International Accounting Standards and Regulation in Australia

Background and Need for Regulation

International regulation is a necessity in the finance arena, as the world bears a high degree of interconnection — particularly via banking and accounting. In 2008, Europe received international recognition for its attempts to strengthen the world financial system and protect nations around the world from a serious crisis. As Brown and Sarkozy noted: "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 worldwide depression" (2009).

The reality is that in order for healthy global finance to occur, there truly needs to be global regulation. A clear example of this emerged when the EU created a thorough set of rules for the financial sector to ensure the crisis of 2008 would not be repeated. These rules consisted of elements such as tight control over credit rating agencies, stricter capital requirements on intensive products such as securitization, and a strengthening of deposit guarantee schemes (Brown & Sarkozy, 2009). These are all forms of international regulation designed to ensure that excessive risk-taking does not become the norm and that capital rules for banks are stronger and more rigorous (Brown & Sarkozy, 2009).

Benefits and Theories 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 is a strong argument for this type of regulation. As Deegan illuminates, many markets for information simply are not efficient, and "on average" market efficiency arguments tend to dismiss or devalue the rights of individuals (2009). Other arguments for regulation demonstrate how it can be highly effective because it enables regulators to demand information from certain entities and obtain it, whereas in other circumstances this would simply not 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 compelled to adopt uniform methods, which in turn bolsters comparability (Deegan, 2009). Regulation forces companies and banks to adopt a greater level of transparency, protecting investors and local and national stock markets while holding everyone to a higher standard of business practice.

Transparency should not be underestimated, as it is closely 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 and quality can be achieved; others argue for standardization or harmonization of accounting practices.

The most commonly cited theory in support of regulation is the "public interest" theory of regulation, which is founded on two assumptions (Shleifer, 2005). The first assumption holds that unregulated markets generally fail because monopolies take over or externalities disrupt normal functioning; the second assumes that governments are mostly benign and capable of correcting these failures 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" (Shleifer, 2005). As the last hundred years have demonstrated, the public interest theory of regulation is the cornerstone of modern public economies (Shleifer, 2005).