ACCT20074 Contemporary Accounting Theory- Social Contract Case

Read the case on The social contract in accounting and You may choose to do one of the following topics, or both. In either case, make sure you clearly indicate what you are doing by saying so in your introduction and by the use of clear headings in your report.

The topics are:

Answer

Introduction

The second topic that is discussed in the current study indicates towards implementation as well as relevance of social contract with regard to the Legitimacy Theory in the area of accounting. It can be hereby witnessed that legitimacy theory in the area of accounting is important in augmenting the financial framework of a corporation and thus, involving and executing social contract along with the theory of legitimacy can be considered to be essential. However, the important information with regard to this topic can be acquired with the assistance of the numerous theories that are constructed by several researchers from different parts of the globe. Analysis of the study replicates the fact that legitimacy concept divulges the social agreement among different accounting professions and shows that social contract is pertinent for proper implementation in the Legitimacy Notion.

Discussion Topic: Relevance and application of social contract to legitimacy theory in accounting

Legitimacy Theory

Beattie (2014) opines that the legitimacy theory in accounting is a comprehensive perception and assumption that activities of a specific entity are appropriate, correct and desirable within a definite socially constructed structure of standards, principles as well as characterisations. Fundamentally, the legitimacy theory can be observed as one of the most quoted doctrines within social along with environmental space.

Social Contract Theory

The concept on social contract replicates the fact that ever since the age of foundation of human evolution, diverse social contracts have in effect aided both people along with the government to function in close link with one another. Bertomeu et al., (2016) asserts that communities are necessarily controlled by definite government units. However, there are diverse theorists who are of the opinion that individuals can gain benefit from staying together and have the requirement to adhere to diverse rules as well as conventions. Mainly, societies are the consequences of co-operation and negotiations and the social agreements principally deliver the framework concerning the manner individuals along with government can act together. Bertomeu et al., (2016) calculated the influence of environment on the current character of accounting since it is supposed that accounting is expected to be engaged in the course of environmental matters.

Application and relevance of social contract to legitimacy theory in accounting

The social contract basically specifies that even though the key motive of businesses is to generate profits, firms also have a moral commitment to act in a liable manner on a social basis. By itself, this notion of social contract is fundamentally a core principle grounded on which diverse notions of corporate disclosures are in actual fact based. Carmona et al., (2016) proclaims that this norm also helps in delivering a vital framework for reviewing different environmental assertions by diverse business houses. In essence, Legitimacy theory is fundamentally one of core social concepts that is mainly supported by the ideas of social contract. Intrinsically, this has been perceived as an efficacious explanatory device as to the intent of environmental reporting acts by diverse business establishments. There are numerous manners in which businesses propose to legitimise own actions by targeting to achieve congruence between specific activities of the business entity along wit

