Access the following document: ASIC (10-132AD): ?ASIC strengthens disclosure requirements for debentures and unsecured notes? ? available at http://www.asic.gov.au/ASIC/asic.nsf/byHeadline/10-132AD%20ASIC%20strengthens%20disclosure%20requirements%20for%20debentures%20and%20unsecured%20notes?opendocument . Required: Should ASIC need to provide this level of regulation regarding disclosure requirements for debentures and unsecured notes? Isn?t it the responsibility of investors to obtain the information they need to make financial decisions?

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Book Portion Book Title : F inancial accounting t h e o r y Book Author : D eegan, Cralg Edition : 3 rd Portion Title : Chapter 3 : T he Regulation of F inancial Accounting Portion Author : D eegan, Craig Publisher : M cGraw Hili Place O f Publication : N orth Ryde NSW Year : 2 009 Page From : 56 Page To ; 103 I sbn Or I ssn : 978007027726 7 This article was originally digitised for t h e following unit. Articles m a y b e reused i n f u t u r e semesters i n o t h e r units by d ifferent lecturers. Unit code : AYB2OO U nit title : F inancial Accounting Lecturer's Name : I rvine, Helen Faculty/School : A ccountancy Request I D : 3 45840 DIGITAL COPY MADE FOR QUEENSLAND UNIVERSITY OF TECHNOLOGY under part VB of the CopyrightAct 1 9 6 8 reliance on: S.135ZMB (insubstantial portlons o f a w ork), OR S.135ZMC (article contained i n a periodical), OR S .135ZMD (literary, dramatic, musical and artistic works), OR S.135ZME (certain illustrations i n electronic Form) on 12/MAR/12 I On completing this chapter readers should: understand some of the various theoretical arguments that have been proposed in favour of reducing the extent of regulation of financial accounting; understand some of the various theoretical arguments for regulating the practice of financial accounting; a nd various theoretical perspectives that describe who are gain the greatest advantage from the implementation of nd that accounting standard-setting i a very political process s which seeks the views of a broad cross-section of financial statement users; he accounting standard-settin understand the relevance of potential econo regulations I 56 4 FINANCIAL ACCOUNTING THEORY companies there were numerous calls for a reduction in accounting regulations (these calls used such terminology as 'accounting standard overload'). But i f financial accounting had been deregulated, what could some of the implications have been? 2. If financial accounting were to be deregulated, what incentives or mechanisms might operate to cause an organisation to produce publicly available financial statements? Would these mechanisms operate to ensure that an optimal amount of reliable information was produced? What is the 'optimal' amount o f information? CHAPTER 3: THE REGULATION OF FINANCIAL ACCOUNTING * 57 Chapter 2 l iridly considered ti n uinber of tlieories to explain the existeiicc of accounting regulation. This chapter extends that cliscussion. While fiiianciwl accouiiting i s quite heavily regiilated i n mnny coinitries, with the level of regulation gcnerally iricreasiiig in the ;~fteririath f o t he high-profile ~ccc)iiii ftiilures at Enron, Worldcoln, H IlI Insurance, l'm-inalat and other tiiig comprinies, it is nevei-Llielcss intercsting to consider arguinrnts for a iicl against the continiied existence of, a i d ge1wni1 growth i n, rcgrdaiiioii. It is ulso usefid t o look a t various theories that pxlilaiii wliat drives lie inipositicui ol' i ~giiiation. y consiclcring sucli theories we will be hettcr B placecl t o imtlc~rst~uid. soiiie ol't lic acvoniitilig presorip tions bccorne for~iial egulatioiis while why r o t h c x i do i mt. Pcrliaps soine p i ~ ) ~ ) oticcoi iiiting rcgultitioiis did not liave the suplmrt ol'parties s~d tlitit Iiavc. inlliieiice (or po\\.vc'r) o vc~rthc regirlatoiy proccw. A t issue here is whether issues of 'power'ould o r shoidtl lie dIoww1 L ilnpacl o n lie iinp1e\"i\"iitntjon of regulations, inclueling c o accounting rrgolalioiis. Is i t walistic t o oxpect t hat tlic intcrests of various til'l'ected parties will 1 1 0 ~ inpacl 0 11 l hc. L i ind ~.c*giil:itioas? c will s ee thit ZIW accoiinting staiirlt~rcl-scttiizg W process is ii j w