1. Case 1: The Case of Corporate Lobbying Against an Accounting Standard

The paper effectively studies the pressure tactics being applied by the various corporate lobbies against the adoption of firstly the fair value system of accounting , as well undertaking a wide variety of the disclosure norms as supported by the IFRS. The accounting questions under study are the disclosure norms. The corporate disclosure norms have an impact on the stakeholders of the business. The aim of the introduction of the new stakeholder norms is to introduce greater accountability among the firms especially beneficial for the stakeholders as well as the investors of the business.

1.1 Rationale behind Public Interest Theory

The IFRS has suggested the system of the new fair value reporting , which has been supported by the various corporate sector , as it would greatly improve their balance sheet performance , whereas a disaster in the form of the Enron case has been reported using the fair value system of accounting. Let us understand the fair value system and the case of corporate lobbying for the standard which proved to be detrimental for the investors and the stakeholders of the business. The level 3 inputs are the unobservable inputs and are used in situations where the active markets are non-existent. May researchers and theorists also believe that the financial crisis have also been caused by the fair value reporting to some extent. This is particularly the case with the level 3 input reporting which is unverifiable to some extent. Applicable accounting information is able to make decisions that the stakeholders difference in the decision making in the future at the daily quoted market prices, and which to some extent confirms the actions of the firm. However reliability requires that accounting information remains to be questioned and therefore needs to be to be independently verifiable and unbiased then real portray of reality and events. If the fair values are based on unbiased market prices then then the fair value valuation is also valid. (Fahnestock, 2009).

The level 3 input reporting is the tier which can be manipulated the most easily and the Enron case is also the clear case of misleading reporting of the level 3 securities. The level 3 asset class reporting under the fair value system can be easily manipulated by external auditors and poses serious threats for all the stakeholders. The use of the system was the cause of the downfall for Enron, the fair value reporting caused the employees and the management to overstate the value of the projects as well as the compensation associated with them. The Enron example clears spells a cause of concern for the use of the fair value system reporting.

(Benston, 2006, Haldeman, 2009).

The case of the Enron is a clear example of the how corporate lobbying and lead to misleading investors as well bring about downfall of the company. The case of Enron emphasises the importance of strict and standardised financial disclosures to ensure accuracy and accountability in the financial reporting system. This is where the theories of legitimacy and stakeholder theory are increasingly gaining importance.

2. Long run Impact of the Disclosures

“Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of Norms, values, beliefs, and definitions” (Suchman, 1995, p. 574, emphasis in original).The theory has gained importance in the recent times. The theory emphasises that it is essential for the organization to maintain a balance between the social values and communities expectations of the business. The public disclosures have been used by the corporations of fulfil the expectations of the stakeholders of the business. The society expects the business to operate in a socially ethical manner.

The first principle of the legitimacy theory is the awareness of the firm of the expectations of the society from the business. This is based on the actions of the organizations. The management’s views of the stakeholder’s interests are the determinant of the legitimacy theory.

The various forms of legitimacy have shown an increased dependence on each other. The management has to adopt legitimate behaviour to meet the expectations of the society and thus, gain widespread acceptability. Therefore legitimacy can be defined as acceptance of the firm’s activities by the stakeholders in the society. The view is gaining increasing importance as the business uses the scarce resources of the society is the businesses are morally entitled to adopt legitimate behaviour to meet the expectations of the society. A business enters a social contract with the community; this contract follows the line of the agency theory as in microeconomic concept. The society through transparency adopted by the organization should be able to monitor the business activities of the firm which is widely acceptable (Lim et al, 2004 and, Tilling 2004)

In the recent years environmental matters have gained significance, and businesses causing environmental damage are considered unacceptable. The issue of global warming has gained heat with almost all businesses globally. For example to reduce the pollution the Euro 2 environment norms have been launched which limit the carbon emissions in the environment. The businesses in Europe and globally have to adopt the norms to maintain a high moral code of conduct in the society. As well as the adoption of the rules ensures that the firm is able to take responsibility for their actions and maintain credibility in the society. Thus, the environmental disclosures have increasingly gained importance in the with the growing expectations of the societies to adopt the legitimate behaviour. The firms are expected to adopt ethical behaviour and maintain high standards.

3. Economic Interest Group Theory Perspective

The stakeholders are a group of entities that affect by the firms operations as well as effect certain operations of the firms. Thus, the stakeholders are an integral part of the decision making process of a corporation. It is the aim of the organization to ensure the maximization of the stakeholder’s interest and these interests have to be safeguarded by the management of the firm. The business has to consider the stakeholders before taking critical business decisions. Thus the various stakeholder groups have been identified as:

The key mission of the stakeholder management is to develop strategies to manage different groups in an articulate manner. Freeman (1984) proposes that the stakeholder management is when managers have to form and ensure effective implementation of the business strategies. The management has to focus on integration of the relationship of the different stakeholder group and ensure maximum satisfaction all the parties. The effective management of the shareholders, employees, customers, suppliers, and community’s relationship is critical to the long term success of the business. Stakeholder management is forms its basis with the integration of the business environment with the stakeholders interest.