As rightly indicated by Christensen et al., (2016), social contract can be regarded as a notion that is present from the ancient time and this can be referred to be an effectual instrument since all the inconsistencies as well as mistakes that are present within construction of specific accounting declarations are removed. However, course of accounting can be observed to be a social agreement between accounting professions and the entire community of business. In essence, a sense of consciousness can be observed among different regulators as well as accounting professions and these professionals are seen to forego a fragment of their own advantages so as to mutually benefit and formulate a improved financial declaration that would be productive to appropriate parties. The incorporation of the social contract thereby delivers important improvements in the financial declarations. Particularly, the accounts as well as the statements presented yearly need to contain both profit as well as loss declarations, balance sheet along with different notes within different accounts (Cohen & Simnett, 2014). Essentially, different accounts need to be presented with regard to different provisions that are provided in the accounting standards. The corporate disclosures need to be grounded on different underlying principles that can provide a structure for studying specific environmental reporting by business corporations. DesJardins & McCall (2014) asserts that social institutions counting businesses function in society through social contract and that subsistence as well as growth can be attained after the delivery of certain socially necessary ends to community in general and distribution of economic, social and at the same time political advantages to different groups from which this essentially draws power. Subsequently, any violations of the social agreements can have adverse impacts on different business corporations. As rightly put forward by Di Pietra et al., (2014), legitimacy theory can be considered to be one of the most significant among different social concepts that can be backed by different notions of social agreements. DesJardins & McCall (2014) mentions the fact that corporate disclosures counting environmental reporting are made in a bid to legitimize or else validate actions as well as existence of corporations. This notion of legitimacy supports the concept that firms alter the reporting policies in a bid to reflect that their functions are consistent with any realignment in community’s social priorities along with expectations. Thus, amalgamation of the legitimacy theory as well as the social contract theory indicates towards requirements of the disclosures that can be associated to providing substantiation that the business is adhering to specific expectations of the community to maintain legitimacy (Drury, 2013). In addition to this, there need to be disclosure depending upon expectations of different stakeholders of businesses as per the stakeholder theory. In addition to this, there needs to be acceptance of ethical accountability as per the accountability model that is necessarily the ethical branch of stakeholder theory. Again, as per the institutional theory, businesses need to carefully adopt specific practices that are similar to other corporations owing to diverse institutional pressures that can be coercive as well as mimetic isomorphism. According to the positive accounting theory, specific disclosures necessarily depends on positive wealth implications. Milton Friedman’s opinion is that corporate reporting is not only about the accountabilities, it is also about augmenting profitability. The viewpoint of Milton Friedman also discards the view that managers possess any kind of moral or else ethical obligations. In addition to this, this view also states that business of business is business and the primary responsibility of business is to augment profit until and unless they are within the purview of law. The opinion of Milton Friedman can be regarded to be the complete alternative of the social contract theory. The social contract theory contrarily mentions that irrespective of the influence of profitability, all the stakeholders have the right to acquire knowhow regarding social as well as environmental implications of the operations of the firm (El-Firjani & Faraj, 2016). According to this view, business concerns are necessarily artificial business entities that communities choose to generate and in return firms need to earn the authority to operate in the community. Again, firms are also accountable to the community for how they function. Therefore, businesses are answerable to the entire community for the way they function. Societal anticipations might therefore extend beyond profitability. It is the legitimacy theory that is one of the important social theories that can be utilized for explaining the primary reasons behind environmental reportage and notions of social contract. As correctly mentioned by Hahn & Kühnen (2013), “Media agenda setting model, political economy model in addition to stakeholder theory are also identified by the works as efficacious explanatory instruments. As correctly mentioned by Hahn & Lülfs (2014), Political economy model, explored theorizes that a business entity’s revelations need to be related to a wide- range of environmental, political as well as social influences. Again, Stakeholder theory, that was appropriately employed by Henderson et al., (2015), can be utilized to enumerate different effects that stakeholders have on decisions of management concerning the reporting activities of the corporation. In addition to this, the media agenda setting theory can be utilized to understand different motives behind corporate social responsibility revelation. The outcomes recognized that a positive association existed essentially between level of negative publicity encountered by a business entity and the specific level of environmental revelations in the annual pronouncements. 

However, the innovative economic, social as well as environmental difficulties dictate different associations and governments, to respect different rules, morals as well as norms, and willingly disclose specific social as well as environmental information so as to probe compliance. Thus, legitimacy theory essentially plays an important role of a reasonable factor for revelation of particular environmental information. The disciplinary background of legitimacy theory helps in understanding the when a particular corporation need to legitimize. In addition to this, these theories also assists in understanding the time when a specific corporation can be considered to be legitimate (Miller & Power, 2013). Furthermore, detailed analysis of this theory also helps in understanding whether legitimacy can be considered to be an objective or else an end for a specific corporation. Essentially, the abstract nature of the particularly legitimacy necessarily makes it intricate to find out specific mechanisms by which a specific corporation can voluntarily divulge both social as well as environmental facts. In essence, the corporation also relates different figurative representation of the image with the culture and takes into account that in a bid to attain the legitimacy, it is essential to augment the culture and promote the same to the external environment. Again, the vital role of legitimacy of corporations, diverse institutions in addition to society survival is driven by different negative social as well as environmental phenomena created by the inadequacy of legitimacy. Therefore, the literature on legitimacy asserts that the subsistence of a particular corporation essentially depends on the procedure of legitimation and on the way continuous pressure as well as challenges can be managed. Thus, the main purpose of the legitimation is to acquire and at the same time maintain approval of the stakeholder. As rightly indicated by Ridley-Duff & Bull (2015), the main issues in this regard include understanding importance of a corporation to act in accord with the legitimacy theory. In addition to this, important issue is also to understand the reason why a particular corporation need social approval in a bid to develop different legitimate actions, comprehend different types of legitimacy along with instability of legitimacy. As correctly mentioned by Rogowski (2015), strategic actions can be strictly circumscribed by specifically institutional environment as well as accountability necessities. Thus, it is significant to note that the long term influence of specifically legitimacy on economic and at the same time financial performance of the corporation can generate several internal conflicts of multi-structural construct of legitimacy that can essentially influence on transition from legitimacy to illegitimacy and from specifically illegitimacy to legitimacy (Schouten, 2013). Therefore, role of particular media can drive the legitimacy of the corporation and can be considered to be significant if accompanied by different stakeholders, society as well as regulators of government. However, the other studies take into consideration the role of stakeholders in the process of manipulation of perception of the community as regards the organizational legitimacy. Essentially, the stakeholders need to act to avert the loss of legitimacy and avoid destruction of the image of the corporation. Thus, the role of stakeholders become important in the process of prevention and at the same time lessening of illegal risks, and the business houses have the opportunity of carrying out definite actions at each level of legitimacy grounded on process of evolution as well as alterations of the values as well as expectations of the community (Schouten, 2013). However, in this specific context, trust becomes an important component of shaping organizational legitimacy and this replicates the overall behaviour of the corporation. Strategy of Legitimation can be considered to be a very significant tool that can impact the awareness of the corporation by its participants. Therefore, the features that aid or obstruct the organisation in achieving, maintaining as well as defending its validity need to be explored through different empirical investigations.

