Topic 2x - ACCT3003 Issues in Accounting Theory 2009 Topic 2 Regulation of financial accounting Solutions to topic review questions Chapter 2 2.1

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Unformatted text preview: ACCT3003 Issues in Accounting Theory 2009 Topic 2: Regulation of financial accounting Solutions to topic review questions Chapter 2 2.1 Accounting standard‐setters have an expectation that the readers of general purpose financial reports have a ‘reasonable knowledge’ of accounting. Specifically, the IASB Framework states that ‘users are expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence’. Hence, there is an expectation that financial statements are not tailored to meet the needs of people who have not, in some way, studied financial accounting. Students should be encouraged to consider whether this expectation is in itself ‘reasonable’. In making this judgement, students should consider the various articles that frequently appear in newspapers, and various discussions that occur on television and radio in relation to an organisation’s profits. Rarely is any mention made of the accounting methods used, even though the profits ultimately reported are directly a product of the many decisions that would have been made regarding how particular items should be accounted for (if possible, direct reference should be made to a number of articles which discuss organisations’ reported profits). Hence, it does appear as if profits are often held out as some form of ‘hard’, objective measure of organisational performance. In considering why the media might behave in this manner, one possibility is that those responsible for writing the stories are ignorant that financial accounting relies upon a great deal of professional judgement and they might believe that every decision made by accountants is clearly mapped out by a comprehensive system of rules. Alternatively, the writers might consider that people simply do not want to be ‘bogged down’ in the fine detail. As another possibility the accounting profession, through such vehicles as conceptual frameworks, may have successfully cultivated an impression (with the people in the media, and others) that the practice of accounting is objective, and the output of the accounting system is highly comparable between different entities—meaning that one organisation’s profits can appropriately be compared to another. 2.3 Issues in Accounting Theory 2009 Solutions: Topic 2 1 2.4 The implications of this approach to reporting profits in the media is that one entity’s performance as represented by its profit might simply be compared to another, and that the entity with the higher reported profit might be considered to be more successful, and therefore to represent a better investment. Its management might also be considered in a more favourable light than the management of the entity with the lower reported profits. Implications such as this, however, assume that readers and media listeners do not appreciate that profits are directly related to the various accounting choices made. Advocates of an efficient market perspective, however, might argue that as long as the information about accounting method selection is made public somewhere, such as in the annual report, then the market (for example, the capital market), on average, will be able to understand how the adoption of particular accounting methods affected reported profits, and hence the market will not simply fixate on the final numbers reported. There are differences in opinion about the efficiency of markets, such as the capital market. A further point that could be raised in relation to this question is that accounting ‘profits’ are not a comprehensive measure of organisational performance given that accounting profits typically disregard many of the social and environmental implications of a reporting entity. Some of the arguments in favour of regulating the practice of financial accounting are provided in the text and include the following: • Markets for information are not efficient and without regulation a sub‐optimal amount of information will be produced. • While proponents of the ‘free‐market’ approach may argue that the market on average is efficient, such on average arguments ignore the rights of individual investors, some of whom can lose their savings as a result of relying upon some unregulated disclosures. • Those who demand information can often do this as a result of power over scarce resources. Parties with limited power (limited resources) will generally be unable to secure information about an organisation, even though that organisation may impact upon their existence. • Investors need protection from fraudulent organisations that may produce misleading information, which due to information asymmetries, cannot be known to be fraudulent when used. • Regulation leads to uniform methods being adopted by different entities, thus enhancing comparability. Issues in Accounting Theory 2009 Solutions: Topic 2 2 2.5 There was also a view that major adverse events such as the Great Depression, and more recently, collapses such as Enron, WorldCom and HIH, were due to the fact that financial information being provided about particular entities was misleading and did not enable readers to be aware of impending problems. Whether a ‘better’ system of accounting could have reduced the likelihood of events such as the Great Depression or unexpected corporate collapses is, however, a highly debatable point. Arguments in favour of eliminating regulation are often referred to as ‘free‐ market’ arguments. Advocates of a ‘free‐market’ approach typically base their arguments on an assumption that markets (such as capital markets, labour markets and product markets) are efficient and that the markets will provide various incentives and penalties to ensure that managers, on average, do as the market expects. For example, if the capital market expects an entity’s managers to provide information, and the managers elect not to, then the market might penalise the entity by charging a higher price for funds advanced to the entity (to compensate the investors for the higher risk that they face as a