Regulatory and Legislative Contexts Chapter 1

Financial Information Analysis2 Copyright 2006 John Wiley & Sons Ltd Background Importance of accounting information Large range of users Key role in modern society Fraud Impact of Enron, WorldCom etc Trust in accounting information eroded How/whether accounting information should be regulated

Financial Information Analysis3 Copyright 2006 John Wiley & Sons Ltd Regulatory Framework Important to regulate accounting information: ‘power’ and influence of accounting information ‘Laissez-faire’ v ‘Regulated’ government v commercial interests conflicting needs of different users competing political interests Preparation & dissemination controlled by: government professional bodies regulatory agencies, stock exchanges, etc.

Financial Information Analysis4 Copyright 2006 John Wiley & Sons Ltd Regulatory Framework - US ‘Anglo-American’ model heavily regulated influence of accounting profession US system emerged during 20th century government role via Congress and Securities and Exchange Commission (SEC) SEC delegates to private sector Financial Accounting Standards Board (FASB) Recent frauds => Sarbanes Oxley Act (SOX) Key legislative intervention Imposes information/cost burdens on business

Financial Information Analysis5 Copyright 2006 John Wiley & Sons Ltd Regulatory Framework - UK Anglo-American model Reflects US structure/ethos 1970’s: Accounting Standards Committee representatives of main accounting bodies formulated best practice Statements of Standard Accounting Practice (SSAPs) By late 1980’s pressure for change

Financial Information Analysis6 Copyright 2006 John Wiley & Sons Ltd Accounting Standards Board Scandals prompted calls for new regime Dearing Report (1988) new regulatory structure need for conceptual framework Accounting Standards Board (ASB) subject to Financial Reporting Council (FRC) more broadly-based membership Urgent Issues Task Force (UITF) Financial Reporting Review Panel (FRRP) ‘Principles-based’ rather than reactive David Tweedie

Financial Information Analysis7 Copyright 2006 John Wiley & Sons Ltd International Accounting Standards Committee/Board International trade and dominance of large multinationals (MNEs) Calls for international accounting standards 1973: IASC formed 100+ national and representative bodies Issued International Accounting Standards (IAS) Now called IASB Issues International Financial Reporting Standards (IFRS) Most IAS continue to apply

Financial Information Analysis8 Copyright 2006 John Wiley & Sons Ltd IASB (continued) Political entity: various competing interests cultural conflict (e.g., US v EU) developed v. developing world harmonisation v. standardisation IOSCO endorsement New structures agreed to reassure US Tensions around: roles of IASB and national bodies (e.g. ASB) success of IAS (particularly vis-à-vis FASB)

Financial Information Analysis9 Copyright 2006 John Wiley & Sons Ltd Legislative Framework - UK Company accounts regulated by statute CA 81 incorporated EU 4th Directive CA 85: companies to prepare accounts ‘in accordance with accounting standards’ Trends: greater disclosure Importance of supplementary narrative statutory recognition of accounting standards impact of ASB/IASB

Financial Information Analysis10 Copyright 2006 John Wiley & Sons Ltd Nature of Companies Common form of business entity Created by registration Memorandum of Association Articles of Association Legal entity separate from owners Various types: limited/unlimited public/private

Financial Information Analysis11 Copyright 2006 John Wiley & Sons Ltd Stock Exchange requirements Only 2,500 + plcs actually listed on SE UK Listing Authority (UKLA) Complex listing rules (‘Purple Book’) Requires that Prospectus be issued SE has extensive disclosure requirements Continuing obligations: circulars, etc must receive prior approval details of many activities must be provided to SE Alternative Investment Market (AIM)

Financial Information Analysis12 Copyright 2006 John Wiley & Sons Ltd Summary Accounting information a critical arbiter of wealth Role of: government regulatory bodies profession business stock exchange Political nature of accounting practice and regulation means all competing to influence