y poliiical 1 ) r o ~ ~ sliilc s o i ~ i c roposcvl rcquireineii t s might a ppeu technically sound ancl W. p logical, ~ 7 c will s c v t1i;tl t his i s not sul'l'icient For ~.JiernO be inandatccl. Mrliat often seems to be ' L I' various p arts ri1' constituency, tvlio niiglit JP u l l i . c ~ l ilher socially or o CWI i o i i i iciil ly 1iy t 1 c ~ * r I 1~ i i~ i csi uUI'C in f'avoiir oT the$ in. 1 ~g , r n cmsiiiciing accoim Ling ~ rgiilalions, the c1xrpter examines arguments for rethicing or clirninatiiig regiilation, many of wliich propose that accountiiig iiif'orinaiioii sliould be treated like m y other good mcl that Forces of c h t ~cmd nd szqyhy should be d lowed to cleterininc tlie a optiinal ainauiit of informiition to be prodi~ced. ropoiieiits of this 'he-market' approach (that is, P proponents oftlie view tliat the provision of accouiiting inforlation shoulcl be basecl on t he laws of supply and clernancl rather tlian o n regulation) have at tiines relied on the work o f the eighteentliceiituiy ecoiioinist Aclain S mith, aiid his mnch cited iiotioii of t he 'invisible hand'. However, Smitli actually proposed the nced Tor some regulation t o support t he interests o f those inclivicluals \\.vho would otlieiivise be disadvmtaged b y tlie hmctioning of unregulated market systcins. The chapter also caiisiders a n umber of perspectives tliat e'xplain why regulation iniglit bc necessaiy. Tilc! public intwmt tlieory qf t-egrilolion is reviewed, Public interest theoiy provides an explanation of why regulation i s iiccessaiy to protect the rights of't he pubIic, whereas t here are other tlieoiies (for example, c r q ~ t u r e / z e r q iicl economic intet-esl !laeo,y o rqpkztion) that ~ a f provide explanations of why regulations iniglit be put in place tliat actudly serve t he interests of some groups at ( he expense of otliel-s ( rather t h n s ewing the 'public interest'). The chapter looks at liow perceptions aboiit t he economic and social consequences oC potential accounting requirements a fkct. the decisions of staiicldard-setters. It nlso discusses whether, i n the light of regulators considering economic aucl social consequences, h ancial accounting sliould ever be tlicb 58 FINANCIAL ACCOUNTING THEORY T HE ' FREE-MARKET' P ERSPECTIVE As indicalcd i 11 ( ;I i i i p ~ c ~ ;i li i iirlniii c ~ itiit1 iissiii i i p tic )iI I I I 1 d d y i ii g ia ' Cree-ii i tirkct' l x q x wlivc 2, O I I ilccotiiitiI1g regiilaitioii is t hat accountiiig iiiforiiiiitioii s lioiild b e ~ ~ a a t e like otlicr goods, cl aiid (I(wiaiic1aiid s upply forces s hoiiltl be iilIowcd t o I'rcely o prrate s o ;is t o gcnurate an optimal s upply ol'inLbrinaticiii ;ibout it11 mtity. A oumbc-r of ~arguiiieiitsI iavc~ een ~ isedn s iipprt o fthis h i perspective. One such al-guinent, b ased oii t he work of a ulhors such as Jenseii and Mecltling (lC376), Watts aiid Ziiiimcnnan ( 1 $I%), S iiiitli ; t n d W mier ( 1 0 78) aiid Sniitli ancl Watts (1OX2), is that, even i n tlw d isciice of regiilutiori, there are privnte ecoriornics-bascd incentives f or the organisation t o provitle credible inforiiiatioii al)out its q m x t i o n s d perforniimce t o ccrlain parties o utsick the orgaiiisatic-m,otliei-wise tlie costs o f the organisation's operations would rise. Thc, hasis o f this vicw is t h t , in the a helice o f informution ahout the organisalicln's operations, o ther parties, including the o\\vtiei-s u f tlic firm (sharelioIdei-s) who tirc n ot involved in the iii;miageiiicii t of' the organisation, w ill iissuiiit' tliat the iriaiiagers iniglit be opmitiiig the business [or h i r o\\vn hciiefit.2 That is, ralher tlxan operating with thc tliin of'maximising the v alue O C the organisation, the i nmugers mill lie a ssumed t o bck operating hi- heir own personal gain (there t 1 While our definition of r eporting refers t o a n independent authoritative body, capture theory (to be discussed shortly) would question whether, in t he longer run. regulators will be able to maintain their independence from those individuals o r groups that are subject t o t he regulations 2 The c osts that arise from the perspective of the owner when the owner (or principal) appoints a manager (the agent) include those associated with lhe agent shbrking (being idle) or consumlng excessive perquisites (using the organisation's funds for the manager's private purposes) These are called agency costs Agency c osts c an be defined as c osts t hat arise a s a r esult of the delegation of decision inaking from one party, for example the owner, to another party, for example the manager (representing an agency relationship) Agency costs are more fully considered in C hapter 7, which discusses agency theory Another agency cost that inight arise when decision making I S delegated to t he agent is the cost associated with the manager using information that is not available to the owners for the manager's personal gain Smith and Watts (1982) provide an overview o f t he various conflicts of interest that arise between managers and owners CHAPTER 3: THE REGULATION OF FINANCIAL ACCOUNTING 59 3 What should be appreciated at this point is t hat t hese arguments are based o n a central assumption that individuals will act in their own self interest, which, in itself, is a cornerstone of m any economic theories. If an individual acts with the intention of i naximising personal wealth, this is typically referred to as being 'economically rational' Economic rationality' is a theoretical assumption and, a s might be expected, it behaviour. 15 challenged by advocates of alternative views about what drives or motivates human 4 I n considering the relationship between managers and lenders, actions that would be detrimental to the interests of lenders include managers paying excessive dividends, taking on a dditional and possibly excessive levels of debt, and using the advanced funds for risky ventures. thereby reducrng the probability of repayment Smith and Warner (1979) provide an overview of some of the conflicts of interest that arise between managers and lenders 5 This is based on the assumption that the value of an organisation is the present value of its expected future net cash flows A higher cost o f capital will result in a decreased net present value of f uture cash flows 60 FINANCIAL ACCOUNTING THEORY W a s hould b c obvious froin tliis bricf discussion ht i s that siicli c ontractad ~irrangemeiits are ticcl to ~iccountiiig i u i i i l x ~ s for exaniplc. paying t he ~ r~ariagerb onus b ascd i ( percentage of in the at)sence of' rcgulation tliere will he private iriccntives t o procliice accouiitiiig information. T llat is, ~ ~ r ~ q m n c of' i his view ( based oii agency tlieoi-y, wliicli is i norc I'tilly iliscussed iii Cliapter 7) ~ i tt s msert t hat there will ( natulally) be conflicts betwecii external owiiers and iiiternal mmagers, and the costs o t'thcw potciitial conllicts will be iriitigated throiigh tlie process o f private contr:ictiiig aiid w ociated I'inancial reportiiig." Organisations tli:it (lo i i u t protliicc i iihmatioii will 1x1 peiidisrtl by l iiglic~ costs ii x iiitctl witti attractiirg capt t J , ant1 tliis will dainagc t he fiumcial sliares i ii their o rqiuis;itioii. F i i r t l i w , tlcpc~ii(1ingo il die parties iiivolvccl i u i d t l i types o l'u ~ in placr., t l i e org;uiisatioii will be best plarcd t o tlctelniii~e w liitt i n limiiatioii slioultl be proditcecl t o iiicrcxsp 111c. coiil'itl(~iicc~ c sternal stalwlioltlers 01' ( therel iy tlecrewi iig 11I C organisnt ion's c(1st o I' ilityol' tlio c htii, a r i d h i s i ii t ian i s e spc~clerlo rediiccn t ~ l i c e r c c h d risk 01' the c.stenial s takclioltlcrs, tliiis liirLhoi*dwrcusiag tlio org:inis;itioii's cost p o f capital (I;i.~uicis \\/Vilson, 1988, W atts, 1977; Watts & Ziiiiriicriiian, 19833).That is, financial & s ~ e n w i i ,liiitlits caii a lso b r cxpckctccl to I ic iintlc.rtalieti, cveii i n the a bsence o f regulwtion, aiicl evirlencr. iiidic;itcs thLt imiiiy orgallisations clid have t h i r firi:uicial statements niulited prior t o aiiy legislative rcquirement to do s o ( Morris, 1984).' I-Icncc, if we accept these arguments, we caii ~ ~ r o p o shat, i n tlie presence oi: a limited te n umber of' coi1tr:icting parties, reducing regulation iniglit seem reasonable given the view t hat various iterns of finaiicial information (as iiegmtiatrd ljetweon the vai-ious p:ii-ties) will be provided. Further, such inforination will be expecteel to b e subject, where cleeined iieoessaiy by tlie coninictiiig parties, t o an audit by ;in inclepenclent third party. IIowcver, in the iireseiice of a inultitude of different parties this argument that private incentives will lead to optiinal a mounts of accounting inibrmatioii ( and a reduced need F or regulation) s eems t o lii-e21k down. A s Scott (2003, 12. 