Pro-Regulation Regulation in Accounting Regulator Battle (the

Pro-Regulation Regulation in Accounting Regulator Battle (The Economist, 2009) The importance of regulation is often overlook or even mocked in society. Regulations and the regulators that administer them are often portrayed as something that slows progress and makes it difficult to navigate the complexities that adherence to the regulatory requirements require. It is easy for people to view regulations from this perspective because when regulations are effective and properly designed they may seem unduly burdensome.

However, when regulations break down or are ineffective it is far easier to see the value of regulation. People commonly do not actually appreciate the value of regulation until they have an example in mind that stands in recent memory. This is summarized in a statement by Tim Geithner after the global recession emerged in 2009 which said, "You want to move at the point where people still have the memory of the trauma" (The Economist, 2009).

Although effective regulation is easy to take for granted when no crisis is present, the overall health of a society is dependent on an effective regulatory environment ensuring that a society operates in a transparent and fair manner. Historical Perspective on Regulation The role of governmental regulation on financial activities in society is far from a new issue. Ever since free markets have developed there has a polarization of positions ranging from a laissez-faire approach that allows full capitalism as the way to socialism or even communism.

However, the historical record seems to provide evidence that when either pole is adhered to too strictly it produces social ills. For example, when pure capitalism and the efficacy of the markets is held as the number one priority this can led to a situation in which many socially undesirable situations arise. The level of competition among firms that creates the value of the market can be heavily distorted and poverty and famine can ensue.

However, when governments intervene too much then this can also create an environment in which innovation and entrepreneurship is significantly hampered. The regulations imposed on financial reporting instruments cannot be so overwhelming that they prevent business owners from trying to create value. With strict regulation there seems to be a sense of complacency and a decrease in incentives and motivation to participate in this environment. Therefore it is a difficult balancing act for regulators to try to maintain. However, without any regulation, society would not be sustainable.

Therefore regulation should be present yet kept in the most effective and simple form as possible so that it can maintain the difficult balance in which it can maintain a stable society. Financial Deregulation One way to make a case for more regulation, or at least more effective regulation, is to examine an example of a case in which deregulation occurred. Fortunately, such an example is readily available.

Beginning in the 1990s, there was broad trend of financial deregulation allowed the financial industry more leeway to operate in a plethora of different ways. One example of such deregulation was the repealing of the Glass-Steagall Act in the U.S. which specifically separated investment banks from deposit institutions. The deregulation measure allowed banks to take risks with depositors' money that was previously prohibited.

Many believe that deregulation allowed banks to accept increased amounts of risk which was one of the main factors that eventually led to the financial recession; however this is heavily debated (Lowy, 2012). The argument behind most deregulation is that the public would benefit from increased levels of competition in the market by allowing firms to have more control over their operations, markets, and investment activities. It was also believed that the market made most regulations effectively redundant because the market naturally regulates the industry through competition and consumer choice.

Therefore, focusing on increasing competition would lead to innovation which would be governed by consumers as they chose the products and services that they valued (Gerardi, et al., 2007). Another argument was that technology also made more transparency possible through modernization of accounting systems and that could also decrease the need for strict regulations as well as transaction costs giving firms an incentive to achieve greater quantities of scale (Wyld, 2011). Figure 1 - Timeline of Key Deregulatory Events in the U.S.

(Sherman, 2009) After the financial industry was heavily deregulated a wave of mergers and acquisitions allowed large firms to consolidate. Eventually the market became dominated by a handful of major players. Initially, it was clear that the consumer did benefit, at least in the short-term, from these acquisitions because there was a wave of new innovations such as internet banking that developed quickly. It was even argued that this trend increased the relative wage of the bottom bracket of unskilled workers (Thorsten, et al., 2010).

However, these gains were undoubtedly limited to short-term advances as unskilled workers were some of the hardest fit during the recession. Conclusion Regulation is needed in society to ensure that the system is both sustainable and socially justifiable. Although deregulation can have short-term benefits for consumers, in the long run it destabilizes the system and creates an environment in which financial catastrophes are eminent. Through effective regulation, regulators can ensure that the playing field is geared toward maintain a level of competitiveness that benefits consumers and producers.