Regulatory and Economic Environment of the USA - Essay Example

Regulatory and Economic Environment of US The global financial landscape has been undergoing a significant transformation over the last couple of decades. Political and Business climate changed drastically. More market-based economies, supported by rapid improvement of technology, developed. These developments increased the connections among the financial centers of the world. There has been a rise in the rate of borrowing foreign capital from US financial market. As a result, the US investors are increasing their investments in this type of equities. Thus, the security market is becoming more global, challenging the regulators of the securities market to meet the needs of market participants with protection and integrity. Efforts are made to develop a financial reporting framework which will protect the interests of investors via fair disclosure of investment decisions. To function effectively, high quality information is needed by financial markets and investors across the world. The confidence levels of the investors get increased when reliable investment information prevails in the market. Ensuring the flow of high quality financial information to the capital market is not dependent solely on the Accounting Standards (AS). AS are properly applied and implemented while preparing the structure of financial reports and the company’s management report. Then the Auditors check the financial statements and judge whether it is presented according to the AS. These responsibilities are to be met to ensure proper application of the AS in order to avoid lack of transparency and provide consistent financial information. There are a number of issues that should be remembered and addressed in order to provide a commendable infrastructure of financial reporting. (International Accounting Standards, April 2000) Elements of Financial Reporting Structure of US A. High quality AS For the development of financial reporting structure of high quality, appropriate Accounting Standards are critical. The users of the information have varying needs resulting in the formation of different accounting traditions. Accounting Standards are shaped according to the influences of private creditors’ need, tax-authorities or central planners in different countries. In US, AS are developed in accordance with the needs of capital market participants. Accounting Standards of US provide framework for reporting that deliver steady, transparent, equivalent, reliable and relevant financial information. In US high quality AS is maintained to regulate the capital market and provide quality information for participants to take appropriate investment decisions. AS of high quality consist of neutral principles, which require comparable, consistent, reliable and relevant information useful to lenders, creditors, and investors for making capital allocation decisions B. Audit Standards of high quality Audit is an important element in financial reporting which increases the reliability of the statement. In order to efficiently allocate resources effective audits are essential in capital market environment as investors depend on reliable information. US recently emphasized the significance of auditing standards of high quality. Investors in the capital market of US opt for enhanced reliability. C. Effective quality control of audit firms The quality control methods and approaches applicable to audit firms need to comprise of elements like, integrity, independence, objectivity, personnel management, continuance and acceptance of clients, engagement performance and monitoring. D. Profession-wide quality assurance To ensure quality performance of audit engagement a systematic approach is needed for accounting professionals. Necessary elements for the system are provision of training and education about recent developments, effective monitoring system and timely and effective disciplinary process. E. Regulatory oversight Financial reporting structure of US comprises of separate interdependent elements, such as standard setting process of private sector, registrants’ financial reporting and self-regulatory activities by accounting profession. (International Accounting Standards, April 2000) International trade & Regulatory environment in US Regulation has been blamed frequently for the decline in United States’ international competitiveness in the last decade along with decline in trade position in US. Regulations pertaining to governing pollution control, health and safety of workers, nuclear power and consumer protection raised the costs for US manufacturers significantly. These regulations created competitive disadvantages to the US manufacturer with imports from other countries that are more likely to contaminate their environment or bring more risks to the workers. (Navarro, n.d., p.466) Financial Regulatory System of US The US Financial Regulatory System of US currently comprises of different elements of federal regulations existent the past, forming a complex arrangement. Major developments and products in financial market are way ahead of the present regulatory system. Various federal regulatory agencies, self-regulatory bodies and financial regulatory agencies are responsible to look after the industry of financial services. Limitations of US regulatory system were exposed after some key changes and new products were implemented in the financial market. Often the regulators fail to identify systematic