result of having limited access to information to enable them to monitor their investment). Further, it is also believed by some people that the absence of information probably implies that the reporting entity has bad news that it has elected not to disclose (it is a ‘lemon’). The textbook also identifies a number of other arguments that have been advanced to support a ‘free‐market’ approach to providing accounting information. These include the following: • Accounting information is like any other good and people (financial statement users) will be prepared to pay for it to the extent it has use. This will, it is assumed, lead to an optimal supply of information by entities. • Because users of financial information typically do not bear its cost of production, regulation will lead to oversupply of information (at cost to the producing firms) as users will tend to overstate the need for the information. • Regulation typically restricts the accounting methods that can be used. This means that some organisations will be prohibited from using accounting methods that management believe best reflect their particular performance and position. This is considered to impact the efficiency with which the firm can inform the markets about their operations. This will have implications for the costs involved when a firm needs to attract investment capital. This perspective is very critical of the ‘one‐size‐fits‐all’ approach to accounting standards wherein the IASB is now responsible for developing accounting Issues in Accounting Theory 2009 Solutions: Topic 2 3 standards that are to be used by organisations operating within different industries and within different countries throughout the world (students should be encouraged to consider whether, for example, an accounting standard on inventory (IAS 2) is equally relevant for a motor vehicle manufacturer in China is equally applicable to a food producer in Australia.) This is an interesting question in the sense that it emphasises that one’s view of the world influences whether one is prepared to accept a particular theoretical perspective. If we reject the view that individual behaviour can be explained in terms of self‐interested, wealth‐maximising behaviour then we would reject private economic interest theories of regulation. If we were trying to explain the regulatory process then we would search for an alternative theory that was more in accordance with our views (unless advocates of the private economic interest theory of regulation are able to convince us that their assumption is reasonable) about individual behaviour, or alternatively, we might attempt to develop our own theory (however, most researchers rely on existing theories). Whatever theories and assumptions we adopt we must remember that perspectives about how humans behave cannot be expected to hold in all situations. While there might be a great deal of anecdotal evidence that some regulators behave as if in their own self‐interest, hopefully there is also evidence that many regulators also take action in the public interest. Students should be encouraged to consider their own assumptions about what motivates regulators and, therefore, what theories best correspond with their own views. This is an interesting and topical question. Climate change is accepted (by most people) as being one go the greatest threats (if not, the greatest threat) to the future of man‐kind and other inhabitants of the planet.Quests towards ecologically sustainable development, which incorporate actions to reduce ongoing contributions to climate change, necessarily put the interests of future generations above current quests to maximise our own wealth and self‐interest. However, if we accept the basic tenets of the private interest theory of regulation then we would probably reject a view that regulators would put the interests of the planet and that of future generations above their own. They would only put in place mechanism to reduce climate change if such actions were believed to be directly beneficial to themselves. Because business corporations have a great deal of power within society, and because their views and support could have direct implications for the reappointment 2.8 2.9 Issues in Accounting Theory 2009 Solutions: Topic 2 4 of the regulators, the opposition of business organisations might further reduce the likelihood that ‘tough’ regulation, with associated costs, would be put in place to combat climate change. For evidence of this we can consider the actions currently being undertaken by the Australian (and other) governments to combat climate change. To many people it would appear that the government action (or inaction) is due to a concern not to damage relations with business associations and because of the economic impacts such actions might take. Arguably (and of course this is a value‐laden belief), economics‐based theories, which at their core adopt assumptions that self‐interest (tied to wealth maximisation) drive the actions of individuals, do not provide great hope for real efforts to address ongoing ecological problems. 2.11 Accounting standard setters throughout the world typically consider the economic and social implications that could potentially arise if particular accounting rules were put in place. That is, while a particular method of accounting might be considered to provide the most accurate and efficient reflection of a reporting entity’s financial position and performance (and of course, this in itself will be based on views about what are the most appropriate ways to measure and recognise elements of accounting—and there is much debate here), if it is considered that the proposed method might lead to unacceptable economic or social hardship for some members of the community, inclusive of the reporting entity, then the method may not be introduced even though it was otherwise considered to be the best method available. Considerations of the costs and benefits of new accounting rules require a great deal of judgement and various costs and benefits have to be traded off against one another (and depending upon who is doing the analysis some costs and benefits might be included, or