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a)
i) One of the biggest problems in financial reporting is that the process of preparing and auditing accounts is not directly visible or even observable to users or even to regulators. Any dishonesty or carelessness in the process could remain undetected until some form of calamity, such as the company’s collapse, causes users or regulators to ask questions. Most countries have a system of oversight for external auditors, but even this is insufficient to keep the work of auditors under constant scrutiny.
Compromising professional standards can be very lucrative. Prepares may wish to manipulate figures in order to increase profit related bonuses, enhance the share price or even just to protect their jobs. External auditors might sense some pressure to collude in order to retain an appointment. These incentives to misbehave or under-perform make the process of regulation all the more difficult.
Financial reporting involves a great deal of subjective judgements, often involving forecasts, estimates and assumptions. This makes it easier to defend any accusation of distortion that was clearly deliberate; its perpetrators will be able to argue that they were the victims of a misunderstanding and that they have behaved correctly and responsibly.
Developing and updating regulations can be difficult because those who are subject to the rules often have to bear significant compliance costs. These costs include direct costs associated with being monitored (e.g. additional fees paid for professional accreditation in order to finance the process) as well as indirect costs associated with preparing for monitoring (e.g. the preparation and retention of detailed records that have little direct value beyond enabling the regulator to conduct the monitoring process).
ii) Regulation and monitoring are complicated by the fact that the victims of alleged accounting irregularities often have an interest in blaming the prepares or auditors who had a hand in the accounts. This is because those parties, particularly the auditors, often have a substantial insurance cover which would enable them to pay compensation. Users of financial statements who discover that they have made a poor investment decision might wish to blame the auditor in order to further a claim for the losses that they have incurred.
iii) Government is always responsible for the regulation of the activities of its citizens, both individual and corporate, and for their protection. While this responsibility might be discharged by ensuring that there are adequate non-governmental systems in place, it would be irresponsible for any government to delegate all of its duties for an issue as important as financial reporting to an interested party such as an accountancy body.
b)
Accountancy bodies are highly professional organizations with a great deal of integrity. They do, however, have a slightly complex set of responsibilities. Members of such bodies expect that their professional body will work hard to protect their interests as well as those of the investing public. It would be irresponsible of government to leave professional bodies completely to their own devices.
Aggrieved shareholders and other parties who claim to have suffered because of an irregularity are likely to blame the government for being too lax. It is politically expedient for government to take an active part in the regulation of areas such as financial reporting.
Accounting bodies have very little real power over anybody but their members. Many of those involved in preparation and, to lessor extend, audit financial statements have no affiliation to professional bodies and are not directly accountable to the profession. Government has the power to set laws and enforce them on all prepares and auditors.
marto answered the question on February 13, 2019 at 08:43
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