Deck 3: Role of Theory in Accounting Regulation

Question 1

In Australia all corporate governance requirements are embodied in the Corporations Act.

Answer 1

False

Question 2

Proponents of the free-market approach to the provision of accounting information advocate that:

A)Market mechanisms cannot achieve a socially ideal equilibrium price for accounting information
B)Market forces can be depended upon to generate any desired information
C)The free-rider effect will result in an under-production of accounting information
D)All of the above

Answer 2

B

Question 3

In 2008 the SEC agreed to permit foreign registrants to file accounts that follow international accounting standards without reconciliation with US GAAP.

Answer 3

True

Question 4

The development of international accounting standards began in 1990 with the formation of the International Accounting Standards Board.

Question 5

Users of accounting information who bear little of the cost of producing the information and therefore have an incentive to demand increased levels of disclosure are know as:

A)Agents
B)Principals
C)Free-agents
D)Free-riders

Question 6

Atkinson and Feltham state that agency theory mainly concentrates on the demand for information for the decision-making purposes.

Question 7

International standard setting is now dominated by the IASB and the FASB.

Question 8

US GAAP have been described as principles-based standards and IAS standards as rule-based.

Question 9

Public-interest theory shows that capital markets are performing more efficiently as a result of government intervention in the standard-setting process.

Question 10

In the application of agency theory to accounting the principals most often considered are investors and lenders and the agents most usually considered are managers.

Question 11

Individual countries must decide the extent to which IASB standards will be followed by public sector entities.

Question 12

International Standards on Auditing (ISA)are developed by the IASB.

Question 13

The IASB sets standards for the private and the public sectors.

Question 14

A limitation of theories of regulation such as public interest theory and capture theory is that they are not mutually exclusive.

Question 15

The Norwalk Agreement is the name of the IASB and the FASB convergence program.

Question 16

Under IAS 38 'Intangible Asset,Australian companies are permitted to carry forward existing intangible asset values at 1 January 2005.

Question 17

Agency theory assumes that the interests of principals and agents are generally aligned.

Question 18

Regulatory capture is more likely to occur when the regulatory agency has individual members who have the potential to be employed in the future by the industry they are involved in regulating.

Question 19

Under the regulatory capture theory of regulation interest groups are assumed to try to gain control of the regulator to achieve their desired wealth distribution.

Question 20

Private interest theory suggests that government intervention in the standard setting process is to rectify failures in the market for accounting information.

Question 21

International standards on Auditing (ISA)are developed by:

A)Public Company Accounting and Oversight Board (PCAOB)
B)International Auditing and Assurance Standards Board (IAASB).
C)International Accounting Standards Board (IASB)
D)The International Organisation of Securities Commissions (IOSCO)

Question 22

Regulatory capture has been found to be particularly pronounced in which of the following situations?

A)Where there are a large number of client entities
B)The regulated industry controls the information needed for regulation
C)The information and product lack complexity
D)The regulated industry has minimal resources compared to the regulatory agency

Question 23

In which of these countries does taxation law have the greatest influence on financial accounting?

A)Australia
B)US
C)UK
D)France

Question 24

Which of these is not an assumption underlying regulatory capture theory?

A)Politicians are not neutral arbiters
B)The government has no independent role to play in the regulatory process
C)All members of society are economically rational
D)The regulated comes to control or dominate the regulator

Question 25

The abandonment of due process by the ASRB in favour of fast-track approval of AARF-submitted standards was an example of which regulatory theory?

A)Private-interest theory
B)Public-interest theory
C)Regulatory capture theory
D)None of the above

Question 26

Private interest theory asserts:

A)The bigger the interest group size the easier it is for them to use the political process
B)The smaller the interest group size the easier it is for them to use the political process
C)The smaller the interest group size the harder it is for them to use the political process
D)Regulation arises as a result of government response to public demand

Question 27

Which of these theories could explain a move towards government control of accounting standards setting in Australia?

A)Public interest theory
B)Regulatory capture theory
C)Private interest theory
D)All of the above

Question 28

Which theory of regulation assumes that politicians are not neutral arbiters?

A)Private-interest theory
B)Public-interest theory
C)Regulatory capture theory
D)All assume that politicians are not neutral arbiters.

Question 29

"While regulatory frameworks vary between countries,they often have common elements'.J.Godfrey,et el,'Accounting Theory',7^th Ed.p.70.
Discuss some of the commonalities and differences in regulatory frameworks between Australia and the USA.

Question 30

The IASB sets standards for:

A)The private sector
B)The public and private sectors
C)The public,private and not-for-profit sector
D)The private and not-for-profit sector

Question 31

Briefly describe the public interest and the private interest theories of regulation and,for each discuss,a situation where the theory can be used to explain an aspect of accounting regulation.

Question 32

Who challenged the public-interest and regulatory capture theorists' view that regulation is a result of government response to rectify inefficiency?

A)Walker
B)Rahman
C)Stigler
D)Collett

Question 33

In relation to accounting and auditing which of these is not a theory of regulation?

A)Public interest theory
B)Life cycle theory
C)Regulatory capture theory
D)Private interest theory

Question 34

Which of these is not an assumption underlying the public-interest theory of regulation?

A)There are agents who will seek regulation on behalf of the public interest
B)The government has an independent role to play in the development of regulations
C)The interest of consumers is translated into legislative action through the operation of the internal marketplace
D)Economic markets are subject to a series of market imperfections or transaction failures

Question 35

Prior to 2005 International Accounting Standards (IAS)were influential in which of the following ways?
I They were adopted for use in countries without national standards
II They were used in the development of national standards
III They were used voluntarily in preparing consolidated accounts in some countries

A)i,ii,iii
B)i.ii
C)ii,iii
D)ii

Question 36

Which of these factors should not affect the extent to which particular countries are able to influence the international standard-setting process?

A)The number of accounting standards issued
B)National economic significance
C)Professional expertise
D)English language competence

Question 37

Regulatory capture is said to occur in which of the following situations?

A)When the regulated entities ensure non-performance by the regulating body
B)When the regulated entities co-opt the regulators into a mutually shared perspective
C)When the regulated entities control the regulations and the regulatory body
D)All of the above

Question 38

"Standard setting is a political process'.Explain and discuss.

Question 39

Which of these statements in relation to the regulation of auditors is not true?

A)The choice of statutory regulation rather than self-regulation may reflect political differences between countries in the approach to management of capital markets
B)Statutory regulation is consistent with a country having a more centralised,interventionist approach to regulation
C)The worldwide trend in recent years has been towards more self -regulation for auditors.
D)In France and Italy regulation was from earlier times the responsibility of state authorities.

Question 40

Which of these is a criticism of the public interest theory of accounting regulation?

A)The theory is not the only explanation for observed behaviours
B)Managers of businesses have strong incentives to 'correct' market failure perceptions about their business activities.
C)A and B
D)Neither A nor B is a criticism

Question 41

Explain why,with the adoption of IFRS by the EU in 2005,each member state was required to set up an independent enforcement body.Do you agree that such a body is a necessary part of an overall system for enforcement of financial reporting requirements?

Question 42

'The central economic reason for the origins of government intervention in the operations of various markets in the "public interest" is that of market failure.' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.57.
Briefly outline the public-interest theory of regulation of financial reporting including the assumptions on which it is based and discuss the circumstances when market failure is most likely to occur.