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Overview of Regulatory Framework

Question:

Discuss about the India And Australia Regulatory Environment.

The regulatory framework for financial reporting provides some guidelines and standards on the basis of which companies prepare their financial reports. The framework consists of some authorities and agency who formulates some rules and regulations, to which every listed company is required to comply with. It is very necessary to have a regulatory requirement for reporting as it will ensure many things, such as need of the users are met, content mentioned in financial reports is relevant and it also monitors the behaviour and the activities of the companies towards their investors.

This report contains a literature review of the regulatory environment of India and Australia, problems faced by the framework and the progress related to IFRS adoption. It also discussed the review of regulatory capture theory and the characteristics that are required to be captured by a regulatory framework. The report is followed by a conclusion which examines the regulation framework of both the countries on the basis of the theory.

The regulatory environment for financial reporting in India mainly consists of the Companies Act 2013 and Securities and Exchange Board of India.  The act lay down some requirements of financial reporting for the companies registered under it and the requirements imposed by the SEBI according to its guidelines are to be fulfilled by the companies listed on Indian stock exchanges. These two together provide the regulatory environment of corporate reporting in India. The act is administered by the Ministry of Corporate Affairs (MCA) and SEBI works according to the provisions of Securities and Exchange Board of India Act 1992. The chairman of SEBI is Shri Ajay Tyagi.

The Companies act 2013, is in correspondence with the previous act 1956. It was introduced after the India’s biggest governance failure named as The Satyam Scandal. Post this blunder, the new act laid down many provisions to govern the listed and unlisted companies in India. It is also focused on harmonizing with the international requirements in several areas. An article published in Business Today, according to Edwin (2014) the main issue with the act was the manner in which it was carried out. The article mentioned that UPA government opted for phased implementation approach instead of full-scale one. Another issue was that the final set of rules were more rigorous than the draft rules which were put to discussion. According to the article published by Indian Chamber of Commerce (2018), though the new act enhances corporate governance but it also imposes several obligations on the companies which ultimately increases the cost of doing business.

Apart from the act, SEBI’s new chairman has also faced many challenges in 2017. As per the article in The Hindu BusinessLine (2017), the SEBI plays its role only in protecting the investors in domestic markets. The chief has to take steps for taking the Indian markets to abroad. Sundaresan (2017), said in an article published at rediff.com that SEBI is required to conduct a deep review and research of the primary market regulations. The securities that offer documents are in bulk and barely disclose and state the clear term. According to him, the new chief need to work upon cleaning up the policy space in the market.

Regulatory Environment for Financial Reporting in India

India announced about IFRS in 2007 and it will fully adopt the same by 2011. The implementation will be in phases. Ball (2006) said that in the developing countries where the quality of local governance is low, the decision of adopting IFRS will proved to be beneficial. The study conducted by Aswal, Agarwal and Das examined the impact of IFRS on Indian companies. In their opinion, the significant difference between IFRS and Indian GAAP will have a large impact on the country’s corporate sector. According to Jain (2011), his study on the adoption procedure of IFRS in India stated that there is a three step process followed in India for adopting IFRS. The first step deals with the assessments of the IFRS impact, second comprises of the activities required to be prepared for the adoption and the third steps deals with the actual implementation of IFRS.

The financial regulatory framework of Australia contains three agencies named as Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and Reserve Bank of Australia (RBA). All these agencies monitor the requirements of financial reporting in Australia. A speech given by Price (2017) on ASIC’s problems states that the long term risk and challenges faced by ASIC are related to the culture and conduct, globalisation, structural changes, establishing financial capability and digital disruption. In his speech, he mentioned that it was been noticed that many financial firms had conflicted remuneration structures and poor culture is been noticed which resulted in poor outcomes. Along with this, ASIC have to focus on enhancing the financial capability and promoting the new and innovative technologies that are prevailing in the market.

