The Issues of Accounting Theory

The summary of the article

Several banking institutions oppose to the adoption of more stringent accounting rules and reporting standards. They claim that mark-to-market accounting would significantly slow down their operations and result in considerable losses. The representatives of the Bankers Association have also expressed their discontent about this change by arguing that new accounting standards would undermine the availability of credit. Recently the Financial Accounting Standards Board has been urged to relax these rules. At the moment, there is a great probability that federal regulators and banking institutions will reach a certain compromise that would suit both sides.

Accounting theory issue

The issue, raised in this article is the ability of private organizations to impact the decision-making of the government and regulators. More importantly, one has to determine whether this lobbying infringes upon the interests of the public or not. The adoption of mark-to-market accounting standards is supposed to reduce the risks of economic crisis, yet banking institutions object to it. Overall, this situation can be described as the conflict of interests. The questions, put forward by the author are particularly relevant to the Capture Theory, which explains the relations of the government, the private sector and the public.


According to the Capture Theory of Regulation, the governmental agencies are not always independent in their decisions and, in the vast majority of cases, they come under the influence of certain interest groups, which seek to adapt legislation to their own needs (Barth et al, 2001, p 7). The crucial point of the Capture Theory is that the interests of the public are often completely disregarded and that average people are often forced to act only as mere observers (Clark & Dean, 2007, p 28).

It has to be admitted that this approach is often criticized because it minimizes the role of the public (Deagan, 2007; Morgan & Yeung, 2007). Besides, lobbying is not something illegal and private organizations exercise their right to advocate their best interests. William Forbes (2009) argues that the Capture Theory is relevant only if the county’s legislature is underdeveloped and it cannot regulate the interactions between governmental agencies and private sector.

The article under discussion shows how private organizations can affect the regulatory agencies. Many banking institutions want regulatory bodies to revise new accounting rules as they may inflict heavy losses upon them. This is why they will pull every string in order to persuade the government. Yet, we cannot say that they take full control and that the Financial Accounting Standards Board (FASB) is so willing to meet their demands and relax accounting rules.

The main rationale for establishing new reporting standards is to avert possible financial crisis, and this measure seems to be quite justified even despite the fact that it will result in many inconveniences for banking institutions. Under the circumstances, the only possible solution is negotiations between the two sides.

Apart from that, we should say that FASB appears to be on the horns of a dilemma. On the one hand, it has to address the concerns of the public and minimize the possibility of any economic collapse. On the other hand, it has to consider the interests of banking institutions, whose income may substantially decrease due to the new rules. On the whole, this case exemplifies two theories of regulation: the Capture Theory and its counterpart, Public Interest Theory.


Therefore, we can say that the relations between the governmental agencies and the private sector can be characterized as a continuous search of compromise. The Capture Theory of Regulation only partially explains this process because it fails to take into account public’s ability to impact the decisions of policy-makers.

Reference List

Barth J. Brumbaugh R. & Yago Glenn. 2001. Restructuring regulation and financial institutions. NY: Sprinter.

Clark F. & Dean G. 2007. Indecent disclosure: gilding the corporate lily. Cambridge: Cambridge University Press.

Dash, Eric. 2010. Mark-to-Market in Proposed Accounting Standards Overhaul. The New York Times. 

Deegan Craig. 2007. Australian Financial Accounting. McGraw-Hill Australia.

Forbes. William. 2009. Behavioural Finance. NY: John Wiley and Sons.

Morgan B. & Yeung K. 2007. An introduction to law and regulation: text and materials. Cambridge University Press.