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Gyan K.C. (OLI8029) Bhola Nath Ghimire( EMV 8036) Suman Maharjan (EMV 8037)

3.33 Let us assume that the government has become concerned that existing disclosure regulation tends to fixate on the financial performance of organisations but fails to address other aspects of corporate performance ,including a failure to provide information about corporate social and environmental impacts as well as about various initiatives and investments an organisation has undertaken to improve its social and environmental performance. As such, the government has decided to introduce legislation that will require business corporations to provide information about the social and environmental impacts of their operations, as well as the social and environmental initiatives undertaken by the corporations. You are required to do the following: (a) Explain from a public interest theory perspective the rationale for the government introducing the legislation and how the government will ultimately assess whether any proposed legislation should actually be introduced Arthur Cecil Pigou is the first one to develop the first economic theory which is called public interest theory. In general, The Public Interest Theory of regulation explains about the regulation which seeks the protection and benefit of the public in a larger scale. The main argument in this principle is possibly the Public Interest Theory does not exist as such for reasons that will be discussed later. In addition to it, the paper contends the similarities of the welfare economics rationale for regulation that the Stigler's and Posner's characterisation of the Public Interest Theory. But, still, it is not proved or denied that the connection between these both concepts of the welfare economics rationale for regulation of the public interest. For the correction of inefficient or inequitable market practices, it holds the regulation that is supplied in response to the demand.

It is an essence to have regulations or to bound up society with regulations. Society without regulations cannot maintain peace and tie up the whole people into one norms. There will be chaos, disorder, mob and many more unacceptable human behaviour. So, for the sake of the societal benefit ,regulation is initially put. It does not consider the particular vested interests in which it operates, rather that the private interests of the regulators but this perspective is unacceptable to the advocates related to the rational economic person assumption because they believe that all the activities of regulators and politicians are basically motivated to gain as much wealth as they can rather than any notion of acting in public interest. Here, the legislation is set as a balancing act between the social costs of the regulation and social benefit. Society needs confidence that capital market efficiently allocate resources to productive assets while applying this argument to financial accounting and accepting the existence of a capitalist economy. Organisations must adapt and change as community expectations change because an organisation will need to show that what it is doing is also changing, if societys expectations about performance change. The organisations will be penalised if they fail to operate in a manner consistent with community expectations which is sometimes called ,the community licence to operate. Despite this principal, it is proved to be as open as possible, and to pay close attention to what people expect from business and in particular. If any organisations want to get success or be successful, they must be consistent with legitimacy theory in which statements it is reflected that the organisations must have to adapt community expectation. In the BHP Billiton Sustainability Report 2008,the view in it reflects and also makes reference to the importance of complying with community expectations. It is said that there is always a risk in health, safety or in environmental incidents or accidents in spite of the efforts and intentions to the best they can because those incidents and accidents may impact negatively to the reputation or an authority to operate. These statements clearly exposes the notions embodied within legitimacy theory that are reflective of the public positions being taken by corporate executives. If

failed in fulfilling community expectations, it can be detrimental to the organisations ongoing operations and survival. (source:Book,p.335) (B) predict from a capture theory perspective the types of constituents that will benefit in the long run from any social and environmental disclosure legislation. Capture theory was developed by George Stigler that says an industry can benefit from regulation if it can capture the regulatory agency involved. Capture theory says that ,regulatory capture happens when a state regulatory agency, created to act in the public interest, instead advances the commercial or special interest that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities.

The types of constituents that will benefit in the long run from any social environmental disclosure legislation are:

and

* Government regulation can protect incumbent firms from rivalries price wars and prevent entry into lucrative markets. * The regulated firm sometimes has a more comfortable and profitable existence than the non-regulated firm, private companies complete for a scare supply of regulation. *The regulatory agency such created with the intention of correcting market failures ,as time goes by the agency is subject to capture by the firms they regulate.That is ,the regulatory agency invariable tends to issue regulations that work to the advantages of regulated firms. *We can also see that the regulated firms will earn higher rates on return than non regulated firms.

