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The ACCT 201 financial accounting assignment sample presents a case of the implementation of new International Accounting Standard (IAS) 40, which has been rejected and not accepted by the property developers of Hong Kong because of several reasons. Two major economic theories of regulation, namely the Public Interest Theory and Economic Interest Group Theory are examined and analyzed to determine their validity under different market conditions and how these theories help the government in imposing laws and regulations for the economic and social development of the country and the people residing in it. The government needs to make complete use of the existence resources for enhancing the economic status of different groups in a country for sustainable economic growth and development.
The article discusses the way the Public Interest Theory has been developed as a theory of regulation and has been reformulated several times for the benefit of the public of a country. Initial formulation of theory assumed the economic markets to be fragile, thus requiring interventions from the government in different sectors. Keeping in mind the fact that no external economic conditions affect governmental regulations, the theory has been reformulated to support public needs and demands. The reformulation was also found to be not completely satisfactory because of several unproven assumptions and non-accountability of the influence of influential groups in developing and implementing the regulations.
The author in the article highlights the way the regulations often imposed by the government are seen as ineffective and the regulators are blamed for the inefficiencies and problems. It is assumed that the government is completely neutral and would always work in the favor of public by keeping their interest and needs in mind. The agencies responsible for the formulation of these regulations usually have an intractable character and there are costs that go into the development of legislative supervision that is highly efficient. These factors were also integrated into the public interest theory at a later stage.
The article also highlights the major problem with the public interest theory, i.e. the lack of a measure to evaluate and compare the expectations and perceptions of the public to the results of the actions taken by the government in public interest. Different ways in which the problem can be overcome till some extent and so that the perceptions of public towards legislation can be improved are also discussed. People have also been shown to believe that the theory of public interest doesn’t exist at all and some people believe that it is misinterpreted in different ways. But all this are just theories and beliefs of different people, as there is no appropriate evidence to prove the same. The lack of any proof or theory to confirm the existence and validity of the theory is something that needs to be worked on for its better implementation.
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The article is extremely critical for understanding the development and implications of different theories of economic regulation because the author takes industrial examples to illustrate the way public interest and interest group theories differ from one another in the imposing of regulations by the government and other agencies. He clearly mentions that the regulations are either made to allocate benefits to the whole of public or the regulations are made to benefit one particular group of people or industry because of influential action of that particular group in the agencies.
The paper describes the different ways the government can allocate power to different set of people or groups and the way these groups can benefit from the different economic regulations. Direct subsidy for money, power to control new entrants and price-fixing are some of the common ways in which groups of people can make use of the regulations pertaining to the development of a particular industry. The example of the oil quota system is taken to illustrate the way interest group theory works. The theory states that the agencies devising different regulations for managing the economy usually work towards the betterment of their industry or interest group.
Any industry that receives governmental regulations and reforms are also highly affected by different political factors and powers. It also needs to pay some amount as costs to obtain the basic legislature. The author compares different variables that affect the economic regulation in these interest groups, thus demonstrating the way capital works over labor and how the public interest theory does not remain valid at certain places, giving the interest group or the industry higher weightage. It is true that the interest group theory prevails in different economies but the governments need to develop a way to measure the same to that it can be proven.
Practical Applications Of The Theories Of Regulation
Public Interest Theory
The public interest theory is a classic theory, which explains the working of the government and imposing of different regulations by it. The classic approach and the initial studies on the theory demonstrates that there are times when markets are unable to regulate themselves because of the fragile environmental and economic conditions and hence this is the time when the government has to intervene and form regulations and strategies so that the efficiency of the markets and their operations become better. (Peltzman, 1976)
Some of the usual problems that cause problems in the market and cause turbulence include the growth of a monopolist and the presence of huge external costs. These two problems make it difficult for the industry to grow and hence the government intervenes and comes up with new strategies to protect the market and the public. (Becker, 1983) This intervention is expected to be for the benefit and interest of the public on a whole, giving them more opportunities and better conditions for survival. This is the most important element of the regulation theory.
The theory claims that the governmental agencies responsible for the execution of these new regulations are completely rational and do not consider any personal or external factor while implementing these regulations. This is the very basic criteria that need to be set out for economic, as well as social regulation. (Christensen, 2010) The theory makes an assumption that bureaucracy is unbiased and would make only those decisions that are beneficial for the society as a whole. But one question that arises here is the credibility of these agencies and the credibility of the regulations that are imposed because there is no way to match the expectations of public and the results obtained by the regulatory agencies. (Croley, 2008)
The public interest theory is also considered as a mode of developing new ideas and measures so that social welfare can be obtained by better economic and accounting practices and regulations in case of adverse market situations. (Hantke-Domas, 2003) This is one of the most interesting factors of the theory because not only is government thinking of the mass benefit but is also securing people against unforeseen adversities and problems.
