Over the years there has been a continual debate over the necessity of accounting regulations. Some people have many reasons favouring accounting regulations such as the belief that accounting conventions are needed in order to allocate and control the economic outcomes of resource allocation and information stipulation in the market. However, others have arguments against the use of accounting regulations, such as regulation leading to oversupply of information as users who don’t bare any cost tend to overstate their needs.
Accounting regulation arose shortly after the 1920s, where researchers wanted to classify commonly accepted accounting regulations. Examples of these include the entity assumption and the matching principle. It was in 1946 that the institute of charted accountants in Australia released five recommendations on accounting principles. Then in 1956 following the great depression, numerous recommendations were issued by the Australian society of accountants. Accounting regulations in financial reporting are seen as “the imposition of constraints upon the preparation, content and form of external financial reports by bodies (governments, regulatory agencies established by governments, trade and other associations in the private sector, loose industrial groups which pursue collusive activities) other than the preparers of the reports, on the organisations and individuals for which the reports are prepared” (Taylor and Turley, 1986: 1).
There are many benefits associated with the implementation of regulations within the market. According to some, accounting regulation is necessary to ensure market efficiency. Market efficiency allows accounting information to be available at just costs. However, in reality markets are imperfect due to factors such as information asymmetry. Without these regulations which permit efficiency, it is believed that markets may fall into disorder. Regulation allows for comparison of reports and accounting information, along with a fair control on prices and appropriate resource allocation.
Regulation is also seen as an imperative device which encourages accountability and allows for the provision of a wide range and greater amount of data in corporate reports. In the presence of windfall profits, regulations are also considered highly desirable. An example of this would be when a situation occurs where there is an immediate demand and suppliers charger higher than normal and thus generate greater profit. Because of the central aim of accounting standards is to uphold comparability, consistency and simplicity in the best interests and welfare of users of financial reports and information. Though the years it has been seen that in the absence of accounting regulation, financial statements may not convey the information that people require to make informed decisions in company actions. Because of this, the role of regulation in rasing the quality of information conveyed in financial reports is imperative. This is highlighted by Baxter (1978: 25). He stated that “standards raise the quality of accounts, make company reports more intelligible and foster comparability; they dispel doubts and – we hope – soon bring harmony of principle. In a world made safe enough by standards, accounting will be plagued by few scandals and our noisy defamers will have to hunt elsewhere for quarry”. The pro regulation perspective considers accounting information as a public good. Once it’s becomes available, there is no cost involved with it use and it can be distributed freely among people. Great emphasis is also placed upon accounting regulations when it comes to the security of information and users of financial information. Regulations allow for less accounting to be inundated with fraudulent organisations producing misleading information. This need for regulations to ensure the business world is a secure place was emphasised by the scandals of the 19th and 20th century. Some believe that regulation is not needed, as they argue that the markets can choose which accounting principles to demand. They advocate that regulation is unproductive in achieving its main aim of accurate, consistent, reliable and comparable financial reporting, Bromwich (1985).
Regulation is sometimes deemed unnecessary using the free market perspective. This perspective considers that “accounting information should be treated like other goods, and demand and supply forces being allowed to operate to generate an optimal supply of information about an entity. “ Jensen and Meckling, Watts and Zimmerman, Smith and Watts are supporters of this perspective. This perspective considers the absence of regulation to create private incentives to produce accounting information and organisations which do not generate information will be penalised by a higher capital cost. The arguments main concern is that regulation will lead to oversupply of information leading to an optimal supply of information by individuals. It is apparent that there are many views when it comes to the necessity of accounting regulations. There are strong arguments both for and against and all people are entitled to their own opinions. Although many see regulation as more of a hindrance compared to a beneficial tool, the arguments in support of regulations vastly outweigh the negative outlooks.