416) states: 0 1 il 1 p ) Hence tlie a rguinent b y some advocates of the 'free-m,irlcrt' perspective is thnl & U nfortunately, w hile d irect contracting f or i nformation production may be fine in principle, it w ill n ot a lways w ork i n p ractice . .. I n many cases there are simply too many parties 6 This is consistent with the usual notion o l 'stewardship' wherein management i s expected t o provide an account of how it has used the funds that have been provided 7 I t has a lso been argued that certain mandated disclosures will be costly t o the organisation if they enable competitors to t ake advantage of certain proprietary information. Hakansson (1977) u sed this argument to explain costs that would be imposed a s a result of mandating segmental disclosures 8 As Cooper and Keim (1983, p 199) indicate, t o be an effective strategy 'the auditor must be perceived to be truly independent arid the accounting methods employed and the statements' prescribed content must be sufficiently well.defined' Public perceptions of auditor independence have been damaged as a result of revelations such a s those in 2002 relating to the large auditing firm Arthur Andersen and its r ole i n both designing and auditing complex accounting transactions at Enron (Unerman & O'Dwyer, 2004), and this could have implications for the benefits a firm derives from having i ts finaiicial statements audited CHAPTER 3: THE REGULATION OF FINANCIAL ACCOUNTING 61 f or contracts t o be feasible. If the firm manager were t o attempt to negotiate a contract for information production with every potential investor, the negotiation costs alone would be p rohibitive. I n a ddition, to the extent that different investors want different information, the firm's cost o f i nformation production would also be p rohibitive. If, as an alternative, the manager attempted t o negotiate a single contract with all investors, these investors would have to agree on what information they wanted. Again, given the disparate information needs of different investors, this process would be extremely timeconsuming and costly, if indeed, it was possible a t all. Hence, the contracting approach only seems feasible when there are few parties involved. 62 FINANCIAL ACCOUNTING THEORY inarginal costs ancl rnargincd lieiiel'its of' i nloriiiatioii p roductiou will be tli1Ticult, aiid t o assiiine tliat tlic niajority ol' c o r p x t e maiiagers liavc tlie eq~ei-iise o cleteriiiine sucli costs anid benef'its t IS,agnin, soiimvhat unrealistic. There is d so a perspective t hat, even i n t he absence of regiilaiioii, organisations \\vould still l)e niotivatecl to disclose I d i good and liad ne\\vs about tlieir f111anci,dposition a nd perf'ormmce. Such a perspective is often rel'rrred to as t he 'inarket fbr lemons' pcrspectivc (Alcerlof', lc3SO), the view being that in the a lwiice of tlisr.losure the capitd market- w ill awuiiie t hat the organisation is ' I ~ m o l i'' 'Tli'it is, tlic kiiliire to provide inforiiiatioii is vicwcd i n the s miv light tis pi*ovicling ' h l iiili)nn,ition. I I c ~ i i w ,e v ~ i iliougli the f'iriii i iiay b c ~ orried al)out disclosing bad I INJS, tlie t w uiarltct i ii~iyi iialcr i iii i issessiii~iitt liat sileiice iinplics that the o rgaiiisatioii has v ciy I)nd I I C ~ to rliselosc. (oLlieiwisr. tliciy would disclose i l). T lis 'itiarlcct [or Ieiiioiis' pcwpccLivr provideu m I iiiccaiihw l or niaiiagers to relcwsc iiilbrmation in tlica ;il)scwccb of'rc~gr~ltttioii, f ailiiw t o (lo s o will s~s i nany h i s i n c of ~ l i u regtilatory i iitcd(~wiicc~ lic', w c w o ; iiitic.ip;iLcd I A t l a t i i S tiiitli, \\die warncat1 of' L lio neg;divci iinpacts t l i a l ctiultl I K ~c m s c d by y c~e~ciiioiiiir~;~llyv ~ ~ i f iilcwsts, p :~itic~ilarly lieii t hey arc' tiiirc>sll.aiiicxl i lur t o i ili al)seiic'cb ol' pi~ ii i l w a (L~clii;tl(.r ogi1Idioii 01' coiiipcBlilioii. Accoidiirg Lo SiriiLIi (LIS