The Evolution and Effectiveness of Accounting Regulations in Addressing Financial Reporting Scandals

Background on Financial Reporting Scandals

a.Unquestionably, public debate about financial reporting during the early years of the 21stcentury has been dominated by the theme of scandals. ‘Enron’ has become firmly established in the collective memory as oneof  the  biggest  financial  reporting  scandals  of  all  time,  but  the  sense  of  crisis  in  financial  reporting around  2001  would  probably  not  have  emerged  if  Enron  had  been  seen  as  an  unfortunate  but  isolated incident.  It  was  the  occurrence  of  a  number  of  scandals  in  a  short  period  of  time,  leading  to  common enumerations such as ‘Enron, WorldCom, Tyco, Xerox, etc.’, as well the unprecedented collapse of a big-5  audit  firm,  that  fed  the  notion  of  a  systemic  crisis  in  financial  reporting.  The  swift  passage  of  the Sarbanes-Oxley   Act   of   2002   with   its  stringent   requirements   to   improve   the   financial   reporting environment, and the deep impact it had on the accounting and reporting processes of companies, helped to  solidify  the  prevailing  perception  that  something  was  fundamentally  wrong  with  financial  reporting, requiring a strong regulatory response.Both Enron and Sarbanes-Oxley were first  and foremost domestic events in the United States, but they reverberated around the world. There were some signs of Schadenfreudeincountries who had long been told that their financial reporting was inferior to that practiced in the United States, but this was probably not the prevailing sentiment.1At any rate, subsequent scandals in other parts of the world, such as Parmalat in Italy, strongly suggested that problems with financial reporting were pervasive rather than local. The overseas impact of Sarbanes-Oxley coincided with a variety of regulatory reforms in financial reporting in countries around the world.Source: Kees  Camfferman  &  Jacco  L.  Wielhouwer  (2019) 21st  century scandals:  towardsa  risk  approach  to financial reporting scandals, Accounting and Business Research, 49:5, 503-535.Required:The widespread perception that financial reporting went through a period of crisis at the beginning of the 21stcentury, justifying a decisive regulatory response.Critically evaluate onthe effectiveness of accounting regulationsintroduced since ‘Enron’ in preventing scandalsin the USand around the world.                                                                     )b.Reporting rules are not the same in any two countries, and this is a fundamental issue around which much of the study of international accounting revolves.There is one critical area which forms part of international accounting, which is related to the supply of information to the international capital markets. To understand why there is a need for international rules, we need to know something about the diversity of accounting that exists in the world. After all, if a litre of petrol is the same in Wales, Spain and Australia, why are company profits not measured with the same uniformity?  (However,  if  you  look  a  little  closer,  you  will  realize  that  the  litre  is  a  measure  that  was consciously imposed, and, before liquid measurement was ‘harmonized’, there was a whole range of different measures). The Americans still stick to their gallon, and the British continue to ‘unofficially’ use their (different) pints andgallons.We probably take it for granted that financial reporting is regulated in various ways, but it is not necessarily obvious that it should be regulated, and, if it is regulated, it is not self-evident who should do the regulation. Economists  such  as  Bromwich  (1992)  point  out  that  those  who  want  to  use  accounting  information  in negotiating with others, for example to raise finance, or to sell products, have an interest in providing good quality financial information.The argument is that the market will ‘price in’ doubts about the reliability of the financial information (i.e. will  ask  a  higher  price  when  it  is  doubtful  about  the  quality  of  the  information)  to  compensate  for  the uncertainty. Consequently, the provider of the information has an incentive to provide good information and to reassure users of its quality, through devices such as using a comprehensive basis of accounting,
Page 3of 8which  is  perceived  to  be  high  quality.  For  example,  it  may  be  better  to  use  International  Financial Reporting Standards (IFRS) instead of Zimbabwe GAAP and to have the statements audited by auditors conducting their work under International Standards on Auditing. The counter-argument is that this leaves inefficiencies in the market, because it takes a little while for the poor quality information to be clearly identified, and there will always be those who believe they can deceive the market (e.g. Enron, Worldcom, Parmalat, etc.Required:Critically  evaluate  the forces  that  has  influenced  the  development  offinancial  reporting  over  the  years across different jurisdictio