Module 1: The Financial Reporting Environment

Purpose of accounting

Model International Laws & Exemplar National Laws

Common Law
- Historic system of laws formulated in England
- Export to many British colonies – Australia, Singapore, Malaysia, India & USA

Civil Law
- Began in continental Europe
- Widely exported during the colonial era – Japan, France, China, Indonesia & Brazil
- Codes of law is a common feature

Sharia Law
- Bound up in the religion of Islam
- Pakistan & Iran

Legal Pluralism – Multiple legal systems in a geographical location

Country Type of law
Australia
India
Malaysia
South Africa

Economic systems
Planned economy
Resource allocation Made by government
Economic wealth Most kinds of wealth not
available for ownership by
individuals
Mixed economy
Partly Government, partly
free market forces of
demand and supply
Divided between public &
private sector
Market economy
Market forces of demand
and supply
Most wealth owned by
individuals, with minimum
being collectively owned

Political systems
Rule of Law

Democratic Law developed by citizens Law is a means of sorting problems out where they arise.
Individuals act within the letter & spirit of the law.
Dictatorial Law developed by government Emphasis on state or government regulation & control of resources.
Behaviour of individuals to large extent dictated by the state by means of
law.
Separation of powers
Democratic nations have powers held in different places, so no part of the political process holds too much influence.
Each body is separate and can operate as a ‘check and balance’ on each other.
Elected legislature Body which decides on what laws should be passed to ensure that the people’s wishes – freedom &
wealth are met
Elected executive Government body which makes the decision that puts the law into action
Judiciary May or may not be elected; rules on any disputes about laws, whether between the government and
the people (criminal law) or between individuals (civil law)

Legal systems
Embodies both laws of the country & the mechanisms the country has in place for regulating and enforcing those laws.

Components of a legal system:

1 Country’s laws
2 Legislature Law-making body
3 Judiciary Body that sits in judgement on disputes about the law
4 Prosecution System that seeks to ensure the criminal law is enforced & that people who break the law are
system prosecuted
5 Police Body that seeks to enforce the law and protects the public
6 Prison system System that ensures that people who have broken the criminal law are detained in accordance with
their sentence

Law : Enforceable body of rules that govern any society

Type of Law:
Positive Law Body of law imposed by the state

National Law Each sovereign state has a set of laws which regulate how entities relate to each other and to the
state, in their own country
International Law Reflects interrelationship of sovereign states, and which attempts to resolve the problem of conflict
of national laws
Various sources:
 Conventions & treaties
 International custom
 General principles of law recognised by civilised nations
1 Public System of law regulating the relations between sovereign states, and rights and duties they have
International Law regarding each other
2 Private Regulates cases which involve the national laws of two or more states where a different result occurs
International Law depending on the state law applied

Barriers to Free International Trade (BTE)

 Exists to protect markets from outside competition
Tariffs Taxes on imported goods
Import quotas Restrictions on quantity of a product that is allowed to be imported into the country
Embargo Total ban / Zero quota

Conflict of laws:
 Where parties from different nations have a legal dispute and it is necessary to determine which national law governs
the validity of the legal situation

Sources of Law

 Criminal Law
o State is the prosecutor as it is the community which suffers
o Persons guilty of crime may be payable by fines payable to the State or Imprisonment
 Sharia system: qisas / retribution
 Diyat / compensation: give legal right to inflict on wrongdoer the same hurt as he has perpetuated on
the victim
 o Burden of proof

Distinction between criminal and civil cases

Common Law Systems

Principles
Sources of Law
Development of Common Law: Case Law
Development of Common Law: Eq

Precedent/case law:
Previous court decision or case which another court is bound to follow by deciding a subsequent case in the same way

Doctrine of precedent:
Judge is bound to apply a decision from an earlier case to the facts of the case before them provided, among other conditions
that no material difference between the cases.

Stare decisis is a legal doctrine that obligates courts to follow historical cases when making a ruling on a similar case. Stare
decisis ensures that cases with similar scenarios and facts are approached in the same way. Simply put, it binds courts to follow
legal precedents set by previous decisions. Latin term meaning "to stand by that which is decided."

Constitutional Law
 Outlines the rules by which a nation or state is run
 Deals with powers that governments have to make laws, and constitution is a set of rules by which the nation or state is
run

Civil Law systems

 Key principles: comprehensibility & certainty
 Key source of law: Statute
o Codified
 France: Code Napolean
 Role of judges in Civil Law
o Judges simply apply the law – do not make law via precedent
 Court of Cassation
o Top court of appeal in France
o Means “to quash”
o The court became a court of appeal
 Statutory interpretation in Civil Law
o Alternative methods
 Teleological method: where judge seeks to identify the social purpose of the legislation and apply it in
a manner that achieves it
 Historical method: where judge looks at the intention of the legislator and then tries to envisage what
the intention would be if the law was being drafted in modern times. The judge then implies that
intention.

