Contract to Legitimacy Theory in Accountingâ€Myassignmenrhelp.Com

Question: Discuss About The Contract To Legitimacy Theory In Accounting? Answer: Introduction Social contract is basically an age old theory which states that an individuals ethical and/or political responsibilities are based upon an agreement among them to form a society in which they reside. Thus it can be construed that as per the social contract theory, moral and ethical codes are the principles, all reasonable individual would agree to and also make it a part of their lives, but only if they would be able to trust on other people also to follow the same. The said theory can be useful in examining queries related to the business ethics. It is an invisible arrangement which mentions that one should not contravene the moral rules and guidelines. There are three mainstream theories of business ethics, stockholder theory which states that an organization has no moral responsibility towards the society but to earn maximum gains by performing the business operations in an ethical manner, social contract theory states that business enterprises work under an unwritten agreement w ith the society as a whole wherein the community gives permission to the enterprise to conduct a business activity under such circumstances which is the most beneficiary for the society and third is the stakeholder theory which states that one of the ethical responsibilities of an enterprise is that they are obligated to all those who have a stake in the final results of the activities undertaken by the company which comprises of staff members, the society as well as the surroundings and the stockholders (Thompson 2016). The report focuses upon explaining the importance and application of social contract to the Legitimacy Theory in accounting. It discusses what does the said theory connote and how is it related to the accounting field. Further the report also analysis the relationship between social contract and accounting. Legitimacy Theory In Accounting The increasing body of literature diverges its focus towards the corporate social accounting and reporting problems. The new economic, social and environmental confronts order to the enterprises and the government enterprises as well to pay heed and respect to the rules, regulations, morals and standards and to willingly release societal and environmental data so as to investigate their adherence. Thus the Legitimacy Theory conducts the role of an acceptable aspect for the revelation of the environmental data. Not to ignore, the global financial crisis occurred in 2008 which led to the shakiness in the financial markets as well as the economy as a whole, demands from the companies to re-consider their moral systems and to emphasise the significance of authenticity. The association of the corporeal financial resources with the ethereal legitimacy resources is crucial for formation of a fresh vision for all organizations (Burlea Popa 2013). However various economists and scholars have criticised the said theory. Legitimacy is a comprehensive awareness about the activities conducted by an entity and whether the same is acceptable, proper and apt within certain socially constructed system of customs, standards, philosophies and descriptions. Thus it can be rightly said that a legitimacy theory has the main part of amplifying the performance of the businesses in employing and developing deliberate and chosen social and ecological revelation of information so as to accomplish their social contract that facilitates the acknowledgment of their objectives and the endurance in an unstable scenario. The said theory has a very deep rooted past which is related to the management theory, institutional theory and stakeholder theory. Advantageously speaking, the sustainability of the legitimacy theory is dependent upon the management tradition that links the old methods and ways with the current modern ethical stances. Therefore, to put the same in simple words, one can dictate that legality counter measu res the fact that entities change their reporting procedures and strategies, and so as to point out that they are operating in a way which is in accordance to the repositioning in societys social precedence and prospects. Legitimacy is very important to follow while accounting for the transactions and various other financial data which is relevant for the society as if the same is not maintained and moulded as per personal needs, then the same may lead to breaking of the invisible social contract terms and conditions and also in some cases leading to an economic downturn. Thus social contract to legitimacy theory in accounting is now a must so as to ensure that the accounting is done keeping in mind not only staying within the lawful fencing but also considering he impact it would have on the society as a whole. Legitimacy Not One Theory But Two Legitimacy theory has dual theories not one. First is the macro theory of legitimation which is named as Institutional Legitimacy Theory which speaks about the entire structure of an organization and how the same is accepted by the society. With regards accounting perspective, the present condition of a business environment which comprises of the capitalist structure as well is generally considered to be a motionless circumstance inside which the investigation is situated. The second is the Strategic Legitimacy Theory wherein the enterprise desires for permissions from the various communities within a society. Accounting for legitimacy is difficult, however the same can be done from the fact as to by being legitimate, how an entity is being able to attract such resources which are compulsory for the endurance (Tilling, 2004). Relevance Of Social Contract To Legitimacy Theory In Accounting The importance of social contract to the legitimacy theory in accounting cannot be under estimated, especially