Index

1. Introduction............................................................................................................................2

2. Objectives............................................................................................................................3

2.1. General.............................................................................................................................3

2.2. Specific...................................................................................................................3

3. Methodology.........................................................................................................................3

4. Models Regulatory Guidelines..............................................................................4

5. Theories on regulation............................................................................................................5

5.1. Theory of Public Interest..........................................................................................6

5.2. Theory of Capture.........................................................................................................7

5.3. Theory of the Competition among Interest Groups....................................................8

6. Regulation From Accounting in light of the Tridimensional Theory of Law...........................10

7. Regulation in accounting.....................................................................................11

7.1. Objectives of accounting regulation

7.2. Costs of accounting regulation..........................................................12

8. Accounting the political process

9. Questionings related to accounting regulation.................................15

10. Final considerations

11. References.....................................................................................................................18
 2

1. Introduction

The choice of accounting standards capable of defining the most appropriate way for the
recognition, measurement and disclosure of economic-financial information to the public
External constitutes one of the major challenges of the accounting community, including that of
academic community (not only of supporters of normative research but also of research
positive - although some try to deny this fact). In this context, the regulation of
Accounting plays an important role in the technical conduct of professionals in the field and in
development of practices that meet users' needs regarding quantity and
quality of accounting information.

The normative frameworks of each country show divergences in the way of developing and
highlight the accounting statements, which is why the convergence process of
national accounting practices to international standards is implying deep
changes in the regulatory framework.
 3

2. Objectives

2.1. General
Understanding the norms of regulatory rationales

2.2. Specific
Study the accounting standards;

Understand the developed theories;

Addressing its importance.

3. Methodology
The method, according to Garcia (1998: 44), represents a rational and orderly procedure.
(way of thinking), constituted by basic instruments, which implies using reflection and
experimentation, to proceed along the path (etymological meaning of method) and
achieve the objectives set in the research planning. Meanwhile, for the
the following method was used in the preparation of this work:

Bibliographic Method: it consisted of the collection and analysis of various works, articles,
magazines related to the topic. The bibliographic search was conducted via the Internet and in
city libraries.

The work followed the principles of qualitative research, which according to ALYRIO
(2008: 61) "it is the type of research in which reality is verbalized, the data receives
interpretative treatment, with greater interference from the subjectivity of the researcher and the
the approach is more reflective.
 4

4. Rational Models of Regulation

Regulation, as a process that consists of the intentional restriction of choice

activities of a subject and stemming from a regulatory entity, is an inherent phenomenon
to man as a social being. Horngren cited by Belkaoui (2000, p. 10) states that 'the placement
of standards is a social decision. Standards impose restrictions on behavior; thus they
they must be accepted by the affected parties. Acceptance can be forced or voluntary, or
both. The desire for security and objectivity of the information generated by accounting
financial is reflected in the adoption of accounting standards, defining the method of measurement and

of the disclosure of economic-financial information to the external public.

Thus, the principles and accounting standards aim to represent the essence of
doctrines and theories related to the Science of Accounting, delineating how the profession will be
position themselves in front of the social, economic, and cultural reality that presents itself.

Thus, accounting regulation is a form of intervention by society, represented by

committees created by her, to not leave it entirely to the free will of each accountant and
each entity chooses the principles and practices underlying the preparation of the statements
accounting, given that these serve thousands and even millions of people interested in the information
accounting.
 5

5. Theories of Regulation

The theme of economic regulation provides one of the most prolific interdisciplinary fields of
discussion involving Law and Economics. This is because in any
From a perspective, regulation is based on the pursuit of what has become almost a
mantra: efficiency. The core of studies on regulation theories resides in this word.
But what is the concept of efficiency?

From the perspective of Administrative Law, Loss (2011) argues that efficiency, in the context
the regulatory activity of the State must take into account constitutional principles and
the proper assessment of public interest for each situation, always in accordance with
cost-benefit analysis of the regulatory activity. On one hand, the State, because
inefficient in the provision of all public services, should delegate part of these services to
private initiative, on the other hand, when doing so and assuming the regulatory function, must seek efficiency

in the oversight and promotion of the common good and public interest for development
society.