The additional benefit of capture theory in long run could be, Regulated firms can be benefited from a process by direct subsidies of money ,entry control,price fixing or control over substitutes or complements. Regulation is almost never an unmixed blessing. Regulated industries or organization must submit to certain rules, regulate on ,standards of conduct other interferences. These are costlyand reduce the net return to the regulated firm, but as long as the net benefit is positive and lobbying costs are not prohibitive those who stand to gain from the regulatory process will demand it. (Financial Accounting Theory , Craig deegan,P 75-para 1,79 para 3,80,para 2) For us ,we are against capture theory because in long term .the regulated firms have high possibility to be monopoly.They are able to decide the price and control the market which is not good from the social point of view,legislature are captured by the industry .the regulation organization will be controlled finally by industry,i.e lawmakers are captured by industry.Constitutuion of power should be in benefit and behalf of consumers not the industry.

(c) Predict from an economic interest group theory perspective of regulation whether any potential legislation to be introduced will lead to an increase in the accountability of corporations in relation to their social and environmental performance despite any implications that this increased corporate accountability might have for the financial success of large but heavily polluting organisations. Of course, the potential legislation that is introduced will lead to an increase in the accountability of corporations in relation to their social and environmental performance despite any implications that this increased corporate accountability might have for the financial success of large but heavily polluting organisations but

before discussing and providing enough support to our agreement, it is better to mention some bit about regulations and before that it is necessary to understand what actually does regulation means. According to the Oxford dictionary, it defines it as a prescribed rule or authoritative direction which can also be synonymised as a rule of order, as conduct prescribed by authority. It clearly states that that the main issue behind this meaning is to control or govern conduct. In regard to the context of financial accounting, it is the power to govern the way to prepare financial statement that have been developed by an independent authoritative body. The economic interest group theory which is also sometimes called as the private interest theory group concludes that such groups are made for the protection of the particular interest. It is also obvious that each and every group has different interest and may not be having a common issue. They can be often found in conflict with one group to another. It can be also taken as a result of varied opinion. They lobby against government or other regulators to put in place legislation that economically benefits them. It has ups and downs, the regulations they force the government to imply lobbying may increase corporate accountability but it pollutes the organisations. It can also be considered as a misuse of power by means of lobbying. It always reflects own interest upon particular things. According to the case mentioned,Yes, there can be increase in the accountability performance in realation to social and environmental performance which will result to financial success in a significant amount enen if that is a polluting organisations.For eg the aerospace company are able to transfer their development expenditure as capital expenditure by lobbying to government and charge it as an expenxes in future years by matching it against the income that is generally large in volume.The development of its products causes mass pollution but due to private interest and lobbying they are able to escape and get benefits from government or regulators and make a huge profit although they are polluting environment. . (Financial Accounting Theory , Craig deegan,P85 para 2-4)

(4.28) The website of the FASB (as at early 2009 ) states that FASB intends: To promulgate standards only when the expected benefits exceed the perceived costs. While reliable, quantative cost-benefit calculations are seldom possible .The board strives to determine that a proposed standard will meet a significant need and that the costs it imposes , compared with possible alternatives are justified in relation to the overall benefits. Do you think that cost-benefit considerations will be different in different countries? If so,how would cost-benefit considerations be determined by a global accounting standard-setter such as the IASB ?

Ans : The Financial Accounting Standard Board (FASB) is a private organization whose basic purpose is to develop Generally Accepted Accounting Principles (GAAP) within the United States in the public interest without taking any profit. The FASB was designated

as the organization by the Securities and Exchange Commission (SEC) for setting accounting standards for public companies in the U.S. It was created in 1973 replacing the Committee on Accounting Procedures (CAP) and the Accounting Principle Board (APB)of the American Institute of Certified Public Accountants (AICPA).It wants to keep standards current to make changes in method of doing business and in the economy. It is not a governmental body only as a part of a structure that is independent to all other .It has been the designated organisation in the private sector for establishing standards of financial accounting and reporting those standards govern the preparation of financial reports. (above para. From Ref : Wikipedia ..) The FASB main gist is to maintain standard in every business field through costbenefit considerations which become the most in this global marketing . Though its not 100% reliable ,and possible in cost-benefit calculations ,it will somehow meet in

that singnificnt purpose which become beneficial to overall. In this competitive world ,no any business stakeholders will take responsibility to invest their monetary transaction in such business which doesnt benefits outweigh the costs.