quolrcl in (hllisoii, 200:3): 01' iiiiiiiiiiiiiii ' T he clamour anci sophistry o f m erchants and manufacturers easily persuade . .. t hat the private interest of a part, and of a s ubordinate part of t he society is the general interest of t he whole (Smith, 1776/1880, B k I , Ch. X, P t II, p. 101). IT] otlicr cvords, a s f ar back as 1776 Adam Smith wrote that it is predictnbk lhat h isiness innnagcrs \\vi11 argue that cvliat is i n t he interests of the business organisations will uctually be i n (lie interests of the society as a whole--an q p I n e n t that is still heard today, m ore than 230 years l ater. That is, it is in the interests of managcrs to a i p e t hat if business prospers then society will also prcispei-. Tliis perspective is consistcnt with the econoinic i nterest theory of regul'ttion, which is discussed laicr in Lhe chapter. I n rclation to how business will oppose the iieed for regulation 011 thc basis of the argument Lliat- 'what 1wneAts business d l :ilso benelil society', bvc c ai~consider a recent Aiistfidiiui govt:rii meiit iiiqiiiiy into corporate social responsibility a nd associatecl reporting. In 2005 the Ferleral goveinirient estalilished through i t s Parliainentai-y Joint Coinrnittee on Coqiorations a nd Fiiiancial Services (PJCCFS) (under the auspices of t he Austrdiart Secrwitics ( I / ~ v e ~ t / ~ ~ c / l f s d C o~iui~ission 21101) w Inquiry into Cn?yorciteR espotzsibihy . Public submissions were invited, Ad 13 Other authors (such as Carey, 1997) have argued that many larger businesses were able t o influence academics (through the provision of funding) to support particular views The results of t he academic research studies, which often supported the views held by the groups that provided t he research funding, were then provided t o government t o substantiate or support particular positions 14 C ollison also argues t hat the works of other well.respected economists have been rntsrepresented by vested interests For example. the works of Berle a nd M eans (1937) h ave ' become identified with conflicts of interesl between owners and controllers of w ealth when they uxplicitly argued that both should be subservient to wider interests . They cornmended public policy rather than self i nterest a s the proper mechanism for allocating corporate income streams As w ith Adam Smith, their flames have arguably becoine misleaclingly tinked with a particular agenda' 68 * FINANCIAL ACCOUNTING THEORY with submissions being received tip to early 2006. T he purpose of t he iiiquiiy was to consider t he merit of iiitrod~iciiig rcater regulatoiy recpireinents in relation to coil3orate social responsibility g aiicl associated reporting (ai1 issue that is mvestigatetl in Cliaptcr 9). IIregiii and Shclly (2007) untleitook an aiialysis of t lir submissions t hat were inade to the inquiiy. I n smnmaiy, tlie arii~lysis inclicated that I)iisincss corporations ant1 related assooiutioris ovei~vlicliriiiiglyf:,tvvoured iiii antiregulation ('free i ~ i a r l ~ tqy~roacli liereby corporations would bc left to volnntai-ily dc+ertiline ') w their social responsi1)ilitirs and t he associated accouiita~,ilit~es,he view being 1li:it iiiarkets will t ultimately pcwdis(A rgiinisatioiis with poor social and cnviroriiiientul r c~coi~ds. h t is, the business o (T orgaiiisations iirgiiecl tliat i f l ~eol-~le tlir niarliclito r incquitablc inarltet practices' Tliat is, regulation is initially put in pbce t o I)enefit wciety a s il \\ \\ 7 1 1 0 l ~ ~ , r:dicr t l i u pai-ticular vested intcrests, and tlie regulatory I ~otlys coiisirl(~ret1o be a neutral arl)iter th'it i t rcprcseiits iIie interests ol' t he socicaty iii wliicli i t opci-ntcs, r athri. t h t the privute iiitcwsts ol' tlie regnlators."' The en;ictiiiriit of Irgislnlion is coiisitlci~c~tl 1)alariciilgucl I ) c ~ t nb ~wcial ;I ~l h~ benefits ;uicl the s ocid c osk o l 11ic r(~giiliitioii. pIilyiiig this ;irgiuiie~itto i'iiiaiieid nccouiltiiig, A iiiic1 acrcptiiig the esistc~nce f i i capitalist ecoiioiiiy, socicaty n rcitls conlitlcr icr t llnt capital ~ i~arlcc~ts o Regiilatioii I S t l e c . i i i c ~ 1t o I )(> ; in to prorliie~ivt~ i isw e ffi cielitly direct ( or allocate) I W O I 1 iiisti-timent to create siich coiifklcwet~. h / l q ~)eoplc. critical of' this liiirly siiiiplistic pcwpectiuc. 