RBA is the Reserve Bank of Australia which provides banking services to the Australian government and also looks after the economic prosperity of the country. This includes currency stabilization, full employment, formulating monetary policy and promoting the welfare of Australian people. However, this regulatory framework has also faced many problems. As per the article published in Business Insider Australia, Jacobs (2017) said that there were been three key issues which the Australian economy will be facing in coming years. According to the RBA governor, these issues are required to be addressed for effectively managing the transition for next stage growth. One of the issues is slowdown in per capita income. After the end of mining boom 2011, the country is struggling to gain the traction. Other issues were the slow growth of wages and high level of household debt.

Talking about IFRS adoption, Australia adopted it on 1 January 2005. According to the report published by Australian Accounting Standards Board, the decision of adopting IFRS has been relatively smooth for most of the companies operating in Australia. The report says that IFRS makes it easier for not-for- profit entities to prepare their financial reports. However, complying with the new standards prove to be costly for NFP and small-medium sized companies. As per the review published in AASB third research report (2016), the evidences stated that the adoption of IFRS proved to be positive for the listed companies. The analyst can make accurate forecast and the relevancy of the financial information has increased. The research also suggest that annual reports has become easy to read, though they are longer. Compliance with IFRS make the Australian entities’ financial reporting services to be comparable with the global peers.

Regulatory Environment for Financial Reporting in Australia

According to the article published in Charted Accountants (2016), IFRS adoption has provided many benefits to the Australian economy. The article stated that as per the research paper of Financial Reporting Council (FRC) and AASB, the quality and comparability of Australian financial reporting has increased and improved due to the compliance with the new standards. In Australia, IFRS had become effective in 2005 and it was positively received by the investors and analyst of publicly traded companies.

Regulatory capture is basically a form of government failure which occurs when a regulatory agency, which is supposed to act in public interest, works for some special interest groups that dominates the industry it is charged with regulating. It is a key focus of economics of regulation or a part of government economic regulation. According to the article by Sharp (2014), capture theory postulates that the existing participants in the industry can easily influence and take over the regulatory agencies so that, its activities are directed towards benefitting the members rather than the public. The theory is mainly developed by Stigler (1971), who said that a firm can get benefits from the legislations if the related and relevant regulatory framework. The regulations introduced by the theory aims at benefitting the public first. The perspective was later on developed by many authors and translated it into the interest group theory.The theory of regulatory capture was evolved in several versions and other studies were also done. Those studies give more focus on the interest groups in formulating the public policy. Peltzman (1976) introduces the regulation theory by stating a concept that no interest captures the regulatory agencies with exclusivity. Later on, new ideas were incorporated by Shleifer and Vishny (1994, 2002) into the interest group theories which were named as toll theories. However, the theory was criticized by Posner (1974). He mentioned some weaknesses in its theoretical foundation. According to him, the theory does not suggest the process followed by the regulated party to capture the regulator. Also, because of the new set of rules customer’s interest will also get affected. It also does not explain the reason that why customers cannot capture the regulatory agency in order to protect their interest.

The theory is useful in a way that it provides main intentions of formulating regulations. The people or individuals who are directly affected by government regulations are included in such formation. This theory of regulatory capture provides the appropriate presentation of the governance as well as the interest groups, as the regulations are been drawn for their needs.  The capture theory enables the regulators to meet the demands of the people who are affected by it. Once the regulatory environment captures the good characteristics, it will work in public interest and it will be very useful for the public.  

As per the guide released by the Department of Treasury and Finance (2011), the regulatory systems must capture the characteristic of being effective, flexible, consistent, accountable and transparent. In order to bring effectiveness, the regulatory authorities must focus on the objectives of its policies and should work in the public interest. Due to the continuous changes in the social, political and economic environment, the regulatory systems require time to time improvements and review of new legislations in order to comply with the changes. Necessary modifications should be made to the regulatory measures for taking into account the changing business environment. Therefore, the system must be flexible enough to deal with such modifications.

