The Pros and Cons of Regulating Corporate Reporting: A Critical Review of the Arguments

Abstract

In this paper, we distil essential insights about the regulation of financial reporting from the academic literature. The key objective is to synthesize extant theory to provide a basis for evaluating implications of pressures on the regulation of financial accounting following the recent financial crisis. We succinctly lay out arguments put forth both for and against the regulation of corporate disclosure and standard setting. We then examine current developments suggesting that accounting standard setting is at risk of becoming entangled in a web of political forces with potentially significant consequences. The crisis has brought into sharp focus the reality that the regulation of corporate reporting is just one piece of a larger regulatory configuration, and that forces are at play that would subjugate accounting standard setting to broader regulatory demands. Recent actions by the European Commission relating to IFRS 9 and proposed legislation in the U.S. Congress to create a systemic risk council serve to illustrate this point. We conclude by discussing in detail the recent fair value debate as a case study of the way in which bank regulatory policy and accounting standard decisions were jointly determined as a potentially socially optimal means to mitigate the effects of the financial crisis.