Question

1. Discuss the ‘free-market’ perspective or argument against the regulation of financial reporting.
   
2. The International Accounting Standards Board (IASB) has a number of roles, including formulating accounting standards and developing a conceptual framework. Is the work they do in developing an accounting standard or the conceptual framework normative or positive in nature? Explain.
   

Answer 1

a.

The free market is an economic system based on supply and demand with little or no government control. ... Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions.

The use of financial regulations may create instabilities and market equilibriums. For instance, if the supply of a certain commodity is regulated, the demand may not be in a position to equal the supply. If the supply is made lower, excess demand is created (Young, 1997). This alternatively creates market inefficiencies, and hence, market failure. This means that unless otherwise, the achievement of an effective market is not easy with the use of financial regulations as a tool for achieving this goal. Regulations alone cannot possibly facilitate the achievement of the proposed single market for retail consumers in the UK.

A major issue on financial regulations is the supervision of individual firms within an industry. This is usually costly with the high financial spending in the program by regulators. They can choose a different way of monitoring firms’ financial patterns without facing the great costs. They can do this by constraining the available resources and coming up with a sample research before getting into the major analysis activities (Skerratt, 2010). There is much risk in either way. This is a clear implication that the regulators should be in a position to assume any risks. The risks are in terms of the use of their scarce resources, which should be focused on the greatest risk areas of the project.

b.

IASB developing an accounting standard or the conceptual framework is considered as

normative in nature because the framework is designed in a way which provides prescription

and tells accountants what should be done. This is basically the normative theory. It set

boundaries so that people does not commit any wrong while conducting their business

activity as well as help them to make appropriate decisions within the limits. If it was in

Positive nature then people would have made their own rules and regulations of recording the

financial data which would have resulted in inconsistency within the industry