after the collapse of Lehman Brothers in 2008. The organizations are now required to become more transparent while accounting for the various transactions. Further to this, the entities are also bound by an ethical duty to report in their accounting statements data about the environment in which they operate. However, it would be incorrect to consider the same as inclusion of more regulation but a way of reporting about the trueness and fairness of the accounts. If the entities do not comply with the terms and conditions of the social contract then they would not be accepted by the society and their survival will be at stake. The collapse of Lehman Brothers which was basically due to presentation of a rosy picture of accounting statements, thus misleading the investors and harming the society as a whole, bought the said theory in vogue wherein the social contract should be a dhered to while accounting the transactions (Abeysekera,2003). By the term legitimacy we mean legal or something that is within the law and the theory on the same is basically concentrated between the business entity and the society. The consumers expect the organisations to work in a legitimate manner and at the same time the corporations are expected to participate in resolving various social and environmental problems (ODonovan, 2000). The legitimacy theory posits that the legality of an organization to work within a society is dependent upon an unspoken societal treaty flanked by the business entity and the society. Legitimacy theory pre-empts that the business houses perform in an ethical way within the social boundaries. The various business entities make all efforts to institute equivalence amongst the social norms and beliefs which are associated with or implied by their actions and the rules and regulations with regards satisfactory performance within the larger social system to which they belong. Steady with the above mentioned view point, the accounting of the assets is a legitimating establishment and provides a way through which the social values are related with the financial and fiscal activities (Lindgreen et.al. 2008) . As early as the 80s, the legitimacy theory has been applied by the researchers who basically concentrate upon examination of the social stances, specifically pointing towards environmental accounting practice. For example the steel companies were examined longitudinally wherein certain variations were discovered with regards the corporate social reporting. Whereas one research confirmed with regards the legality account, the other failed to disclose the disparities in the admissions at BHP (Faisal et.al. 2004). As stated, the relevance cannot be over-emphasized, but however the organizations in todays scenario recognize the requirements of the society with regards the information about how the company is complying with the social contract and transmitting the said information in a tactical manner so that it is confirmed that the same is in line to the desires of the society. Thus this enables in formulation of an image via communication of the information to the society. The said stand point is held up by legitimacy theory as well. However, such a disclosure is not mandatory until and unless the relevance of the same is questioned by any segment of the community with regards the accuracy of the results. Therefore it can be interpreted as, if the societys perception of a business entity is at par with the way the organization desires to be perceived, there exists to be no differentiation to the legitimacy gap (Collins 2012). Thus it does not call for any motivation for disclosures or demandi ng to legalise any such results or aims of the business entity. The fact that legitimacy theory offers the researchers and the social order as a whole, a method of essentially unloading corporate confessions. But the accepting and learning of the hypothesis must become more difficult and complicated, depicting on improvements both within the accounting literature and further. It is only ten when the entire latent of legitimacy theory for probing a huge number of disclosures be realised in totality (Patten, 1991). Some of the industries wherein the relevance of the social contract in legitimacy theory in accounting can be emphasized are the asbestos industry since it has to undergo a disestablishment phase, brothels since they have become more legal as per the Australian scenario and the forest industry since it is always on the verge of defending legitimacy. However the list does not end here. The data that would be disseminated will help to give a more clearer picture and also more detailed information so as to inform decision making by the vari ous stakeholders (Wambi 2015). Thus in this context it can be rightly connoted that the society has a much larger and a prominent role to play over looking at how the resources are being utilised. The social contract to legitimacy theory in accounting gave rise to the corporate sustainability reporting (CSR). It is basically the duty of all corporates towards the society in which they dwell. It is an commitment of the businessmen to ensure that such policies and procedures are being followed which are as per the requirements of the objectives and the aims of the society. It however covers financial, legitimate, principled as well as flexible expectations that the society has from the various organizations at a particular point of time. CSR is crude terms is how an organizations conducts its business processes so as to ensure that the end result is optimistic on the society (Suchman, 1995). Further to this, the companies are required to notify and pen down about the quality of the management which comprises of individuals as well as procedures and also the type of and quantity of their implications on the community which are a part of distinguishing areas. Thus the legitimacy