Public Interest Theory And The Role Of Politicians As Regulators

Financial Accounting Theories

Question:

Interest Theory and what of the role of regulators (politicians)? What are the motivations of politicians as regulators?
 

This study is about the public interest theory and the role of politicians as regulators, their motivations and its repercussions on the society. The argumentative study is presented through an analysis of the research publication by Jean Houdet and Charles Germaneau. The methodology undertaken is to make an analysis in three parts. The first part gives an internal introduction and regulatory theories. The second part is an argumentative presentation that argues on the role of politicians who act for the benefit of a few interest groups through an analysis of the research publication by Houdet and Germaneau. The third part presents the requirement for a standard accounting practice and regulation that will meet the changing business needs. The study concludes with the fact that politicians as regulators play according to a few interest groups while framing regulations at the cost of the society and environment. A single, unified accounting practice is required.

The first part of the study is an internal introduction. This part makes an analysis of the financial accounting theory and the need for theories of regulations. Special emphasis is given to the role played by politicians and the factors which motivate these politicians to intervene in objectives and functioning of governing regulators.

2.1 Financial Accounting Theories

Financial accounting theories are classified as normative and positive theories.

2.1.1 Positive Accounting Theory

This is a positive theory which predicts and explains accounting practices and is based on the economic theory that focuses on agency relationship as they provide resources to the firm such as owners and managers, managers and debt providers. It assumes that self-interest drives an individual’s action to increase his wealth and increase his self-interest.

2.1.2 Normative Accounting Theories

These theories identify the objectives of GPFR such as the conceptual framework. Normative Accounting Theories are classified as current-cost accounting, exit-price accounting, and deprival value accounting.

2.1.3 Systems Oriented Theories

They are of three types namely:

• Stakeholder Theory: It has two branches which are ethical (or normative branch) and managerial (or positive branch). It describes that all stakeholders such as employees, lenders, shareholders, customers, government and interest groups have a right to get the information provided to them.
• Legitimacy Theory: Organizations should ensure that their operations remain within the norms of societal requirements, are legitimate. Through disclosures in annual reports, organizations consider the rights of the investors as well as the public in general.
• Institutional Theory: Organizations tend to take the same form and characteristics within their field. This theory overlaps with the stakeholder and legitimacy theory.

2.2 Role of regulators

The objective of accounting is to provide access to information so that interested parties may take decisions. Accountants and accounting standards require regulations. Regulations help to benefit the society in general rather than to serve a particular interest group. Regulations are required

• To protect public interest
• For healthy competition.
• When there are windfall profits
• Information asymmetries
• Profit skimming
• To correct inequitable and inefficient market practices

2.3 Theories of regulation

• Public Interest Theory
• Capture Theory
• Economic Interest Group Theory

2.3.1. Public Interest Theory

The Public Interest Theory gives a normative justification for regulations. It depicts that regulations are formed to correct inequitable and inefficient market practices. This theory gives importance to regulations to benefit the society instead of benefitting vested interests.

• The government should work as a neutral arbiter(Deegan 2006)
• It helps in healthy competition, stabilizes the economy and ensures social objectives in policy-making

Deepwater oil spill damage of BP depicts the way markets are unregulated and inefficient. It also shows that government lacks neutrality which was the main criticism of public interest theory.

2.3.2 The capture theory

Organizations that come under regulations will ultimately control regulators as decisions made by regulators will impact the industry significantly. Interest groups use government regulators like politicians as protective gears to serve their own interests.

The Public Interest Theory

2.3.3 Economic Interest Group Theory

It prescribes that interest groups become regulators wherein regulations serve particular parties for private interests such as politicians. It is also called as the “Coalition-building theory

2.4 Motivation of politicians as regulators

Politicians are pressurized by powerful interest groups in regulatory intervention. The incentives that politicians get from these interest groups are:

• To be re-elected
• To maintain control and power
• To attract support for re-election successfully

Politicians compete to increase their wealth and income and help interest groups to achieve their narrow self-interests thereby shaping regulatory practices. State power is made to fit demands by interest groups. Interest groups provide political support through campaign and vote contributions. The deep-water horizon spill by BP is an example of how BP used political power to protect itself from the environment crisis it created through its oil-spill. 

This part describes the research publication that is taken for analysis. The methodology used for the analysis is through an argumentative study that supports the research publication on the ‘Deepwater Horizon Oil Spill’ by Joel Houdet and Charles Germaneau. The analysis argues to support that politicians are regulators who act for interest groups and studies the motivations behind the role of politicians as regulators.