Cost-benefit is based on cost effective analysis . It is the exercise of evaluating an actions consequences by weighing pluses, or benefits against the minuses ,or costs. It is the fundamental assessment behind every business decision .Cost benefit consideration was first proposed by A-J-T-J Dupuit. But it was later applied only from 1936 U.S Flood Control Act which required that the benefits of flood control project exceed their cost. It is often used to decide whether to accept of proceed with a project or proposal. It is by which the cost of a particular project are analysed relative to the potential benefits of the undertaking. In the case, if it comes to see a cost more rather than benefits than it wouldnt be undertaken. It is the systematic process for calculating and comparing benefits and costs of a project decision or government policy. No business stakeholders want to spend money unless the resulting benefits are expected to exceed the costs. It should may touch in every aspect economically, socially, politically etc. which may not hamper in future. For that when considering a proposed technology holders should assess in advance the cost and benefits to be expected from its implementation and they adopt it only if the anticipated benefits outweigh the anticipated costs. (Above para,ref: Encyclopedia.) The FASB and IASB are travelling the world to clarify their proposed rules of simplifying how companies book revenue and to soothe an unsettled business community. The FASB and IASB move ahead inorder to develop high-quality accounting standard that serve the public interest by providing information that is useful to prevent and potential investors and creditors and other users in making investment credit and other similar decisions. Though they have no authority in policy making about accounting because of private sectors they force government to undertake and considered their policies also and move ahead accordingly. They are the best accounting standard setters which based on cost-benefits analysis to uplift global standards competively worldwide. Suppose : X company wants to invest

money automatic printer machine which handles three men doing work in one day within few hour but that company X has to go through cost benefit analysis that does that resulted benefits are expected to exceed costs or not before investing a large amount of money. It should have to bring positive output on the investors so that other investors also influenced by that and become competitive in the society,country,worldwide and lead towards success and progress. (Ref:www.fasri.net) The cost benefit analysis is the FASBs conceptual framework and current methodology of analysing cost and benefis which must assess from the board i.e including from a wide variety of constituent,like advisory committee ,task forces,industry representatives,and professional group whether the benefits of a proposed standard justify it costs or not. There are four main principles of cost benefit analysis: Consumer sovereignty Valuation of goods according to willingness to pay Parento-optimality as the criterian of welfare maximisation Neutrality with respect to income distribution We think that cost-benefit consideration will be different from different countries . In that case that all countries arenot well deserve to follow that same rules and policies that is undertaken by policymakers because they are not rich enough in comparison to rich countries.For example:if rich country invest large quantity of money on hydropower project but poor doesnt afford that and that policy will certainly bring differences in their investment which surely bring differences in socially, economically,politically, .It is also obviously seen that most of the countries are adopting same policies inorder to sustain their development competitively worldwide. In cost-benefit analysis ,the priorities goes on monetary transaction I.e is on economically that the benefit is proceed to over cost or not and then only it look onward socially,politically,etc. Thats why a global accounting standard-setter such as the IASB would seriously look overall benefits which will meet to whole. The

standers-setters FASB and IASB have to seek to reduce the differences in classification and measurement model for financial instruments which would relate to every sectors. They should develop a common approach on impairment of financial assets that will meet to all commoners.Only then the mission of these strong standard- setter organization will come to be fruitful to run all the countries equivalently,effectively and competitively . And that will be the great success to make the world more advanced through accounting.