1.

Accounting information is a public goodonce available, people can use it without paying and can pass it on to
others. Parties who use goods or services without incurring some of the associated production costs are referred to
as free riders. In the presence of free riders, true demand is understated because people know they can obtain
the goods or services without paying for them. To alleviate this underproduction, regulation is argued to be
necessary to reduce the impacts of market failure .
2. One argument supporting regulation is that it is in the public interest. Without regulation, there is the possibility
of failure in the free market system because the firm is a monopoly supplier of information about itself. This
situation creates the opportunity for restricted production of information and monopolistic pricing if the market is
unregulated. Mandatory disclosure would result in more information and a lower cost to society, rather than to
have all investors privately contracting for the same information and paying higher monopolistic prices
3. While proponents of the free-market approach may argue that the market on average is efficient, such on
average arguments ignore the rights of individual investors, some of whom can lose their savings as a result of
relying upon some unregulated disclosures. Parties with limited power (limited resources) will generally be unable
to secure information about an organisation, even though that organisation may impact upon their existence.
Investors need protection from fraudulent organisations that may produce misleading information, which due to
information asymmetries, cannot be known to be fraudulent when used. Financial reports are normally prepared
by the management of the company who possess more information than the owners of the company so
information asymmetry arises between them. Without regulation, even though management might disclose
relevant accounting information voluntarily in order to get funding, the degree of credibility and completeness of
information is unclear. The business might not disclose all relevant information to users or withholding information
unless the disclosures is for their benefits.
Furthermore, asymmetric information will lead to inequality of opportunity and returns among investors.
Regulators often use the level playing field argument to justify putting regulations in place. From a financial
accounting perspective, this means that everybody should (on the basis of fairness) have access to the same
information. This is the basis of laws that prohibit insider trading, which rely upon an acceptance of the view that
there should not be, transfers of wealth between parties simply because one party has access to information
which others do not.
4. Regulation leads to uniform methods being adopted by different entities, thus enhancing comparability.
Globalization has led increase in contribution of capital by foreign investors -> comparability of accounting
information has become more important because investors need to compare financial performance of companies
accross countries in order to make investment decisions.