ACCA Applied Knowledge · Financial Accounting · The regulatory framework
Which of the following statements best explains why regulation is needed because of the separation of ownership and management in a large company?
Managers prepare the accounts but shareholders own the company, so managers may be tempted to present flattering results for their own benefit. Regulation, through set accounting rules and audit requirements, limits this bias and protects owners who depend on the information.
- AManagers who prepare the accounts may be tempted to present results in a way that favours themselves, so independent rules limit biasCorrect
- BShareholders are legally prevented from reading the accounts without regulation
- CManagers always own the majority of the shares, so rules are unnecessary
- DRegulation ensures that dividends are always paid every year
Explanation
Where managers run the company on behalf of owners, they control the reporting and may bias it, for example to protect bonuses. Regulation constrains this by requiring accounts prepared under set rules and often audited. The other options are untrue or irrelevant.
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