What are the reasons for regulation of accounting profession?

Answer 1

Baldwin and Cave (1999 argue that there are a number of reasons for regulation. One of

the best known form of regulation was exercised by US government over the potential

growth of monopolies at the turn of the twentieth century - the anti-trust legislation (for

example the Sherman and the Clayton Acts). Where monopolies exist it is considered that

there has been a market failure because competition does not exist. Therefore, it can be

inferred from this that regulation is associated with preserving competition. Thus, it is

associated with the ideology of the efficacy of markets and competition, hallmarks of

capitalism. In centrally controlled economies many "monopolies" are created (usually as some form of bureaucratic control). However, in other countries it is generally believed

that it is necessary to maintain an environment conducive to competition. In Australia the

Australian Competition and Consumer Commission (ACCC) is charged to ensure

competitiveness and rule against anti-competitive behaviour (ensuring compliance with

the Trade Practices Act, 1974). Sometimes "natural" monopolies" arise where there are

economies of scale that ensure the market is served at the least cost (for example, many

utilities such as water, gas or electricity suppliers) in which case regulation is designed to

maintain fair trading.

Regulation is considered desirable where there are "windfall profits" - where through

some fortuitous event a firm is able to make above "normal" profits. For example,

suppliers of equipment to aid search and recovery where there has been a natural disaster

(which seems to be happening more regularly these days!). Because of the urgent need -

the immediate demand - suppliers may attempt to charge higher than normal prices and

thus generate above normal profits. Similarly, in the past many costs that are related to

certain productive activities were excluded such that the "true" cost was not recognised.

These costs were defined as externalities because they were not included. Of particular

relevance in recent times are the costs of avoiding pollution, for example, discharge into

the river system the cost for which had to be borne by societies at large. In any discussion

of environmental or social responsibility accounting externalities are of considerable

importance.

A significant problem that was central to much of the neo-empirical and positive

accounting research is the need for regulation arising from information inadequacies

leading to information asymmetries. Such research was directed at determining the

possible need for regulation in the form of accounting standards to address the problem.

Regulation is sometimes necessary to ensure that "profit skimming" does not occur. This

is when a supplier will only supply the customers that leads to the greatest profit returns

and ignore supply to others. This is the central issue in respect of the privatisation of

Telecom Australia. The government has to ensure that telecommunication services

continue to be provided as equally and fairly as possible to all Australians irrespective of

where they live; rural or urban. This case, however, is not an isolated instance and there

are many other less widely known similar cases where regulation is used to ensure

continuity and availability of service on an equitable basis. Similarly where there is seen

to be anti-competitive and predatory pricing regulation is used as a preventative measure

and outlaws such activities. Microsoft was accused of this type of behaviour (source

codes for the windows platform) in the USA and the government brought law suits to

overcome it.

From the perspective of consumers there are instance of what is colloquially known as

the free rider effect. This is the situation where some consumers benefit from a service

without paying for it at the expense of other consumer who do pay for the service. A

physical example is where a business opens next to a large public car park and therefore

avoids the cost of providing car parking to potential customers. This may serve as a

disincentive for the producers of the service so governments will intervene and levy a tax on the service. However, the term is often used in the context of securities markets in

respect of the amount of disclosure of financial information a firm must make. If

regulations insist on a high level of disclosure, it is argued, some parties will benefit from

the disclosure without having to bear the cost of providing the information. A similar

situation is referred to as moral hazard where consumers not paying for a service or

product over-consume without regard to the costs being borne by others. This is a

problem in the insurance industry where it is often claimed that some people make

excessive claims against their policies whilst others make few or no claims. Insurance is

based on the idea of pooling the costs of bearing risk such that all participants benefit so

when some make excessive claims they may be benefiting more than others

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Regulation is also necessary in the rationalisation and coordination of economic activity

so as to organise behaviour or industries in an efficient manner. An example is the

marketing of many primary products through a central marketing agency, such as the

wool board or the marketing of fish or meat. There is similar reasoning where some

central planning is necessary. Once again this is important when considering

environmental impacts of activities where some people are required to bear more costs

than others. In order to have an equitable outcome regulation can be designed to balance

the costs borne by different sectors. For example, preserving forests may lead to timber

sectors bearing a cost of a loss of jobs or firm closures so regulation is needed to ensure a

fair and equitable outcome in that such costs are borne by the broader society (which

benefits from the preservation of the forests).

A not so obvious need for regulation arises in labour markets. This is a highly politically

charged situation. For example, the ideology of a government may want to limit

membership of unions to reduce the bargaining power of labour providers so it bans

compulsory unionism. This is seen by some as directly reducing the bargaining power of

workers which directly affects their wages and conditions (including their health and

safety).

In some countries there are or have been shortages of some goods and services so that

rationing (limits to the amount of goods or service permitted to be purchase by each

consumer) has been necessary. In these situations it has been believed that regulations

rather than market forces enable a more just distribution. For example, a shortage of

petrol could disadvantage those furthest from its supply (say rural consumers). A purely

market driven reaction by suppliers would be to minimise transport costs and sell to those

nearer the production in the confidence that all of the product will be sold anyway (very

similar to profit skimming). Regulation can be used to ensures that there is a fairer

distribution of petrol.

The above are some reasons for the necessity of regulation. In reality there may be a

combination of many of the above reasons that leads to regulation. As indicated,

regulation can be negative in that it prevents or restricts some behaviour or it may be

positive in that it serves to encourage or facilitate activity.