Main Theories That Explain the Politic Process of Accounting Standard Setting and Regulatory Process

Choose one of the 3 main theories that explain the politic process of accounting standard setting and regulatory process in Australia. Explain critically the main elements of this theory and illustrate with examples. How does this theory operates in the real world. Public interest theory holds that regulation is supplied in response to the demand of the public as a result of inefficient or inequitable market practices. Initially it is assumed to benefit society as a whole rather than particular vested interests. The regulatory body is considered to represent the interest of the society in which it operates rather than the private interests of the regulators and that the government is a neutral arbiter. Economic markets are imperfect, this is due to the lack of competition, barriers to entry, information gaps between buyers and sellers, as well as public good.

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This leads to a need for intervention to protect the general public and consumers. Regulations takes interest of the public through legislative actions; by passing laws and make sure everyone complies. Public interest theories of regulation is aware that its purpose of achieving certain publicly desired results would not be obtained, if left to the market. At the same time, regulation is provided in response to the demand from the public for what is happening in the inefficient and inequitable markets. As a result, regulation is pursued for public, as opposed to private, interest related objectives.

This was the dominant view of regulation and still retains many adherents. It is generally felt that determining what is the public interest is a normative question and advocates of positive theorizing. It would, therefore object this approach on the basis that it is not possible to determine objective aims for regulation; there is no basis for objectively identifying the public interest. There are other charges that was issued regarding public interest approach. These include attention being directed to the regulators, questions is raise, such as if the regulators are sufficiently competent and if it is possible for them to continuously act in a disinterested manner?

Critics suggest that there may be questions regarding the reward (whether if it is sufficient), career and training structures for these regulators. On top of these, it is often argued that the public interest approach, have not been unaware of the need to view regulation in a broader framework over the years; there is no improvement made relating to the approach. Some, while recognising the political implications in the process of regulation have argued that political considerations be excluded and that accounting remain only concerned with measuring the “facts”. In light of the above discussion, if taken at face value, it would seem unduly naive. However, over the years it have been the point of much accounting debate; that is, the false belief that accounting is value neutral and only concerned with reporting the economic facts. For most of the period, the accounting profession sought to maintain a regime of self regulation.

The professional bodies have attempted to develop generally accepted accounting principles (GAAP) and after which, followed by a conceptual framework that would serve as the basis of an accounting theory. The search for GAAP and a theoretical framework have been a struggle due to different viewpoints on the necessity and form of regulation; resulting in considerable tensions. The involvement of accounting and professional accountants in spectacular business collapses and major cases of business fraud has ensured the need for accounting regulation. Thus, there has been a public interest concern that resulted in the need of regulation; pressure from various segments of society has demanded regulation.

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