Despite of all these elements of the theory that has made it so popular, academicians are still shown to believe that the theory actually doesn’t hold true. There is actually no source that defines the initiation of the theory or any such regulations. And hence, there are people who feel that the theory doesn’t exist at all. Not only that, some people also believe it to be misinterpreted because of the lack of enough experimental evidence to prove the worth of the theory. (Jones, 1988)
Economic Interest Group Theory
The theory is another modified version of the previous theories that defined the economic regulation in different countries. After the non-acceptance of the public interest theory, academicians came up with the theory of economic interest group, which basically says that the government leads to the distribution of power and regulations among different set of individuals or groups. (Owens, 1998) This leads to the imposition of higher costs on one industry or group while the other one gets more power. The origin of the British Factory Acts led to the imposition of certain restrictions on the working of women and children, thus leading to a betterment of the steam-mill workers. This is a practical example, which demonstrates the functioning of the theory and what it implies. (Marvel, 1979)
Another important aspect that has come out from the theory is the fact that all the regulators are usually looking for maximizing the utility of the regulations and thus the final output that is obtained because of any particular regulation ultimately gets affected by the different interest groups in the question. (Kuan, 2011) Usually the guild of chartered accountants in different countries are shown to fight for higher independence for the auditors or for giving them more privileges, thus trying to maximize the utility for the interest group.
One thing that highly affects the performance of the interest groups in the discussed economic regulation theory is the fact that the groups that are not organized well in their approach. If the groups have access to different resources but adopts a completely unorganized approach towards it, they cannot extract maximum benefit out of the same. And hence this leads to wastage of resources, which otherwise could have used for benefitting the public on a whole. Thus, the interest groups need to optimize and plan their strategy for effective results. (Baldwin, 1999)
The interest group theory also leads to a trade-off between the interests of two parties. When one interest group dominates the regulations and extracts beneficial outputs from the same, there is always another group that adversely gets affected by the same. For example, if we take the given case of the implementation of the IAS 40 standard in Hong Kong, we see that the implementation may enhance the interest and benefit of the public as a whole but would instead lead to an adverse impact on the property developers. Such a trade-off is very common and thus interest group theory focuses on the advantages obtained only by the groups in focus. (Kuan, 2011)
The interest group theory also leads to the generation of competition among different groups and different sets of people. The interest group becomes niche under the given conditions and thus a competition gets started between that particular group and related groups. These groups always keep competing among themselves for better resource allocation and higher maintenance. This is a key feature of the theory, as it leads to the regulation of a particular industry or group at one point of time and simultaneously creates healthy competition. (McFarland, 2010)
Thus, we see that the public interest theory and the interest group theory both are relevant in the real world scenario and both are seen under different conditions and circumstances. These theories operate and work under different set of conditions and lead to different implications. It is very difficult and almost impossible to measure the exact implications of these theories and to analyze if they are actually valid or not. More experiments and analyses are hence required to prove the criticisms, assumptions and outcomes related to both these theories. Academicians have studied the validity and existence of these theories in different countries across different sectors, including oil, accountancy etc.
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Current HKSA Position and Theory of Regulation
The given case demonstrates that the Hong Kong Society of Accountants (HKSA) wants to adopt the controversial international accounting standard, IAS 40 but the decision has been receiving opposition from the property developers in the past. The standard asks the property fluctuations to be a part of the profit and loss account, something that has been the part of the balance sheet till now. The personnel from HKSA are keen on the implementation of the standard because it will lead to better market transparency and also would lead the accounting standards to be at par with international standards.
In the given scenario, the interest group theory suits the situation of HKSA. With the implementation of the new standard, HKSA will have no direct benefit but the betterment of the market transparency and the overall accounting sector. The interest group theory states that the government or agencies make regulation that would work in the favor of the interest groups. And in this scenario, HKSA wants to implement the standard even if the property developers are opposing the idea. This shows that the society wants to do it as a technique to benefit its own purposes and needs.
It is clearly mentioned that a property development company that was listed in London faced severe losses because of the implementation of the new accounting standard. Such fear has also been there in the minds of property developers because booking such big losses would adversely affect their reputation, as well as their business. They are not gaining anything out of it and hence the decision cannot be for the interest or benefit of the public on a whole. Not only will the property developers will have to book losses but at the same time, but even the banks trading in derivatives would be required to change their strategies according to the market rates. This would lead to negative impacts on the bottom lines of these banks and even on the people buying and selling derivatives from these banks. Thus, the public is no where getting any benefit out of the standard.