For economists, particularly the leaders of the Chicago School, a performance

The efficiency of economic activities should be understood as the correction, by the State, of
market failures, among which we can exemplify the lack of competition, monopolies
natural and negative externalities (Wolk, Dodd, & Tearney, 2004). These failures, without the
regulatory action would cause inefficient allocation of resources, such as provisioning
insufficient public goods and services and monopoly pricing practices (Majone, 2013).
Specifically observing financial markets, Scott (2009) adds that another
a crucial factor that makes regulation necessary is the information asymmetry, which is also
considered a market failure to be addressed by regulatory processes.

In general, if the world could be described by the assumptions of the markets in

perfect competition, there would be no motivation for the interventionist character of the State
in its regulatory and limiting role over the universe of choices of economic agents
(Barrionuevo Filho & Lucinda, 2004). However, this situation is merely a model.
theoretical economic, abstract. In practice, the behavior of agents is directed towards
maximization of individual utilities. Besides that, the information is asymmetric (some
agents hold more information than others) and their divergent interests. They are mapped
the motivations for the existence of a regulated environment.
 6

In this session, we will discuss the main theories of regulation, namely:

Theory of Public Interest, Theory of Capture, Theory of Competition in Interest Groups
and the Tridimensional Theory, its intersections and points of divergence, relating them to the
Theory of Accounting.

5.1.Public Interest Theory

The oldest theory of regulation is the Public Interest Theory, also referred to as
Positive Theory of Regulation. As the name suggests, its basic purpose is to maximize the
social well-being, safeguarding the public interest whenever it is in conflict (with) or
threatened by the interests of private economic agents operating in the market. Thus, from
in a synthetic way, this theory predicts the prevalence of the public interest over private interest
economic agents (Loss, 2011).
According to Scott (2009), this theory suggests that regulation is a result of public demand.
for the correction or mitigation of market failures, and it is thought of as a trade-off between the

costs of regulation and oversight and their social benefits, in the form of improvements of
market operation.

Let's look at the cases where market failures, such as natural monopolies and the
negative externalities are present. Without the regulatory action of the State, the
the market, in itself, could not provide the results desired by the community, and the interest
the public would be tarnished (Cardoso, Saravia, Tenório, & Silva, 2009).

From this perspective, King (2006) argues that American societal norms after the
Great Depression of 1929, just like the Sarbanes-Oxley Act seventy years later, can
to be explained by the Theory of Public Interest, insofar as in both cases this was
violated.
Despite appearing flawless, this approach has received criticism. According to Posner (1974),
empirical research has not yet shown that regulation would be directly
related to an efficient performance of the regulatory State. Furthermore, regulation neither
there would always be an acceptable cost (based on the administrative structure required by
regulatory activity – people, infrastructure, investment, etc. – and social benefits
provided by her); on the contrary, it would have a high cost.
 7

Furthermore, the technical complexity of regulated activities makes work difficult for
monitoring of the regulatory body by legislators, which bureaucrats, which weakens the
the ability of these to force regulators to act in the public interest,
revealing the possibility of agency problems, given that regulators could act in
self-interest at the expense of the collective (Scott, 2009).

Another issue that goes against the public interest perspective is: starting from the premise that the
the regulator is also an agent and therefore also has interests to be maximized, even up to
At what point would regulation be acting in favor of the public interest or its own?
industry (or regulated sector) does not need to be sustainable to justify its existence
regulator? These and other discussions have sparked the emergence of new theories, imposing
criticisms of the Public Interest Theory. This is what we will address next.

5.2. Capture Theory

Some researchers, such as Loss (2011), consider the existence of a Theory of

Regulatory Failure, in which the development of regulation would culminate in the distortion of
foundations of public interest, leading agencies (executors of regulation) to favor
private interests, through certain models of influence. Basically, there are three models of
influence
i. Instrumental: the harmful influence on the public interest occurs through the exchange of
professionals between the industry and regulatory bodies and the relationship between them

professionals;
ii. Structural: the process of appointing members of the governing body of the agencies
regulators are subject to the industry's lobby; the big players in the sectors
regulated, in conducive environments - like Brazil - are resource donors
financial in electoral campaigns, thus preparing the appropriate scenario for
exercise of influence in the appointments of directors and in the preparation of
regulations and their enforcement;
iii. Capture: this model has become more prominent and is conceived as a theory
per se, the Capture Theory. It takes into account that the 'capture' can occur through
of both models above; on one hand, regulation would originate from itself
demand from the industry (the legislators captured by the industry), or the
 8

regulation, over time, would be controlled by the industry (the regulators

are captured by the industry.