01' w l i y r(yp1atioii is iiitrotLicc.tl ( l i ~ ;ire rxainple, IJc-Itmi:in, It.)lif;Posiier, I H~LI.;Stiglei., 1!-I71). I'osiwr ( lC37~L) iiestioils the 'ussiuiiptions q t hat ( ~oiioiiiiciiarlwts ;ire' c ~ u t r m r r ~ fi;igilcl :uid ap1 t o c q~r;itc~ incllicienLly ( or iiic~cliiit;ddy)f i ly v c~y i Ical't : iloiiLy tlie o ~lic'ri lia[ g ovriiiiririit rcyplnlioii is virtuully costlc~ss'(1). 3 36). l ' o s ~ ~d cs ~ crit1c.i o q p i i ~ i i t tliiiLlc.gisl;itioii is L ~)icallyiiiitiiill~~i)iit lacc [or ' tllc. p ihlic gootl' 1 x1~ s i ii p 011lyfkls LO acliievc. its aiiiis tliic* L OgovcwiaiviiL incy)tit.ritlr, iiiisii1aii;igcIrric'liit o r a lack ol' f h t l s . As I IC statcns (1). 337): [There I S] a good deal of evidence that the socially undesirable results o f regulation are frequently desired by groups jnfluential in the enactment of t he legislation setting up the regulatory scheme .., Sometimes the regulatory statute itself reveals an unmistakable purpose of a ltering the operation of m arkets in directions inexplicable on public interest grounds ... The evidence that has been offered to show mismanagement by the regulatory body is surprisingly weak. Much o f it is consistent with the rival theory that the typical regulatory agency operates with reasonable efficiency to attain deliberately inefficient o r inequitable goals set by the legislature that created it. Propoiicnts of the ecniioinic.s-baser1 assumption of 'self-interest' \\ voiild argue against accepting that any legislation w a s put i n place Iiy particular piii-ties becuuse they geiiiiiiiely believed that it was h i the public interest. R uther, tliey consirlei- that legislators will p i t in place legislatioii m ly b e c a ~ i ~te inight increase their own \\ ~ ~ c ~ ~(1)erlxips through increasing i iI~li tbeir liltelihood of being re-elected), and people \\vi11 lohby h r particular legislation only i f it is in their o wl seli'-intert.st. O bvioidy, :is with most tlieoretical assumptions, this sc.lF-iiiterest mumptioii is one that (hopehilly!) cloes not always liolcl. Thc. piivate interest groiip tlieoiy o f regulation i s considered later i n the o hq>ter. In t he following scction tlie regulatoiy capture theoiy of regtilation is discussed. Unlilie the private iiiterest group theoiy of i.egulutioii, capture> tlieoiy a dmits the possibility that regulation might iiiitially b e p ut i ii plaoc f or tlic public interest. I-Iowcver, i t kirgues that the regulation will ultiiiiately br.coinc3 coiitrollrtl Iiy t hosr pu-ties who it 1vas snppos"cl to colltrol 19 This p erspective would n ot be accepted by a dvocates of the ' rational economic p erson' assumption, a s they w ould argue t hat a ll a ctivities, including t he a ctivities o f r egulators and p oliticians, are primarily m otivated by a desire t o maximise personal w ealth r ather t han any notion of a cting in the p ublic interest. 74 FINANCIAL ACCOUNTING THEORY CAPTURE T Researchers who embrace c apture tlicory (capture thmrists) would typically argue tli,it, although r(~gu1,itioii iriiglit Le introducecl with t he a im oT protcctiiig tlie 'public inleresl' ( a s q p x l in public interest tlwoiy briefly clescri1)ecl &ove), t his I ~iuclablc~ will not i~ltiin~ttely a iin I)e aclnevctl I x ~ ~ u s c n ,the. process o f introcluuing regiilatioii, tlie orgiiiiisritioiist hai ,ire subject it o t h r egulation will ultiinutely coiiic L control the rcgrilak)~ Thr rrgulatetl illclustries will o . sec,k t o gain control of thc reguliitoiy 1)otly because t hcy k i i o w that t lw decisions i nadc by t h ~ rcgiilator will potcntidly h we a signilicaiit inipact o il tlwii iiitliisLi-y. Tlw rcgiilatcd pnrties or iiit1iistric.s will s w l c t o take c1i;irge ol' ( capture) t lip regulator with t he iritmtiori of ciisiiriiig t hut tlic rcgul,itions su1)scqueiitly r ckmwl by t lir regiiIator ( post-captiire) wiIl 1x1cadviuitagcous t o their inthistiy. As 'iii example of possible rr-gulatorycqitnrc., consiclc~r rccent n rwspiper :irtiele a entitled 'Avi,ilion inclustiy \"onphirecl\" sal'ety b ody' ( C N J I ~ W~~JJ c4, J uly 2008), in which I[ ?' / L s was s latctl: A former senior legal counsel to the Civil Aviation Safety Authority for more than a decade has accused the regulator of failing as a safety watchdog because rt i s too close t o the industry. Peter Ilyk, who left the authority in 2006, t old a Senate inquiry into C ASA's a dministration and governance the authority had been 'captured' by the industry, making it r eluctant to deal decisively with air operators who fefl short of safety regulations ,,. Another former staff member, Joseph Tully, who was policy manager general aviation before he left last year, agreed CASA was too close to the i ndustry. 