Public Interest Theory and Economic Interest Group Theory Essay

Introduction

This paper discusses the public interest theory and economic interest group theory as separate approaches of regulation using the related selected journal article for each to outline the major points of each theory. The other part makes use of the features of each case with reference to a potential outcome, using each theory of regulation approach by identifying the features of the case and the actions and motivations of the parties involved in, and affected by, the case.

Public interest theory

Under the public interest theory, regulation is done as a respond to the demand by the public to correct inefficiency and lack of equitability in the market as a caused by the players in a given industry. There is the presumption that regulation is beneficial to society rather than to few best particular groups when these players alone are left alone by their self-interest. Regulation therefore may be viewed to as the representing the interest of the society over the private interest of regulators. The theory includes as a necessary assumption that economic market forces are easily broken extremely in which case inefficiency happens if left unregulated and that regulation as handled by the government is further presumed to be virtually costless and that said government is an assumed neutral arbiter. Thus, like any other theory, public interest may also be criticized on the ground of its application only if the public will exercise their right of demanding a better allocative efficiency. In reality however, the law makers or legislators may do their law making functions with their personal interests and may not do so for the benefit of the public. As a result, a requirement for the efficient and effective working of the theory presupposes also a regulation of the interest of the lawmakers.

In the article “Reflections on the public interest in accounting”, Dellaportas and Davenport (2008) have provided a way to further understand the concept of public interest theory by detailing the role of government in having some role in setting accounting standards for the regulation of the market. They argued that the expression, ‘the public interest’ is so embedded in policy development, that reforms in accounting are promoted under the assumption that such development will improve the well-being of the community. They noted however that current conceptions of the public interest are inadequate to define a principle which must stand as a measure of public policy. Dellaportas and Davenport (2008) concluded that in accounting, the public interest generally connotes having the collective well-being of people as objective with the institutions and the profession serving to protect the economic interests of third parties, which include the investors, by facilitating an efficient and effective economic decision making process via the provision of relevant and reliable economic information. They further noted that fact that that the premise underlying the accountant’s duty to protect the public interest has its roots in upholding the fundamental principles of professional conduct that should encompass the presence in the professional the desires level of expertise, knowledge, competence and integrity. By upholding such principles, members of the profession would be in the best position to serve collective welfare of the public by protecting the economic well-being of the community. The presence of code of ethics of the profession does support the collective well-being of the community if compared with universal standard with aim of providing benefit to the whole or at least majority population affected by the services provided by accounting professionals.

Economic group interest theory

Under the economic group interest theory, the government is viewed as process in which wealthy or utility is redistributed among individuals and groups. There is trade-off of consumer and producers interests under the interest group theory but is there is also economic regulation as driven by a different set of combatants where much regulation as fueled by competitor against another competitor interests. Competition as to price by producers’ prices will come as a result that will cause prices to go down when high-cost producers will have left the industry eventually (Tollison, 1998). To attain this, it is also assumed that the firms in the industry are heterogeneous with respect to their costs of production. Since the greater the number of suppliers would drive greater total cost in the industry, the expected industry supply curve is upward sloping. This is where regulation through economic interest comes in since this situation in effect imposes relatively greater costs on the higher-cost, marginal firms, which should convince them to leave the industry. The result of would be to raise market price in the industry especially but with the exit of higher-cost firms, there would be the outweighing of increase price over the increase in costs for the lower-cost producers with due consideration however with the relevant elasticities of producers. In turn, the effect could be to increase the wealth of some producers at the expense of both consumers and the some producers with high costs. The latter will have to leave the industry as a result (Tollison, 1998).

The economic group interest theory may be appreciated in the article “Stockholder Accountability” by Collier (2008) where the author has focused on the broader accountability of organizations in terms of the power of stakeholders with their differing interests. The presence of differing interests of stakeholders is a necessary element of the interest theory since said represent those of the different economic groups’ which may need to compete to achieve regulation of the industry. It is for this reason that the author concluded that that accountability requires governance and a stakeholder accountability perspective is the only way available option for organizations like the organization which the author studied. It may be pointed that a non-profit distributing and quasi-public organization with social welfare objects was the subject of the study which he named Q-Group to protect confidential matters in the study.

The author stated that Q Group aimed to transform its governance structure to improve its efficiency and effectiveness, with one of its intentions being to improve its ability to satisfy its multiple but not mutually exclusive accountabilities to stakeholders which, the most important of which is the regulator since it has the power to intervene under the law and that the subject organization is quasi-public one. Collier (2008) thus found that not all stakeholders were equal and on each of the dimensions of power, legitimacy and urgency and it was the board its role that will make identification and prioritization of the salience of each stakeholder.