Bernstein (1995) considers that the capture process permeates the life cycle of the organs or
regulatory agencies. According to the author, this cycle has four phases: (i) gestation, in which
the formation of groups occurs that will exert pressure for the establishment of regulations
in your favor; (ii) youth, in which the agency imposes an aggressive pace of oversight,
however, its initial supporters, who constituted the regulatory framework, are "tired"
while the experienced industry organizes for the capture process and the legislator loses
Gradually, the interest wanes, considering that regulation takes on an "almost-legislative" role.
(Ferraz Júnior, 2011); this process culminates in phase (iii), the maturity, with the agency
becoming part of the status quo that seeks to protect its own existence, reconciling with
the interests of regulated companies; (iv) finally, the agencies become merely passive
and bureaucratic, stabilizing as protectors of the industry and acting to
institutionalize such a position. This cycle restarts with scandals of corruption and crises.
that justify their restructuring. Corroborating the process of capture by the regulator
industry, Stigler and Friedland

(1962) Studied the effects of regulation and deregulation in the electricity sector.
North American during the period between 1907 and 1932. The authors conclude that the profit of companies

energy increased abnormally during the period when the sector was under
regulation; on the other hand, they did not find significant empirical evidence of benefits to
society. What the capture theory did not consider was the fact that influences are
exercised not only by the industry, that is, by the sectors to be regulated. Others
groups, in fact, would also exert pressure on regulation, driven by necessity
of greater alignment of regulators with their own interests.

5.3. Theory of Competition among Interest Groups

This theory is also known as the Economic Theory of Regulation, whose greatest exponent
It was George Joseph Stigler, an economist from the Chicago School who received the Nobel Prize in
Economics in 1982 for its studies on the demands for regulation and their effects on the
structuring of the industry and the functioning of the markets.
 9

According to Cardoso et al. (2009), both legislators and regulators would be concerned.
in maximizing your personal interests, therefore, perpetuating yourself in power. In this way, the
regulation would serve to meet the needs of the interest groups that exert the most pressure
exercised on legislator and regulator. From this perspective, there is a similarity between the
Theory of Interest Groups and the Capture Theory. In a didactic way, we can clarify
this theory: let's imagine a certain economic sector; each firm operating in it represents
a group of interest (aiming, for example, to maximize profits, optimize its costs
operational, reduce tax rates or increase barriers against foreign competitors); the
clients of these companies also form a group of interest (seeking better
cost-benefit relations in their acquisitions); the environmentalists, in turn, would be
worried about the social responsibility actions of organizations and with production
ecologically sustainable. According to Scott (2009), interest groups will exert pressures
about legislators and regulators, in distinct measures and natures, constituting a demand
by regulation. 'Demand' is a key word for the model proposed by Stigler (1971).
From an economic perspective, the author proposes that regulation should be viewed as
a commodity, and as such, could be explained in light of the market forces of supply (of the
legislators) and demand (from interest groups). Regulators are, therefore, the vehicle by
where this "market" will operate.

The legislators themselves constitute a special interest group (to remain in power). They
will shape the regulatory body of the State in order to meet the interest groups that most
effectively contribute to their individual goals of maintaining or expanding their status
political. In summary, according to Stigler's model (1971), regulation, as a commodity, will be
allocated to the most politically effective groups in convincing the legislator to grant them
regulatory favors (Scott, 2009).
The theories addressed so far are those most traditionally used in dealing with
regulation. A new approach was proposed by Silva (2007), Cardoso et al.
(2009) and by Cardoso, Silva, Mário, and Iudícibus (2010), specifically for the field of
regulation in accounting, based on the assumptions of the tridimensional theory of law,
by Miguel Reale.

6. Regulation of Accounting in the light of the Tridimensional Theory of Law

 10

The first attempt to understand accounting regulation from the perspective of

the three-dimensional theory of law was proposed by Silva (2007). According to the author, the theory
developed by Reale argues that regulation - in this case, in the legal sense - emanates
of the dialogue between fact, value, and norm, mediated by the action of an entity endowed with power

legitimate to serve the public interest.

