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Behavioral Finance - Essay Example

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Behavioral Finance

The financial reporting standards perform the function of regulating the business world by laying down the accounting standards and procedures which the limited companies need to follow. This not only helps in getting the financial information about companies on a common base by having standardized policies, but also serves the purpose of providing the users of financial statements with clear, accurate, reliable and relevant information (2005).
In the United Kingdom, there are three basic elements of the regulatory framework for all the listed companies. The government has its role in regulating the businesses by way of the Company Law; the accounting professionals perform their duties by preparing, interpreting and implementing the accounting standards being prepared for the financial reporting purpose; and finally the stock exchange keeps a check by having various stock exchange rules for the companies listed in the London Stock Exchange.
The Company Law is to be fulfilled by all the limited companies whether public or private, however there are variations depending upon the nature of the entity. It's the basic regulatory framework introduced by the government in order to keep a record of the companies in the country (Ray Ball, Lakshmanan Shivakumar, 2004). However, this Company Law does not pay much attention to imposing regulations for the standardization and consistency of the accounting standards and policies. It just lays down the general rules and requirements for preparing financial statements, their format and their content. The procedure for finalizing the content is not discussed. The Company Law makes it mandatory that all the listed companies should prepare and disclose financial statements based on true and fair facts (Davies, Paul L., 2008). This law emphasizes the candor and honesty to be kept in view while preparing the statements but it is not specified that what the real way is (Marco Becht, Julian Franks, Colin Mayer, Stefano Rossi, 2008). The Company Law mentions that the financial statements must include balance sheet which gives information about the position of the company at the specified time, and the income statement which is a disclosure of the financial performance of a company over the year.

The UK's Accounting Standard Board (ASB) serves the purpose of providing the basic accounting methods which each company must follow in order to prepare the financial statements. The Company Law requires preparing the financial statements, and the accounting standards lay down the foundations or the basic principles which need to be followed in order to prepare these financial statements. The accounting standards have formulated the ways in which transactions are to be recorded, the procedure for preparing income statements and the balance sheets, the effect of any transaction on the other aspects of the financials, and the requirements for following any accounting policy (such as FIFO or LIFO for recording the cost of the inventory). These accounting standards aid not only those who prepare the financial statements by providing them the basic frameworks and procedures, but also the users of these financial ...Show more


Regulatory frameworks are at the heart of every system in the world in order to get it running in an organized way and yield the best possible results. In the corporate world, this regulatory framework relates to the different requirements for running the operations of the businesses as well as the further regulations for reporting the financial performance of the organization (Irene Henriques, Perry Sadorsky, 1999).
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Behavioral Finance Essay essay example
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