European Union and the Capture Theory

European Union and the Capture Theory

It is certainly a fact that the world revolves around the concept of "Self-interest". Financial reporting and its regulation are no different as they too are affected by the self-interest of the Professional Bodies involved (Deegan, C. 2009). But, when the goings gets tough, these individuals group into team to help achieve their objectives. These individuals do have a burning interest to control and oversee the regulations which is not possible because of the non-compliance and the lack of legitimacy (Gaffikin, M 2008). . Instead, alternatively, these groups capture the government regulations which are primarily intended to protect the public interest. Such control of the regulatory bodies by those entities which usually belong to some specific industry is best explained by Capture Theory (AmosWEB. 2011). This is possible due to the large extent of interaction possible during the regulating process. The demand for lobbying will continue to exist as long as the net benefit stays positive and lobbying costs are prohibited. Such empathised regulations which are made according to the needs of the professional bodies are moreover legitimised by the government (Gaffikin, M 2008).. So, during the standard setting, it is inevitable that the regulators have to work in an overly political environment. Such is the politics of the foundation of the regulations.

With a follow up of the idea; Markets require full and transparent information, because of which the companies must disclose the information the way it should be, IASB (International Accounting Standard Board), attempted to force the firms to account for the derivative losses or gains on their books. In 2003, the volume of financial derivatives increased multi-fold and as recorded by a report by the Bank for International Settlements: the fair value of over-the-counter derivatives was $7.9 trillion (Whittington, G. 2005). As historic cost of accounting was applied for financial transactions; the values of the derivatives had very low or even zero historical cost; yet their current values were highly sensitive to the underlying variable such as interest rates or exchange rates (Wild, J.J 2007).. Thus, it was very crucial that the entities measure the derivatives at current value under the IASB 'Fair Value' standard (Whittington, G. 2005). Shaken from the Enron affair and the disruption of capital markets, IASB hoped to control the further unpleasant surprises, uncertainty and lack of confidence in business for the sake of the upcoming economic prosperity (Whittington, G. 2005). But, the draft that IASB proposed soon attracted various wedges filled with power struggles from different stakeholders. Powerful stakeholders like European banks and French Government lobbied and raised a voice against the draft's proposal ideas saying; it would ultimately result in an artificial volatility and it will have harmful consequences