Sharia Law systems

 Based on religion of Islam
 Law extends into the areas of belief and religious practice – law is God-given & so having wider significance than social
order
 Sharia is ‘a way to the watering place’  path to be followed
 Sharia law is ordained by Allah as guidance for mankind
 Sourced directly from Allah
 Judges are clerics – known as Imam

Sources of Sharia Law

 Key source of law: Quran & Sunnah (“beaten track”, derived from the sayings of the Prophet known as Ahadith)
  Secondary sources of Law: Madhab

Role of judges in Sharia Law

 Clerics

Interpretation of Sharia Law

 Quran cannot be altered – word of Allah
 May only be interpreted – Mohammed as Allah’s prophet was qualified to do so
 When guidance may not be obtained by the Quran, the judge may turn to the Sunnah to see how the Quran was
interpreted by the Prophet
o Sunnah is used by malay jurists:
 Confirm law in Quran
 Explain matters mentioned in the Quran in general terms
 Clarify verses in Quran that may seem ambiguous
 Introduce a rule where the Quran is silent
o Ahadith that comprise of the Sunnah were recorded some time after the death of the Prophet and are
classified according to reliability
 Mutawir: Virtually guaranteed
 Mashtur: less certain
 Ahad: little certainty

Rule against usury:

- Commerce & trade, known in Sharia as Riba – “unlawful gain”  interest that is strictly forbidden by the Quran

Legislation

 Statute law
o Jurisdiction with legislative supremacy
o Jurisdiction with judicial review

Interaction between legislation & case law

 Legislative supremacy, or parliamentary sovereignty, exists when country’s constitution provides that its legislature is
supreme to all other government institutions
o Statute law may override common law
 Parliament may:
 Repeal earlier statutes
 Overrule or modify case law developed in the courts
 Make new law on subjects which have not been regulated by law before
Types of legislation

1 Public Acts Legislation that affects the general public

2 Private Acts Legislation that affects specific individuals and groups
3 Enabling legislation that empowers a specific individual or body

Creating new legislation

 Changes in society, business operations and/or technology

 Trend in case law & creation of precedent may give rise to need for legislation in a certain area
 Individuals/organisations may be unhappy with the operation of existing laws and lobby (influence) government to
change the law
o Lobbying plays a major role in creation & amendment of all legislation
 Very effective at changing government policy & laws

Advantages & Disadvantages of Statute Law

Advantages
 Legislature elected in parliamentary democracy  law making process is theoretically responsive to public opinion
  Statute law in theory can deal with any problem & laws can be made or changed at any time
 Statutes may be drafted so that they are carefully constructed codes of law
 A new problem unwelcome undevelopment in any case law can be dealt with by passing an Act of parliament
 Statute law applies to all members of society
 Parliaments have access to wide expertise

Disadvantages
 Some statutes can be bulky
 Parliament often lacks time to draft legislation in sufficient detail or to access whether existing legislation requires
change
 A substantial statute can take up substantial Parliamentary time
 Not possible to anticipate every individual case that may arise
 Laws can be changed infinitely leading to high costs, unnecessary changes and confusion
 Parliaments may sometimes not be impartial  pressure groups
 Parliaments can avoid making law about a sensitive issue  just by ignoring

Statutory Interpretation
 Required due to:
o Ambiguity: caused by error in drafting or words may have dual meaning
o Uncertainty: words of statute intended to apply to a range of factual situations
 Courts have to discern whether case falls into any of this situations
o Unforeseeable development
o Legislation may use a broad terms

Models of Statutory Interpretation

Literal rule Dictionary definitions Whitely v. Chapbell

Extended by the Golden rule
Golden rule Words should be given their plain, ordinary or literal meaning
‘Mischief’ rule Judge considers what mischief the law was intended to
prevent
Contextual rule Word should be construed in its context
Purposive model Words are not only interpreted according to their ordinary,
literal & grammatical sense but with reference to context &
purpose of the legislation

Rules of Statutory Interpretation

The Ejusdem Generis Rule Statute often list several specific things & end the list with more general words
Expression Unius Est Exlusio Alterius Exclude anything else
Noscitur A Sociis Presumed that words draw meaning from the other words around them
In Pari Materia If statute forms part of a series which deals with similar subject matter

Extrinsic aids to interpretation

- Found outside the Act and the models/rules/presumptions listed above
Intrinsic aids to interpretation
- Found within the Act in some form

The Acts Interpretation Act 1901 (Australia)

Intrinsic aids:
 Anything that does not actually form part of the Act but is set out in the document containing the text of the Act as
printed by the Government Printer.

