further, there is a view that the stakeholders of an organisation have a right to various information about an entity, and regulation is typically needed to
ensure that this obligation is adhered to by all reporting entities. Regulation itself is often introduced on the basis that it is in the public interest to do so, the
view being that regulators balance the costs of the regulation against the economic and social benefits that the legislation will bring. Clearly, assessments of
costs and benefits are difficult to undertake and will almost always be subject to critical comment.
There are alternative views as to why regulation is introduced in the first place. There is one perspective (referred to above) that legislation is put in place
for the public interest by regulators who are working for the interests of the constituency (public interest theory). Public interest theory does not assume
that individuals are primarily driven by their own self-interest . (Hence, public interest theory makes assumptions that are not in accordance with economic
theories that have as their core assumption that all individuals are driven by self-interest, with this self-interest being tied to efforts to maximise personal
wealth.) However, an assumption of self-interest is made by other researchers who argue in favour of an economic interest theory of regulation. They argue
that all action by all individuals can be traced back to self-interest in which all people will be seeking to increase their own economic wealth. 32 Under this
perspective, regulators will be seeking votes and election funding/support, and through
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embracing self-interest will tend to provide the legislation to groups who can pay for it in terms of either providing votes or providing funds to support the
regulators’ re-election.
Capture theory provides another perspective on the development of regulation. It argues that, while regulation might initially be put in place for well-
intentioned reasons (for example, in the ‘public interest’), the regulated party will, over time, tend to gain control of (or capture) the regulator so that the
regulation will ultimately favour those parties that the regulation was initially intended to control.
This chapter has also considered how perceptions about potential economic and social consequences impact on the development of accounting
standards. In the light of this, the chapter has questioned whether financial accounting reports can really be considered as neutral, objective and
representationally faithful—as the IASB Conceptual Framework for Financial Reporting would suggest.

QUESTIONS
3.1 What is regulation? LO 3.1
3.2 As this chapter indicates, some people argue that the extent of regulation relating to financial accounting is excessive and should be reduced.
(a) What arguments do these people use to support this view?
(b) How would you rate the arguments in terms of their logic? LO 3.4
3.3 What is the basis of the market for lemons argument? LO 3.4
3.4 Given the process involved in developing accounting standards, do you believe that accounting standards can be considered to be ‘neutral’ (that is, not
serving the interests of some constituents over others)? LO 3.3 , 3.5
3.5 The website of the IASB (as accessed in 2013) states:

The IASB is the independent standard-setting body of the IFRS Foundation. Its members are responsible for the development and
publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the IFRS Interpretations
Committee (formerly called the IFRIC). All meetings of the IASB are held in public and webcast. In fulfilling its standard-setting duties the
IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers
and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world,
including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession.
Do you believe that the IASB will always act in an ‘independent’ manner. Further, will the ‘engagement with various stakeholders around the world’ have
any potential implications for claims that IFRS are developed to provide financial information that is representationally faithful? Clearly identify the
theoretical basis that you have applied in arriving at your answer. LO 3.2 , 3.3 , 3.6
3.6 What is meant by saying that financial accounting information is a ‘public good’? LO 3.1 , 3.3