Chapter 12_ Standard Setting_ Economic Issues.docx - Chapter 12 Standard Setting Economic Issues 12.1 Overview ● Gov delegate responsibility for

Chapter 12_ Standard Setting_ Economic Issues.docx -...

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Chapter 12: Standard Setting: Economic Issues 12.1 Overview Gov delegate responsibility for standard setting to a specific agency, such as securities commissions, who then delegate to semi-autonomous bodies (IASB, AcSB, FASB) The fundamental problem is how to conduct this mediation between conflicting interests of investors and managers How to combine the fin reporting and efficient contracting roles of accounting info How to determine the socially “right” amount of info the amount that equates the marginal social benefits of info to the marginal social costs: the first-best amount of info production For many products, market force sare enough to drive production close to first-best w/ little regulation - but it is impossible for market forces to attain first-best alone Major reasons: Information asymmetry: since fin accounting info has characteristics of a public good, suppliers of info do not always get paid for the info they produce they will then under produce relative to first-best As a result, info asymmetry leads to adverse selection and moral hazard, which is greater than what is socially desirable SO: too little reg = info asymmetry, too much reg = a greater cost on society than the benefits of lower info asymmetry Enron and WorldCom created severe criticism of the stability of unregulated markets 12.2 Regulation of Economic Activity Firms w/ a monopoly: reg typically takes form of regulation of rates, price caps etc. Reason for reg arise from the public-good nature of accounting info, where regulators try to increase info production to compensate for the underproduction that arises from public goods - ex. of externality where the actions of one party (ex. underproduction) affect outside parties Another reason is to protect those who are at an info disadv. due to info asymmetry SO: externalities and info asymmetry used to justify regulations to protect investors Standard setting: the reg of firms’ info production decisions by a regulator In considering issues of info production, there are two types of info that a manager possesses: a. Proprietary Info: this info, if released, would affect future CFs (ex. Technical info about valuable patents, planned mergers etc.) costs to mngr and firm of releasing can be high b. Non-proprietary Info: this info, if released, doesn’t directly affect firm CFs includes earnings forecasts, details on new financing, fin statement info etc. (the audit is also non-prop info) 12.3 Ways to Characterize Info Production Info is a commodity that can be produced and sold Different (unified) ways to think of info:
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a. Finer Information: adds more detail to the existing fin statements (instead of saying above or below freezing, you have a thermometer) ex. expanding note disclosures, additional line items on the fin statements, segment reporting etc.
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