Sizwe Njeke Sekese is a member of the South African Institute of Chartered Accountants, a professional accounting organization aimed at developing and maintaining quality accounting standards and procedures for all publicly listed companies. For the last four months, the organization has been unable to reach an agreement with other professional accounting bodies regarding the formulation of a national government policy that would improve the quality of financial reporting among ECMs.
You are a member of an organization that advocates a "free market approach," which would allow enterprises to choose the appropriate level of disclosure according to their particular circumstances. Specifically, your organization believes that competitive market pressures will ensure that an optimal level of disclosure is achieved since firms will compete to reduce the cost of obtaining funds from the market. However, other professional bodies have strongly advocated the mandatory regulatory approach and argue that an adequate level of disclosure regulation is necessary due to a potential market failure in the supply of financial information. Since financial information is characteristic of a public good, information is likely to be under-produced if mandatory regulations are absent, consequently stifling the growth of these markets.
1. If you were the CFO of a large publicly held company with headquarters in South Africa, what position would you like Mr. Sekese to favor and why?
2. Describe some of the benefits of allowing companies the freedom of choosing their own disclosure policies versus mandating reporting procedures. As an investor, which approach would you like to see implemented? Be specific.
3. Does mandating reporting procedures necessarily increase the amount of information available to investors? Briefly explain.