Free Market
Part A (Question 1)
Free-Market Perspective
What is “free-market” perspective on accounting regulation? Deegan (2010, p.38) states:
Accounting information should be treated like other goods, with demand and supply forces being allowed to operate to generate an optimal supply of information about an entity.
In the absence of regulation, managers still provide financial information for the interest of the organisation. Market mechanism would ensure the information published to be prudent. Managers would effort to provide adequate and reliable information to attract investors and therefore to maximize welfare. According to Watts and Zimmerman (1979), corporations produced financial statements voluntarily, for example in the US before disclosures became an obligation by government mandate. This means ‘not producing information will be penalized by higher costs of capital, resulting to a good reputation with respect to financial reporting will improve the firm’s ability to raise capital and so to lower firm’s cost of capital’(Papadopoulos 2011, p.4).
It has been argued that since various parties have different interest in an entity, parties would request their own desired financial information of the organisation and be prepared to pay for it. Not all users will have the same information needs; ‘given the numerous groups having legitimate claims on the company, it is possible that if certain information is made public it may be beneficial to one group, and harmful to another’ (Inchausti 1997, p.51).
In the absence of regulation, entities can reduce certain costs. The overload of accounting regulations can result in cost burden on many entities. As Collins and White (2006) state:
The burden of regulatory and related compliance has grown and continues to grow. This burden appears to be particularly onerous on smaller entities and their external accountants and this burden is certainly consuming resources which could be better utilised improving business
Free-Market Perspective
What is “free-market” perspective on accounting regulation? Deegan (2010, p.38) states:
Accounting information should be treated like other goods, with demand and supply forces being allowed to operate to generate an optimal supply of information about an entity.
In the absence of regulation, managers still provide financial information for the interest of the organisation. Market mechanism would ensure the information published to be prudent. Managers would effort to provide adequate and reliable information to attract investors and therefore to maximize welfare. According to Watts and Zimmerman (1979), corporations produced financial statements voluntarily, for example in the US before disclosures became an obligation by government mandate. This means ‘not producing information will be penalized by higher costs of capital, resulting to a good reputation with respect to financial reporting will improve the firm’s ability to raise capital and so to lower firm’s cost of capital’(Papadopoulos 2011, p.4).
It has been argued that since various parties have different interest in an entity, parties would request their own desired financial information of the organisation and be prepared to pay for it. Not all users will have the same information needs; ‘given the numerous groups having legitimate claims on the company, it is possible that if certain information is made public it may be beneficial to one group, and harmful to another’ (Inchausti 1997, p.51).
In the absence of regulation, entities can reduce certain costs. The overload of accounting regulations can result in cost burden on many entities. As Collins and White (2006) state:
The burden of regulatory and related compliance has grown and continues to grow. This burden appears to be particularly onerous on smaller entities and their external accountants and this burden is certainly consuming resources which could be better utilised improving business
References: BURTON, J. (1975). An Interview with John C. Burton. Management Accounting, 56(11), pp. 19-23. COLLINS, S., & WHITE, G. (2006). A Free-market Perspective for the Prepares and Users of Financial Accounting Information Today, Journal of Contemporary Issues in Business and Government, 12(1), 63-73. DEEGAN, C. (2010). Australian Financial Accounting. North Ryde, Australia: McGraw-Hill. TAYLOR, P., & UNDERDOWN, B. (1985). Accounting theory and policy making. London: Heinemann. WILLIAMS, T. (1965). Regulation and Accounting. Journal of Accountancy (pre-1986),119(5), pp.91.