What Is the Purpose of Modern Accounting Regulation?


Modern accounting regulation is constantly evolving to keep up with companies working in a digital world. Regulation provides many benefits for private businesses and publicly traded companies, from ensuring legal financial reporting to detecting illegal accounting activity before the effects cripple company reputations and financial outlooks. Regulation also creates a backbone believability to company financial reports.

Ensuring Business Transparency

A primary purpose of modern accounting regulations is to ensure the transparency of financial management for both public companies and private businesses. Transparency is necessary for government agencies to easily determine if public companies and private businesses are paying taxes appropriately and paying dividends to investors in a legal manner. Companies operating with open financial books also have an easier time showing revenue streams to potential investors and illustrating the allocation of capital versus the cost of doing business.

Ensuring Investor Confidence

Companies that are hiding losses through creative accounting may be in violation of several regulatory laws, including the Securities Exchange Act of 1934. This regulation, created by the U.S. Securities and Exchange Commission, requires the filing of quarterly and yearly financial disclosure forms for publicly traded companies. Regulation in accounting is necessary to ensure investors can make informed decisions on what companies are doing well and what companies are making unwise business decisions. Without these regulations, consumer confidence in investment markets may drop dramatically, leading to a stagnation of business development.

Providing Meaningful Assessment

Without a form of regulation, business accounting would have no meaning, since every company could just use a different method to paint financial numbers in the best possible light. Regulation streamlines the accounting process, giving every business the same framework to determine finances. This allows for easier comparing and contrasting of business performance and allows other companies to more easily determine where individual performance ranks amidst the competition in a given sector of the market. Without regulation, no business really has a clear definition of what a successful business looks like in terms of financial numbers.

Accountability and Fraud Detection

The modern digital world has a variety of ways for individuals within a company to move business capital through different accounts in an attempt to defraud a company or hide losses. Accounting regulation is necessary to detect these illegal practices and to hold those guilty of committing such crimes responsible. Effective accounting regulation can detect trends in money movement early in the fraud process, which can both lessen a company's financial losses and preserve the company's public reputation. This way the guilty party takes the blame for the fraud and not the entire company.

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