In an interesting interdisciplinary essay, Cardoso et al. (2010) investigated the process of
regulation of accounting from the perspective of the tridimensional theory of law. The authors
evidence the feasibility of this interdisciplinary approach between law and
accounting when viewing the regulatory process that encompassed monetary correction of
balance:

The federal government, with the enactment of Law No. 9,249/95, suspended the mechanism of

monetary correction of the Financial Statements, including extinguishing the Unit

Reference Fiscal (UFIR), which served as a monetary indexer. With that, not
it became more possible to recognize accounting for inflationary effects for purposes
shareholders and tax. On March 22, 2001, the CFC issued Resolution No. 900,
in which it establishes that the application of the principle of monetary updating is

mandatory when the accumulated inflation in

three-year period, based on the IGP-M, is 100% or more. Therefore, the historical passage
portrayed elucidates the transformations involved in the process that involves a
called the dialectic of complementarity. In it, the norms begin to undergo
changes due to the emergence of changes (in terms of facts and values), in the face of
existing tension between the economic event (fact) to be recognized, measured and
disclosed and what is desired (target value), possibly
until it becomes necessary for its revocation (Cardoso, Silva, Mário, & Iudícibus, 2010, p.
16-17).

In this context, the very process of convergence of accounting practices in Brazil

to international accounting standards (IFRS - International Financial Reporting Standards)
can be interpreted in light of this theory, as Cardoso et al. (2010, p. 7) did, when
they argue that "the economic-financial facts that affect the entities are interpreted
by an entity endowed with power (Committee of Accounting Pronouncements), according to the values

shared by society (comprehensibility, relevance, reliability e

comparability, for example) and, from there, the norms (accounting standards) emerge.” Once
addressed the main explanatory theories of accounting regulation, it is necessary
 11

understand how these theories are related to regulation in the field of

accounting, as proposed for the next session.

7. Regulation in accounting

In the field of accounting, regulation includes the production of accounting standards by

State or private standard setters, which define the elements of accounting practice,
Rules and principles to be followed in the financial reports of organizations (Kothari,
Ramanna, & Skinner, 2010.

Starting in the 2000s, the movement of countries towards the convergence of their
accounting practices, referring to IFRS. In Europe, the harmonization between the Standards
accounting of the various countries of the European Union was accelerated in 2002, when it was announced

that starting in the year 2005, companies listed on European stock exchanges should
adopt the iasb in their accounting reports (chiapello & medjad, 2009).

According to Suzart, Souza, Carvalho, Riva, and Martins (2012), the regulation process does not occur at

unilateral action by the regulator in the interest of the public. The Authors
they argue:
(...) The regulatory process is not a hermetically sealed process,
where the regulator chooses the best alternative, considering welfare
collective. The concessionaires, especially the large corporations,
they would seek to reduce their political costs by influencing the regulator in
choices of accounting practices that allowed for lower profits [implying
with lower taxation]. From a corporate perspective, the concessionaires
they would seek to present higher profits to attract or retain investors
(suzart et al., 2012, p. 17)

The findings of suzart et al. (2012) are also reinforced by a study conducted by
Carmo, Ribeiro, Carvalho, and Sasso (2012). Empirically verifying which theory of Regulation
would have greater explanatory power over the international normative accounting environment, Carmo et al.

(2012) identified that the theory of interest groups proved to be more suitable than the
theory of public interest for this purpose. This supports the assertion that 'the Process of
regulation is not hermetically sealed" (suzartet al., 2012, p. 17), on the contrary, it suffers
 12

pressures (lobbying) from interest groups in order to adapt the Regulation according to
your greater benefit, to the detriment of collective well-being.

7.1. Objectives of accounting regulation

The theory of regulation exerts considerable influence over accounting since

establishes standards to be met in the name of a greater collective interest. According to
with Cardoso et al. (2010), for guiding the way of elaborating and disseminating the reports, the
regulation of accounting plays a decisive role in meeting the needs of
users of accounting information.

Due to informational asymmetry, managers can often take advantage of the

discretion to decide what to disclose (Murcia, 2010). Yamamoto and Salotti (2006)
as cited in Murcia & Santos, 2009) highlight that disclosure is defended by those
that believe that companies only increase the level of disclosure of their information if
Thank you. Raffonieur (1995 as cited in Murcia & Santos, 2009) considers that
odisclosure would be a way to make it mandatory to disclose information that the
companies do not intend to disclose voluntarily.

