Shortcomings of political regulations


Interest Theory and what of the role of regulators (politicians)? What are the motivations of politicians as regulators?

You should then respond to the article by arguing a position. Do you agree or disagree, explaining why. You should give consideration to events in recent years that may have had an influence.

Websites that may assist:

AASB (website of Australian Accounting Standards Board)

IASB (website of International Accounting Standards Board)

FASB (website of US·based Financial Accounting Standards Board ICAA (Institute of Chartered Accountants in Australia)

CPAA (Certified Practising Accountants Australa


From the public perspective, interest theory is defined as the economic philosophy that supports the need for regulation to increase economic efficiency. Interest theory explains the need for regulation to act as a response to the inequitable and inefficient market practices. The most common criticisms are that political intervention, as a source of regulation, is based on vested interests instead of acting for the benefit of the society. However, it is imperative to include the role of the regulatory body as it is responsible for representation of the society in many aspects. There are many instances where political regulation intervention has been accused of serving private interests despite being the key pubic economy regulator. The Interest Theory, particularly the Public Interest Model, is based on the assumption that since the markets are very delicate, there is a need for regulation to enable them to operate effectively. Furthermore, Hulsmann (2014) suggest that in the situations where there is no legislative or any other form of regulation, markets are bound to operate inequitably on their own.

Role of Politicians in Regulation and Interest Theory

In Australia, the political intervention as part of the legislative government is believed to occupy the position of the neutral arbiter.  The principle of interest theory is based on the concept that government regulation of financial institutions such as banks is to facilitate the effective operation of the banks to ameliorate the possible market failures. In public interest perspective, the legislative regulation is aimed at benefitting the whole society. In the banking sector, the execution of the political regulation of the public interest is dependent on the ability of the banking industry to allocate resources in an efficient and social manner. According to Hertog (2010), banking sector should maximize the output through minimizing the input variance and political control. It is essential for the achievement of the objective.  The relationship between interest theory and political regulation is signified by the role that the government plays in responding to the demands from the public, regarding the need to rectify the market failure situations such as the 2008-2009 global economic crisis. The political regulations can be through the rectification of the undesirable market conditions brought by social and political factors (Maloney, 2010). Other possible issues that can be rectified through political regulations include missing markets, market disequilibria and the lack of market competitiveness.  Political regulations through the legislative intervention occupy a critical role in unwinding asymmetric and hidden information, reducing the transaction costs when they rise and controlling externalities.

Assumptions and Drawbacks of Political Regulation in Interest Theory For the successful intervention of political aspects of the government to influence the interest theory, there are the fundamental assumptions that have challenged the contribution and efficiency of political regulations in interest theory…

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