Nevertheless, there is profound ambiguity among diverse investigators concerning the suggestions that legitimacy theory proposes about diverse voluntary disclosures of firms. As fittingly suggested by Smith (2014), there is a vital matter that needs to be considered are two diverse classes of legitimacy theory, one is the macro theory that is also mentioned to as Institutional Legitimacy Theory. Particularly, this theory deals with the manner organizational structure have acquired acceptance from essentially the society mostly. Schouten (2013) advocates that legitimacy along with institutionalization are essentially indistinguishable and both of these facets authorise businesses primarily by making them seem normal and at the same time significant. As appropriately suggested by Smith (2014), from the perspective of accounting enquiry, on condition that time frames in addition to enquiries that are taken into consideration, current business setting including capitalist structure, democratic system of government among many others are usually considered to be assumed, an unmoving situation within an investigation is positioned. Nevertheless, this assumption need to be sensibly taken into consideration for a longitudinal study of considerable length.

As correctly suggested by Treviño et al., (2014), essentially there are diverse strata of legitimacy theory. Particularly at the institutional level, there exists government, community, religion, as well as entrepreneurship. However, at the level of organization, there is presence of establishment, preservation, lee way as well as defence. As rightly put forward by van Bommel (2014), one specific layer that is underneath the level of institution is the level of organization. Principally, fundamental administrative legitimacy process by which a business attempts to search for authorisation or else avoidance of authorisation from diverse groups in a community. Primarily, it is thus from this phase that majority of accounting research have a tendency to draw knowledge of legitimacy. Businesses intend to institute congruence between diverse social morals and standards related to or else imply by actions along with doctrines of suitable activities in the setting of higher social framework of which these activities are a fraction. Insofar as two diverse schemes of value are consistent, administrative validity is supposed to be present. Nevertheless, at the period when certain possible inequality subsists between two dissimilar value schemes, there remains a risk to administrative legitimacy. Administrative outlook of legitimacy is a functional reserve that businesses eradicate often viably from cultural atmosphere and that these factors work in pursuit of purposes. Rogowski (2015) asserts that legitimacy can be reflected to be reserve that a specific business needs to operate. Again, there are definite actions along with events that augment legitimacy and at the same time there are activities/events that decline the same. Yet again, lower level of legitimacy can have precisely unpleasant consequences for a business that can eventually lead to forfeit of the authority to operate. Although it can be considered that for a business to be valid and, this basically turns out to be a very subjective exercise to attempt and directly estimate legitimacy. Though it has strong consequences, legitimacy can be regarded to be an abstract concept, given realism by many performers in the social environment (Ridley-Duff & Bull, 2015). In itself, for an investigator to try and directly introduce or else rank, validity of diverse businesses can appear to be fundamentally subjective task, referring the personal views of the investigator. Over and above this, legitimacy frequently has been hypothesised as resources that businesses need to acquire from the atmosphere. Nevertheless, instead of observing legitimacy as certain thing that can be switched between establishments, legitimacy is well reflected as an important measure of the setting for interchange along with a consequence of interchange. Principally, legitimacy has a substantial arrangement and this subsists as a figurative depiction of the amalgamated analysis of a corporation, as revealed to diverse witnesses as well as members genuinely by flow of resources. Nevertheless, resources need to have figurative import so as to correctly operate as a definite value in course of social interchange. Again, legitimacy can also be measured to be upper order demonstration of that definite symbolism – a reflection of representations. Miller & Power (2013) claims that appropriate models in the zone of legitimacy notion need to scrutinise relevant stakeholders and the manner it impacts the flows of the resource that is crucial for the formation of the business, development as well as progression, continued existence, either by way of control or by way of declaration of good will. Miller & Power (2013) correctly mentions that there are essentially four diverse organizational participants/stakeholders and each one of these stakeholders are thought to regulate various resources. However, the most important stakeholders/patrons of business consist of state that sequentially regulate resources for example agreements, legislation, tax, endowments in addition to guidelines. Over and above this, the participants explicitly “public” also deliver benefaction as clients, support as well as backing as public interest as well as labour. Besides this, the economic community is yet another significant stakeholder that necessarily controls overall levels of investment. Additionally, the participant “media” also assumes charge of diverse direct resources, however, this can significantly affect different selections of stakeholders. Along with this, business attempt to manage the legitimacy since this aids in ensuring certain sustained capital flow, labour together with customers necessary for feasibility. Essentially, this also visualizes varied regulatory activities by state that possibly might materialize in the absence of correctness and expects diverse product rejects along with other disrupting actions by outside parties. Nevertheless, by alleviating or else agreeing diverse possible problems, organizational legitimacy delivers managers with a specific degree of independence so as to decide the way, in what manner as well as the place where business functions can be carried out (Hahn & Kühnen, (2013).