risk arising from financial conglomerates and ensure the management of these risks. Financial market oriented problems arising from less regulated participants should be addressed by the regulatory body. Complex new products in the financial market also challenge the regulators as the consumers find it difficult to understand. There was a proposal from the Treasury Department recently to reform the regulatory system of US, make it more understandable to the investors and consumers. This will also provide protection to the consumers in US. (Financial Regulation, Sept 29, 2009). In 2008, there was an immediate need for the regulation of US financial market because of the credit crunch, which resulted in some severe financial failure. The policymakers in US are taking serious steps to reorganize the financial regulations for long-term benefits. Classification of financial reporting in US US government after a long delay has decided to regulate their financial reports in compliance with the new GASB rules that are laid down by the Governmental Accounting Standard Board (GASB) in June’99. US government has now changed its way of communicating with the public or anyone having interest in the government’s financial proceedings. At present all the financial activities of US government are easily followed by US citizens. These include cost of government services, information related to building of infrastructure in US and so on. Every citizen has the right to know the financial proceedings of their government and the position of financial health in comparison with the past years. This helps them make their short-term and long-term financial investment decisions. GASB ensures that person using government financial statement gets all the required information from the financial report before taking his decision. State governments previously used to make ‘fund’ based financial statements. To visualize the ‘Big picture’ the new form of financial statements provides additional financial information from government perspective. Data which is provided in finance reports should help the decision makers make sound decisions and ask for better explanation of work from government officials, if found faulty or not up to the mark. So this new framework of financial reporting has made the general public of US more aware of the government’s financial stand and its future developments. This new format also helps US citizens to find proper answer to their questions related to financial happenings in the country. (GASB’s report, n.d) Nobes introduced a model of financial reporting with two classifications, Microeconomic and Macroeconomic systems. The microeconomic systems which is mainly business oriented had key determinants like, basic philosophy and historical origin whereas, the macroeconomic system which is government oriented is based on taxation and economic management. In US the economy is mainly business oriented and hence the use of microeconomic system is more appropriate for financial reporting. We see that GASB also developed a new reporting model with microeconomic orientation. (Nobes and Parker, 2004) Under GASB 34, a new reporting model was developed for Public Housing Authorities (PHA), with two reporting options, which are essential- the governmental and the enterprise model. In the net asset statement both long-term assets and liabilities are mentioned. This is done using economic resource assessment and accrual basis of accounting, for the enterprise model. In the governmental model, emphasis is given on the economic activity and the usage of goods and services rather than purchase of goods and services by consumers. Under GASB 34, requirements of the financial reporting for business-type activities are much lesser in comparison to the requirements of public house authorities. (PHA GAAP flyer, Dec 2001) Conclusion Today the world is changing rapidly and after a period of 30 years we would experience a totally new form of economic environment, which would not have many similarities with the past. Although USA is considered to be the most powerful economy, its growth has sluggish in past decades. It is not expected to undergo any rapid improvements in recent future. Major influences like debt and interest structure, consumer taste, natural resources and energy affected the regulatory and economic environment of US. References 1. US Security & Exchange Commission, (2000), international accounting standards, Available: http://www.sec.gov/rules/concept/34-42430.htm 2. Navarro. P, (n.d), US Regulatory environment and international trade, Available: http://web.merage.uci.edu/~navarro/Vita05/JA%2027%20The%20US%20Regulatory%20Environment.pdf 3. US GAO- Financial Regulation, (2009), Financial Regulation: Recent Crisis Reaffirms the Need to Overhaul the U.S. Regulatory System, Available: http://www.gao.gov/products/GAO-09-1049T 4. Mali74, (2007), Factors that Affect the American Economy, Associated Content, Inc., Available: http://www.associatedcontent.com/article/318851/factors_that_affect_the_american_economy.html 5. GASB’s reporting model project, (n.d), Governmental Accounting Standard Board, Available: http://www.gasb.org/repmodel/background.html 6. GASB’s New Financial Reporting Model, (2001), US Department of Housing and Urban Development. PHA GAAP flyer VOL 2 issue 1, Available: http://www.hud.gov/offices/reac/pdf/gaapflyer5.pdf . 7. Nobes, C. and R.B. Parker (2004). Comparative International Accounting, Prentice Hall. Read More