ignored, when doing the analysis). Considerations of costs and benefits can be very subjective. Many different parties will make lobbying submissions to the standard‐setters in which they indicate how they will be impacted by the proposed requirements. Not all people will be satisfied by the outcome of the standard‐setting process with some believing that their case was not appropriately considered, and as a result, believing that they bear a disproportionate amount of the costs relating to the new requirements. If accounting standards were developed in a ‘neutral’ manner, then rules might be put in place on the basis of their theoretical merit, and not as a result of considering the costs and benefits that might follow. Issues in Accounting Theory 2009 Solutions: Topic 2 5 By considering various costs and benefits as part of the process of developing accounting standards, the final result will be that the accounting standards themselves will be an outcome of various cost/benefit trade‐offs and political considerations. The standards will be different to those that would be developed solely on the basis of providing the most objective picture of the organisations’ performance and position (and, of course, there will be differences of opinion as to what is an ‘objective picture’). It could therefore be argued that given the process involved in developing accounting standards, in which various cost/benefit decisions are made and in which various lobbying submissions are considered, then the standards themselves are not developed in an objective manner. Without objectively‐developed accounting standards it is questionable whether financial reports developed in accordance with the standards can themselves be objective. 2.12 Free‐market advocates would argue that if the users of financial accounting information are not required to pay for the information then they will tend to overstate their demands and needs for information in an effort to encourage regulators to mandate additional disclosures. The free‐market advocates believe this creates unnecessary costs for organisations as they will end up producing information that people would not demand if they knew they would have to actually pay for it. Free‐market advocates argue that accounting information should be treated like other goods, and forces of supply and demand should be left to operate freely to determine the optimum amount of information to supply. ADDITIONAL QUESTIONS 2.3 In making this judgement, students should consider the various articles that frequently appear in newspapers, and various discussions that occur on television and radio in relation to an organisation’s profits. Rarely is any mention made of the accounting methods used, even though the profits ultimately reported are directly a product of the many decisions that would have been made regarding how particular items should be accounted for (if possible, direct reference should be made to a number of articles which discuss organisations’ reported profits). Hence, it does appear as if profits are often held out as some form of ‘hard’, objective measure of organisational performance. In considering why the media might behave in this manner, one possibility is that those responsible for writing the stories are ignorant that financial accounting relies upon a great deal of professional judgement and they might believe that every decision made by accountants is clearly mapped out by a Issues in Accounting Theory 2009 Solutions: Topic 2 6 comprehensive system of rules. Alternatively, the writers might consider that people simply do not want to be ‘bogged down’ in the fine detail. As another possibility the accounting profession, through such vehicles as conceptual frameworks, may have successfully cultivated an impression (with the people in the media, and others) that the practice of accounting is objective, and the output of the accounting system is highly comparable between different entities—meaning that one organisation’s profits can appropriately be compared to another. The implications of this approach to reporting profits in the media is that one entity’s performance as represented by its profit might simply be compared to another, and that the entity with the higher reported profit might be considered to be more successful, and therefore to represent a better investment. Its management might also be considered in a more favourable light than the management of the entity with the lower reported profits. Implications such as this, however, assume that readers and media listeners do not appreciate that profits are directly related to the various accounting choices made. Advocates of an efficient market perspective, however, might argue that as long as the information about accounting method selection is made public somewhere, such as in the annual report, then the market (for example, the capital market), on average, will be able to understand how the adoption of particular accounting methods affected reported profits, and hence the market will not simply fixate on the final numbers reported. There are differences in opinion about the efficiency of markets, such as the capital market. A further point that could be raised in relation to this question is that accounting ‘profits’ are not a comprehensive measure of organisational performance given that accounting profits typically disregard many of the social and environmental implications of a reporting entity. 2.6 As the separation between the ownership and management of an organisation increases this generally leads to an increase in the demand for accounting regulation. As separation increases, parties with a financial interest in an organisation will have less direct knowledge of the operation of the organisation. They will then become dependent upon financial information being generated by the organisation. To help ensure that appropriate information is being provided to the external parties, regulation will be introduced to help ensure that generally accepted principles are being used in the preparation of the information, and to assist external parties to make assessments of one organisation’s financial position and performance relative to another organisation (the attribute of comparability). Issues in Accounting Theory 2009 Solutions: Topic 2 7 Of course, the above argument is a ‘pro‐regulation’ argument. As chapter 2 has demonstrated, however, researchers that embrace an anti‐regulation stance would not favour the introduction of regulation irrespective of changes in the degree of separation between management and ownership. Such researchers would argue that there are ‘market‐based’ incentives for organisations to provide sufficient reliable information and that failure to produce such information will lead to market‐based penalties being imposed upon the organisation. 