'You have got t o keep a professional distance when you're a r egulator ... we have become more of a p artner than a regulator in the last few years,' Mr Tully said. Another example of a possible c aw o f regulatory capture can he seen in a newspaper article entitled ' Mow alcohol, mort often is hai-dly the solution to a growing problem', which appeared in the Stybicy A ~ O P J I ~1J ? ~ ( 20 April 2007). The article stated: fwfdd Research recently released by the NSW B ureau of C rime Statistics shows that the only criminal offence that became more common in t he state in the past two years was malicious damage to property, Other research by the bureau has found that a substantial proportion o f these offences were committed by intoxicated males late at night on weekends in the vicinity of licensed premises ,.. NSW-along with other state governments-has liberalised liquor licensing laws because the Competition Commission has decreed they are 'anti.competitive', that is, they d o n ot allow licensed sellers of alcohol t o c ompete through longer trading hours, and because restrictions on the number of new licences act as barriers to market entrants. The result o f t reating alcohol like any other commodity has been more licensed premises in our cities, and more pubs and clubs trading for up to 2 4 h ours . .. S tate and federal governments have developed 'partnerships' with the alcohol industry t o c hange drinking culture and reduce alcohol.related problems, resulting in 'regulatory capture' with governments increasingly accepting the industry's diagnosis, and preferred remedies, for the problem ,.. Instead of acting on recommendations supported by independent research, state governments have adopted the paradoxical idea promoted by the industry that allowing drinking for CHAPTER 3: THE REGULATION OF FlNANClAL ACCOUNTING 75 u p to 24 hours a day, seven days a week, w ill r educe binge drinking and public disorder . .. T he State Government should heed the lessons of t he alcohol summit and avoid worsening these problems, by tightening rather than liberalising liquor regulations. I f i t chooses instead t o r eward the liquor lobby for its generous support in the recent election campaign, one hopes the Bureau o f C rime Statistics has the funding necessary to evaluate the effects o f m ore liberal alcohol policies o n f uture rates of malicious damage and assault. Obviously tlicrc. x e r conoinic henelits t o iiii i iitlustiy ( such a s tho aviation inclustiy o r the :ilcohol industiy) t is able to 'caplure' the Imdy th,il ~-egulatest. Accnrcling t o Mitniclc (1980), i t here nre at lrast live ways i n wliicli a rcy,iilaterl c iitity or industry will be d )le to c y>tiue it rc-gulatoiy body (Mitiiick, 1080,11. 95,iis repi-oduccd iii Wullter, 1987, 13. 281 ): 1. C apture i s said to occur if the regulated interest controls the regulation and the regulated agency; 2 , o r if the regulated parties succeed in coordinating the regulatory body's activities with their activities s o t hat their private interest is satisfied; 3 . o r if the regulated party somehow manages to neutralise or ensure non-performance (or mediocre performance) by the regulating body; 4. o r if in a subtle process o f i nteraction with the regulators the regulated party succeeds (perhaps not even deliberately) in co-opting the regulators into seeing things from their own perspective and thus giving them the regulation they want; 5. o r If, q uite independently of t he formal or conscious desires of either the regulators o r t he regulated parties, the basic structure o f t he reward system leads neither venal nor incompetent regulators inevitably to a community of interests with the regulated