3.1 Description of the Research Publication

British Petroleum has an annual profit of over $23.6 billion which is the largest for an Australian Corporation. It employs around 100,000 employees around the world. On 20 April 2010, in the Gulf of Mexico, the Deepwater Horizon rig exploded (Houdet & Germaneau 2011). BP was held responsible for damages to the environment along with Transocean, MOEX and Anadarko. Bob Dudley the CEO of BP accepted responsibility for the incident stating that  (Wilson & Kuszewski 2011)

• The ‘well integrity’ had failed
• Undetected hydrocarbons had entered the wall and ignited the Deepwater Horizon
• The well was not sealed by a blowout preventer
• It has caused 11 deaths as well as environmental havoc through hurricanes and seasonal threats to areas around the Gulf Coast (Hiscock 2012). 

3.2 Argument supporting the role played by politicians as regulators

The research publication on the BP deepwater oil spill exposes the environmental damage caused by the oil spill. But the corporation tried to get off the issue through manipulative activities. Regulations are required to protect the society and environment. But when regulations are manipulated, it backfires on the society. BP used political power to make the government act in its favor and act against the public interest.

3.2.1 Arguments supporting this position

• BP has not disclosed the ecosystem and social damages fully nor has it exposed the calculation methodologies of its $40.9 billion pre-tax charge. It was more of political bargaining that resolved the amount that determined the loss to the environment than a technical calculation says the research publication(Houdet & Germaneau 2011). The White House withheld information regarding the oil spill by blocking the information to the public.
• Immediate impacts in the Gulf of Mexico after the oil spill could be seen with the naked eye. Dolphins averaging 200 are dying annually; shrimp fisheries have closed and deep-water corals show tissue damages are some examples of the environmental disaster. About 20 valuable categories of ecosystem services around the Gulf of Mexico have been affected(Houdet & Germaneau 2011).
• Other events in recent years include the removal of the mining tax by Rio Tinto and BHP Billiton through political intervention and bringing in a new tax policy so that the mining industry does not pay much tax(WordPress 2011).
• President Obama was criticized for blocking foreign crews from helping with the clean up.

3.2.2 Result of the Deepwater Oil Spill

1. Gulf Coast States lost around $65 billion revenue annually through tourism
2. The commercial fishing industry from the Gulf Coast lost about 40% of its 2008 sales which was equal to $4.3 billion loss
3. The Gulf of Mexico producing about 73% of domestically harvested shrimps was reduced by 50% after the oil spill(Smith, Smith & Ashcroft 2011)
4. British Petroleum was claimed guilty of willful misconduct and gross negligence and was asked to pay $18 billion by a federal judge for violating the Clean Water Act.
5. BP had recorded a $43 billion towards costs for the oil clean up which is a meager amount compared to the damage
6. BP had spent eight times the bill towards its auditing firm to block its audit file report which was against the transparency code of accounting(Cohn 2014)

Interest groups who influence public policies are collective organizations who involve in lobbying and influence government ministers, parliament and party platforms so that they can change public policies in their desired direction (Vromen & Cook (eds.) 2012). 

There are about 500 organizations that are involved in standard-setting. International bodies set standards of accounting for a number of products and services. However, the problem of standardization prevails because (Edwards & Walker (eds.) 2009)

• Benefits and costs of standards are not evenly distributed members across communities
• There is a problem of identifying the optimal criterion
• Choosing a socially optimal standard and a social welfare criterion is difficult

Issues like the oil spill of BP and, the mining tax issue by BHP Billiton and Rio Tinto are some examples analyzed stating the need for new accounting standards and regulations and the role of politicians as regulators who manipulate regulations

4.1 AASB

The AASB or the Accounting Standard AASB 137 has been set to ensure measurement bases and recognition criteria that apply to contingent assets, contingent liabilities, and provisions. Disclosure of adequate information in the notes helps users for decision-making. The AASB 137 gives guidance towards implementing new measures (AASB 2010). Generally Accepted Accounting Principles or GAAP are promulgated by the FASB or the Financial Accounting Standards Board and includes the SFAS or Statements of Financial Accounting Standards providing accounting guidelines.

Politicians as Regulators

4.2 FASB

The FASB (Financial Accounting Standards Board) in the US provides rules for companies to follow in their financial reporting and to provide useful information to investors and other stakeholders for decision-making. It has issued many Accounting Standard Update (ASU) regarding share-based payment accounting, adoption of US GAAP Financial Reporting Taxonomy, lease accounting guidance, pension accounting and, measuring and recognizing of financial instruments (FASB 2016). Robert Herz, FASB chairman has criticized politicization of accounting. According to him, special interest groups provide inferior accounting methods that do not provide transparent and unbiased information of the entity. He has pointed out to the interference by the SEC and Congress on various accounting issues like lobbying, troubled debt, pensions and special purpose entities.