The features of the case include the fact that government can influence the setting of standards that affect the decision makers in the market. As a result, the parties which may include the members of the accounting profession and the investors who will make use of the financial information provided by the companies after having been audited by member of the profession who will have to comply with accounting and auditing standards, the creation of which necessitated the necessary regulation by the government which represent the public interest.

The potential outcome of the regulated market by the use of accounting and auditing standard includes the greater possibility that the stronger players or investors would not manipulate the information to their advantage as against weaker players or investors.

The parties involved my include the accountants or auditors practicing the profession which in effect considered as agents or extension of government in effecting regulations to achieve efficiency in the use of resources. The third parties who stand to benefit from the regulation by the use of standards are also included. The motivations and actions of accountants must be geared therefore towards promotion of public interest. Dellaportas and Davenport (2008) concluded public interest is supported by the normative definition and that said the definitions and narratives explanations public interest highlights the economic interests of the few rather than the majority. As an alternative consensualist concept of the public interest consulted to better understand key stakeholder groups and common interests which led the authors to emphasize the limitations of a financial reporting framework that which may make provide useful information only to a constricted group of users.

On the other hand, the investors would most likely be motivated to attain efficiency also in the use of resources by expecting higher returns of their investments after making judgment of reliability of the financial statements as a result of the accounting standards used as a form of regulation. These investors would inherently be still attracted by profit maximization of objective and they will attempt to take advantage what ever they can have by having a better appreciation of information including those provided by financial information from audited companies. In relation to this, Dellaportas and Davenport (2008) noted are the need for process theories which are concerned with the procedures to provide consistency of a accounting professional’s with serving the public interest which are achievable normally by adherence with the fundamental principles of professional conduct.

The features of the case may include the need for accountability of stakeholders which is primarily given in the board to achieve efficiency in the allocation and use of resources. The motivations and actions of all stakeholders are still necessary to attain efficiency. The stakeholders include the shareholders, the tenants, the regulator and lenders and each group is motivated to the continuance of the success of the relationships of each hence, there must be continued efficiency in the use of resources. Since the subject of the study is governance improvements plan, the board of directors, the members of which come from shareholders hold the key in making the target of efficiency closer to reality. The use however of this strategy to improve efficiency may come closer to providing regulation or intervention which is the case is mostly influentially controlled by regulator because of the legal framework under which Q group operates.

Since his study is on the improvements in governance which were aimed in improving the internal relationships within the structure of semi-autonomous boards, the author is expected to come out with the findings on the appropriateness of strategies. In this regard, he found that appropriate strategies were implemented to meet external stakeholder demands in a changing environment, as much as the changes were concerned with improving efficiency (Collier, 2008)

Collier (2008) noted stakeholder claims, whilst being different, were not competing but complementary given the social culture of the organization, thus he found the importance of board culture (Jensen, 1993) and the changes brought about by the governance improvement plan in organization under study and thus he found evidence of possibility of improvement. Collier (2008) further asserted that the firm is a link of contracts between all stakeholders in which there are power differentials. He stated that the stakeholder-agency theory has been developed by identifying governance of the centre of differing rather than competing contractual relationships with stakeholders.

According to Collier (2008), the boards of directors in quasi-public organizations have both an economic concern with efficiency and broader social concern. He explained that stakeholder-agency theory is re-focused on the role of the board as being accountable to multiple stakeholder claims which can be considered as factors that can change over time. He argued that whilst board accountabilities may be multiple, these accountabilities may not be mutually exclusive but may be mutually reinforcing. He concluded further that the stakeholder-agency approach involves not only a combination of structures and processes but also highlights the importance of the need for an appropriate culture for the board (Collier, 2008).

Conclusion

This paper has found in the case of public interest theory, that despite finding the need to have the government to intervene in the use of accounting standard to achieve efficiency in the use or allocation of resources via professional code of conduct for professionals, the authors noted the critics claim that self-regulation could still accomplish the same objective better (Dellaportas and Davenport, 2008). The argument of self-regulation is more akin to allowing the market to determine efficiency. This paper also takes noted that as found by Collier (2008), the boards of directors in quasi-public organizations have both an economic concern with efficiency and broader social concern which would in effect sets limit to the exclusive application of economic interest group theory. It can be therefore concluded that both theories may apply to ensure more efficient allocation of resources.

References

Collier, P. (2008) “Stakeholder accountability”, Accounting, Auditing & Accountability Journal, Vol. 21 No. 7, Emerald Group Publishing Limited, pp. 933-954.

Dellaportas and Davenport (2008) “Reflections on the public interest in accounting”, Critical Perspectives on Accounting, Elsevier.

Jensen, M. (1993), “The modern industrial revolution, exit, and the failure of internal control system”, The Journal of Finance, Vol. XL VIIII, pp. 831-80.

Tollison, R. (1998) “The Interest-Group Theory of Government”, edited by Owens and Rowley, University of Mississippi, Web.