Arguments for a regulatory approach

Introduction

The size of the world is been shrinking from the last decade and it’s already been referred as a global village.  The environment regulators and lobbying groups have been taking a special interest in the market system and seeing it as a powerful challenger. Due to this phenomenon, it has created many opportunities as well as insecurities in every one’s mind. That resulted in an ongoing debate between the accountants who whether they should regulate the market or not.  The debate among the different sects of the accountants is whether they should regulate the market or not. There is a conflict of the viewpoints between the two groups required to the degree of the openness in the operations in the market.

The law makers are with the notion that the government should intervene in the markets and create standards.  We will call this regulatory approach.

The industrialists are more of the opinion that market should be working freely but the government should make it certain that standards are not copyrightable. We will call this open or free market approach.

Regulatory approach:

 This approach is mostly advocated by the law makers. They believe that regulations of financial market guard nation’s interest by protecting investors and guarding against the systemic risk.

 Stoll argues that regulation is justifiable because it protects the interest of the investors who are unacquainted and unskilled. The other reason for the financial market regulation is the systematic risk (Stoll, 1998).  Systemic risk is referring to the trigger event which can cause a series of bad economic consequences. This clearly states that if one financial institution fails the institutions will follow automatically.  This is very much evident to the recent recession which has taken the whole world by storm.  Regulation of derivates is important because it stops the systemic risk at the minimum cost. It believes that establishing effective and efficient public policy requires not only an accurate assessment of risk attached with derivates but also the incentives provided by the instrument and potential cost of regulatory interference (Henschel and Smith Jr., 1994). Henschel and smith Jr. believes that regulations are important because derivative market provided corporations with financial tools that can be used to control their revelation to financial prices and risks. Moreover, they support the productive laws that are been designed to minimize the risk while preserving the effectiveness of the domestic and international capital markets.

Though all these scholars are in favor of the regulatory approach, but we shouldn’t’ be forgetting that there are some drawbacks, which also affiliated with this approach.  If we trace back to china where very thing is regulated and planned, which resulted in destroying everything. A planned economy looks good on the paper but in real life, they are hardly commendable.

Free market approach:

This approach is mostly supported by the investors and industrialists who believe that accounting information should be considered as an intangible product and should be offered to the freely and let them decide what and how much they need it. That means giving market enough authority to decide how and what challenges, they can face without any restrictions.  This approach can work only when presumably the market can decide so, here, the market is presumed to be Efficient Market.

Tietenberg argued that today the market has typically turned into a battle field, and it is impossible for the regulatory bodies to control the market. They need to change their course of action and allows more flexibility to the individuals to reach out their goals. By changing the incentives, the individual that is facing all these challenges would be able to make a better choice which will coincide with the best society choice. The flexibility helps the individual to achieve the environmental goals on the lower cost, which in return makes the goals easier to achieve and establish.

While Roberta Romano refers to the incapability’s of the regulatory bodies to keep the market mechanisms going effectively.  Moreover, the reformers themselves are not satisfied with their product and the approach to the security’s regulation was a mistake. They advocate that preemption is now not a solution instead they should take up a market oriented approach. This will enhance the role of the state in the security regulation.

            Free market approach is one of the very desirable approaches almost for everyone but there is a gloomy side as well. Free markets approach can only work in the efficient markets, and an efficient market only exists hypothetically. If we use this approach, we are bound to face the global depression. That the world has already faced twice.

Conclusion:

As it is evident in the above discussion that today everyone is in the search of the best approach to make the market more effective and efficient.  Gray is in the opinion that free market approach does not work in the real life. It does give some advantages but for the short run whiles it leaves a long lasting damage effect in the long run (gray, 1998). On the other hand, Henderson a libertarian says that regulation reduces the freedom of doing business. He believes that the more regulations imposed on us the worst repercussion will come.

It is really difficult to conclude which approach is best for the market. In my opinion that market; there should be some regulation, as well as they should be given enough flexibility to reach out their goals. Regulation is necessary because today the money is only concentrated in few hands and leaving nothing for everyone. Witnessing this scenario it is important for the government to step down in the market and enforce some regulations to protect the rights of the innocents and benefits the society as a whole. And by providing the freedom of taking their own actions would enable them to take the right course of action at the right time. And it will lead to the complete efficiency and bring about the optimal distribution of country’s resources.

Reference:

Tietenberg T.H “environmental instrument for the environmental regulations”

            Oxfords review of economic policy vol.6 no 1.

Stoll, Hans R.(1998) “Regulation of Financial Markets: A Focused Approach,” Plenary Lecture Multinational Finance Society Meeting : Finland

            http://www2.owen.vanderbilt.edu/fmrc/pdf/wp9917.pdf

Hentschel, Ludger and Cliffor W. Smith Jr.(1994), “Risk and Regulation in Derivatives Markets,” Journal of Applied Corporate Finance 7.3:1-29.

John Gray, (1998) “False Dawn, the Delusions of Global Capitalism.” New York press

Goodman P. S. (2007) “The Free Market: A False Idol after All?” the New York Times December 30th 2007.

            http://www.nytimes.com/2007/12/30/weekinreview/30goodman.html?pagewanted=1&_r=1

Cooper, K and G. Keim, 1983, The Economic Rationale for the Nature and Extent of Corporate Financial Disclosure Regulation: A Critical Assessment, Journal of Accounting and Public Policy, vol.2.

Gaffkin, M, 2005, Faculty of Commerce – Accounting and Finance Working papers, University of Wollongong

B. D. Wit & R. Meyer, 2004, Strategy process, content, context, 3rd ed., South-Western Cengage Learning, London.

Deegan. C, 2009, Financial Accounting Theory, 3rd ed., McGraw-Hill, Sydney

B.R&Cave, 1999, Understand Regulation, Theory, Strategy and Practice, Oxford, Oxford University Press.