There have been many approaches to understand the stakeholder theory, the first approach is the normative approach that enables the firm to understand and identify its responsibility towards the stakeholders. Theory takes into account ethical consideration while considering the interests of the stakeholders. The business has to maintain a balance between the stakeholder’s interest and the management of the social conduct. Thus, a clear definition of the business ethical code of conduct is required to enable the decision making process. Ethical action should be taken while managing stakeholder interests. The business should be able to critically evaluate the decision it undertakes as well consider its effects on the society. The management should be able to effectively disclose the information as the information is defines the goals and the aspirations of the business. A single theory may not be suitable to explain the complex management structure as well as the decision making process of the management. The managerial decisions are a result of the complex strategy formulations and their effective implementations throughout the organization. Thus the interdependence between the stakeholder and the legitimacy theory cannot be denied. Every stakeholder group exercises a certain degree of bargaining power on the business , therefore maximization of the interests is required.

(Fontaine,2006 , Freeman )

The CSR or the corporate social responsibility concept is increasingly gaining importance in the current business environment. The CSR recognises the social responsibility of the business. The CSR can be defined as the concepts which integrate the stakeholder and the environmental concerns with the business operations and effective management of the stakeholder interests. The CSR is voluntary, but today it has become a vital concept and are effective in the organizational decision making. (Laan, 2009).

The main concepts that have been associated with the CSR are Business ethics ensures moral responsibility and therefore it is the duty of the business to act in a morally legitimate manner. The business and society co-exist together and therefore the interdependence of the two cannot be denied. The firm has to ensure the confidence of both the groups by taking care of their interests. The management has to develop tools to ensure the expectation of the society is met. The management has to understand the complexity of the relationship and ensure its critical management.

(Fontaine et al, 2006, Laan 2009)

Thus, the application of the corporate lobbying can prove to be detrimental effect on the corporate structure. These accounting standards should be carefully studied and analysed before being adopted. The aim of the standard should be to provide a certain degree of credibility in the accounting system. The public disclosures ensure the credibility of the firm as well ensure investor confidence in the firm. The CSR concept is gaining widespread global importance. With globalization, the global companies are increasingly adopting the concept of CSR. The concept can be defined has the conduct of ethical business activities in a legal framework of the country in which the business operates. Profit maximization cannot be the only motive of the business, the business has to take into account all the stakeholders associated with it, as well has ensure that the business operates in an ethically manner and adopts a high moral code of conduct. The CSR concept has to ensure that the business operates in environment friendly manner and meets the expectations of the society. The CSR concept is associated with the effective management of the stakeholders and the environmental management .The CSR when effectively implemented throughout the organization enables to effectively address the demands of all the stakeholder groups associated with the business. Supporting the environmental issues has increasingly become a part of the CSR of the businesses the firms adopt special steps to ensure transparency in the financial reporting and full detail full reports of the stakeholder management in the annual reports of the company. Special accounting standards have been adopted to ensure that the social disclosures are made transparently. The social disclosures ensure the accountability of the business to the society  .(Baird et al, 2002).

2. Cost Benefit Considerations

The FASB over the years has concluded that the investors would investor and the users of the financial statements greatly benefit from the better disclosures adopted are made. The new disclosure norms increase the transparency in the working of the enterprise, and enable the investors to take informed decisions while undertaking the investment decisions. Several parties have expressed their concerns over the current basis of sensitivity analysis on the basis of which the cost benefit analysis have been undertaken. The FASB has taken the consideration seriously and has asked the makers of the financial statements to report on the issue in questions (Ernst and Young -2009). The current accounting system and the standard provided, which be used effectively and efficiently such that it is cost effective to the organization and the benefits of the use of the standard can realised by the corporation both in the long run as well as the short run. The cost effective use of the standard would enable appropriate disclosures ensuring transparency and accountability in the system, thereby ensuring that the stakeholders of the business are also equally benefited by the use of the standard.(Deloite , 2011).

3. References

•  Fontaine, Charles, A Haarman, and S Schmid. “The Stakeholder Theory.” Edlays education 1.1 (2006): 1-33. Print
• Freeman, R. Edward , Andrew C.Wicks, and Bidhan Parmar. “Stakeholder Theory and “The Corporate Objective Revisited”.” Organization Science 3.15 (2004): 364–369. Print.
• der Laan, Sandra van . “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs ‘Solicited’ Disclosures.” Australasian Accounting Business and Finance 3.4 (2009): 15-27. Print.
• J Benston, George . “Fair-value accounting: A cautionary tale from Enron.” Journal of Accounting and Public Policy 25.1 (2006): 465–484. Print.
• J Benston, George . “. The shortcomings of fair-value accounting described in SFAS 157” Journal of Accounting and Public Policy 25.1 (2008): 101-114. Print.
• G. Haldeman, Robert. “Fact, Fiction, and Fair Value Accounting at Enron.” Fisher edu 1.1 (2009): 1-10. Print.
• V. Tilling, Matthew. “Flinders University, South Australia.” COMMERCE RESEARCH PAPER SERIES 1.1 (2004): 04-6. Print.
• Braid, Victoria , David Wofford, and Christina Kramer. “WHAT IS CORPORATE SOCIAL RESPONSIBILITY?.” 21ST CENTURY CORPORATE SOCIAL RESPONSIBILITY: ADVANCING FAMILY PLANNING AND REPRODUCTIVE HEALTH 1.1 (2002): 1-10. Print.
• Ernst, Young. “FASB issues proposed ASU on improving disclosures about fair value measurements.” Ernst and Young 33.1 (2009): 1-4. Print.
• Deloitte, Company. “FASB issues proposed ASU on improving disclosures about fair value measurements.” Deloitte 18.2 (2011): 1-4. Print.

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