Financial Statements and Profits Essay

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TUTORIAL 2 - Semester 2 2013

Deegan Topics 2 and 3:

The financial reporting environment and Regulation of financial accounting

2.1 What expectations do accounting standard-setters have about the accounting knowledge of financial statement readers?

Accounting standard-setters have an expectation that the readers of general purpose financial reports have a ‘reasonable knowledge’ of accounting. Specifically, the IASB Framework states that ‘users are expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence’. Hence, there is an expectation that financial statements are not tailored to meet the needs of people
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There are differences in opinion about the efficiency of markets, such as the capital market.

A further point that could be raised in relation to this question is that accounting ‘profits’ are not a comprehensive measure of organisational performance, given that accounting profits typically disregard many of the social and environmental implications of a reporting entity.

2.7 Pursuant to capture theory, how, by whom and why would a regulator be captured?

Pursuant to capture theory, while regulation might initially be introduced in the public interest, the regulatory mechanisms are often subsequently captured by those groups that are subject to the regulation. The regulated parties seek to capture the regulatory process so that they can then act to ensure that any subsequent regulations to not disadvantage them. This chapter referred to the work of Walker (1987) who provided evidence that the Australian accounting profession was able to capture the government controlled accounting standard-setter (at the time, the standard-setter was known as the Accounting Standards Review Board). Across various industries there has been historical evidence of related regulatory bodies being captured by
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