Last Updated 02 Apr 2020

Regulatory Competition Among Accounting Standards Within and Across International Boundaries

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Financial statements that are simple and comparable to the general public may not be in the best interest of the managers. Managers like to manipulate ?nancial reports to suit their own interests. Financial reporting would be easy to just report whatever is in the cash till. Despite the fact that financial reporting would be simplistic, it is better to have complex account than a simple financial reporting. There is no perfect standard for any corporations in the world. An ever changing corporate world makes it harder to ascertain for the prefect standard.

However, experimentation with alternatives in a competitive regulatory environment generates data to help identify with the most wanted accounting standards. No single set of standards has been shown to be the best suited for all ?rms. The argument for regulatory monopoly in accounting is often based on the assumption that in the absence of such regulation, there will be no standards. Financial reporting standards act as a template to prevent managers from taking advantage of the shareholders cost of capital and fraudulent behaviour or thoughts.

Despite being a set of rules, the financial reporting standards still has its leeway from country to country. With a centrally planned accounting standards, standards setters are susceptible to lobbying pressure especially when disagreement arises between varies interest party. On the contrary, with regulatory competition, standards setters can avoid the lobbying pressure. This is because those who do not like the standard can freely choose another one that is suitable. Analysis For the first claim above, I agree that a simple financial report is favourable to the public but not so to the managers.

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However, this may not always hold true as it may paint a biased picture favourable towards the managers. This is mainly attributed to the manipulations of the financial report for their own interest. In addition, a financial reporting that only reports the cash in the till would eliminate all the complexity of financial reporting. However, I feel that a complex financial report that depicts the true situation of a company is better than a simple financial statement that just only accounts for whatever is in the till.

Having guidelines may be easier for financial reporting but it may leave out certain “hard to count” assets and liabilities which are crucial in preparing an impartial financial report for the public. Therefore, I agree with the author that a complex financial report that may arise from regulatory competition is better and more precise compared to a guided and simple financial report. Secondly, my apprehension with the experimentations of alternatives is that in reality, corporation may not have the time or resources to try out different alternatives.

A failed experimentation with an alternative accounting standard may negatively affect the capital that will be invested in the company by investors. However, I do agree with the author that experimentation with different standards through regulatory competition will eventually lead to the perfect accounting standard for every corporation. This is due to the ever changing rules selected in accounting standards through regulatory competition. 3 No single standard setter knows the perfect standards for different industries and circumstances.

Hence, I believe that in order to have the perfect standards it is for the best to leave it to the market. Like I have mentioned above, accounting rules are always carefully chosen according to different regulatory competition. Just like the laissez faire concept. Hence, with regulatory competition, the market will decide which standards are the best by allowing corporations to experiment with alternatives. Subsequently, the main argument favouring the harmonisation of accounting tandards is the fear of having no standard with competitive regulations. However, better firms can engage the best quality of audit as an attempt to convey their quality over to investors. 2 Firms can convey such message by paying a price premium charged by audit ?rms, which are perceived to provide services of higher quality. This further proves that even without regulations there will still be standards; in fact the reports prepared will be better quality as better audit firms are employed.

The up side of using accounting standards set by standard setters is that it is prescriptive. I agree with the writer that in this case, by having prescriptive standards are actually positive as it restricts managers from exploiting the cost of capital belonging to the shareholders. In addition, not all standards that are prescriptive lack flexibility which will hinder professional judgement. An example would be the flexibility between UK GAAP, US GAAP as well as International GAAP despite all coming under the same accounting standards.

Finally, I disagree with the author to a certain extend that it will lessen the lobbying pressure. I believe that having regulatory competition may provide for more lobbying opportunities as pressure to conform to authorities who are usually the big corporations or political government are futile to resist. 4 Nevertheless, I agree with the author that regulatory competition will not eliminate lobbying pressure but lessen it. With regulatory competition, accounting standards are diversified hence reducing its vulnerability to lobbyist.

Critical appreciation Throughout the whole paper, the author has a strong stand on the differentiation of accounting standards by putting more weight on discussing on the advantages of regulatory competition that arises from differentiated accounting standards. Even though there are discussions on the advantages of having standards towards the end of the paper, there is not much emphasis. However, I agree with the author that his arguments for regulatory competition are not for the elimination of accounting standards.

I strongly believe in the Pareto efficient solution for setting accounting standards; for every accounting standards set it will not benefit everyone but as long as it benefits the majority it will be a considerably good standard. Overall, I love this article as it opens up my mind regarding the benefits we can get by adopting regulatory competition by having different accounting standards at the same time emphasised about the consequences of just having regulatory competition.

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