2.16 The argument is that in developing accounting standards it is important and perhaps appropriate to consider the costs that might be imposed on some parties if the standards are put in place. That is, there may be some unacceptable economic consequences that might result from implementing the standards (at issue here is from whose perspective are the economic consequences deemed to be unacceptable—it would generally be considered that it is from the standard‐setters’ perspective). However, once we start considering the costs and benefits that might result (and the recognition and weighting of the respective costs and benefits would arguably be different depending upon whose perspective is adopted), rather than the merit of the standards themselves, we really cannot argue that the standards have been developed in an unbiased manner. Chapter 3 3.2 Arguments in support of reducing regulation often use the argument that accounting information is like any other good and that the forces of supply and demand should be allowed to operate so that the optimal amount of accounting information is produced. These advocates of the ‘free‐market’ approach also argue that markets, such as the capital market, the market for managers and the market for corporate takeovers, operate efficiently and will impose penalties on managers who do not elect to provide unbiased information about an organisation’s financial performance and position. Arguments based on a contracting perspective are also used to support arguments for reduced regulation. The argument is that all individuals will act in their own self‐interest and will take actions to maximise their own wealth. Further, it is assumed that people will expect others to behave in this manner. If investors or creditors are considering advancing funds to an organisation, then if the managers agree to provide financial information of a periodic nature (probably subject to an audit by an independent third party), then the outside parties will be able to monitor the actions of the (self‐ Issues in Accounting Theory 2009 Solutions: Topic 2 8 interested) managers and will be prepared to advance funds to the entity at a lower cost. Managers will have incentives to provide information as failure to do so might mean that no funds can be attracted, or if they can, only at high cost. Hence, in the absence of regulation there will be private incentives to produce accounting information. Further, managers are assumed to be able to best determine what methods of accounting best reflect the performance of their entity, rather than leaving it to regulators to impose particular methods which in particular cases may be unsuitable. There is also the ‘lemons’ argument which suggests that in the absence of regulation managers will still be motivated to provide financial information, or else, the organisation will be assumed to be a ‘lemon’. In considering the logic of the above arguments, we can consider a number of issues, including the following: • Accounting information has a characteristic similar to a ‘free good’ and it is generally accepted that market mechanisms do not operate efficiently in relation to free goods. • An acceptance of market efficiency and the notion that it will lead to optimal amounts of information being produced suggests that managers are somehow able to determine the marginal costs and marginal benefits associated with disclosing particular items of information. It is arguable whether most managers have this degree of sophistication. • There is evidence to suggest that markets display characteristics which indicate that they are not always efficient. Further, market‐based arguments are based upon ‘on average’ outcomes. That is, while market mechanisms cannot be expected to control the behaviour of all people (such as managers) at all times, on average they will provide a disciplining mechanism. On average arguments, however, ignore the possibility that in the absence of regulation some people may lose their life savings. • There are arguments that in the absence of regulation only those parties with sufficient power (perhaps as a result of controlling scarce resources) will be able to obtain the information they demand. Such arguments suggest that issues associated with rights‐to‐know are ignored and in the absence of regulation, affected individuals will have no access to information. • The ‘market for lemons’ argument assumes that if you do not disclose particular information then the market will penalise you. This assumes that the market somehow knew you had information to disclose. Issues in Accounting Theory 2009 Solutions: Topic 2 9 • Contractual arguments in favour of producing information to reduce agency costs seem to be more applicable in the presence of small numbers of contracting parties, but as the number of parties with an interest in the organisation increases, the view that various contracts (with associated information production requirements) can be coordinated becomes, perhaps, quite unrealistic. 