Recapitulación: h.Mag 1, visión en conjunto.

Part of the problem in evaluatin g the success of regulation in meeting stated objectives is attempting to determine the original purpose for the promulgation of these rules. Different underlying motives for regulation are, therefore, examined in the following section and linked with the fInancial accounting paradigms discussed in Chapter Three.

4.4.1 Theories of regulation

Regulation theories are based mainly on public and private interest arguments. Public interest theories perceive regulation as a method of improving societal welfare. In contrast, private interest theories are oriented toward the wealth maximisation of cenain individual interest groups (Mitnick, 1 980, p. l l l ). Public interest theories are normative (i.e. what should be), whereas private interest theories strive to describe and explain (i.e. a more positive perspective).

Under public interest theories the purpose of regulation is expressed in the need for public protection or interest (peirson & Ramsay, 1983, p.293). Regulation is seen as correcting market imperfections such as monopoly situations. These theories "assumed that regulation is established largely in response to public-interest related objectives" (Mitnick, 1 980, .p.9 1 ) . There are two main versions, the original theory and a reformul ation (Posner, 1 974, pp.336-337). The original version of public interest "holds that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices" (Posner, 1 974, p.335).

Posner ( 1 974, p . 3 3 7 ) describes the reformulated version as the perception that regulatory agenc ies are created for bona fide reasons but are then mismanaged . Mitnick ( 1 980, p .94) distinguishes three possible explanations for deviations from public interest effects. The first view is that the regulators are or become venal (evil). The second is that the regulators are or become incompetent. The final sentiment is that regulation becomes captured by the regulated interest groups.

The accountability paradigm ' s social welfare focus, as discussed in Chapter Three, would seem to encompass both the original and reformulated versions of public interest theories. The original perspec tive could be viewed as the successful

. application· of regulation whilst the reformulated the failure of

Members of the governing elites within accounting frequently publ icise the commitment of the pro fe ssion towards the develop me nt of accounting rules (regulation) in the public interest (Buckley, 1 980, p.58) and Mitnick (1980) observes that " .. . p ublic interest rhetoric i nvariably accompanies legislative and j udicial decision-making in the regulatory area" (p.275). Numerous scholars are cynical about the idea of pure public interest theories. They feel that private interest theories offer a better explanatory5 tool for regulation.

Under private interest theories regulation is recognised as a mechanism designed to confer benefits on politically effective groups (Peirson & Ramsay, 1983, p.293). Regu lation is viewed as the product of coalitions between regulated industry and related interest groups, the former obtaining some monopoly profits from regulation, the latter obtaining higher prices. All these parties gain at the expense of unorganised groups such as the consumers and the public at large (Posner, 1 974, p.35 1 ). For instance, Bailey ( 1 976, p.82) argues that politicians will institute regulation in times of crisis to appear active and effective (see also Downs ( 1957, p. 1 37» .

These private interest theories h ave been applied to accountants. Buckley ( 1 980, p.60) feels the accounting profession employs a rule-making apparatus to enhance the price of its products through the process of restricting entry, restraining supply therein increasing the price charged. There are several versions of private interest theories to explain regulation, each of which focuses on one major group in society (see Table 4.2).

TABLE 4.2 THEORIES OF REGULATION

TWO MAIN CONFLICTING THEORIES Public interest theories Private interest theories

Original version Reformulation

Consumer protection Industry protection

Marxist/muckraker view Political scientist view Economic theory of regulation

5. It is noted that the private interest school of regulation also has its nonnative basis. For instance, agency theorists perceive regulation from a contractual viewpoint (Jensen & Meckling ( 1 976), Watts & Zimmerman ( 1 97 8 , 1 98 6, 1 990). This perspective stems from nea-classical economics which has its own nec-conservative biases (see Tinker et al. ( 1 982, p. 17 2; Tower & Kelly ( 1 989, p. 1 4

»

Within private interest theories three main viewpoints are offered to explain the regulation phenomenon: consumer protection, industry protection and the economic theory of regulation (fable 4.2) . The consumer protection theory is the traditional view of regulatory origin wherein rulesllaws are begun at the behest of adversely affected groups to correct abuses (Mitnick, 1980, p. 176). Under this viewpoint, consumers are seen as the recipient of protection from either a product or an activity. This protection could take various forms such as quality controls or maximum price restrictions which could conceivably result in lower industry profits. The decision usefulness paradigm of financial accounting objectives (discussed in Section 3.3.2) would seem to be especially applicable to this theory. Useful information is seen to be provided to control price and quality decisions for the consumer's benefit.