party. Thus, while the i ntrocluction o f regulation can in m any cases be e xplained in tei-ins of protecting the 'public intercs t', i t i s iirguecl that iiievitalily it \\vi11 be difficult for a regulator to reinaiii i ndepeiidcnt of those parties or industries beiiig regulated, a s the s uivivd of thr regulatoiy body ovcr a period o f time ofteii depeiicls on satisfying the expectatioiis o f t h e partics o r groups being regulntccl. Fui-thcr, t he greater t he industry's total resoiirces r rlative t o those o f t he regulator, the greater will bc the clzance that the regulator will iiltimatcly bc uiiablc to remain indepeiidmt. Accounting I-Icaclliiie 3.4 provides cominentaiy 011 h ow it appears that o ne industryinvolved in the production of asbestos-was able t o c ontinue operating w hen rviclerice suggested that i t was i n the piiblic i nterest for regulation to be i ntroduced that curtailed tlie iise of' asbestos The evidence suggests t hat t he industiy was able to 'capture' the rcgul~itoiy piwcess a nd thereby allow asbestos use t o continue-to t he advtiiitage of t he industiy, b ut t o thc. c letriiiient ol'socicty. As with various industries, at various t iiires a i d i n vdrious jurisdictioiis, it lias been a r p d iliat l i q c wcoimting firms have uatptured tlac ticcoiintii1g st:117tl~u.d-settinl:procc'ss. Tliis was o f sucli c o~icc~rii Lw U iiitcd S tatrs h a t in 1977 I hc> LJiiited States C higress iiivestigatcd w lic~thert lir iii l ( t I i ( w ) R ig E ight ;ic*coiiiitiiigl intis liad 'captured' the s taiitl;vcl-settiii~l~rocess(MIrtcalL' i i q i i i i y ) . I 111 t l i c ~ iisLrdiaii coiitcsl, Walltcr ( 1987);wgiicd tlial t lic A uslrnli~ui A Accouiiting Staiitlaril\\ R rwiew 1 3o:utl ( AS 1313) (wliicli wiis s&sCyiicwtIy rchplnccd I)y tIw h iistniliaii Accountiiig S tandmls 13o;Ud) 76 FINANCIAL ACCOUNTING THEORY ALAN MITCHELL T he dangers of asbestos emerged in the 1920s. Why did succcssive governments fail to protect us, asks economics editor Alan Mitchell. T here's o ne question t h a t the inquiry into J arncs H ardic will not answer. Why did successive federal nnd slate governments s it back and allow t housands ofAustralians t o be poisoned by exposure to asbestos? We must answer that question if wc a re l o h ave a ny hope of avoiding similar disasters in the future. On the face of it, Lhe history of asbcsLos i n Australia, the U S a nd Europe looks l ike a m onumental example or ' regulatory capture'. Regulatory capture is a common phenomenon in which regulators, governments, regulatory authorities tincl professional bodies come to identify m ore w ith the interests of the people they arc supposed t o be regulating than with the interests of tlie people they are supposed to protect. On the question of asbestos, Australian governments appear to have taken their lead from the US a nd Europe. The failure of U S f ederal and state governments t o p rotect their citizens against asbestos is o utlined by Michelle White, professor of economics at t he University of California at S an Diego, in the spring edition o f the J ournal of Econoiizic Perspectiues. According to Whitc, physicians recognised t h a t exposure to asbestos caused disease, and asbestosis was named and described in British medical journals, in the 1 920s. A bout t h e same time insurance companies in the US a nd Canada stopped selling life insurance t o asbestos w orkers. Safer substitutes for many uses were lcnown as e arly as t he 1930s, y et US consumption of' a sbestos did not pcak until 1 974. Workers' compensation becamc available in thc US from thc 193Os, b ut a sbestos p roducers successfully lobbied state govcrnments for low levels of c ompensation and restrictive eligibility rules. I n t he 1970s, t he newly established U S O ccupational Health and Safety Aclministrat,ion ( OSHA) b egan regulating the exposure of w orkers t o a sbestos. But when studleb showed that the ncw regulation was t oo l ax, the OSHA was slow t o r espond, allegcdly because of indusLry concerns. In tlie late 1 9 7 0 s t ho C onsumel. P roduct Safcty Commission Lo pressurcd manufacturers remove asbestos voluntarily from products such as h airdryers, b ut t hese efforts were halted under the Reagan administration. I n t he l ate 1980s t he E