Chapter 1 Regulatory Context © Philip O’Regan 2016

Background Importance of accounting information Large range of users Key role in modern society Fraud: impact of Enron, WorldCom, etc. Global Financial Crisis trust in accounting information eroded How/whether accounting information should be regulated Chapter 1 © Philip O’Regan 2016

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 Preparation and dissemination controlled by: government professional bodies regulatory agencies, stock exchanges, etc. Chapter 1 © Philip O’Regan 2016

Regulatory framework – US “Anglo-American” model – “rules-based” influence of accounting profession Government role via Congress and 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 Reforms prompted by Global Financial Crisis Chapter 1 © Philip O’Regan 2016

Regulatory framework – UK Anglo-American model Reflects US structure/ethos 1970s: Accounting Standards Committee representatives of main accounting bodies formulated best practice Statements of Standard Accounting Practice (SSAPs) Chapter 1 © Philip O’Regan 2016

Accounting Standards Board Scandals prompted calls for new regime Dearing Report (1988) new regulatory structure proposed 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 Chapter 1 © Philip O’Regan 2016

Impact of Financial Crisis Severe criticism of status quo reacted slowly and inappropriately Financial Services Authority replaced by Financial Conduct Authority new Accounting Council Greater emphasis on: timely disclosure sustainability governance (including audit) Chapter 1 © Philip O’Regan 2016

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) These are the focus of this text most IAS continue to apply Chapter 1 © Philip O’Regan 2016

IASB ctd. Political entity: IOSCO endorsement Tensions around: various competing interests cultural conflict (e.g., US v. EU) developed v. developing world harmonization v. standardization v. convergence IOSCO endorsement Tensions around: roles of IASB and national bodies success of IASB (particularly vis-à-vis FASB) Chapter 1 © Philip O’Regan 2016

Legislative framework – UK Company accounts regulated by statute CA81: incorporated EU Fourth Directive CA85: companies to prepare accounts “in accordance with accounting standards” CA06: greater disclosure + accountability Trends: increased disclosure (including strategic report) importance of supplementary narrative statutory recognition of accounting standards Chapter 1 © Philip O’Regan 2016

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 Chapter 1 © Philip O’Regan 2016

Stock Exchange requirements Only 2,500 + plcs actually listed on LSE UK Listing Authority (UKLA) Complex listing rules (“Purple Book”) Requires that a prospectus be issued LSE has extensive disclosure requirements Continuing obligations: circulars, etc. must receive prior approval details of many activities must be provided to LSE Alternative Investment Market (AIM) Chapter 1 © Philip O’Regan 2016

Summary Accounting information a critical arbiter of wealth Role of: government, regulatory bodies, profession, LSE, etc. Political nature of accounting practice and regulation means all competing to influence Annual Report now subject to numerous sources of input Key document that must be interpreted Focus of this text Chapter 1 © Philip O’Regan 2016