As correctly point out by El-Firjani & Faraj (2016), the theory on organizational legitimacy suggests that a company might possibly be in four diverse phases with regard to legitimacy. Fundamentally, these stages include establishment of correctness, preservation of legitimacy, specific extension of validity, protecting varied legitimacy. Nevertheless, social facets are engaged in each of the stages of legitimacy. As rightly mentioned by DesJardins & McCall (2014). The initial stage of formation of legitimacy replicates the primary stages of development of a business and have a tendency to to circle around matters of competence, precisely financial. Nevertheless, the business need to be conscious of the socially constructed values of quality along with desirability and need to execute as stated by acknowledged values of professionalism (Smith, 2014).

Over and above this, preservation of legitimacy indicates towards a specific stage that majority of businesses usually assume to be operating where activities basically contain continuing performance along with figurative reassurances, tries to suppose and avert otherwise envisage plausible challenges to rationality. Nevertheless, preservation of this legitimacy can be regarded to be active construct and is not essentially as easy as it principally seems to be. Social facets are also vital in this respect as anticipations of the society are in effect not stagnant and modifications across time necessitate businesses to be very reactive to the overall environment in which a specific business functions (Ridley-Duff & Bull, 2015).

Subsequently, the following stage comprises of the phase of extension of this legitimacy. Fundamentally, there perhaps might be a specific time in which a business go in an entirely novel market otherwise modifies the manner it links to the current market. Essentially, this in turn can direct towards extension of validity that is suitable to be strong besides active as organisation attempts to gain assurance and support of distrustful clients (El-Firjani & Faraj, 2016).

Particularly, legitimacy might perhaps be endangered by a specific event both internal in addition to external and as a result might need defence. Beattie (2014) opines, activities of legitimacy have a tendency to be robust and at the same time receptive as administration attempts to counter the threat. Even excluding a key incidence it is anticipated in “Western Capitalist System” that nearly every corporation can often need to maintain the legitimacy. Fundamentally, this can be considered as the last stage that has be possibly the central focus of diverse investigators in accounting. Besides this, this also delivers chance to evaluate crucial connection between both validity and available resources. Mainly, a core paper correctly quoted by diverse Social in addition to Environmental accounting investigators seem related principally to this stage. In essence, legitimacy theory in actual fact delivers diverse investigators in addition to public a precise way to critically discharge varied corporate revelations. Nonetheless, gaining understanding and studying present theory need to done in a more refined manner by drawing on diverse improvement both within works of accounting. Again, this is time when the entire potential of explicitly the legitimacy theory for assessment of widespread range of diverse disclosures be properly realised. DesJardins & McCall (2014) suggests that knowledge learnt can be employed for providing superior and simultaneously valuable information so as to notify different stakeholders of the firm and help them to arrive at proper decisions. Fundamentally, in this way, the whole community can be empowered to gain improved control over and above oversight over mainly the manner of allocation of resources.

Companies in Australia deliver CSR reports and sustainability reports along with the financial statements of the firms. A recent survey conducted by KPMG reflects that the sustainability reporting exercises helps n increasing both the incidence as well as quality of the sustainability reports. As per reports, approximately 30% of the top 500 firms in Australia have declared sustainability reports for the financial year 2006 ("KPMG International", 2017). For example retail firms such Wesfarmers and Woolworths Limited and mining firms such BHP Billiton among many others publishes sustainability reports that provides materials as well as evidences regarding economic, governance performance as well as social performance.

Conclusion

The above mentioned study helps in gaining an understanding regarding the fact that legitimacy concept can be considered to be one of numerous social models that can be utilized to exemplify the idea behind specific environmental assertions and the concepts of social contract. This current study mentions that the legitimacy notion can be regarded as one of notions that are mostly referred to within societal as well as environmental space. Again, this study also aids in acquiring comprehensive knowhow regarding legitimacy that is fundamentally a comprehensive perception or else hypothesis that essentially asserts that activities of a particular business entity are certainly required, fitting within socially built structure of standards, ethics, and theories along with definitions. Fundamentally, this study aids in acquiring a succinct outline concerning the matter that legitimacy model is a robust tool for realising voluntary societal along with environmental revelations offered by business houses. Again, this assists in understanding the matter that this deliver a proper vehicle for participating in serious debate. Thus, from a theoretical viewpoint, it can be noted that whilst this study delineated different appropriate concepts that can be utilized to illustrate the reasoning behind reporting on specific environmental factors; however the argument focussed on theory of legitimacy.

References

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