REGULATORY APPROACH OF AN ACCOUNTING THEORY

1. Agency theory provided a necessary explanation of why the selection of particular

accounting methods might matter, and focus on the relationship between principles and
agents, a relationship which, due to various information asymmetries, created much
uncertainty briefly explain how agency relationship arise and give rise to agency costs.

2. Jensen and Meckling are generally credited with having developed agency theory in a 1976
publication (Godfrey et al., 2010). Referring to the agency theory, briefly explain the three
agency costs.

3. Accounting standards can be viewed as a key part of the regulatory framework as they
influence the behaviour of preparers and auditors and thus the information provided for
users of financial reports (Godfrey, et al., 2010). Explain why accounting standard setting
process is political in nature.

4. a. In the context of regulatory capture theory, identify the pre-conditions that may
have existed that could facilitate regulatory capture.
b. ‘Regulation is intended to protect the interest of individuals and society as a whole;
where regulation society is better off than otherwise.’ (Godfrey et. al.; 2010, p.80)
Differentiate the regulatory capture and the private interest theories of regulation.
c. It is argued that regulation is intended to protect public interests with consequent
effect on improved economic performance. Discuss whether the original purpose of
regulation is achieved with reference to the three (3) theories of regulation.

5. a. ‘Free market economists would argue that markets function best without
government intervention….’ (Godfrey, et al., 2010, p.55)
Discuss TWO (2) arguments to support each of the following approach to standard
setting:
i. regulatory approach; and
ii. free market approach.
b. Certain specific theories of regulation have been proposed to explain and predict the
regulations of accounting and auditing as observed in capital markets. Explain the
relevance of the following theories of regulation to accounting and auditing:
i. Public Interest Theory
ii. Regulatory Capture Theory
c. The regulatory approach in standard-setting may give rise to accounting standard
overload. Describe TWO (2) disadvantages when accounting is over-regulated.