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Theories Of Economic Regulation Add in library

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Question:

Describe about the Theories of Economic Regulation?
 
 

Answer:

Introduction

It is to be noted that currently most of the countries having international operations are following International Accounting Standards. The international accounting standards (IFRS) mainly framed and created based on the requirement of European courtiers. The UAE which is very fast on the path of growth, have very different religious laws and culture that creates hurdles to follow conventional accounting standards. For the growth of the UAE financial institution it is very necessary to have accounting standards which is in alignment of their local law, culture.  The theories named public Interest theory, Economic Interest group theory of regulation; Economic regulation theory and institution theory are discussed and analyzed which support the view that the Islamic Accounting standards should be introduced with relevant legislative body, Governing   Body. As major population in UAE is of Islam the reporting regulation should be in alignment of the local laws. Also the roles of the experts and manger in formation of uniform practice of reporting, accounting treatments and the corporate governance are explained well below.  

Discussion of Different theories

Public Interest Theory

The theory focuses on the reasoning of existence of the regulation. One need to understand any Proposing, formatting and implementation of regulations should have intention to meet public interest and not personal or private interest (Posner, 1974). The main reason for Regulation existence was to help and provide social and economical support to the society as a whole and not to the particular group. The formation of any legislations or regulations have intention of serving public interest and thereby help the over society to maximize the welfare (Deegan, 2009).  There are two major assumptions which need to be considering before applying theory for any discussion which are as follow:

 

The regulator and public have same intention to formulate the regulation. The regulations are the outcomes of public’s desired intentions.

The public interest has clear and fair definition.

The formation of Sarbanes-Oxley Act is the very good example Public interest Theory. There were number of corporate issues that were faced by US corporate like Enron and Arthur Anderson failures. Such failures had made the regulator to protect public interest and hence the act name Sarbanes-Oxley Act has been formed. (Deegan, 2009)

The theory’s centre point is public interest and welfare so to protect any biased regulation formation and to eliminate malpractices its suggest that following party should be involved in formation of the Regulation(Adams & Tower, 1994).

Legislative body

The above body should have role of observing, supervising and analysis the act of resource allocations. For successful implementation of the regulation and to serve the purpose of its formation this body plays very significant role.

Regulatory Body

The said body should have function of arbitrator and to provide unbiased opinion in relation to the dispute created in resource allocation. This body can be considering as control check authority over Legislative.

& (4) Industry Forces $ Non industry Forces

The above parties operate in market under the regulation and in the eye of Legislative and Regulatory body.

It is to be noted that the Public interest theory is consider as key for resolving temporary imbalances which could have permanent effect. The regulation which is going to be formed has to make balance between social benefit and cost attached to the said regulation. IF we apply this theory to Islamic practice in relation to accounting standards , we can say that Islam community has their own different culture , belief an laws name “Shariah “,  Which govern and guide the financial transactions.  It is to be noted that all Islamic citizen want to avail banking service subject to the regulation of Shariah laws. It is to be noted that current international accounting standards are not based on Islamic culture and their local law but it represent the requirement in the contest of conventional banking.

So as per the public interest theory the development of the Islamic Accounting standards has to be done. The proper regulatory and legislative body should be formed which have clear intention to provide clear reporting and accounting guidelines in conformity with muslin laws. The adoption of the International Accounting Standard does not serve the purpose of its implementation for UAE Corporate.  As In International accounting standards no considerations have been taken to support Islam regulation as it’s very different from others culture and belief. The formation and implementation of Islamic Accounting standards will give platform to UAE corporate to follow uniform practice in operations and reporting which can be supported by accounting and auditing regulatory authority (Shanmugam, Perumal and Ridzwa, 2004). And as a result same will help in growth of UAE financial institution. In the UAE almost all the financial institution and international company’s   follow international accounting standards. However it is to be noted that the international accounting standard has been framed by keeping in mind generally accepted practice all over the world, but the culture of the UAE is very different than that of other countries.  Islamic principals are very different from that of other religion. So it is very important to mould Islamic accounting standards accordingly, as in number of cases the principal’s of Islam conflict with international accounting standards. Also corporate governance of the Islamic corporate has to be promoted according to the Islamic cultural root. It is to be noted that the requirement of the development of the Islamic standards arises due to need of standardized accounting disclosure for the presentation of Islamic Corporate Companies and other organization. As the end user of the financial statement are Islamic only. The Islamic accounting standards are framed and issued by AAOIFI in United Arab Emirates. AAOFI is international non for profit Islamic corporate body which have main objective of framing, suggesting and implementation of Islamic accounting standards in varicose

 

