Question

Financial reporting regulation has costs. 1. Discuss the costs and benefits of financial reporting regulation. 2. What should happen if the costs outweigh the benefits?

Answer 1

Financial reporting comes at a cost—the cost to prepare, provide, and audit the information.

Benefits of financial reporting regulation

1) a series of financial crises and corporate scandals have prompted calls for regulatory reform.

2) to increase the harmonization and global convergence of accounting rules and reporting standards.

The cost-benefit principle holds that the cost of providing information via the financial statements should not exceed its utility to readers.

This is a significant issue from two perspectives, which are:

1) Level of detail provided

2) Types of information required

A further consideration is that providing additional information requires more time to produce the financial statements. If an inordinate amount of time passes because of the need to prepare more information, it can be argued that the utility of the resulting financial statements is reduced for readers, since the information is no longer timely.

When cost weigh the benefits according to cost-benefit analysis the essence of the financial reporting is flawed in itself.