Extrinsic aids:

Accessing the Law

 Essential component of the rule of law = all persons are equal before the law
 o Law must be easily accessible & available
 Reading a judgement in case law
o Each case heard by a judge contains a judgement & decision
 Actual judgement: contains two important elements
 Ratio decidendi: “ reason for the decision”  creates precedent for the future
 Obiter Dicta: “sayings by the way”
Subordinate Legislation
 Rules of law, often of a detailed nature, made by subordinate bodies to whom the power to do so has been given by
statute

Advantages
1 Saves time
2 Allows technical expertise
3 System allows the law to be enacted quickly and swiftly,
responding to the needs of the community
4 Allows swift alteration without referring back to
legislature
Disadvantages
Lack of accountability for the law
Possible lack of scrutiny of all detail
System is unrepresentative in that some power is given to
persons who are not democratically elected
Can be produced in large volumes, and often with little or
no publicity, hard to keep up to date with developments

Case Law and Precedent

 Consists of decisions made in the courts, so it is judge-made law based on the principle of consistency
 Once a legal principle is decided by an appropriate court it becomes a precedent

Common Law and Equity

 Originally developed in England as a system incorporating rigid rules applied by royal courts, often with harsh
consequences  Equity was developed
 Equity
o Supplement but do not replace the common law
o Based on fair dealings between the parties
o Adds to and improves on the common law by adding to the concept of “fairness”

Interaction between Common Law and equity leads to 3 features:

1. Equitable Rights
2. Better procedure
3. Better remedies: award of damages or financial compensation for loss
a. Specific performance: defendant must do what they agreed to do
b. Injunction: defendant must abstain from wrongdoing
c. Rectification: alteration of a document to reflect the parties’ true intentions
d. Rescission: restoration of the status quo

Where equitable rules conflict with common law rules, then equitable rules prevail.

General rules of precedent:

 Binding precedent: lower courts are bound to follow decisions in superior courts within the same court hierarchy
 Persuasive precedent: superior courts do not have to follow decisions made in lower courts, though they may use them
to help make a decision
 Persuasive precedent: decisions made in other court hierarchies can also be used in reacging a decision but are not
binding
 Courts are not bound by their own decisions

Doctrine of binding precedent & Stare decisis

- Judge is bound to apply a decision from an earlier case to the facts of the case before the court provided, among other
conditions
o There is no material difference between the cases
o Previous case was the one that created a binding precedent on the current case
- Stare decisis: “ to stand by a decision”

Ratio decidendi (“Reason for deciding”)

Obiter dicta (“something said ‘by the way’”)
1. Judge statements of legal principle that do not form the basis of the decision
2. Judge statements that are nit based on the material facts but hypothetical facts

Avoidance of precedent
 Declaring an earlier decision to be too wide
 Declaring the obiter dicta obscure (indistinct)
 Stating that the previous decision was made per incuriam (carelessly)
 Declaring it overruled by the decision of a superior court or subsequent legislation
 Declaring the decision to conflict with a fundamental principle of law
 Declaring an earlier precedent to be too wide

4 main methods of avoiding precedent:

1. Distinguishing
2. Reversing
3. Overruling
4. Disapproving
Advantages & disadvantages of Precedent

Factor Advantage Disadvantage

Certainty Law is decided fairly & predictably Judges may be forced to make illogical distinctions to
Guidance is given to judges & risk of mistake avoid an unfair result
reduced
Clarity Following reasoning of ratio decidendi, should lead Judgement may be inconsistent with each other or
to statements of genera legal principles the legal principles followed
Consistency Law is applied consistently to different cases on Application means the law can be reactive and slow to
the same issue change
Flexibility System is able to adapt to changing circumstances System can limit judge’s discretion
Detail Precedent states how law applies facts and should Detail produces a vast body of reports to take into
be flexible enough to allow for details to be account
different
Practicality Case law is based on experience of actual cases Unfair precedents may be created that allow
brought before the courts wrongdoing to be perpetuated

Court-based Adjudication
 Depends on a system of courts which settle disputes
o Court of first instance: court where a case is heard for the first time
o Court of appeal

Australian system of courts

Alternative Dispute Resolution (ADR)

 Any type of procedure or combination of procedures voluntarily used to resolve differences, other than court-based
adjudication

Negotiation First step where each party attempts to resolve the dispute without the presence of a third party
Mediation Facilitative process assisting parties to reach agreement
Conciliation Advisory process which advises on best courses of action
Arbitration Settlement of a dispute or ‘determination’ by an independent person, usually chosen y the parties
themselves

Advantages and disadvantages of ADR

Advantages
Choose person to settle dispute
Less expensive than court decision
Expensive legal representation not always necessary
Can avoid long delays involved with court
Disadvantages
Conciliation/ mediation means no legal agreement is agreed
so they may not be adhered to
If ADR fails, parties may have to go to court anyways
Private arbitration may be more expensive than court action
Private decisions mean no public disclosures or accountability
Decisions are private