t heory enables the companies to feel obliged while taking into account the interest of the various sections of the society i.e. customers, employees, government as well as ecological conditions in various parts of their operations (Jupe, 2005). The existence of a social contract, makes the business entities realise that they have dual responsibility of earning profits as well as functioning ethically within the social boundaries. The financial responsibility and duty of the management of a business organisation entails that society demands the business to manufacture and deal in such goods and services as is asked by the customers and earn a profit which is basically an incentive for the business competence and efficacy. The legitimacy theory basically calls for ensuring that the business is conducted and accounted for as per the rules of the game which protects the society as a whole. Therefore for the same, the society demands from the entities to perform their financial goals with in the guidelines put forward by the societys legitimate system (Toukabri et.al. 2014). The legitimacy theory in accounting has also pointed out disclosing not only the financial data but also the non-financial ones as many a times, the latter also has a great impact on the health f the company as well as the industry in which the company dwells. As was very evident in the case of Lehman Brothers in 2008 wherein the financial statements failed to disclose the relevant data about the firm such as the usage of Repo 105 in accounting and that too in a manipulated manner. Thus the social contract has laid emphasis upon the relevance of the non-financial information also which is also a part of the accounting of the firm, even if no specific value can be attached to the same. The relevance of such a disclosure of non-financial data is that it helps to bridge the gap of the information irregularity that lies amongst the management and main stakeholders of the firm and also to help the investors to understand the major areas of performances and get a broader picture of corpora te recital that takes into consideration the society at large as well. Social contract to legitimacy theory in accounting ensures the future of a company, as no company can survive for long if it does not adhere to the norms laid down by the society and acts in an illegal and unlawful manner. Further, if legitimacy theory in accounting is followed with regards to the fact that a company is a part of the society only and hence cannot function alone, then it would enable better positioning of the firm and good employees would be attracted to work with the firm which help in turn help reduce the employee turnover ratio and also ensure that it is being able to attract and employee better individuals from the society who would help them achieve better financial results in future (Addison, 2011). CSR disclosures in a lawful manner is important in accounting as it also helps the firm to attract more capital and also enhance the value of the shareholders investors. Lastly since legitimacy takes into the society and not just the stakeholders or the investors, legitimacy based accounting will cater to such circumstances wherein the firms have been a party to such scrupulous practices which has had an impending implication on the society and also contravened the contract terms as well. Since the legitimacy theory concentrates upon the view point of the society in which it dwells, the management of an organization are to mandatorily account and disclose such data which would alter the thoughts and opinion of the outside users towards the entity (Williams Adams,2014). Application Of Social Contract To Legitimacy Theory In Accounting Social contract to legitimacy theory in accounting is basically a way to ensure that the entities report about their sustainability in the corporate world. Sustainability reporting in the field of accounting which covers up both financial as well as non-financial metrics for the benefit of the society in which a firm resides in a legitimate way is important in the present scenario wherein the economies are in a turbulent situation. The application of the social contract varies from country to country and is also industry specific. The jurisdictional setting of the various countries are different and the said setting also has a very critical implication over the formulations of various corporate reporting variables (Wilmshurst Frost, 2000). As has been stated in the above paragraphs, the legitimacy theory is dependent upon a concept that the legality of a business organization to work within the societal fencing is dependent upon an inherent social contract between the business houses and the society. Thus its rightful application will only help to derive the required results and the same is decided basis the expectations of the society from the industries and the individual firms as well. Sensitivity, as is said to be right word, linked to the various industries is an unswerving argument with legitimacy theory (Omran Ramdhony, 2015). Considering the legitimacy theory, it is understood that the kind of industry can have a very crucial impact on the opinionated visibility and constrain admissions in order to reduce the pressure and condemnation from society. The application is said to have been successful when the value generating systems of an organization which look for legality and the social systems from which they seek legality from are congruent. The legitimacy theory is not fixed or monotonous but a continuous process via which the expected legitimacy of an entity is emerging in a non-stop manner and is reconstituted via the social surroundings. The various strategies with the help of which the corporations try to create, increment or maintain supposed legitimacy in accounting are the most crucial factors in defining the behavioural patterns