Week 4 Tutorial

Part A- 3.19
a) The public interest theory of regulation - PIT supporters claim that the regulatory
process aids price competition by, for example, eradicating restrictive trade practices
usually associated with monopoly power abuse. PIT envisioned regulators as independent
and neutral arbitrators reacting to public demands to address inefficient and/or
inequitable market behaviors in its initial form.

b) The capture theory of regulation - is mostly based on political science literature. It

assumes that regulation is a partisan political process that rewards politically powerful
organizations who seize and control the regulatory process. Within the larger body of
capture theory, it distinguishes between two paradigms: Marxist/Muckraker and Political.
The Marxist/Muckraker viewpoint mirrors the broader thinking of radical theorists who
believe that the regulatory process serves capitalism's interests while alienating labor's
position in society. Radical theories of the state, it is said, present alternative
explanations.
c) The economic interest theory of regulation - The economic theory of regulation predicts
that in markets with a large number of firms competing, demand for regulation will be
highest where the corporate lobby is powerful. The concepts of capture theory are refined
and expanded into a reconstructed theory of economic regulation based on the concept of
public choice. According to this theory, regulation is an economic good whose
distribution is determined by supply and demand principles.

Part B
Question 1
a) Financial accounting is used by investors and lenders to gain essential information about
a company's financial stability and risks. And, even in the absence of legislation, it is the
responsibility of the firms to offer financial disclosures; so regulation is unnecessary
because enterprises will disclose freely. It is basically a voluntarily disclosure of financial
reports to its lenders or investors done by the firms to avoid misinformation and convey
transparency, accountability and accuracy.
b) Financial statement limitations are those variables that a user should be aware of before
relying on them excessively. Knowing about these characteristics could lead to a
reduction in the amount of money invested in a company or prompt more investigation.
Thus, implementing a conceptual framework could address the limitations of the
unregulated reports, as it includes a framework for establishing accounting standards, a
foundation for resolving accounting disputes, and fundamental ideas that are not
duplicated in accounting rules. The framework also improves financial statement readers'
understanding and confidence in financial reporting, as well as making it easier to
compare financial statements from different companies.
Question 2
a)
Public Interest Theory
 Explains how the
government intervenes in
markets and the rules that go
along with it are solutions to
market failures and defects.
According to this idea,
regulation serves the public
good rather than the interests
of well-organized parties.
 The public interest model
states that government
should try to establish laws,
rules, and policies that
benefit the general people.
 If one feels that the public
interest model is usually true,
one is more likely to
advocate for government
regulation, even if one
acknowledges that regulatory
goals may be difficult to
attain despite politicians' and
bureaucrats' best intentions.
Private Interest Theory
 Interest group activity is
regulated according to
private interest theories.
Transfers of wealth to more
powerful interest groups
frequently result in a
reduction in societal
wellbeing. Firms,
customers or consumer
organizations, regulators or
their staff, lawmakers,
unions, and others are
examples of interest
groups.
 The private interest model,
on the other hand, proposes
that government officials
implement laws that benefit
them personally.
 If one believes the private
interest model is a more
realistic representation of
reality, government
regulation will be viewed
with greater skepticism.

b) Regulation based on the private interest theory is susceptible to political sway since the
standards established would be in the best interests of the highest bidder rather than the
welfare of society. Some accounting companies in Fiji are examples of self-interest
groups who bid for the adoption of IFRS in order to keep their multinational clients and
prepare their financial statements using international reporting standards. As a result,
multinational corporations organize a lobbying group to advocate for the harmonization
of accounting standards, which would allow them to analyze their performance across
borders and offer financial data to international stakeholders.
According to public interest theory, the regulatory function is delegated to the public in
reaction to market failures, and it is more likely to promote the general welfare of society
than the interests of well-organized stakeholders.
As a result, in Fiji, the impact of public interest on financial reporting has never been
more than negligible. Since 1986, the Fiji Institute of Accountants (FIA) has been the
sole entity responsible for developing and promulgating the country's accounting and
auditing standards. If the IASB or IFRS fail to address any significant issue relevant to
Fiji, the institute has the ability to depart from these international standards.