3.3 The basis of the ‘lemons’ argument is that if an entity elects not to disclose particular information, and perhaps its competitors are making disclosures, then the non‐disclosing entity must have something to hide. In such respects it must have bad news which it would prefer people not to know about. It is a lemon. If we accept this perspective that no news will be considered as meaning that the organisation is hiding bad news, then stakeholders will react negatively to companies that do not make disclosures when some disclosure was expected (this reaction might be in the form of capital market participants paying lower amounts for the securities of the organisation). The ‘market for lemons’ perspective is assumed to provide an incentive for managers to release information, even in the absence of any regulation that requires disclosure, as failure to disclose will have implications for the organisation, and if we assume that various contractual arrangements are in place, also for the managers’ own wealth. Of course, whether we actually believe that the market will penalise non‐disclosers is a matter of opinion. Is the market really expected to be that efficient that it becomes aware that potentially bad news about some (perhaps unexpected) issue has not been disclosed? What do the students think about this? 3.6 A ‘public good’ is a good which, after it is first made available, others can use without paying for and which can be passed on to others that also do not pay for its use. Public goods, or free goods as they are often called, are traditionally considered as goods which are not scarce and which do not have a price. Relying upon market‐based arguments to ensure that optimal amounts of a good are produced assumes that all users pay for the good. If free‐riders exist (people who use but who do not pay) then the quantity of a good will be under‐produced relative to what would be produced if all that used did pay. It is possible that users of a public good would pay for it if required, but if a good is public in nature then there is no need to pay for it. Advocates of accounting regulation use this argument to suggest that optimal amounts of information will not be produced if we are to rely upon market‐based mechanisms alone. Issues in Accounting Theory 2009 Solutions: Topic 2 10 3.11 The answer to this, as with most questions in the textbook, depends on the theoretical perspective we adopt. If we adopt the theoretical economics‐based assumption that managers will act in their own self‐interest, then we would predict that there will also be a contractual demand to have financial statements audited by an external and credible third party. Such an activity will increase the perceived reliability of the data, and this in turn is expected to reduce the perceived risk of the external stakeholders, thus further decreasing the organisation’s cost of capital. That is, financial statement audits can also be expected to be undertaken, even in the absence of regulation, and evidence indicates that many organisations did have their financial statements audited prior to any legislative requirements to do so (Morris, 1984). As Cooper and Keim (1983, p. 199) indicate however, to be an effective strategy ‘the auditor must be perceived to be truly independent and the accounting methods employed and the statements’ prescribed content must be sufficiently well‐ defined’. 3.14 Advocates of a ‘free market’ approach argue that in the absence of regulation there will still be private incentives for firms to produce accounting information, with the requirement to produce accounting information often included within various contractual arrangements in which the party is involved. This perspective is based on Agency Theory which asserts that when principals (owners) appoint agents (managers) to perform duties on their behalf there will (naturally) be conflicts of interest (assuming self‐interest) and to resolve these conflicts, contractual agreements will be put in place. Accounting is considered to play a key role in allowing principals to monitor the efforts of agents. For example, to motivate managers to work in the interests of owners the managers might be offered a percentage of profits. This would require the managers to produce accounting reports (which could be audited by an independent party). Similarly, it is argued that when organisations borrow funds, the managers will agree to provide information to the debtholders to enable the debtholders to monitor the ongoing security of the advanced funds. This contractual agreement is expected to mean that the organisation can attract the funds at a cost below what would be required if the managers did not agree to provide information on a periodic basis. While in theory contractual mechanisms might work when there are a small number of contractual parties, Scott (1997) argues that in the presence of a large number of parties the argument tends to break down. As he argues (p. 332): Issues in Accounting Theory 2009 Solutions: Topic 2 11 Unfortunately, while direct contracting for information may be fine in principle, it will not always work in practice. In many cases there are simply too many parties for contracts to be feasible. If the firm manager were to attempt to negotiate a contract for information production with every potential investor, the negotiation costs alone would be prohibitive. In addition, to the extent that different investors want different information, the firm’s cost of information production would also be prohibitive. If, as an alternative, the manager attempted to negotiate a single contract with all investors, these investors would have to agree on what information they wanted. Again, given the disparate information needs of different investors, this process would be extremely time‐consuming and costly, if indeed, it was possible at all. Hence, the contracting approach seems feasible only when there are a few parties involved. What should also be appreciated is that the contractual arrangements referred to above relate to contractual agreements (and the associated information requirements) between the organisation and parties that hold resources which the organisation requires (for example, labour or debt capital). Such a perspective tends to ignore the information requirements of other parties that might be influenced by an organisation (perhaps they live nearby) but who do not have resources that the organisation needs (that is, the contractual perspective ignores issues associated with right‐to‐know). 