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What is the meaning of better corporate financial reporting? How can financial reporting be improved? There are many claims of shortcomings of financial reporting. Conflicts among these claims point to the political elements of the problem inherent in collective choice in a society. Since “better” depends on the interest group whose perspective is chosen for analysis, politics lies at the heart of accounting policy. The set of possible means of arriving to any agreed upon meaning of “better” includes not only regulation, but also social norms and market competition. Judiciously combining all three approaches, instead of relying on any one alone, may help us improve financial reporting. This paper examines the meaning and means of better financial reporting.
How should we think about and improve financial reporting? The topic has received much attention during the past century. Perhaps an initial step toward making progress is to recognize that the problem of designing such regimes and standards is not unique to accounting. There are more than five hundred domestic standard-setting organizations in the United States alone and hundreds more in other countries. These organizations are busy defining their technical and business environments and setting standards for everything from ships to shoe laces. In addition, there are international bodies who set standards for things such as radio transmissions across national boundaries. An examination of the accounting regime in the larger context of other products and services in society may help us appreciate the costs, benefits, limitations, and economics of developing a better financial reporting regime (Jamal and Sunder, 2011).
5. Concluding remarks
No matter what institutional mechanism we devise to set accounting regimes, our ability to identify socially superior solutions will remain limited and imperfect. Others’ preferences and circumstances are not known, and they change continually. People adjust their behavior to changes in the regime in difficult-to-anticipate ways. Accounting regulators’ record in assessing the consequences of their actions is not impressive, especially when the new rules are complex. For this reason, aggressive top-down written rules can have only a limited role, in combination with bottom-up social norms that arise from practice and experience.