Regulation of businesses is necessary to address market failures and protect public interest. Some key reasons for regulation include addressing issues like market imperfections, externalities, and information asymmetries. Regulations are imposed by government bodies and can take various forms including price controls, taxes, subsidies, and rules on competition and corporate governance. Businesses respond to regulations in different ways, from mere compliance to full compliance and innovation. International regulations also influence businesses globally, with countries like the US and EU having significant impact. Acts like the Sarbanes-Oxley Act in the US regulate financial reporting, auditing, and whistleblowing for listed companies.
1. External regulation in business
Why is regulation of businesses necessary?
Regulation is any form of state interference with the operation of the free market. This could involve
regulating demand, supply, price, profit, quantity, entry, exit, information, technology or any other
aspect of production and consumption in the market. Regulation of business is needed for:
Addressing market failure: Government try to intervene market failure by the following ways:
1. Providing public goods
2. Providing merit goods for long term interest of society
3. Controlling the means of production through state ownership of industries
4. Redistributing wealth by direct taxation of income
5. Creating job opportunity
6. Influencing supply & demand through price regulation, indirect taxation, subsidy
7. Influencing market through persuasion
8. regulating markets through legislation
Regulation will be more appropriate in case some market failures like Market imperfection,
Externalities, asymmetric information, equity, etc.
Protecting public interest: Regulation in business are designed to ensure that the need of
other stakeholders can be met. People find it difficult to trust business entities that exist to
make profit. Experience has taught people that the objective is met at the expense of public
interest. So the society has increasingly demanded that the business should be externally
regulated to restore the balance of power.
Bangladesh regulations:
Regulations imposed by Bangladesh parliament
Notifications/ circulars/ decision addressed to certain entities or individuals
There are many regulatory bodies which oversee and enforce these regulations. For example, RJSC,
SEC, Bangladesh Bank, The Department of Environment, The information commissioner, the
Controller of Insurance, etc.
Outcomes of regulations:
1. Address market failure
2. increase or reduce social standing of various social group
3. See through the collective desire of a significant section of the society
4. Enhance opportunities for the formation of beliefs in society
5. Affect the development of particular preference across the society
6. Deal with the problem of irreversibility (current activities will result outcomes from
which future generation may not recover at all)
How do businesses respond to regulations? - a variety of ways
1. Entrenchment of a particular practice (nil or no response)
2. Mere compliance
3. Full compliance
4. Innovation as per Porter hypothesis (strict environmental regulations trigger the discovery and
introduction of cleaner technologies and environmental improvements, the innovation effect.
Direct regulation of the level of competition in a market:
Generally monopolies are not in the public interest as they do not allocate resources effectively. The
government seeks to diminish them by direct regulation so that the market become perfect
competitive. For this, the government prohibits anti-competitive agreements and abuse of dominant
position. Many different types of such agreements may fall within the prohibition:
Fixing purchase or selling price or other trading conditions
Agreeing to limit or control production, market, technical development and investments
Sharing market or supply sources
Applying different trading conditions to equivalent transactions
Making conclusion of contracts subject to acceptance of supplementary obligations.
Government also prohibits cartels which is an agreement between businesses (for prices, output
levels, discounts, credit terms, technology, etc.) not to compete with each other.
Direct regulation of externalities:
Externalities (external costs and benefits) are regulated by the government by the following ways
Price regulations (setting maximum or minimum selling price)
Direct and indirect taxation or tariffs
2. Subsidies to suppliers
Regulations by means of quitas, standards or fines.
Direct regulation of people in business:
Individuals in organizations are regulated in some way to protect the public and interest of creditors:
Insider trading of listed company’s share: People in an organisation will commit a crime under
SEC act 1993, if they use knowledge they have as insider to make profit or avoid a loss when
buying and selling shares and at the expense of open dealings in the market
Market abuse: If the people engaged in the stock market do not act standard behavior like,
misusing information as an insider, distorting market price, creating false or misleading
information about supply, demand and price, they must be fined or imprisoned.
Fraudulent trading of an insolvent company: If an insolvent company is found to have been
carried out with the intention to defraud creditors, or indeed for ant fraudulent purpose,
concerned director or managers will be personally liable for company’s debt under the
Insolvency Act 1997.
Wrongful trading of an insolvent company: If a director is involved in wrongful trading, he may
be required by a liquidator to make a contribution to an insolvent company’s assets under the
Insolvency Act 1997.
The effect of international legislations:
International legislation regulates some markets more than other. The development process of global
regulation is complex and very from industry to industry. But some common features emerged
The US has huge influence over the globalization of business. EU is starting to have influence
International organization like WTO, IMF, ICC also have power to influence in development of
regulation
US corporations are very effective at enrolling the power of their own government and
international bodies to promote their interests.