Economic Interest Group Theory of Regulation

The above theory says that particular group generally tries to make formulate the regulation in their interest.  The same is also called as private interest theory. In Society it is sure that many groups are not in alignment with each other interest and object and hence they generally try to convince the regulator body to frame the regulation which is favorable to such group(Deegan, 2009).. There are many examples of the same.   The extraction industry was in need of specific regulation in reporting and to treatment of pre-production cost related transaction. In extraction industry for pre-production cost there were two treatments available. One is full cost method and other successful theory. Under the former names theory the cost is required to be capitalized   irrespective of whether the project find successful or not. On the other hand the later theory makes it compulsory to expense all the pre-production cost if the said project does not found successful. Now the IFRS 6 has  made it compulsory to follow the later discussed theory  which is result of demands of the major regulator of the this industry . It is very difficult to have good financial position for small companies in such scenario. This can be considered as perfect example of economic interest group theory (Cortese, Corinne and Irvine, Helen J. and Kaidonis, Mary,2009) There are other examples like implementation of AASB 139 with minor change for Australian financial institution. The follow of said accounting standards make it difficult to show true picture as it does not show the real position of the company. (Deegan, 2009).

It is to be note that almost all the UAE financial institutions are following International Accounting standards. The Central bank is the regulator for all such financial institution. However it is to be noted that Dubai International Financial Center was the first organization who had decided to implement and follow Islamic Accounting standards and it has its own regulatory body named Dubai Financial Service Authority. Now the DFSA has taken support of the other authorities and tried to convince the regulatory body to set the Islamic Accounting standards to have solid growth of the Bank as many of the banks were not following this.  DSFA has played very major role in consulting the central bank for setting the Islamic accounting standards and have tries to set the standards  for own benefits.

3 The Theory of Economic Regulation      

The said theory says that the existence of the regulation is nothing but one economic product which is handles by two major groups, One is industry leaders or stakeholders and other is the Regulatory authority .The industry stakeholders are considered on demand side and  regulatory authority which is government body only at supply side (Posner, 1974).. The regulator has power to act in the best interest of the public if demanded by the industry stockholders. When the number of the dominated players in the industry is more, in such time demand for the regulation are very high. However when the markets are monopolized and the industry players have strong cartel, the demand is very less for regulation formation. The theory is trying to deliver the fact that the regulations are not formatted to have market efficiency position but such regulation are used by market players as a medium of taking economic benefits which may affect by the political factors.

It is to be note that DFSA is the key driver in formation of the Islamic accounting standards. The has its own financial institution operating successfully. Now in future it is very muh possible that the regulation which are implemented in Islamic Accounting standard may serve the medium of economic benefits in future 

 

Institutional Theory

The said theory mainly provides the rational reason why particular organization adopts its operation structure as followed by other organization in the same industry. The main reason behind this is that every organization try to convince outsiders that they have legitimate organizational structure and have legitimate operations to survive in the industry .There are number of researchers who have taken the help of this theory in various accounting researches. Every organization has its own choice to its accounting practice according to its organizational culture or industry culture , so organizations should have choice to determine its various practice according to the Cultural and industry follow trend(Deegan, 2009). There are major two component of this theories, One is Institutional Isomorphism and second is Institutional decoupling. It is to be noted that this both concepts are very important to analyze the independent corporate practice. (Deegan, 2009)

We are going to make analyze of the Institutional Isomorphism theory which helps in knowing the political and ceremonial forces that exist within the organization. The theory says that the one organization tries to follow the principals and operation mode as of other organization. For an example if a new organization has started its business in particular country, Now this organization defiantly will follow and copy the operation structure and other practices. This is very necessary to convince the outsiders for existence of legitimate business in the company. 

 The institution theory also gives the theory which is in support of legitimacy theory and stakeholder theory.  The said theories say that the manager is the pressurized to adopt and act in compliance with the widely accepted corporate practice. There are three types of the pressures which are on manager coercive, mimetic or normative(Deegan, 2009). In real life it is very difficult to differential above three types however I have tried to provide brief on it as below(Carpenter and Feroz, 2001).

Coercive Isomorphism

The above theory says that manager can have both formal as well informal pressures because of other organizations operations function operating in the same society(DiMaggio and Powell, 1983). This type of pressured are generally found under which on organizations survival is dependent on other organization. (Deegan, 2009).

Mimetic Isomorphism

Under this theory the managers are always in the constant pressures for making efforts for convincing external stakeholder that the organization has legitimate business. If the organization does not take any innovative actions and procedures in implementation, manager believes the legitimacy of the business can be doubted by the external stakeholders. (Deegan, 2009).

