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The difference between the public
and the private interest
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Capture Theory Perspective
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Contents
Introduction............................................................................................................................................ 3
Capture Theory ..................................................................................................................................... 3
Pros and Cons of the Capture Theory .............................................................................................. 4
Self Interest Theory.............................................................................................................................. 4
Conclusion ............................................................................................................................................. 4
References ............................................................................................................................................ 6
Introduction
The basic concept of the Financial accounting theory is based on the fact that the
accounts should be so much updated that they would be able to provide all the
required information to the investor before he takes the decision about investment. In
the given case the concerns of the senate committee is justified in the sense that the
information provided by the accounts should be correct, relevant and consistent. This
could involve huge responsibilities as the disclosures in the accounts are of utmost
importance. So Dr Batterham’s, who was playing a dual role as the chief scientist of
the Federal Government, role was under scrutiny.
Capture Theory
The information about a company that is revealed by the accounts becomes a public
good after it is made available to anyone. The free riders who take advantage of the
information can also not be charged for using this information. This causes
dissatisfaction in the company management and they are tempted to disclose lesser
than required. This is called the free market approach. Another approach that was
adopted was self regulation approach which meant the companies have to exercise
self-regulatory measures and supply all the relevant information to the market forces.
But in this case also the firms become the monopolist supplier can fraudulently
disclose false information to regulate the prices and other factors. Both these theory
didn’t work. So M. Walker came up with the argument of capture theory in
1978.(economic theory).
This theory argues that there should be regulatory measures are initially established
to protect public interest but later are captured by regulated parties who manipulate
the rules to suit their convenience. The regulatory authorities start believing that the
companies that are regulated have to be given extra facilities as they adhere to rules
which may result in profit reduction. Government created ASRB which is now known
as AASB (Australian Accounting Standards Board) as regulatory authority to protect
the public interest and adhere to their right of information. But the regulatory bodies
were able to capture the AASB and started manipulating the rules to suit their needs.
The outcome of the above process is that the standards set by accounting
association are legitimised by different professions according to their requirements.
Pros and Cons of the Capture Theory
The main advantage of the capture theory is that it takes care of the public interest in
full. It seconds the argument fully that the society in which the firm operates has the
full right to have the knowledge about the functions that are going on inside the firm.
The cons of using the capture theory are that it completely ignores the firm’s self
interest. In this case the firm would be lured to make manipulations to the set
standards as their personal interest does not find a place. The accounting group is
not the only thing that the AASB has to focus on. It has many other roles to play as
well. So it might not be as dedicated to the accounting profession as it could be.
Moreover there are lots of political interests that go into the setting of standards by
AASB. There also appear to be some rules which look biased. There are also social
and economical factors involved while setting up of rules.
Self Interest Theory
This theory is based on the argument that, individual come together only to pursue
some self-interest. If their self- interest is not looked into at a particular place, they
would lose the motivation to work and the firm would fail to operate. So the
accounting standards should be set keeping into mind not the public interest but self
interest. In this case the private interests of the involved parties are first taken care of
(Gaffikin 2009).
On comparing the self interest theory with the capture theory we get to see that the
basic difference is that the capture theory takes care of public interest only and the
self interest theory takes care of the private interest of the parties involved. In the
capture theory the exercise of the self control would not make much difference
where as in the self interest theory the exercise of the self control is of utmost
importance. The rules set by the self interest theory are completely according to their
private needs and the rules of the capture theory are completely according to the
public needs.
Conclusion
From the above discussion we can conclude that both the disclosure theories have
the pros and cons attached to them. One completely ignores the individual where as
completely overlooks the society. Both these theories are related yet they are so far
from each other. In order to strike a balance between the two, there has to be some
accounting standards which are set by a group of people who are totally unbiased.
Thus we cannot say that any of the above two theories, the capture theory and the
self interest theory are bad. They just need little mouldings to overcome the
limitations they have.
The senate committees concerns are relevant in this case as the private interest can
result in the negligence of duties towards the public. So Batterham’s dual roles could
lead to a disaster if the private interest start ruling. This could result in both the moral
and financial hazard.
References
Gaffikin MJR 2009, ‘Regulation as Accounting Theory’ working paper series,
accessed 21/09/11, <
http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1049&context=accfinwp&seiredir=1#search=%22walker%20argument%20about%20accounting%20disclosure%
20theory%22>
Psaros, J., Patel, C., Warnakulasuriya, S., 2003. A Study of Uncertainty
Expressions in Australian Accounting and Auditing Standards, Pacific Accounting
Review,15 (2), p1 - 28
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