Under industry protection theories it is reasoned that regulation is not necessarily bad for a profession. This perception claims that the true purpose of regulation is to provide producer (i.e. preparer) protection. For instance, S tigler ( 197 1, p.5) views price protection and barriers to entry as two important advantages that the regulated industry may garner from regulation. Under this viewpoint, the regulatory agency is seen to be captured, therein controlling policy and enforcement matters. Some industries rather than discouraging regulation may actively seek such restrictions, feeling that life within a regulatory industry reduces competition and inhibits supply, thereby increasing the price one can charge.

Posner (1974, p.34 1 ) distinguishes two types of capture theories; the Marxist/muckrakers view and the political scientist perspective. The

Marxists/muckrakers version states that one of the tools that capitalists use to control the wealth in society is regulation. Various individuals within the critical thought financial accounting paradigm might agree with this viewpoint. For example, Merino

& Neimark ( 1982) describes the promUlgation of the Securities Acts in America in the following manner, "sociohistorical analysis suggests the securities acts were designed to maintain the ideological, social, and economic status quo ... " (p.49). Many of these (critical thought) scholars argue that regulation maintains the existing positions in society which effectively freezes out certain less powerful groups such as employees, consumers and the local community (see for example Tinker ( 1 985)).

The political scientist viewpoint states that over time regulatory agencies are dominated by the industries regulated. This theory predicts a regular sequence, in which the original purposes of a regulatory program are later thwarted through the

efforts of the interest group. For instance, Walker ( 1987, p.282) vehemently argued that the Australian standard setting body was captured by the accounting profession.6 The decision usefulness financial accounting paradigm could be seen to apply to this narrow producer class in that useful information is employed as part of this capture process.

The economic theory of regulation as expounded by S tigler (197 1 ) disregards the assumption of pristine legislation promoted for the public interest. The theory admits the possibility of capture by interest groups other than the regulated firms and replaces the capture metaphor by the more neutral terminology of supply and demand (Rahman, 1988, p.9S). S tigler ( 1 97 1 , p.3) agrees with the political scientists that economic regulation served the private interests of politically effective groups. The economic theory of regulation is committed to the assumptions of general economic theory, notably that people seek to advance their self-interest and do so rationally (Mitnick, 1 980, p.343). This theory utilises the views of the information economic fmancial accounting paradigm. Regulation is viewed as a product whose allocation is governed by laws of supply and demand (posner, 1974, p.344).

Is accounting regulation then a system to diminish market imperfections or is it a tool for the profession to maximise returns? The answer is probably a mixture of the two, as Davis & Menon ( 1 987) state, "It seems reasonable to presume ... that both public and private interest conside�tions are present in any decision to institute regulation. The issue would seem to be one of relative proportion" (p. 1 9 1 ). Properly designed regulation, taking into account different interest groups' motives, is considered an important instrument for public accountability.

4.4.2 Linkages between regulation theories and financial accounting paradigms

A constructive overview can be observed when public and private regulation theories are compared with financial accounting paradigms (see Table 4.3). Whilst the financial accounting paradigm classification scheme may not unfailingly link with regulation theories, it does appear to offer useful insights.

Table 4.3 categorises the accountability paradigm as encompassing public interest theories because regulation is perceived holistically as a way to protect and improve societal welfare. In contrast, the other three financial accounting paradigms appear to incorporate different parts of private interest theories of regulation.

TABLE 4.3 L IN K A G E S O F R E G UL A T I O N T H E O R I E S W I T H FINANCIAL ACCOUNTING PARADIGMS

Financial PUBLIC INTEREST: Original version Refozmulation PRIVATE INTEREST: Consumer protection Industry protection Marxist/muckraker view Political scientist view Economic theory of regulation

Accountability Accountability Decision Usefulness Critical Thought Decision Usefulness Information Economics

The deemed required l evel of regulation amongst these financial accounting paradigms appears varied. The quest for accountability, amongst all the paradigms disc ussed, neces sitates the most signi ficant role for regulation. U nder the accountability perspective, it is thought that extensive, authoritative accounting standards will provide a higher quality and quantity of corporate infozmation both fmancial and non-fmancial in nature.

4.5 C H O I C E O F P UB L I C A C C O UNTA B ILITY AND P U B L I C