IFRS Adoption

Enforcement and development of government regulations must have a high level of transparency and should be clearly presented to the society and business sectors. This helps in building trust among public and also assures that the authorities work for the interest of public only. For creating a stable regulatory environment, consistency must be there and the regulations should be predictable for fostering business confidence. Another characteristic that is to be captured is that the government should be accountable for its decisions related to the regulations and must insure public scrutiny. The same is been applied for the regulatory agencies. As such, the development must be monitored on the basis of the systematic reports provided to the public. 

Thomadakis (2007) mentioned in his paper that the good regulation is one which serves the public interest by supporting the ongoing processes such as market process in which the public participates and also to the activities like auditing, on which the public relies. He said that the basic premise of a regulation is that it must act and be seen to act in public interest only. One of the characteristic he mentioned is there must be trust and confidence. Regulations must protect public interest from unwanted private risks and systematic risks. Thomadakis said that in order to have a quality financial reporting, principle based approach must be adopted rather than stating the rules. Establishment of principles will allow the regulations to respond effectively and be consistent in its actions. He also mentioned the same characteristics such as transparency, effectiveness, flexibility and so on. Proportionality is one of the factor which is required to be captured by the regulatory environment. It considers the benefits and cost of the regulatory proposal to the economy as well as society. However, costs are easy to be assessed as compare to the benefits. But the advantages or benefits of a regulatory environment must outweigh its disadvantages and cost.

Conclusion

From the above literature review, it can be concluded that there are some problems in the regulatory environment of both India and Australia. However, talking about Australia there was a regulatory capture evidence on AASB. Before ASRB, accounting profession was in-charge of accounting setting standards in Australia . It acts both as a regulator and objective of regulation. The evidences captures stated that at time of establishing ASRB (now AASB), accounting profession petitioned that board will have no independent capability and no academic as chairperson. In 1985, the procedures got updated by ASRB in order to ensure that priorities will be set only after consulting with ARF. Previously, the same was done on the basis of public submission. Other evidences were that most of the members of board are financial directors and professional accountant and no independent regulator. Also, the board put a quick procedure for dealing with the submission from AARF only. So these were some capture of accosting standard setting in Australia which works for specific interest groups other than public (Wong, 2015).

As per the definition of capture theory, the regulatory environment of India must work in public interest. As such no evidence were captured, but the problems faced by SEBI and Companies Act must be resolved so that the interest of public can be protected. However, it was been noticed that the regulatory track record of seeking public comments was poor and SEBI’s public consultation documents also carried statement like in interest of investors and market development. Another fact which was observed is that the regulator did not allowed appropriate time for receiving public comments. Also apart from SEBI, there are other capture evidences for TRAI and AERB also. The evidence of regulatory capture was also provided for National Stock Exchange of India. It raises the issue of conflict of interest at NSE and states the recruitment procedure followed by the board. The problem faced in the implementation of companies act directly affected the companies and increases their cost. The issue eventually affected the public and enables the companies to work in investors’ interest first.

So, in order to have a good regulatory environment, both the countries’ framework needs to be effective, transparent, flexible and consistent in their working. Also according to the capture theory, they must work in accordance with the public interest. The characteristics that are mentioned in the above reports must be present in the regulatory environment so that they can respond effectively and consistency can be there in their activities or actions. Also it is necessary for the regulatory authorities to make required changes or modifications in the rules and regulations in order to meet the requirements of the public. The report concludes that it is the core responsibility of regulators and regulatory agencies of protecting the interest of public and making them aware about the economic risks prevailing in the environment.  However, the theoretical approach of the theory cannot be applied every time and it is not always possible that the regulatory bodies works completely in public interest.