of the corporate and the corporate communication as well with regards the society and the surroundings as well (Milne, and Patten, 2002). A firm accounts for its transactions both financial and non-financial in the financial statements simply because their exists a contract with the outside world which is invisible. Due to existence of such a contract, the demand for authenticity in the accounting comes into picture. Thus the application of the social contract to legitimacy theory has a direct relationship to the context as well as the audience (Deegan 2014).Todays scenario calls for accountability of an organization to the various groups of the society who normally have inconsistent views and expectations. The legitimacy of an organization is due to the social stances. It can be viewed as a discursive product which is gained and continued through social interactions. But for some few notables studies, the social contract to legitimacy theory in accounting perspective has been mainly concentrated with the spontaneous character of the managerial revelations. The organisations have a significant role to play in maintaining a social dialogue with the society in which it works as well but at the same time ensure that the legitimacy theory in accounting is also applied while adhering to the terms of the social contract. The accounting which is transparent and does not hide any material transactions or events from the society is said to have fulfilled one of the many conditions of the contract it has entered into with the society. It has commented that frequently, all are presented with reasonable explanations with regards the motivations given to the management with regards disclosures to be made, but no attention is given with regards the method by which such disclosures are to be which would or would not entail to greater accounting transparency towards the non-capital provider stakeholder groups or can rightly be said to the society who may not have contributed to the capital of the company. Thus how would the application of social contra ct to legitimacy theory in accounting can be made is yet another question unanswered. The application of triple bottom line, way of reporting helps to provide data about the economic, social as well as environmental presentation of an organisation. The said application helps to develop a relationship of the organization with the concept of sustainable development. Many business houses and the government entities have already enrolled to the said concept. (Lindblom, 1994) By social contract of an organization with the society, one means that the organisations should ensure to apply its operational activities in such a manner which is legal as well as construes to the societal norms. The business organizations have off lately altered the way they conduct their business and it is not profit centric only but also discusses about the moral responsibility they have towards the society, thus apply the same every time a new business operation is being undertaken by analysing the impact it w ould have on the society and whether the same is permitted by law (Bebbington et.al.2014). Whenever the firm notices that its legitimacy is being endangered, then it may resort towards adaptation of various tactics such as adaption of such results, aims and methods of operation which are in line to legitimacy, communicate to change and modify the definition of social legitimacy so that it conforms with the present practices adopted by the entity and make an attempt by communicating in clear terms, to become acknowledged with symbols and principles which imply legitimacy (Archel et.al. 2009). Disclosures in the annual reports are basically a strategically approach adopted to bring in legitimacy or maintain the existing one within the business entity. The media is one of the major driving factors which helps in forming the public figure of the organizations and thus disclosures in the annual reports are ways and means of getting back the lost confidence and support from the society due to the negative publicity by media (Hoque, 2006). Even though is a necessity to do maintain social relationship and ensure the same is accounted for in a legitimate manner as per the legitimacy theory, thus if a corporate makes disclosures about the legality of its transactions and its operations then the same is being done effectively since it is mainly construed to be for the continued existence and endurance or profitability stances instead of an expression towards better accountability (Ashforth, Gibbs, 1990). There are various proofs which show that various disclosures are a legitimation tool and not merely an accountability mechanism. However, the application of social contract to legitimacy theory in accounting has certain gaps to cater to. First and foremost is the measurement i.e. it is very difficult to measure and account for in value terms the social contract being adhered to, secondly, the kind of disclosures which would entail to maintenance of social contract to legitimacy theory in accounting is also questionable su ch as the methods to be used and what social groups really bestow to legitimacy, thirdly, the disclosure strategies adopted are basically guided by self interest due to which some activities undertaken by the organizations can be categorised as institutionalised instead of being driven by legitimation strategies and lastly those researchers who apply the legitimacy theory in accounting, do not take into account the activities that are concentrated at legalising the broader social system (Owen, 2008). Thus it can be narrated that the gap that exists between the application of social contract to legitimate theory in accounting lies to the fact that even though the disclosures are being made so as to educate or manoeuvre the society in a style with an intention to provide legality to the