The pros and cons of regulating corporate reporting:A critical review of the arguments
Robert Bushman, Wayne R. Landsman Accounting and Business ResearchVol. 40, Iss. 3, 2010
There were a series of scandals in the UK in the 90’s which resulted in the collapse of Barings Bank, due to this the Financial Services Authority changed the structure of financial regulation that consolidated regulation responsibilities. The aftermath of the financial crisis of 2007 to 2009 has drawn the financial accounting standard setting into the orbit of political processes focused on restructuring the regulation of the world’s financial markets. The crisis has ignited worldwide ...view middle of the document...
Criticism of public interest theory
1) Non-governmental parties’ arrangements mitigating market failures - government intervention is unnecessary.
2) If non-governmental parties unable to come to arrangements, market failures resolved by courts and enforcement of tort rules. In this case if competitors were not able to work together, then there are bodies apart from the government like courts that would enforce rules ensuring fairness and recovery of markets.
3) Capture theory – governments not capable and incompetent, unable to bring the solution. People acting on behalf of governments are seen as selfish agents, whose decisions will be influenced by personal, rather than public interest good and goals.
Next the authors moves on to talk about the theory of disclosure regulation (firm specific forms), where he applies previously discussed arguments.
Is it necessary for regulating disclosures? Question is being asked again. What happens if not?
According to R. Bushman and W. R. Landsman there is a strong believe, that in absence of formal ruling forces of market discipline will very likely create influence for optimal disclosure. This would mean that in certain circumstances companies are more than happy to disclose information voluntarily. However, contained information, when not regulated, may turn out not accurate or extensive enough for certain purposes.
The Authors consider and bring us closer to understanding of an actual need for regulation in regard of disclosure. These are the issues:
Market forces putting pressure for disclosing means being open and competitive, attracts investors who believe companies have nothing to hide,
If not disclosing voluntarily – hiding bad news or unfavourable information, that lowers share prices/value of the company.
They then explain issues related to misreporting – reputational, legal and contractual penalties. To ensure credibility of reports, even when disclosing them voluntarily, companies should engage professionals (e.g. auditors, credit rating agencies, underwriters).
This brings us to look at the Market wide effects of disclosure (not firm specific only, but collective).
Subject of revealing proprietary information to competition is considered first. Firms may be unwilling to disclose, due to the nature of sensitive information. This may have impact on the allocation of capital and investments, productivity also price competition. Author also talks about over/under production of public information (costly) and disclosing sensitive information about other companies.
There are also benefits noticed by the writer: more accurate assessment by investors, allowing lower the cost of capital and also reduction aggregate expenditures on information.
Next the authors moves on to talk about TREATMENT OF FINANCIAL INSTITUTIONS and the need to disclose additional information in order to measure and manage systemic risk. He then makes a comparison with the situation and types...