Accounting free essay: Account regulation
A). Discussion: why it is important that accounts are regulated
The importance of accounting regulation and other incidental concerns around accounting laws and practices touch on the professional mandate of accounting within the harmonised context. Accounting history and the evolution of business context reveal that the practice of keeping the books of accounts shifted from a routine record keeping practice to a managerial necessity. Initially, the nature of business context defined by prevailing conditions during the periods prior to the agrarian and industrial revolution heavily relied on small-scale setting. Business owners during that period controlled every aspect of their business, which was less oriented to commercial targets, making record keeping remotely important in the running of the affairs of the business. Improved role of business in the changing environment availed by drastic commercial orientation to business and commerce during agrarian and industrial revolutions introduced keeping of business accounts as one of the necessities of businesses.
Ownership and management roles were equally clearly defined during these changes, making keeping accounts an invaluable business practice with respect to accountability of the management roles to the ownership. Regulating how different businesses conducted the keeping of business accounts ensued prompted by harmonisation and adoption of the most effective maintenance of accounts records. To this date, keeping with the pace of the most effective practices of accounts maintenance has been the core of accounting practices, as facilitated by professional accounting bodies. Sharing of business successes is a common trend that world business embraces, which makes regulation and harmonisation incidental to a synchronous approach (Broadbent and Laughlin 2002, p623).
Other Reasons of Importance
The free market operates devoid of clear rules defining behaviour and it may be difficult for businesses to come to an agreement touching on possible conflicts. Accounts regulation assists in bringing rules to be followed as a measure of deviation from standard financial expectations subjected to the market players (Taylor and Turley 1986, p7).
By facilitating accounts regulation, the accounting profession and other authorities such as governments avail free information that is primarily incidental to business competitiveness. Unfair access to such information would be the preserve of a few financially powerful businesses since information is very costly in business operations.
Alternatively, the requirement that businesses avail their books of accounts and in a particular format eliminates certain aspects of risks, which would arise if businesses handled their information differently. As an illustration, insider trading would be more material a risk to businesses than it would if disclosure of financial records following a specific standard were not observed. Closely related to this risk would perhaps be the exposure of businesses to market distortion if regulations were not absent. It is therefore the reason why certain scholars argue that accounting information is a public good since its disclosure protects the market and the public from several harmful risks of manipulation and exploitation of the market (Gerboth 1973, p479).
How Accounts are Regulated in the UK
Regulation of accounts in the UK has origins in the UK generally accepted accounting principles and practices (UK GAAP), which is the consideration of virtually every business approach in accounts keeping and maintenance (Davies, Paterson and Wilson 1997, p35). From such a diverse origin of business practices and principles, it is possible for professional bodies in the UK to identify the most applicable accounts keeping principles and avail them to professional accounting bodies and government for formulation of regulation. The UK GAAP and the professional accounting recommendations that inform policy formulation such as in the statutory requirements of certain standards of keeping books of accounts closely define UK accounts regulation. As an illustration, the Companies Act requires businesses to prepare their financial records following particular accounting standards proposed by professional accounting practices. Regulation authority in the UK is as defined by the UK government through the Companies Act that explains how private and public companies need to approach accounting processes, within the backdrop of International Accounting Standards and UK Accounting Standards designed by local professional bodies. Regulation in this aspect embraces the internationally accepted standards in order to enable global business environment to be compatible with the UK practices.
Disadvantages to Regulation
Regulation is criticized for its interference with natural business, which would otherwise be controlled and regulated by forces of the market. In the free market setting on which the global business is established, regulation is deemed as interference since deregularisation presents the perfect environment for capitalism. Introduction of watertight rules and standards is therefore considered as an infringement on the ideal market setting for free forces to take charge. It would perhaps open a competitive channel on which the best accounting practices define success of the company in handling records.
Additionally, the conditions availed by accounts regulations present business truth as a relative attribute of business practices. It implies that forcing businesses to report in a particular way eliminates the possibility of certain inherent truths to be disclosed by virtue of being locked out of the accounting regulations. Interpretation of regulation requirements makes it difficult for every business to fit in the perfect scenario envisioned by the standards.
B). Fundamental Qualitative Characteristics as Laid Out in the International Concepts
Qualitative characteristics defined in the international accounting concepts elaborate on the nature of accounting information based on the usefulness that can be attached to such information. Generally, there is a hierarchy of accounting qualities that are applied in the definition of the usefulness that accounting information has to the business decision making processes (Introduction to Accounting n.d., p38). In the hierarchy of accounting qualities, usefulness of the information is the top most quality that can be used to define the nature of accounting information. To define how usefulness as a quality is achieved by accounting information, there are various concepts that must be considered which include; how predictive business gets from the use of the information, feedback value, how timely it is, how faithful it is deemed upon presentation, understandability, how verifiable it is, neutrality and how comparable it is (IASB 2006, p27).
Usefulness is a factor of several other decision making variables that define the quality of business moves made upon reliance of the accounting information. With regard to the decision maker, usefulness presents the appropriate mental resources that facilitate decision making, such as understanding of the prevailing circumstances as well as prior knowledge. In making quality decisions touching on the business, financial accounting information enables the managers to design most favourable cost-benefit conscious decisions without compromising on the materiality of the information (Putra 2009, para.3).
Broadbent, J. & Laughlin, R. (2002) Accounting choices: technical and political trade-offs and the UK’s private finance initiative, Accounting, Auditing & Accountability Journal, vol. 15, no. 5, pp.622-654
Davies, M., Paterson, R. &Wilson, A. (1997) Ernst & Young UK GAAP (Fifth Edition), London, UK: Butterworth.
Gerboth, D. L. (1973) Research, institution and politics in accounting enquiry, Accounting Review, July, pp.475-482.
IASB (2006) Measurement bases for financial accounting- measurement on initial recognition, [Online] Available from < http://www.bdointernational.com/Services/Audit/IFRS/Comment-Letters-on-IFRS-Standard-Setting/SiteAssets/Pages/IASB-Discussion-Paper-Measurement-Bases-for-Financial-Accounting—Measurement-on-Initial-Recognition/DP%20Measurement%20Bases%20for%20Fin%20Acc%20-%20Measurement%20on%20Initial%20Recognition.pdf> [Accessed 26 February 2012].
Introduction to Accounting (n.d.) Accounting rules and regulations, [Online] Available from <http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/Dysonch2.pdf> [Accessed 26 February 2012].
Putra (2009) Qualitative characteristics of accounting information [Hierarchy of accounting qualities], [Online] Available from <http://accounting-financial-tax.com/2009/08/qualitative-characteristic-of-accounting-information-hierarchy-of-accounting-qualities/> [Accessed 26 February 2012].
Taylor, P. &Turley, S. (1986) The regulation of accounting, Oxford, UK: Basil Blackwell.
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