Behavioral Finance: Elements of the Regulatory Framework in the UK - Assignment Example

Assignment Behavioral Finance 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). Financial reporting refers to the disclosure of the company’s financial and operational information in order to provide the users a clear and accurate picture of the actual performance and worth of the company (2005). Although every business is different in some respect from the other, but their accounting procedures are to be performed in some standardized manner in order to have consistency and get an accurate picture. 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 statements such as the shareholders, the investors, and somehow the auditors as well (Baruch Lev, Paul Zarowin, 1999). The users benefit from these regulatory standards because they get extended information about the company, its operations, and its financial performance by the implementation of these standards as compare to the information disclosed by the requirements under Company Law. They also get access to the tactics and the principles used in preparing these statements thereby having a more clear and accurate understanding of the company’s activities (David W. Right, 1996). Besides, the most important advantage of the accounting standards and policies is that they help in standardizing the accounting information available in the market by streamlining the methods used. As a result, the users are able to compare the performance of different companies easily because the results are generated and disclosed on a similar note thus enhancing the comprehensibility and comparability (Santhosh Abraham, Paul Cox, 2007). Although, compliance to these standards does increase the overall cost of the businesses but it is worth it. Some of the formulators of these standards also face difficulties when finalizing the content of these standards, but again their efforts are worth the benefit they are creating for not only the preparers of the financial statements but also for the users in the business world. Another important fact to be considered here is that the purpose is not only formulating these standards but also to work for their proper implementation. For this purpose, in UK, Financial Reporting Council (FRC) was established in 1990 which is working for the overall welfare of the formulation and implementation of the accounting practices. This is helping to make the reliable and relevant information available to the respective persons in true sense. The third important element of the regulatory framework in the United Kingdom is the stock market. The London Stock Exchange is itself a regulatory framework in which the public limited companies list themselves in order to get excess to the capital market by attracting increased number of investors. But it is not an easy game to get listed in the stock exchange. In order to qualify for this, the companies need to comply by the rules and policies as required by the stock exchange (Narayan Y. Naik, Anthony Neuberger, S. Viswanathan, 1998). The companies must fulfill the regulations for getting listed on the stock exchange and get their securities traded in the market (Sussane Lutz, pg. 153-168). Although some space is given to the growing companies by requiring less information, but in most cases, stringent requirements are to be followed to remain listed on the stock exchange. As in UK, there are regulatory frameworks all over the world to keep track of the accounting standards being followed and implemented. But these standards differ from country to country depending on different factors such as the social values, the culture elements, and the attitude of the country towards regulation and implementation of such standards (Saudagardan, Shahrokh, 2001). Also, each country is different and the legal requirements differ accordingly depending upon the nature of the events that take place in that country. With the advent of globalization, the need for consistency and standardization has increased (2006). In this global marketplace, if any company originated in UK and listed in the London Stock Exchange decides to get listed on Tokyo Stock Exchange as well, then what standards it needs to follow in order to comply with the regulations with both the stock exchanges? This question posed difficulty for many companies which decided to globalize their presence by listing on various stock exchanges in order to get increased access to the capital markets (Pauline Weetman, 2001). Each country had a different set of GAAP (Generally Accepted Accounting Principles) requiring the economic transactions of the company to be recorded in the way that is suitable to that specific country (McGregor, Warren, 1999). In order to solve the issue of such variable practices being followed around the globe, IASC (International Accounting Standards Committee) was established in 1973 which formulated IASs (International Accounting Standards). However, this did not solve the issue because no country can be forced to comply with these standards because each of these standards was not feasible to each country (Zeff, Stephen A., 1998). There was lack of acceptance on behalf of some countries because the standards were not suitable for each company in each country referring to the circumstances. To resolve the issue of worldwide acceptance for getting better transparency and comparability, International Accounting Standards Committee Foundation was established in 2001which had members from across the globe to get diversified input (Pactor, Paul, 1998). This helped in producing standards which were more acceptable to the countries because their concerns were already taken into view in the process of formulation of these standards (2006). Still, it depends on the country that whether it adopts the IFRS (International Financial Reporting Standards) fully, in amalgamation with their national standards, or decides to adhere to their national standards only (Tiffany Bradford, 2007). Further, the implementation of these regulations is also subject to the legal system present in the country. Another issue was that whether the international standards should be prepared on a principle-based approach or by taking the rules-based approach. But, it was decided that the principle-based approach is the right one to be followed because it gives more certainty and objectivity (Donna L. Street, Kimberley A. Shaughnessy, 1998). On the other hand, when rules are established they only give certain values whose implementation depends on the subjectivity of the decisions taken (CMA Management, 2006). The efforts put by the European Union in harmonization of the accounting standards in the region have proved very favorable. The countries which are a part of the EU have adopted these international standards or otherwise the EU directives in order to have consistency and comparability. As a result of the overall efforts of the accounting bodies, about 100 countries are making attempt to get in compliance with the IFRSs. This is a positive aspect and sets the path for future of the standardized global practices. Biblography 1. LSE attracts hedge-fund investors. 2009 , The Financial Express : http://www.financialexpress.com/news/lse-attracts-hedgefund-investors/184666/ 2. Business Glossary: 2009. Financial Reporting : http://www.allbusiness.com/glossaries/financial-reporting/4951111-1.html 3. Answers.com, 2009. Objectives of Financial Reporting: http://www.answers.com/topic/objectives-of-financial-reporting 4. ShooSmith, 2009. Listing and Stock Exchange Regulations : http://www.shoosmiths.co.uk/services/959.htm 5. FRC Financial Reporting Council, 2009. Financial Reporting Review: http://www.frc.org.uk/images/uploaded/documents/Annual%20report%2006.pdf 6. Suit101, 2007, IFRS: Accounting Standards: International Financial Reporting Standards and the IASB Available at :http://gaap-standard-accounting-practices.suite101.com/article.cfm/ifrs_accounting_standards 7. International Accounting Standards Board, 22 Feb 2006. US FASB and IASB reaffirm commitment to enhance consistency, comparability and efficiency in global capital markets Available at : http://www.iasb.org/News/Press+Releases/US+FASB+and+IASB+reaffirm+commitment+to+enhance+consistency+comparability+and+efficiency+in+global+c.htm 8. Deloitte, 2009. Accounting Standards Updates by Jurisdiction. Available at: http://www.iasplus.com/country/country.htm 9. "International Accounting Standards." Encyclopedia of Business and Finance. Ed. Allison McClintic Marion. Gale Cengage, 2001. eNotes.com. 2006. 7 Aug, 2009 10. Regulatory Framework/definitions: http://www.thefreelibrary.com/IFRS:+consistency,+comparability+remain+a+challench.-a0164304462 11. The Boundaries of Financial Reporting and How to Extend Them Baruch Lev and Paul Zarowin Journal of Accounting Research, Vol. 37, No. 2 (Autumn, 1999), pp. 353-385  (article consists of 33 pages) Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2491413 12. David W. Wright, May 1996. Evidence on the Relation Between Corporate Governance Characteristics and the Quality of Financial Reporting Available at: SSRN http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10138 13. The Relationship between Environmental Commitment and Managerial Perceptions of Stakeholder Importance Irene Henriques and Perry Sadorsky The Academy of Management Journal, Vol. 42, No. 1 (Feb., 1999), pp. 87-99  (article consists of 13 pages) Published by: Academy of Management Stable URL: http://www.jstor.org/stable/256876 Read More