ACCA Applied Knowledge · Financial Accounting · The regulatory framework
Which of the following is the most direct reason why financial reporting by listed companies is subject to regulation?
Regulation exists because external users such as investors cannot require management to provide tailored information. Rules make financial statements reliable, comparable and understandable. It does not equalise profits, prevent business failure or remove the need for audit.
- AUsers such as investors cannot demand tailored information and need reliable, comparable financial statementsCorrect
- BRegulation ensures that all companies report identical profits each year
- CRegulation guarantees that no company will fail
- DRegulation removes the need for an external audit
Explanation
Shareholders and other external users cannot demand bespoke information from management, so regulation sets minimum requirements to make statements reliable and comparable. Regulation does not make profits identical, prevent failure or replace audit, so the other options are wrong.
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