Silva (2007) ponders that due to the great variety of users and interests in
Accounting information, each country has developed a unique process for its accounting standards.
Meanwhile, there is currently a global trend towards the convergence of these standards.
harmonization of accounting practices, through the convergences currently underway, can
help to positively break the normative heterogeneity between countries.

7.2. Costs of accounting regulation

Pohlmann and Alves (2004 as cited in Murcia, 2010) remind us that regulation is
consisting of a set of coercive norms, enacted by the State or by bodies with
powers to make it happen, related to certain activities. They are usually generators of
costs for regulated entities, so that they can meet their proper compliance. In
meanwhile, the authors consider the operational costs, such as the more relevant ones
 13

costs of disclosure and service, and the costs of a political nature, among them, those of
monitoring, delobbying and procedural cost (Pohlmann & Alves, 2004 as cited in
Cunha, Santos, Bezerra, & Pinto, 2010.

According to Cunha et al. (2010), regulation costs are usually made up of a set
of expenses, reduction of revenues or increase in taxes or fees, as a consequence of
coercive norms, issued by the State or another body, with the power to regulate
specific sector of business activities. As for the increase in expenses, this can be
manifesting through procedural expenditures or structural expenses (systems, spending on
people, consulting) incurred in the process of complying with the established standards by
regulatory agencies (Pohlmann & Alves, 2004 as cited in Murcia, 2010). They are the
called service costs. The disclosure costs, in turn, arise from
compliance with disclosure standards established by regulations. In this sense,
we can exemplify such costs with the quantity and nature of social disclosure and
environmental presented by companies in annual reports.

An example of cost arising from accounting regulation, given by Cunha et al. (2010), is
when the federal government alters a specific accounting standard, resulting in a change
in the accounting statement of a certain entity. If this accounting change causes
a reduction in the company's liquidity ratio and it has a financing contract that the
forces to have a higher liquidity index, due to the breach of contract.
you may have to pay higher interest rates. If the company has to resort to justice
to safeguard itself because the government has changed the rules, it will also be, once
but incurring additional costs.

In addition to the costs inherent to the accounting process itself, the costs of regulation
Accounting is also affected by the political process, that is, the political costs, next
analyzed, may arise as a consequence of the accounting regulation process.

8. Accounting and political process

 14

The political process can influence Accounting by encouraging its users to adopt
certain practices, whether as a form of adaptation or as a defense. The main
The effect of this relationship is the so-called political cost.

In a recognized study, Watts and Zimmerman (1978) found that larger companies
attracts greater political visibility from government and regulatory bodies, and, therefore,
tend to avoid or reduce the expected political costs of a potential intervention
external. Consequently, large companies have a greater tendency to minimize the
results of the political costs of what the small ones.

Political costs can present themselves in different ways, namely: costs of

monitoring, delobbying, and procedural costs. Monitoring costs are the costs
constituted politicians and arising from the regulator's action. They are composed of resources
consumed in the process of regulating standards and in the subsequent monitoring of their
compliance by companies.

The costs of lobbying are those arising from the attempt of a group of companies to influence
in the decisions of regulatory bodies through the presentation of proposals for standards and
changes in the current legislation, or that are necessary in the activities in which they operate.
This cost is closely related to the Theory of Competition between Interest Groups.
where the legislator and the regulator are concerned with perpetuating themselves in power, being,

therefore, the regulation designed to meet the needs of the interest group that
exert greater relative pressure on the regulator and the legislator.

The procedural cost may be a consequence of the company's need to adjust to a certain
process resulting from a factor of political or relational order. For example, the company having
to bear the costs of renegotiating contracts due to the need for changes in
initial clauses.

There are factors that make organizations not always choose the practices.
accountants that provide information that is relevant for both investors and
for the other users. If by chance a specific practice results in a
increase in political costs, organizations tend to seek other practices that reduce or
 15

avoid such costs, even if the first practice produces more relevant information for the
users (Suzart et al., 2012).