References

(2011). Key characteristics of good regulatory systems. Agriculture.vic.gov.au. Retrieved from https://agriculture.vic.gov.au/agriculture/pests-diseases-and-weeds/protecting-victoria-from-pest-animals-and-weeds/legislation-policy-and-permits/new-invasive-species-management-legislation/discussion-paper-invasive-species-management-bill/appendix-1-key-characteristics-of-good-regulatory-systems

(2016). Australian economy benefits from adoption of international accounting standards. CAANZ. Retrieved from https://www.charteredaccountantsanz.com/news-and-analysis/media-centre/press-releases/australian-economy-benefits-from-adoption-of-international-accounting-standards

(2017). Challenges aplenty for SEBI’s new chief. businessline. Retrieved from https://www.thehindubusinessline.com/markets/stock-markets/challenges-aplenty-for-sebis-new-chief/article9565870.ece

 (2017). IFRS adoption in Australia was relatively smooth. Iasplus.com. Retrieved from https://www.iasplus.com/en/news/2017/03/australia

(2018). Australia's Financial Regulatory Framework. Reserve Bank of Australia. Retrieved from https://www.rba.gov.au/publications/annual-reports/cfr/2002/aus-fin-reg-frmwk.html

(2018). Companies Act.  Indianchamber.org. Retrieved from https://www.indianchamber.org/companies-act/

Ball R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, International Accounting Policy Forum, pp. 5-27. Retrieved from https://s3.amazonaws.com/academia.edu.documents/30499203/005-028.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1523516264&Signature=64ljV67MkYVtSOzABvM4M0uudyY%3D&response-content-disposition=inline%3B%20filename%3DInternational_Financial_Reporting_Standa.pdf

Edwin, T. (2014). Overdoing the vigilance. Businesstoday.in. Retrieved from https://www.businesstoday.in/magazine/cover-story/new-companies-act-corpoarte-functioning/story/206790.html

Jacobs, S. (2017). RBA governor Philip Lowe says there are 3 key issues facing the Australian economy. Business Insider Australia. Retrieved from https://www.businessinsider.com.au/rba-governor-philip-lowe-says-there-are-3-key-issues-facing-the-australian-economy-2017-9

Jain P. (2011). IFRS Implementation in India: Opportunities and Challenges. World Journal of Social Sciences Vol. 1. No. 1. Pp.125 – 136. Retrieved from https://www.wjsspapers.com/static/documents/March/2011/8.%20Pawan%20Jain%20-FINAL.pdf

Peltzman, S. (1976). Toward a more general theory of regulation. The Journal of Law and Economics, 19(2), 211-240.

Posner, R. A (1974). Theories of economic regulation. Bell Journal of Economics & Management Science, vol. 5, no. 2, p. 335.

Price, J. (2017). Challenge and change: ASIC’s regulatory focuses for 2017–18 and beyond and what risk managers should be thinking about. ASIC.gov.au. Retrieved from https://download.asic.gov.au/media/4453986/john-price-risk-management-association-published-12-september-2017.pdf

Sharp, D. (2014). Introduction to Regulatory Capture Theory. Economics.org.au. Retrieved from https://economics.org.au/2014/02/introduction-to-regulatory-capture-theory/

Shleifer, A., & Vishny, R. W. (1994). Politicians and firms. The Quarterly Journal of Economics, 109(4), 995-1025.

Shleifer, A., & Vishny, R. W. (2002). The grabbing hand: Government pathologies and their cures. Harvard University Press: Cambridge.

Stigler, G. J. (1971). The theory of economic regulation. The Bell journal of economics and management science, 3-21.

Sundaresan, S. (2017). 4 big challenges the new Sebi chief faces. Rediff. Retrieved from https://www.rediff.com/business/column/column-4-big-challenges-the-new-sebi-chief-faces/20170303.htm 

Thomadakis, S. (2007). WHAT MAKES GOOD REGULATION? Ifac.org. Retrieved from https://www.ifac.org/system/files/downloads/30th_anniversary_Thomadakis_Pres_Nov_07.pdf

Wong, P. (2015). Regulatory capture theory. Tetracarbon. Retrieved from https://www.tetracarbon.com/blog/2015/4/8/regulatory-capture-theory

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