organization, the researchers failed to consider whether these disclosures will have a deeper implication with regards the efforts to legitimise specific economic, social and political systems in vogue that basically challenge and destabilise the interest of specific stakeholders such as the employees (Guthrie, and Parker, 1989). Numerous CSR studies have engaged the structure of legitimacy theory so as to inspect the expected motivations for the corporate social and environmental disclosures. For example, the incremental environment related disclosures by the petroleum companies after the Alaskan oil spill can be understood as a proof in support of t he legitimate theory (Hybels, 1995). Theories To Explain Environmental Reporting And Disclosures The legitimacy theory is considered to be one amongst the various social theories which is sustained by the notion of social contract. The same been documented as an effectual descriptive tool with regards the intention of environmental accounting by the business entities. By the said theory of legitimacy, it caters to discuss about the fact that the business entities concentrate upon legalising themselves and their activities with regards the operations as well as accountability of the transactions by working within the boundaries drawn by the society and the contract that they have with the society which is although unsigned and invisible but has a great implication (Lanis, Richardson, 2012). However it is very important to understand that the social norms is not constant and it will keep on altering depending upon the requirements, for example the reporting requirements ad usage of any accounting standard has become more stringent after the aftermath of Lehman in 2008, since it h appened due to illegal usage of Repo 105 which was a pronounced standard by the USA. Thus they failed to cater to the social contract and their responsibility towards the society and the numerous investors due to which the society suffered drastically leading to loss of many lives as well. Thus the social norms which keep o changing as per circumstances, will also lead to modification of the reporting policies and thus in this scenario will entail towards revealing data about the environment so as to conform to the social perceptions (Dunfee, 2006). It is very important to note that the legitimacy theory is not the only one theory that exists. Recommendations The legitimacy of the organizations and the way they disclose their corporate transactions in the annual reports and the websites can be utilised as a stratagem to uphold and reinstate the legality of an institute which is very crucial for the survival in todays scenario. The legitimacy which is accredited to a business entity can alter over a period of time and these corporate revelations can be used as a form of instituting, preserving and repairing any kind of legitimacy. The corporate reports published by the organizations can not be looked upon as neutral and unbiased. They are a combination of the interchange between the company and the surroundings or the society to which it is catering to. By ensuring that the disclosures are being made voluntarily without any undue influence or any stated rules and regulations, the strategy would help the firm to manipulate its relationships with the society as a whole. Working in isolation will not help an organization to reach up high in t he corporate ladder as well as be able to live for a long time (Berdufi Dushi, 2015). The boundaries and the rules are not stationary and hence the entities should be receptive to the changes occurring. It is highly recommended to ensure that the data is disclosed in conformity with the accounting standards as well as the social norms so as to institute the business authenticity. Organizations who still work only towards maximising profits although legitimately, yet have to face survival issues as the desires and demands of the public has changed and demands the corporates to even take care of the human, environmental as well as societal issues. Conclusion Thus on a concluding note it can be said that legitimacy theory basically concentrates upon highlighting the idea of a social contract which exists between the business entity and the society as a whole in which it is participating. The survival and the existence of an organization is said to be endangered if it fails to perform its activities and accounts for the same in confirmation to the societal norms and in a legitimate manner. An organization is said to have adhered to the legitimacy theory if the corporates value system is harmonizing to the value system of the broader society to which the corporate belongs. Thus it can be construed that the legitimacy theory is understood as a conception that the business entities disclose and reveal information so as to legitimise their behaviour in front of the society. Thus such disclosures in the annual statements basically points towards image building. The fact that the society plays a vital role in the survival of a company, the fact that they demand for legitimating the actions undertaken by these organizations can also not be denied. Ultimately the relevance of social contract to legitimacy theory in accounting cannot be ignored as it helps the to reveal and discuss about their sustainable actions so as to legalise their activities. The disclosures are finally made so as to cater tot he negativity entailed by the media as well as the criticisms posed by the society at large. The accounting of these activities also helps to provide a more detailed data to the various stakeholders who desire to be aware of the risk from the firms actions. Further accounting does not only ensure that which is recorded in the financials but also takes into consideration the social as well as environmental implications. 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