Regulation is defined as a set of rules that is designed to control and govern conduct by authority (Deegan 2009, p.59). On the basis of this definition, Deegan (2009, p.59) has defined regulations relating to financial accounting as rules that are developed by independent authoritative body to govern the preparation of financial statements which are accounting standards. Since decades ago, there have been arguments for and against the existence of accounting regulations. With a stance of pro-regulation, this essay is going to examine the reasons that financial accounting and reporting should be regulated and the merits of accounting regulations.

Firstly, financial reports are normally prepared by the management of the company who are
Without sufficient regulation, public will be left unprotected and suffer unreasonable losses during the occurrence of market failures such as corporate collapses of Enron and HIH Insurance. This will lead to the decrease in confidence of public regarding the efficiency of the capital markets and they might not be interested in investing in capital market anymore. With regulation, consumer interests will be protected by securing improved economic performance as compared to an unregulated situation (Godfrey et al. 2006, p.386). It can be shown by the example of European Union which chooses to adopt a ‘watered-down’ version of IAS 39 (Deegan 2009, p.98). As the adoption of full version of IAS 39 is expensive but the non-compliance of it might cause a widespread of social and economic effects such as undue impact in the confidence of stakeholders in European capital markets, the European Union has chosen to adopt a ‘watered-down’ version. Although the ‘watered-down’ version is not the best practice, it is economical and public interest can be protected as financial instrument of companies is still under regulation, which is better than an unregulated situation.

Furthermore, the international harmonization also raises some problems with respect to the applicability of capture theory embraced by the opponent of regulation. The lobby groups in many countries have lost their ability