Political costs, finally, represent the expenses incurred by organizations to avoid

political actions that are contrary to them, as well as the expenses charged to others
social groups, such as unions, regulatory bodies, governments, among others. This
the vision is in tune with the results of the study by Watts and Zimmerman (1978), which
they conclude that, in sectors sensitive to political issues, companies are all the more
susceptible to the incidence of potential political costs the greater the degree of
highlighting their positive results. Media campaigns for social responsibility,
lobby strategies and the use of accounting procedures that reduce their earnings are
just a few ways to avoid these political costs.

9. Questions regarding accounting regulation

Due to what has been analyzed in Accounting as an instrument for reducing asymmetry.
informational and as an important instrument of disclosure, and the evident absence of
voluntary interest in the dissemination of information by companies is established that
a regulatory process is inevitable.

Various questions may arise regarding this regulation process, such as: what is its
scope, who should regulate, how this regulation should be done and what the role should be
performed by the regulator and regulated. Furthermore, as some studies mentioned here
they indicate that regulation can sometimes lead to more costs than benefits, and therefore,
harmful to the public interest.

The recent movement of international convergence to IFRS standards has strengthened the process
of accounting regulation executed through regulatory bodies linked to entities of
class like the IASB in Europe and the CPC in Brazil.

There does not seem to be a clear definition yet of who should carry out the accounting regulation and even

which point should be regulated. In the United States, as the political philosophy of prevails
less intervention of the State in society and the economy, the government delegated to the entities of
 16

class the responsibility for regulation, having, however, to intervene to regulate in

critical situations such as in the case of the enactment of the Sarbanes-Oxley Act.

In Brazil, where the government tends to maintain a significant presence in all segments
of society and, consequently, in the economy, accounting regulation has been
predominantly carried out through legal devices and supported by collaboration from
class organs, which, although in a secondary role, have managed to make great
contributions to the regulation process and to ensuring its execution.

10. Final considerations

This article addressed the main terminological and semantic distinctions between the
terms regulation and regulation. It was argued that, from the perspective of Law
Administrative, the act of regulation is related to issuing rules, regulations, and it is
the prerogative of the State in any sphere of government, municipal, state, or federal, and
reaches the population in its universality. Regular, in turn, has a broader sense in
that refers to the duties, as it encompasses both the establishment of regulations and the
 17

its supervision, that is, the effort made to ensure compliance with
rules; however, because its effectiveness is applied to a specific community, one can say
in the strict sense, like the Brazilian cases in the telecommunications sectors,
electricity distribution, provision of health services, among other sectors, said
regulated. As an example, the role of regulatory agencies was discussed, which issue norms
they regulate, however, with their action restricted to the sector of the economy they aim to regulate.
The main theories of regulation were also explored, specifically: (i) Theory of
Public Interest, (ii) Capture Theory, (iii) the Theory of Competition among Groups
Interest (noted as Economic Regulation Theory), and (iv) the innovative Theory
Three-dimensional law applied to regulation in accounting, in practice, an application
of the thoughts of the jurist Miguel Reale about regulation in the legal field.

The objectives of this essay were considered achieved when discussed the
foundations of accounting regulation and regulation, its objectives and costs
operational and political aspects associated with them. Some studies were discussed that prove
empirically that the political costs, arising from the dissemination of accounting information,
are directly related to the size of the companies: those of larger size are more
vulnerable to the incidence of political costs. Therefore, they have a greater tendency to employ
accounting procedures to reduce the disclosure of its earnings, especially in
economic sectors most permeated by political action.

11. References

Andrade, E. C. (2004). Externalities. In C. Biderman, & P. Avarte (Eds.). Economics of

public sector in Brazil (Ch. 2, pp. 16-33). Rio de Janeiro: Elsevier.

Barrionuevo Filho, A., & Lucinda, C. R de. (2004). Theory of regulation. In C. Biderman, & P.
Avarte (Orgs.). Public Sector Economy in Brazil (Cap. 4, pp. 47-71). Rio de Janeiro:
Elsevier.
 18

Bernstein, M. H. (1995). Regulating business by independent commission. Princeton:

Princeton University Press.

Cardoso, R. L., Saravia, E., Tenório, F. G., & Silva, M. A. (2009). Regulation of
Accounting: theories and analysis of the convergence of Brazilian accounting standards to IFRS.
Public Administration Journal, 43(4), 773-799.