But at the same time, accountants want the new standard IAS 40 because it will increase market transparency. This will make the work of the accountants easier, as they will be able to effectively assess the international accounting reports and compare the same to the local ones. The local accounting regime and routine would move towards a better and more globalized approach, thus benefitting them in different ways like better assessment and comparative facilities and better book-keeping. Cross-border listings would also become easier with the adoption of the standard and thus this shows that the HKAS is following the interest group regulation theory, wherein the group of accountants is getting benefitted from the regulations.
Some people can argue and say that the property developers may not oppose the idea because of market fluctuations and volatility but that is because they are concerned about their own benefit and not because the regulating agency, which is HKAS in this case is making a decision based on them. Thus, the community or the interest group of the accountants would make decisions that suit them.
Past HKSA Position and Theory of Regulation
HKSA had proposed the adoption of the standard, IAS 40 couple of years back also but the idea was not appreciated by the property developers and other people from the society and hence the idea was scrapped. The property developers were scared of booking higher losses and thus the society had finally agreed upon not adopting the standard. This scenario depicts the adoption of the public interest theory by the group. The interest group here in question is HKSA and despite of its ease and benefits of adopting the theory, the society dropped the idea of implementation.
The theory or standard has been in controversy since its invention and not only in Hong Kong but other countries are also shown to be having a problem with the same. This shows that the public in either of the countries is not happy with the standard and the implications it would have. Thus, when the society rejected the idea because of opposition from public, it was done for the benefit of the public and hence it can be said that the society adopted the public interest theory.
Accounting Regulation and Political Process
Accounting regulations have been changing over time for the enhancement and betterment of the current book-keeping services. There are numerous factors that affect the changes in the accounting regulations and their implementation. It is also said that accounting regulation is the output of a political process. I completely agree with the statement because the political processes assess the implications of the regulations and determine if it’s in the favor of their goals and utility maximization. There are several different accounting standard and practices but the ones used by a country or economy is usually governed by different political processes. (Albrecht, 2010)
The adoption of the standard in this case would have positive, as well as negative impact on the property developers because on one hand they might have to book higher losses but at the same time on the other hand, they would have better market transparency and would be able to invest more in the international markets. The adoption or non-adoption of the standard by the society would not only affect the property developers but would affect any person who makes use of the financial statements of Hong Kong and other countries for either investment or any other purposes.
Here we discuss the basic theories that govern the development and implementation of regulations in different countries under different economic conditions. Two main theories that define the economy of regulation include the public interest theory and the interest group theory. Both the theories present contrasting views and opinions on economic and accounting regulations and it is important that the correct application and implication of the appropriate theory is determined at the right time.
We discuss the case of the dilemma and opposition surrounding the adoption of IAS 40 standard by the HKAS to illustrate how the application of different theories leads to different outcomes and different regulatory decisions at times. It is important for the economists, as well as the accountants to be well versed with these theories and their functioning so that overall outcomes become as they desire. The possible impacts of the adoption and non-adoption of the standard on property developers and other stakeholders are also assessed and analyzed.
- Croley, S.P. (2008), Regulation and Public Interests, Working paper, Princeton: Princeton University Press
- Jones, D. (1998), Regulatory Concepts, Propositions and Doctrines: Casualties and Survivors, Journal of Economic Issues, vol. 22(4), pp.108-190
- Marvel, H.P. 1977. "Factory Regulation: A Reinterpretation of Early English Experience." Journal of Law and Economics 20 (October): 379-402
- Baldwin, R., & Martin, C. (1999), Understanding Regulation- Theory, Strategy and Practice
- Posner, R.A. (1974), Theories of Economic Regulation, The Bell Journal of Economics and Management Science, vol. 5, no.2, pp. 335-358
- Stigler, G.J. (1971), The Theory of Economic Regulation, The Bell Journal of Economics and Management Science, vol.2, no.1, pp.3-21
- Peltzman, S. (1976), Toward a More General Theory of Regulation, Journal of Law and Economics vol. 19, pp. 211-40.
- Becker, G.S. (1983), A Theory of Competition Among Pressure Groups for Political Influence, Quarterly Journal of Economics, issue 98, pp. 371-400
- Christensen, J.G.(2010), Public Interest Regulation Reconsidered, Paper presented at “Regulation at the Age of Crisis”, ECPR Regulatory Governance Standing Group, 3rd Biennial Conference, University College, Dublin
- Hantke-Domas, M. (2003), The Public Interest Theory of Regulation: Non-Existence or Misinterpretation?, European Journal of Law and Economics, vol.15(2), pp. 165-194
- Owens, A.J. (1998), The Interest-Group Theory of Government [online] available at http://www.thelockeinstitute.org/journals/luminary_v1_n1_p4.html, last accessed on 04/13/13