Pro-Regulation Regulation in Accounting

Regulator Battle (The Economist, 2009)

The importance of regulation is often overlook or even mocked in society. Regulations and the regulators that administer them are often portrayed as something that slows progress and makes it difficult to navigate the complexities that adherence to the regulatory requirements require. It is easy for people to view regulations from this perspective because when regulations are effective and properly designed they may seem unduly burdensome. However, when regulations break down or are ineffective it is far easier to see the value of regulation. People commonly do not actually appreciate the value of regulation until they have an example in mind that stands in recent memory. This is summarized in a statement by Tim Geithner after the global recession emerged in 2009 which said, "You want to move at the point where people still have the memory of the trauma" (The Economist, 2009). Although effective regulation is easy to take for granted when no crisis is present, the overall health of a society is dependent on an effective regulatory environment ensuring that a society operates in a transparent and fair manner.

Historical Perspective on Regulation

The role of governmental regulation on financial activities in society is far from a new issue. Ever since free markets have developed there has a polarization of positions ranging from a laissez-faire approach that allows full capitalism as the way to socialism or even communism. However, the historical record seems to provide evidence that when either pole is adhered to too strictly it produces social ills. For example, when pure capitalism and the efficacy of the markets is held as the number one priority this...

The level of competition among firms that creates the value of the market can be heavily distorted and poverty and famine can ensue.
However, when governments intervene too much then this can also create an environment in which innovation and entrepreneurship is significantly hampered. The regulations imposed on financial reporting instruments cannot be so overwhelming that they prevent business owners from trying to create value. With strict regulation there seems to be a sense of complacency and a decrease in incentives and motivation to participate in this environment. Therefore it is a difficult balancing act for regulators to try to maintain. However, without any regulation, society would not be sustainable. Therefore regulation should be present yet kept in the most effective and simple form as possible so that it can maintain the difficult balance in which it can maintain a stable society.

Financial Deregulation

One way to make a case for more regulation, or at least more effective regulation, is to examine an example of a case in which deregulation occurred. Fortunately, such an example is readily available. Beginning in the 1990s, there was broad trend of financial deregulation allowed the financial industry more leeway to operate in a plethora of different ways. One example of such deregulation was the repealing of the Glass-Steagall Act in the U.S. which specifically separated investment banks from deposit institutions. The deregulation measure allowed banks to take risks with depositors' money that was previously prohibited. Many believe that deregulation allowed banks to accept increased amounts of risk which was one of the main factors that eventually led to…