The need of a regulatory framework for financial reporting is undisputed. The reasons are manifold and need appropriate elaboration for an appreciation of its humungous implications on the global economy, and particularly so on the United Kingdom and the disparate countries in the European Union.
"The framework remained stable for 10 years following significant reforms in 1990-1991. A further process of change is now taking place. These changes arise from three sources: refinements in the UK's regulatory framework, the European Commission's drive for a single capital market, and political interest in accounting regulation following the Enron collapse" (Fearnley, & Hines, 2003, P 215 to 233).
It is pertinent to note that regulations have evolved across all nations taking into account the need to control the parallel economies that have entered many industrial segments, including capital intensive ones like infrastructure development and real estate (Fearnley, & Hines, 2003, P 215 to 233). The other factors that have contributed to the growth of regulatory environments are the rigid territorial, industrial and political lobbies promoting their narrow interests (Fearnley, & Hines, 2003, P 215 to 233). This has led governments across the world to undertake measures to control and restrict their capital markets and adhere to protectionist industrial policies (Fearnley, & Hines, 2003, P 215 to 233).
The year 2001 saw the formal incorporation of The International Accounting Standards Committee (IASC) Foundation and beginning of the functioning of The International Accounting Standards Board (IASB) (IASB, 2009). During 2005, nearly 7000 listed businesses across 25 nations in Europe changed over to IFRS and the US SEC published a set of milestones for removal of the reconciliation requirements by 2009 (IASB, 2009). In 2006, IASB and FASB agreed on a Memorandum of Understanding for advancing convergence of IFRSs and US GAAP. By 2007, over 100 countries universally required / permitted the use of IFRSs and in 2008, IASB pursued a comprehensive response to the financial crisis (IASB, 2009).
This essay attempts to analyse the divide between independent body regulation and legal regulation of the accountancy profession, taking account of the ongoing debate between the efficacy of rules and principles with regard to the regulatory framework for financial reporting.
Commentary
The Advantages and Disadvantages of Rules v Principles in Accounting Regulation
"A new kind of international regulatory system is spontaneously arising out of the failure of international 'Old Governance' (i.e., treaties and intergovernmental organisations) to adequately regulate international business. Nongovernmental organizations, business firms, and other actors, singly and in novel combinations, are creating innovative institutions to apply transnational norms to business. These institutions are predominantly private and operate through voluntary standards" (Abbott & Snidal, 2009, p 501).
The last thirty years of accounting history have been characterised by a continually escalating spread of accounting standards and other technical regulatory statements (West, 2003, p. 1). It is widely believed that these essential accounting rules are required to improve the quality of accounting information and have achieved that objective (West, 2003, p. 1). However, it is also contended that this very fixation with accounting rules making and compliance has diverted the focus from the fundamental function of quality of financial information and reporting (West, 2003, p. 1). Compliance with rules, both in terms of quantitative and qualitative information, determines the trustworthiness and efficacy of accounting data for rendering the account of an event or circumstance (West, 2003, p. 1). Experts argue that making the compliance of accounting rules the paramount purpose of the accounting practice and profession is to give more emphasis to the means than to the ends that the profession follows (West, 2003, p. 1).
The project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards has led to the analysis of various contentious topics of concern (Fair Value …, 2008, P 139-168). In fact there has been extensive discussion on the possible repercussions of the use of fair value as the favoured measurement basis, the debate being extensive between two underlying opposite global views, namely the Fair Value View and the Alternate View (Fair Value …, 2008, P 139-168).
The former is implicit in the IASB's proclamations, even as the latter is at the core of the overtly expressed disagreement with the IASB's statements (Fair Value …, 2008, P 139-168). The Fair Value View presupposes that, in a comparatively stable market scenario, the fair values taken from the current market prices and reported in the financial data should suffice for satisfaction of the needs of ordinary investors and creditors (Fair Value …, 2008, P 139-168). At the core of The Alternate View, however, is the assumption that the markets are relatively imperfect and in such an environment, the financial information should satisfy the requirements of the current shareholders by providing data relating to past events and transactions, using entry-specific measurements that reflect the available opportunities (Fair Value …, 2008, P 139-168).
"It is concluded that, in a realistic market setting, the search for a universal measurement method may be fruitless and a more appropriate approach to the measurement problem might be to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts" (Fair Value …, 2008, P 139-168).
Taking the accounting of goodwill as an example, its treatment in the United Kingdom, under IFRS 3 and IAS 36, has been radically altered; goodwill is now not amortised and charged to the Profit and Loss account, but is subjected to an impairment test at least once every year. With goodwill now subjected to an annual impairment review, it becomes necessary for companies to determine cash generating units to which such goodwill is correlated for performance of impairment review at that level. The methodology for reviewing and arriving at the correct valuation techniques, considering the appropriate discount values and establishment of cash flows and terminal values, will essentially need to be agreed upon between the management and the auditors (Goodwill, 2009).
"In a market analysis, it has been observed that the benefits of adjustments for non-amortisation of goodwill have been significant and have varied from a few percent to 10 times of the reported profit / loss results for some of the 25 out of the 31 such companies" (Goodwill, 2009).
The Advantages and Disadvantages of Law
History has repeatedly proven that badly conceived corporate laws can retard innovation and distort economic growth, whereas well planned policies can construct confidence in neo-liberal economic regimes, facilitate considered risk taking, and promote growth. However, even well conceived and comprehensively enacted legislation has its boundaries (Green, 2005, p 66). The US Congress, subsequent to unprecedented corporate collapses (in the late 1990s) on account of various managerial frauds, brought in the Sarbanes-Oxley (SOX) Act in 2002 for safeguarding capital markets and restoring investor confidence (Green, 2005, p 66). "Though the global investor confidence has resurfaced after the recent economic recovery, the jury is still out on whether and to what extent the SOX Act will actually protect the capital markets from frauds and malfeasance" (Green, 2005, p 66).
The enactment of SOX was intended to tackle specific abuses relevant to the most recent frauds. Its focus is on corporate financial reporting and the allied responsibilities of national caretakers (Green, 2005, p 66). Extreme legal and regulatory frameworks are however known to engender non-compliance. They also lead to much higher costs for non-complying organisations for ensuring project approvals and execution.
The Advantages and Disadvantages of IASB
Greater public participation in equity capital, the globalisation of stock market listings, and the increasing union of global financial markets over the past two decades have increased demands from corporations, firms and investor bodies for international convergence of disparate national accounting standards. Such escalating insistence for global accounting rules has led western government to delegate the task of formulation and formalisation of norms for preparation and issuance of financial statements to the IASB, (an independent London based body of technical experts that is financed by trade and industry).
The objectives of the IASC, in terms of the information available on its website, are (a) the development of "a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB" (IASB, 2009, p 2 to 4), (b) the promotion and "use and rigorous application of those standards", (c) taking "account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs), and (d) "bringing about convergence of national accounting standards and IFRSs to high quality solutions" (IASB, 2009, p 2 to 4).
Conclusions
The further development of the regulatory framework for qualitative accounting and reporting standards will need to strike a balance between the "truer and fairer view" pertaining to representation of financial and commercial transactions, both on and off balance sheets, and transparency of legal compliances in totality.
In light of this, it becomes important to further the regulatory framework for financial reporting under an increasingly independent and impartial IASB for the global convergence of harmonious accounting standards and coherent compliance by all the member countries, rather than engage in inflexible, rule bound and necessarily disparate legislation in different countries. This will not only facilitate international trade but also lead to achievement of transparent operational compliances of prescribed accounting standards.