 

Normative Isomorphism

The said theory talks by pressure created on employees or and manager due to the expectation of certain professional Group. Like if an account manager is working in the organization than we can say that it has pressure to comply with accounting practice adopted and followed by the other professional accountants within the same society. Also the informal pressure to manger can also be part of Normative theory for which the culture and its background plays very important role. Also there exists pressure on manager to follow same reporting practice as adopted by the other professional (DiMaggio and Powell, 1983).. Such practice exist to remain in the line of generally accepted practice (Deegan, 2009).For an example if the manager of particular school who has newly appointed recently. It is bound that the said manager will follow and implement certain practices which were followed by his in other school organization previously

It is to be noted that UAE has number of good professionals who are interested in Islamic Financial banking.  As currently the number of expert for conventional banking are more, the Islamic banking can take benefit of such expertise by molding the experts by giving training to           follow practice of Islamic Accounting standards. As per the Isomorphism’s three types theory supports our view that local Islamic expert’s religion and culture will help such expert to implement Islamic accounting standards in better way. As the Islamic accounting standards will have background of Islamic banking practice, culture and religious laws.   Such managers and expert can create uniform practice for reporting, accounting treatments and thus can help in the growth of the Islamic Financial and banking institutional.

Conclusion

After referring to the above discussion we can say that the culture, principals and thinking of the Islamic countries are in much difference with Western countries. The fact is that the International accounting standards are developed keeping into mind the western countries business nature and their accounting issue. Same cannot be applied to Islamic entity where basic fundamental principals are different. Instead of complying international accounting standard on own discretion it was very necessary to have uniform Islamic accounting standards to remove the irregularities of the accounting transaction and book keeping. Yes the Islamic standard has its own limitation as far as coverage is concern but over a period of time the same will become wide by introduction of new provision based on the experience. We can say that major difference is in the financial institutions and banks operation and not for another entity.

 

References

Posner, R A, 1974 Theories of Economic Regulation. The Bell Journal of Economics and Management Science, Vol. 5, No. 2.

Deegan, C., Financial Accounting Theory, 3nd edition, McGraw Hill Book Company, Sydney, 2009

Shanmugam, B. Perumal, V. Ridzwa, H.A. (2004) Islamic Banking: An International Perspective, Serdang: University Putra Malaysia Press

Carpenter, V. and Feroz E. (2001). "Institutional theory and accounting rule choice: an analysis of four US state governments’ decisions to adopt generally accepted accounting principles". Accounting, Organizations and Society, 26, p565-596

DiMaggio, P J & Powell, W "The iron cage revisited" institutional isomorphism and collective rationality in organizational fields", American Sociological Review, 48 (1983), 147-60

Teran, N.D., 2007. Islamic Finance In London: The City Makes A Head Start For Hub Status - The Market For Islamic Banking Is Forecast To Grow At Double The Rate That Conventional Wholesale Banking Will Grow In The Next Five Years. Unsurprisingly, Banking Centres Around The. The Banker, pp. 1

Cortese, Corinne and Irvine, Helen J. and Kaidonis, Mary (2009) Powerful players : how constituents captured the setting of IFRS 6, a standard for the extractive industries. Accounting Forum, 34(2). pp. 67-152.

Richard Posner, 1974,”Theories of Economic Regulations”, Accessed on 27 March 2015,< https://www.nber.org/papers/w0041 >

Jalal Azarberahman,2012,” Theoretical Bases of Islamic Accounting and Challenges Ahead”, Accessed on 27 March 2015,< https://www.iracst.org/ijcbm/papers/vol1no32012/12vol1no3.pdf >

*Mohammad Sharairi ,and Jesmin Islam,and Harun Harun,2013,” A History of the Development of Islamic Accounting Standards: An Investigation of the Influence of Key Players”, Accessed on 27 March 2015,< https://www.wbiworldconpro.com/uploads/dhaka-conference-2013/accounting/1394963123_104-Jesmin.pdf >

Anon,n.d.,”Islamic Accounting “,Accessed on 20 March 2015,< https://www.iasplus.com/en/resources/topics/islamic-accounting>

Hamid, K. T., 2012, IBF 8211 (Accounting for Islamic Financial Institutions), accessed on March 27, 2015 < https://www.academia.edu/2027832/IBF_8211_Accounting_for_Islamic_Financial Institutions>

IASPlus, 2013, Islamic Accounting, accessed on March 15, 2013 ,https://www.iasplus.com/en/resources/resource64

FASB, International convergence of accounting standards: a brief history, Viewed on 18 February 2013, https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264&

Abdul Rahim Abdul Rahman,n.d.” An Introduction To ISLAMIC ACCOUNTING THEORY AND PRACTICE

“, Accessed on 27 march 2015,< https://www.kantakji.com/media/9260/introduction-to-islamic-accounting-practice-and-theory.pdf >

Adel Mohammed Sarea and Mustafa Mohd Hanefah,n.d., Adoption of AAOIFI accounting standards by Islamic banks of Bahrain”, Accessed on 27 March 2015,< https://econpapers.repec.org/article/emejfrapp/v_3a11_3ay_3a2013_3ai_3a2_3ap_3a131-142.htm >
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