The US Sarbanes-Oxley Act 2002
This act is a piece of US regulation that has had a global reach. This act has been passed after
experiencing corporate scandals like Enron, WorldCom, etc. This act is directly applicable for listed
companies in UK. These companies should face the following tasks of ensuring their accounting
operations comply with the Act
1. A comprehensive external audit by Sarbox Compliance specialist to identify areas of risk, then
2. The installation of specialized software to provide the “electronic paper trails’ necessary to
ensure Sarbox compliance
Corporate responsibility for financial report: Under this Act, the CEO and CFO
Must reviews all financial reports and sign a personal certificate that they do not
contain any misrepresentations and information in the financial report is “fairly
presented”
Are responsible for the internal financial controls
Must report any deficiencies in internal accounting controls or any fraud involving
management, to the Board, Audit Committee and external auditors
Must indicate any material changes in internal accounting controls
If they submit an inaccurate certification, they may be fined up to &5 million plus a prison term of up to
20 years.
Management assessment of internal controls: All annual reports must include internal control report to
State that management is responsible for an “adequate” internal control structure
State management’s assessment of the effectiveness of the control structure
Report any shortcomings in these controls
Besides, external auditors must attest to the accuracy of the company management’s assertion that
internal accounting controls are in place, operational and effective
Company are required to disclose on an almost real time basis information concerning material
changes in their financial condition or operations
Accounting and audit firms and whistleblowing
• The Public Oversight Board registers and regulates accounting firm in US
• Audit firm should retain working paper for several year, have quality control standards in place
and perform an audit review of each client’s internal control system
• Auditors are expressly prohibited for carrying out a number of services for the client. Provision
of other non-audit services is only allowed with the prior approval of the audit committee
• There should be rotation of lead or reviewing audit partners every five years
3. • Auditor should discuss critical accounting policies and possible alternative treatments with the
audit committee
• All member of the audit committee should be independent and at least one member should be
financial expert. Audit committee should be responsible for appointment, compensation and
oversight of auditors.
• Employees of the listed companies and auditors are granted whistleblower protection against
their employers if they disclose private employer information to parties involved in a false
claim.
International regulation in trade
International free trade support efficient allocation of resources in the world by
Encouraging specialization
Evening out of surpluses and deficits of resources
Competition
Economies of scale
Close political links
Barriers to free international trade
Tariffs & customs duty
Import quotas
Embargoes (ban on certain imports and exports)
Hidden subsidy for exported or domestic producers
Import restrictions
Government actions to devalue the nation’s currency
Arguments in favor of protectionist measures:
Preserve output and employment in domestic industry
Counter dumping of surplus production
Protect unfair measure taken by other country
Protect country’s infant industries
Deal with the problems of a declining industry
To reduce balance of trade deficit
Arguments against protectionist measures:
Reduce volume of international trade
Import will be reduced, so also exports
Damage the prospect for economic growth
Political ill-will amongst countries
Free trade agreements:
1. The World Trade Organisations
2. Regional trading organizations (EU, NAFTA, SAARC, Mercosur, ECOWAS
The Business Finance Function
The task of finance functions
Recording Financial Transactions- ensuring that the business has an accurate record of
its revenue, expenses, assets, liabilities and capital
Management Accounting- providing information to assist managers and other internal
users in their decision making, performance measurement, planning & control activities
Financial reporting: Preparing information about a business for external users that is
useful to that in making economic decisions
Treasury management- Managing the fund of business namely cash, other working
capital, long term investment, debt finance and equity finance
The structure of finance functions
Figure 7.1 from Books (pare 198)
Management Accounting:
Management Accounting provides information to managers within organizations, to assist decision
making, planning & control.
4. Cost classification
1. By nature of expenditure: Material, Labor and Expense
2. By Function: Production cost, administrative expense, distribution costs
3. By traceability: direct cost, Indirect Cost
4. By cost behavior: Fixed cost and variable costs
5. Costs for decision making: Sunk costs, avoidable cost, unavoidable cost, differential cost,
incremental costs, marginal cost, opportunity costs, etc.
Making resource decision in the short term to medium term
1. Cost-volume- profit analysis
2. Breakeven analysis
3. Contribution analysis
4. Limiting factor analysis
Pricing
Impact on business pricing policy
Costs
Competitors
Customers
Corporate objectives
Making Invest decision for long term
1. Capital budgeting
2. Capital investment appraisal
Managing finance functions:
1. Planning & Control-
Forecasting what is needed
Evaluating available resources
Developing objectives plan and targets,
Implementing plans and monitoring performance
Using feedback from monitoring to make necessary amendments to the plan
2.