Nur Fadzilah bt Norizan (AC086628) Nur Izyan bt Mohd Ishak (AC086934) Thilaga Segaran (AC086628)

Question 1
General acceptance of accounting standards is important to the accounting profession. By whom does the profession require general acceptance of the standards, and why it is important to the profession?

The profession require general acceptance of the standards by Financial Accounting Standards It is important because, financial statements prepared under the General acceptance of accounting standard are intended to reflect an economic reality, The standards makes a company's financials comparable and understandable so that investors, creditors and others can make rational investment, credit and other financial decisions. In order to be useful and helpful to users, the standards requires information on financial statements to be relevant, reliable, comparable and consistent. Without the standards , companies would be free to decide for themselves what financial information to report and how to report it, making things quite difficult for investors and creditors who have a stake in that company.

Question 3 (a)What is Regulatory capture

Regulatory capture occurs when a regulatory, created

to act in the public interest, instead advances the commercial or special concerns of interest group that dominate the industry or sector it is charged with regulating.

(b) How can standard setting bodies such as the AASB avoid regulatory capture?
AASB which is an independent body of technical experts

introduces neutrality into the accounting standard setting process. This prevents those subject to disclosure requirements (ie. business)from highly influencing the creation of standards within which reports are prepared. However, though it is the financial reports of companies which are regulated, it is the role of the accounting profession to ensure that they are prepared in accordance with accounting requirements. It has been contended that the declaration of accounting standards by the AASB could result in the accounting profession capturing the process of creating requirements for financial reporting. However, the move towards international harmonization of accounting standards to which proposed accounting standards are subject, reduce the possibility of regulatory capture at a domestic level.

(c) If a standard setting body is captured by the profession, are there any steps that the government can take to make the body independent? If so, should the government take those steps? Justify your answer.
Yes the government should, because to assist decision

making by stakeholders, information flows need to be improved within the economy. However, governments should only regulate such flows until the costs of providing additional information outweigh the expected benefits from doing so.

(d) Do you believe that current International accounting standard setting arrangements, based around the IASB, are at risk of regulatory capture? Why or why not?

Yes, current International accounting standard setting

arrangements, based around the IASB, are at risk of regulatory capture This is because IASB has power to control the setting of accounting standards. Accounting policies dominated by the accountant and who will protect the public interest.

 Answer for (a) Yes, in my opinion, further regulation will prevent deliberately

misleading reporting. In October 2001, Enron scandal were reveal as in eventually led to the bankruptcy of Enron Corporation. Enron was attributed as the biggest audit failure. After the year of corporate collapses, this hearing about Enron scandal and corporate collapses led to the passage of the Sarbanes-Oxley Act on 30 July 2002 and the main provision included the establishment of the Public Company Accounting Oversight Board to develop standard for preparing of audit report. This standard is the restriction of public accounting companies from providing any non-auditing services when auditing, provision for the independence of audit committee members, executives being required to sign off on financial reports, and relinquishment of certain executives bonuses in case of financial restatement, and expended financial disclosure of companies relationships with unconsolidated entities.

 Answer for (b) Yes, because of the additional laws will prevent the corporate

collapses thus will development successful financial market around the world. Beside that, International Standards on Auditing (ISA) are developed by the International Auditing and Assurance Standards Board (IAASB). The IFAC established the Public Interest Oversight Board (PIOB) in 2005 with the objective of increasing confidence in the standard issued by the IAASB and other bodies. The aim is to ensure that standards are set in a transparent manner that reflect the public interest, with input by the public and regulators, and to facilitate audit regulation. There a some evidence said shows that the strength of accounting and auditing standards and the effectiveness of their enforcement are factors in the successful development of financial markets around the world.

 Answer for Important of enforcement of the financial reporting

requirement in order to promoting high quality of reporting are: Can provide relevant information that is useful to

present and potential investors and creditors and other users in making rational investment, credit, and similar decision makings. Can provide reliable information to the extent that investors can depend on it to represent the economic condition or events that it be to represent. Verifiable, which means that the degree to which different people when asked to measure something using the same approach, they can arrive at the same amount.

Question 12
Each of the three theories of regulation discussed

in this chapter has its strengths and limitations in describing accounting standards setting, either past or present. What do you believe are those strengths and weakness? provide an example where you believe each of the theories has applied, or is likely to applied.

Public Interest theory Strengthen According to the public interest theory , regulation is the manifestation of political pressure brought to bear by the public, which demands that a market failure be corrected.
Weakness However, it is difficult to meet demands from all people

because competition between demanders is not formally acknowledged by the regulator. The public interest theory does not have much support among economists these days. For Example, the weakness of this theory is its assumption that perfectly informed social welfare maximizes are either managing the regulation or running the regulated firms

Captured Theory Strengthen Government has "legal" coercive power and thus has monopoly control of the "supply" of regulation. Weaknesses Does not supply a theoretical explanation of the process by which the regulators get captured. Does not square with the widespread practice of crosssubsidization in regulated industries.

Private interest theory Strengthen It has power to coerce and will exercise this power in a way that best suit the government objectives.
Weaknesses

The government are not independent because the group which produce the highest bidders are able to use the power of the government to their own advantages

QUESTION 15 The IASB and FASB began a convergence project in 2002.

a) What are the expected benefits of the convergence

project b) What factor make convergence difficult c) How is the future of the IASB tied to convergence

 Answer for (a) Convergence of accounting standards would eliminate the issue of

the comparability of financial statements worldwide. Investors will have consistent information when evaluating foreign securities. investors would have the potential to reduce risk through international diversification. Not only would the financial statement comparability aid individual investors, it would simplify the evaluation by multinational companies of possible foreign takeover targets. Financial reporting costs would also be reduced by companies who would like to list their shares on foreign stock exchanges. Crosslisting of securities would allow companies to gain access to less expensive capital in other countries and would make it easier for foreign investors to acquire the company's stock. These same companies would see cost reduction in the preparation of worldwide consolidated financial statements. Multinational companies would not have to prepare two sets of financial statements and have personnel that have an extensive knowledge to two different sets of accounting guidelines.

 Answer for (b)

Difficult to change their taxation practices. Taxation is another reason why it is difficult for global convergence of accounting standards. In some countries financial statements form the basis for taxation; whereas, in other countries the financial statements are adjusted for tax purposes and submitted to the government separately from the reports sent to stockholders . It is challenging for a country to change their taxation practices. The public will usually pressure the government to reduce taxes; therefore, if a policy is viewed as increasing taxes, there will likely be heavy backlash.

 Political influences Political influences may also hinder the advancement of accounting convergence. It is difficult to change the status quo because, in large part, keeping the norm requires no adjustment. Nationalism is a political roadblock that hinders progress in the arena of global accounting convergence. Nationalism may cause a nation to focus on a set of homogenous policies that are separate from the policies and interests of other nations. This is evident in the attempt of global accounting standards. Different countries may be cautious of altering their accounting guidelines and giving a separate body any kind of authority over them.

 Answer for IASB need to play proactive role in publicizing its view on important accounting issues, undertaking cutting edge research to provide timely feedback to the resolution of accounting issues.