International Regulation, Accounting Standards and Australia
Background and Need for Regulation
International regulation is a necessity in the finance arena as the world bears a high rate of interconnection, particularly via banking and accounting. In 2008, Europe was given international accolades for its attempts to strengthen the world financial system and protect nations all over the world from a serious crisis. "Europe led the way last year in facing down the global financial crisis, restructuring our banking system and strengthening the global financial system. The European Union was also at the forefront in calling for a new forum for economic cooperation of G-20 leaders. And from the outset of the crisis, it was Europe that promoted the fiscal stimulus -- and sought to coordinate it globally -- that has been a major factor in preventing recession becoming a world-wide depression" (Brown & Sarkozy, 2009).
The reality is that in order for health global finance to occur, there truly needs to be global regulation. A clear example of this was when the EU created a thorough set of rules for the financial sector so that the crisis of 2008 was not repeated again; this consisted of elements like tight control over credit rating agencies, stricter capital requisites on intensive products such as securitization, and a bolstering of the deposit guarantee schemes (Brown & Sarkozy, 2009). These are all forms of international regulation which ensure that risk taking does not become the standard and that capital rules for banks are stronger and tighter (Brown & Sarkozy, 2009).
Benefits of Regulation
All of these decisions have the interest of the world and the global economy at heart and attempt to protect international interests. In many respects, there's a strong argument for this type of regulation; as Deegan illuminates, many markets for information simply aren't efficient and generally, "on average" market efficiency arguments tend to dismiss or devalue the rights of individuals (2009). Other arguments for regulation demonstrate how regulation can be so effective because it enables the regulators to demand information from certain entities and get it, whereas in other circumstances this just wouldn't be possible (Deegan, 2009). Regulation is vital because it protects individual investors from fraudulent organizations that can hide behind fabricated or invented information (Deegan, 2009). Regulation creates an environment where more and more entities are forced to adopt uniform methods which thus bolster comparability (Deegan, 2009). It's easy to see how regulation can so clearly benefit the world economy. Regulation forces companies and banks to adopt a greater level of transparency, protecting investors, local and national stock markets and holding everyone to a higher standard of business practices.
Transparency is nothing that should be underestimated, as it's related to quality. Quality is defined as, "the extent to which accounting information reflects the underlying economic situation of the firm. It is related to the concept of 'transparency,' defined as the ability of users to 'see through' the financial statements to comprehend the underlying accounting events and transactions in the firm" (Gallery, 2006). Regulation is one way, some argue, that transparency/quality can be achieved, and other argue for standardization or harmonization of accounting practices.
Main Theory in Support of Regulation
There are numerous theories which support regulation, such as the most commonly cited one is the "public interest" theory of regulation, a theory which is founded in two assumptions (Shleifer, 2005). The first assumption is that markets which go unregulated generally fail because monopolies take over or externalities disrupt; the second assumption believes that governments are mostly benign and are able to correct these types of failures and forms of corruption through regulation (Shleifer, 2005). "According to this theory, governments control prices so that natural monopolies do not overcharge, impose safety standards to prevent accidents such as fires or mass poisonings, regulate jobs to counter the employer's monopsony power over the employee, regulate security issuances so investors are not cheated, and so on" (Shliefer, 2005). As the last hundred years have demonstrated, the public interest theory of regulation is the cornerstone of modern public economies" (Shleifer, 2005).
Criticisms of Regulation
This is just one example of a common theory which supports regulation; however, it's a theory which has been criticized and derided by experts, scholars, economists and professionals for a very long time. The three main criticisms that this theory is normally on the receiving end of are as follows: markets and private orderings can look after and deal with the bulk of market failures without the intrusion of government, or even regulation (Shleifer, 2005). Furthermore, in the particular instances where a market might need extra help or guidance, government regulation isn't needed as litigation can address whatever conflicts exist (Shleifer, 2005). Finally, if markets and courts can't adequately address the issues or problems that markets are having, it's highly unlikely that government regulators will be able to achieve this, as they have reputations of being "incompetent, corrupt and captured" so there's the very real possibility that government regulation will indeed make things worse (Shleifer, 2005).
There are some very real and immediate drawbacks to government regulation. As Deegan explains, accounting regulation is not necessary because people generally pay for information to the extent that it has use (2009). Capital markets generally act to punish or discipline organization which fails to provide information, thinking that no news is equivalent to bad news (Deegan, 2009). Regulation can also create a situation where there's a surplus of information as a result of the fact that users who do not want to deal with the price of supply can tend to overstate their needs. Regulation can also limit the accounting methods that an organization is able to use -- this can be tremendous headache, making an entity unable to use methods which truly reflect their performance and position (Deegan, 2009). Unfortunately, this isn't a simple matter of convenience; regulation in this case can mean that it can impair the efficiency with which the firm informs the market about operations (Deegan, 2009).
Drawbacks to International Accounting Standards
As we've seen, in recent years, Australia among other countries such as those in the European Union have opted to adopt accounting standards such as those stipulated by the IASB. The average person might find this both reasonable and logical; in order to follow international regulations it can help to adopt international standards. However, as recent history has demonstrated, such an attitude is completely over-simplistic and incorrect. International standards can have a truly negative impact on profits of major corporations, which is often the reason they're in existence in the first place: to make profits. Deegan gives an apt example of The New Corporation Ltd. In 2000, they reported $1.92 billion in profit (2009). However, according to documents filed with the U.S. Securities and Exchange Commission that profit almost of $2 billion dollars would have been filed as a $329 million dollar loss (Deegan, 2009). This example highlights how the standards and regulations of one country can be meaningless and detrimental to another.
Advantages of International Accounting Standards
At the same time, many people within the international community are pushing for the adoption of international accounting standards for a variety of reasons. These reasons are indeed legitimate and offer a range of benefits; for example, such standards means that international investors are able to better comprehend the financial performance and standards of companies all around the world (Deegan, 2012). With this greater level of understanding and transparency abounding, there's the expectation that a greater amount of capital inflow will be created and that it will be even easier for companies to be listed on the stock exchanges of foreign countries (Deegan, 2012). If a particular company is listed on more than one stock exchange, this would mean that company would only need to produce one set of financial statements for a host of cost savings (Deegan, 2012).
The team members working for international entities in the arenas of accounting and auditing will have greater mobility to move to other companies as a result of this unification of the standards. The cost savings will orbit around the accounting-standard setting function, as opposed to the individual companies attempting to mimic the work of others; the bulk of functions of the standard-setting process will orbit around the IASB (Deegan, 2012). Furthermore, there is an expectation that the IFRS will help develop more accurate and comprehensive and timely financial statement information, in connection with the information that would have been generated from the national accounting standards that were replaced (Deegan, 2012). Deegan also points out that "to the extent that the resulting financial information would not be available from other sources, this should lead to more-informed valuations in the equity markets, and hence lower the risks faced by investors" (2012).
In the case of Australia, many experts believe that there is absolutely no point in Australia having standards that the rest of the world cannot understand. Even though for the longest time, Australia had its own way of dealing with…