Question

“In the case of developing financial accounting standards, do you believe that regulatory intervention can always be considered as ‘fair’ and ‘neutral’? If not, why not? Critically explain your answer in the light of relevant theories relating to the regulation of financial accounting. Give at least one example to support each theory discussed.  

Answer 1

History attests to the influence of crisis and scandals as an impetus for regulatory intervention by politicians (Banner, 1997; Reinhart and Rogoff, 2008). After a series of scandals in the United Kingdom in the 1990s culminating in the collapse of Barings Bank, there was a dramatic shift in the structure of financial regulation that consolidated regulation responsibilities under the auspices of the Financial Services Authority. A wave of financial scandals epitomized by the Enron debacle catalyzed swift and sweeping changes to U.S. securities regulations with the passage of the Sarbanes Oxley Act of 2002. Today, in the aftermath of the financial crisis of 2007-2009, financial accounting standard setting finds itself drawn into the orbit of complex political processes focused on restructuring the regulation of the world’s financial markets. The crisis has ignited worldwide debate on issues of systemic risk and the role played by financial regulation in creating and exacerbating the crisis. Proposals abound for how regulation of financial markets and financial institutions should be changed to mitigate the potential for such large-scale financial meltdowns in the future. The scope of regulatory issues under debate spans many aspects of the financial system, including the alleged role played by financial accounting standards in deepening the trajectory of the crisis. The crisis has energized politicians, regulators, and economists to scrutinize financial accounting standards as never before, creating significant pressure for change (see e.g., G-20, 2009).