4 Whilst acknowledging the importance of high quality corporate reporting, the recommendations to improve it are

sometimes questioned on the basis that the marketplace for capital can determine the nature and quality of corporate

reporting. It could be argued that additional accounting and disclosure standards would only distort a market

mechanism that already works well and would add costs to the reporting mechanism, with no apparent benefit. It

could be said that accounting standards create costly, inefficient, and unnecessary regulation. It could be argued that

increased disclosure reduces risks and offers a degree of protection to users. However, increased disclosure has several

costs to the preparer of financial statements.

Required:

(a) Explain why accounting standards are needed to help the market mechanism work effectively for the benefit

of preparers and users of corporate reports. (9 marks)