• Enron and Worldcom faced political challenges and pressures that almost shook the White House which made it relevant to insulate standard setting from politics.
• The failure of Wall Street and AIG; false financial reporting by Freddie and Fannie were other national issues that the US faced during the global meltdown that brought in the Sarbanes-Oxley into practice(Herz 2009).

4.3 IFRS

In the UK, companies have to follow IFRS while preparing consolidated financial statements. They can also follow UK GAAP. Amendments have been made in July 2015 UK GAAP as changes in the business world required new rules and regulations.

4.4 Need for Standardization

Accounting practices must be flexible and should move with the flow of the business world. (Hassler 2015). Past failures, unreasonable goals and structural weaknesses in systems have to be removed. Expectations should be set so that they are reasonably accomplished. An accounting standard that will increase the societal welfare should be identified.

• Standards should not only involve technical expertise, it should also consider social efficiency
• Regulatory bodies should not have political interference
• A new socially superior accounting standard will still remain imperfect and limited in the same way as a new drug for a disease has to be improved upon. 

5. Conclusion

Regulations play a critical role in the welfare of the society and the economy. Regulations and its framework should work in the public interest. The research publication on the deepwater oil crisis by BP shows how interest groups such as big corporations use political power to manipulate regulations in their favor. Business environment fraud has to be eliminated and steps to be taken to minimize or prevented (Parker, Sale & Ussery 2006). Politicians tend to give in to short-term concerns when regulatory policies are against their personal electoral interests. As neutral transmitters of public administration, bureaucracy in politics is indispensable (Hamidi-Ravari 2014). The private interest theory argues that short-term political moves are made for vote-maximizing through modifying regulatory policies. (Mejri & Wolf 2013).  

AASB 2010, ‘AASB 137: Provisions, Contingent Liabilities and Contingent Assets- July 2004’, Federal Register of Legislation, vol V, no. 3, pp. 1-13.

Cohn, M 2014, BP Demands Release of McGladrey’s Audit of Deepwater Horizon Oil Spill Claims, viewed 19 May 2016,

Deegan, C 2006, Financial Accounting Theory, McGraw-Hill Australia Pty Ltd, Sydney.

Edwards, J, Walker, SP (eds.) 2009, The Routledge Companion to Accounting History, Routledge, New York.

FASB 2016, PricewaterhouseCoopers LLP, viewed 20 May 2016, 

Hamidi-Ravari, A 2014, ‘The Critical Role of the Reporting Entity Concept in Australian Financial Reporting’, Essay Series, Research Centre, Australian Accounting Standards Board, ISSN 2202-5723, AASB Research Centre, Victoria.

Hassler, A 2015, ‘Accounting for the Future’, Senior Honors Thesis, Honors Program, Liberty University, ISBN 1530, Digital Commons, New York.

Herz, R 2009, The Accounting Cycle: Politics of Accounting Standards Setting, viewed 20 May 2016, 

Hiscock, G 2012, Earth Wars: The Battle for Global Resources, John Wiley & Sons, Solaris.

Houdet, J & Germaneau, C 2011, ‘The Financial Impacts of BP’s Response to the Deepwater Horizon Waterspill Comparing Damage Valuation Approach and Highlighting the Need for More Reliable Environmental Accounting and Reporting’, Research Gate, pp. 1-5.

Mejri, M & Wolf, D 2013, ‘Crisis Management: Lessons Learnt from the BP Deepwater Horizon Spill Oil’, Thesis, Business Management and Strategy, Macrothink Institute, ISSN 2157-6068, Proquest, Cedex.

Parker, P, Sale, M & Ussery, C 2006, ‘Business Environment Fraud: Accounting Happenings’, Allied Academics International Conference, vol 11, no. 1, pp. 65-78.

Smith, LC, Smith, ML & Ashcroft, PA 2011, ‘Analysis of Environmental and Economic Damages From British Petroleum’s Deepwater Horizontal Oil’, Albany Law Review, vol 15, no. 1, pp. 1-23.

Vromen, A, Cook, I (eds.) 2012, Contemporary Politics in Australia: Theories, Practices and Issues, Cambridge University Press, Port Melbourne.

Wilson, E & Kuszewski, J 2011, Shared Value, Shared Responsibility: A New Approach to Managing Contracting Chains in the Oil and Gas Sector, IIED, London.

WordPress 2011, ‘BHPBilliton: Dirty Energy’, Alternative Annual Report 2011, vol II, no. 1, pp. 1-28.