3.16 The ‘market for corporate takeovers’ argument works on the assumption that an under‐performing organisation will be taken over by another entity that will subsequently replace the existing management team. That is, 'the market' will be aware of the current potential the organisation has – potential which is not being utilised by the existing management team. With a perceived threat of takeover, it is predicted (by free market advocates) that managers would be motivated to maximise firm value and thereby to minimise the likelihood that outsiders could seize control of the organisation at low cost. The ‘market for corporate takeovers’ argument assumes that information will be produced to minimise the organisation’s cost of capital and thereby increase the value of the organisation. The above arguments assume that management will know the marginal costs and marginal benefits involved in providing information, and, in accordance with economic theories about the production of other goods, management will provide information to the point where the marginal cost equals the Issues in Accounting Theory 2009 Solutions: Topic 2 12 marginal benefit thereby maximising the value of the organisation and resultingly making the organisation more expensive for anybody seeking to acquire it. Whilst the disclosure of accounting Information will be to the interests of shareholders, it will also be in the interests of managers ‐ there will be an alignment of interests. 3.18 (a) Public interest theory would probably provide the best explanation for the existence of laws which prohibit insider trading. Insider trading is considered by many to be unfair and to provide benefits to those people with access to particular (inside) information at the expense of people without such information. Laws against insider trading are often defended on the basis of the ‘level playing field argument’, that is, that all capital market participants should have access to the same information, or else inequities are introduced. If insider trading was allowed to exist then many people believe that the confidence of people about the functioning and fairness of the market would be eroded and this would have implications for the economy. A lack of confidence in the market would be deemed not to be in the public interest. Advocates of a free‐market (anti‐regulation) perspective would question whether issues of fairness should be put before issues of market efficiency. Advocates of the ‘free market’ often reject issues of fairness or equity as irrelevant and instead place their confidence in markets—mechanisms that somehow (as if guided by an invisible hand?) function to the overall benefit of all. What do the students think in relation to this issue? In the case of insider trading, an anti‐ regulation perspective would suggest that various market‐based mechanisms would act to ‘punish’ parties found responsible for insider trading. They might also argue that laws against insider trading focus too much on equity issues at the expense of issues of efficiency. Allowing insider trading would encourage managers to seek additional information which ultimately would become available to others (albeit, after the managers have made personal gains from using the information). In the public interest theory of regulation the regulators are assumed to act in the interests of the public and will only introduce regulation if the benefits to the public are believed to be greater than the costs. Regulation is not introduced to support particular vested interests and the regulators are not assumed to be driven by their own self interests. (b) 3.19 a) Issues in Accounting Theory 2009 Solutions: Topic 2 13 (b) Advocates of capture theory also typically assume that regulation is also initially introduced with the public’s best interests in mind. However, once regulation is introduced, the parties that had been subjected to the regulation tend to be able to capture the regulatory process. The regulated parties typically do this for their own benefit. Hence, while it is assumed that the regulators might act in the public interest, it is typically assumed that those subjected to regulation act in their own self‐interest. We can debate whether it is consistent to believe that some people act in their own self‐interest whereas others (for example, the regulators) do not. Economic interest theories of regulation assume that everybody acts in their own self‐interest, including regulators and those people that are regulated (perhaps not an overly pleasant view of human nature?). Regulators will only propose and support regulation which leads to favourable outcomes for themselves, perhaps in terms of their re‐ election. This perspective does assume that all people have similar motivations (in contrast to capture theory). (c) Students should consider which perspective of regulators matches best with their own views. 3.28 (a) If we embraced the public interest theory of regulation then we would tend to believe that the regulator introduced the requirement because, on balance, it provided greater social benefits than related costs. That is, there was a net benefit to society (even though some parties might gain and some parties might lose). As we indicated in the chapter, however, the determination of costs and benefits of particular regulation tends to be a rather subjective exercise. The public interest theory of regulation does not give consideration to the implications the decision may have on the livelihood of the regulator (that is, it would ignore the fact that industry bodies with significant electoral power might be opposing the legislation). (b) By contrast, if we embraced the economic interest group theory of regulation then we would argue that the regulator, like all individuals, is driven by self interest and the enactment of the legislation must be perceived by the regulator as being beneficial to their own interests. For example, perhaps powerful labour unions with power to effect the re‐ election of the regulator demanded the introduction of the legislation. 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This note was uploaded on 04/30/2011 for the course ACCT 3003 taught by Professor Jennymarks during the Three '10 term at South Australia.

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