The financial regulatory framework in UK is called GAAP or General Accounting Accepted Practice and is the body responsible for the rules and regulation that companies within the UK must follow when reporting financial information. There are three main sources of rules governing accounting regulation in UK namely: the companies’ act 2006, (which incorporated EU accounting directives), UK accounting standards (FRSs and SSAPs) and London Exchange Company listing (International Accounting Standards). Recently, the FRC (Financial Reporting Council) issued a new directive which will require (except the small companies, which can use FRRSE) to report in accordance with FRSI or IFRS by the end of 2015.
There has been much debate over the advantages and disadvantages of the regulation of financial reporting. The central argument put forward by proponents of regulation of financial reporting is that a lack of regulation of the market results in severe market failure and regulation mitigates the chance of such failure. On the other hand, proponents of the free-market approach argue that the private incentives for self-regulation and production of credible financial reports are such that regulation is unnecessary and often worsens market collapses- the opposite of its intended purpose. This paper will argue that whilst regulation is necessary to mitigate market failure and serve the public interest, it is important to consider that regulation has in some cases caused financial crises. The global economic crisis has “ignited worldwide debate on the issues of systemic risk and the role played by financial regulation in creating and exacerbating the crisis” (Bushman and Landsman 2010: 259).
The first part of the paper introduces and briefly outlines the framework of regulation of financial reporting in the UK and the various sources of authority governing accounting regulation. The second part critically discusses the arguments against the regulation of financial reporting. The proponents of the free-market approach argue that the private incentives for self-regulation and production of credible financial reports are such that regulation is unnecessary and often worsens market collapses- the opposite of its intended purpose. The third part analyses the arguments in favour of the regulation of financial reporting.
1. Financial Reporting regulation in United kigdom
The definition of regulation is defined as sets of rules that are designed to control and govern which is conducted by government. However, regulation of financial reporting are rules designed and developed by independent self-regulatory board.
“The necessary of regulation of accounting information is aimed at ensuring that users of those users of financial statements receive a minimum of information that will enable them to make meaningful decisions regarding their interest in reporting entity. Regulatory frame work is required to ensure that relevant, reliable, comparisons...