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Discuss the Need for Regulation in Financial Reporting

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Introduction

Discuss the Need for Regulation in Financial Reporting There is a need for regulation in financial reporting because of a number of reasons. There are several major user groups of financial reporting, some of which include equity investor groups, employee groups, analyst adviser group, the government, the public and other stakeholders. These different stakeholders however, need to be able to interpret and use financial information in a systematic way in order to make the necessary financial decisions. If these different user groups created financial reports, it will be prepared in diverse ways which would suit their various requirements. If this is the case, then different groups will interpret different financial reports in different ways. There are international differences in accounting practices. Accounting practices differ from country to country and so do the regulatory frame work and the balance between the public and private regulation. Over the years, bodies like the EU have been formed. There is need for accounting regulation as all these different countries coming together may have different accounting standards, thus there will be the need for financial reports regulation. ...read more.

Middle

These disclosure requirements resolve some of the problems associated with the asymmetry of information between the directors and some user groups. They also enable user groups to compare the level of their inducements with those received by the other groups. The Act also requires that the directors not only present the financial statements to the shareholders each year but also that independent auditors are appointed to examine the financial statements and report their findings to the shareholders. The law addresses the problem of information asymmetry by requiring the disclosure of certain key items of interest to user groups. The Accountancy Profession also recommend the same but in this role as regulator. The accountancy profession is more influential in achieving a significant increase in the comparability of financial statements. Whereas the law provides the general framework for what is to be accounted for in the financial reports, the accountancy profession provides detailed rules in the form of accounting standards about how items and transactions should be accounted for. In regulating financial reporting, there is a conceptual framework. This has no specific definition for a conceptual framework. ...read more.

Conclusion

all recordings must only include monetary transactions; historical cost which states that all resources must be recorded with their original price and accounting period recognises that profit occurs over the time and can only be defined as profit depending on the accounting period. Other conventions include the materiality convention the realisation of revenue convention and objectivity. There are several criteria and objectives which are useful when choosing your accounting method. The choice of accounting method must always be relevant, reliable, comparable and understandable to all parties involved. If these are met then the accounting method will be favourable to all accounting users. Accounting standards may however have some undesirable consequences. This may limit the extent to which the preparers of accounts are able to prepare the financial statements to meet both the needs of different user groups. It may also discourage the preparers of account from experimenting new ways of describing accounting transactions. There is no assurance though that a standard procedure will provide the information required by the various financial user groups. Nevertheless there is the need for financial reports being regulated because it would be comparable and it would save both time and money adjusting them to a common format. 1 ...read more.

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