QUESTION

On successful completion of this course, you will be able to:

1. Given a range of contexts, explain the role of research and theory in accounting
2. Critically evaluate accounting theories in a variety of situations
3. Formulate arguments for and against different accounting theories and perspectives
4. Justify the selection of an accounting theory, given real life contexts
5. Debate the global standardisation of accounting practices
6. Practice accounting effectively in a culturally-diverse global environment

SOLUTION

Introduction

Both the theories namely Legitimacy Theory and Managerial Stake holder theory have emerged from political economic aspects and are interrelated but have significant differences (Laan, 2009). The stakeholder theory pertains to the responsibility and accountability relationship shared by an entity with its various stakeholders and is applicable to the micro environment of the entity. Entitities try to fulfill the conflicting information requirements of stakeholders by providing them required reports regarding its financial activities. The stakeholders of business entities are its contractors and suppliers, customers, employees owners, share holders.

Critical Evaluation of Information Source

The two articles chosen for review as per the requirement in the assessment are “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs ‘Solicited’ Disclosure”

and

“The edge of legitimacy: Voluntary social and Environmental reporting in Rothmans’ 1956-1999 annual report”

It was intended two select two separate articles for the two separate theories namely Legitimacy and Stakeholder theory, but the article “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs. ‘Solicited’ Disclosure “addresses the impact of both these political economic theories on voluntary disclosures, hence this article was considered apt for examining both the theories with respect to voluntary disclosures. A suitable article which separately addresses the impact of managerial stakeholder theory on voluntary disclosure was not found in the library.

The second article “The edge of legitimacy: Voluntary social and environmental reporting in Rothmans’ 1956-1999 annual report” is an example of voluntary disclosure by a firm and the reasons are explained with the help of theories. This article was chosen because it exemplified the propounded theories and their effects on voluntary disclosures.

The two articles chosen fulfill the five point criteria of selecting source of information as given in the Library Compass (this has been described in Ans ii)

Ans.(ii)

First of all for choosing the articles the relevance to the assignment was considered. There are several articles available on the theories but the search was narrowed down to relate to the context of voluntary disclosures.

Both the chosen articles are peer reviewed and belong to scholarly articles and have been sourced from renowned Journals/sources relevant to the subject

The five standard criteria for evaluating source of information as given in “Compass: library help online “are as follows:

• currency
• reliability
• coverage
• accuracy
• author credentials

The applicability of the above five criteria in the selection of the two articles for review are discussed one by one, as follows:

Currency: The first article “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs ‘Solicited’ Disclosure” belongs to the year 2009, and the second article “The edge of legitimacy: Voluntary social and environmental reporting in Rothmans’ 1956-1999 annual report also belongs to the year 2009.Hence these two articles are current and can suggest trends for the present times.

Reliability: The chosen articles are reliable as both of them have been chosen from trusted sources. The publisher as well as the journal containing the articles are established and have proven credibility. The authors are established scholars in the field in which they have chosen to provide information. For the first article “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs. ‘Solicited’ Disclosure” has been sourced from  The Australasian Accounting Business & Finance Journal and has been written by Sandra van der Laan, who is faculty of Economics and Business in The University of Sydney. The author has sighted around 40 references in the article.

The second article“The edge of legitimacy: Voluntary social and environmental reporting in Rothmans’ 1956-1999 annual report” has been published in Emerald, a renowned and leading global publisher in the field of business, society, public policy and education since forty years.  The authors for this article are Matthew V and Caro A. Mathew V is associated with Tilling School of Business, The University of Notre Dame, Fremantle, Australia, and Carol A is associated with Tilt Flinders Business School, Flinders University, Adelaide, Australia. They have sighted around 55 references in their article.

Coverage: Coverage refers to the extent up to which the assignment has been covered. The assignment pertains to assessing the impact of two political economic theories on voluntary disclosures made by entities.

The first article “The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs. ‘Solicited’ Disclosure” examines the applicability of both Legitimacy and Managerial Stakeholder theory on voluntary disclosures .the article looks into the development of the theories, motivation and characteristics of voluntary disclosures made by different types of entities and future trends in voluntary disclosures.

The second article “The edge of legitimacy: Voluntary social and environmental reporting in Rothmans’ 1956-1999 annual report” is a detailed example of application of Legitimacy applied by one very famous entity in the tobacco industry for over more than 50 years. Instead of considering a range of firms the article takes into consideration the voluntary disclosure aspects of one firm that represents the entire tobacco industry. The article is based on extensive literature review and proposes an extension of the Legitimacy model.

Accuracy: The authors in their article have given information regarding their mode of analysis and research and basis of analysis, all their methods are in sync with Business concepts. The articles have sighted real life examples and  have used real data to develop their proposition. Hence their conclusion pertaining to the subject can be said to be accurate.

Author Credentials: The first article has been written by Sandra van der Laan  who is from Faculty of Economics and Business The University of Sydney.The University of Sydney is a reputed university.The author, most aptly has chosen to write and provide readers information pertaining to her area of education and interest.

The second article has been written by Matthew V and Carol A. Mathew V is associated with Tilling School of Business, The University of Notre Dame, Fremantle, Australia, and Carol A is associated with Tilt Flinders Business School, Flinders University, Adelaide, Australia. Both the institutes and universities to which they belong are well recognized as centers of learning and their article was chosen to be published by Emerald which has over forty years’ experience, and is a leading independent publisher of global research with impact in business, society, public policy and education.  They have also chosen to write and provide information to readers pertaining to their chosen field of education and specialization. Hence their contribution can be considered insightful.

Tabular Presentation of Summarization of Evaluation

Practical Application of Accounting Theory

Ans.

The Legitimacy theory has macro implications for an entity and pertains to a broader perspective of stakeholders to the business. Like the stakeholder theory Legitimacy theory also takes into consideration the diverse and competing groups of stakeholders, these stakeholders do not have any direct dealings with the entity but are a part of the larger society within which the entity operates, such stakeholders may include environmentalists, NGOs and socialists. But unlike the stakeholder theory this theory is based on conceptualization pertaining to perceptions and the processes involved in redefining or sustaining those perceptions, it may also include concepts related to global power relationships.

The second article provides a comprehensive tabular representation of the various stakeholders to an entity and nature of their influence on the entity (Tilling and Tilt,2009).

(Tilling and Tilt, 2009)

As per the above table an entity views all its stakeholders whether at micro or macro level as possessors of certain resources and the entity by providing information on its activities aims to maximize its resource utilization linked with these sources. For example the media has substantial power to influence public opinion and serve as enhancing the entity’s image. The Public constitutes of various potential customers, employees, lenders etc. The financial community if positively influenced can provide better and more financial resource.                                                                                                                                                                                                                                                                                                                                    The state if positively influenced can provide consent to contracts, grants etc.

Many times accountability towards environment can be demanded by various pressure groups for example in case of environment related matters. Companies can be legally instructed to reduce pollution and adopt pollution control measures. Such activities these companies can report in a voluntary manner to show their environment conscious attitude and to elicit favorable opinion from the social audience at large. Entities which report their good practices have better chances of being awarded with more projects or increased sales or contracts.

The report on social activities can be presented in a detailed manner in reports; this is called accounting for the activities and can be made available to the public through print media such as in company’s annual reports, websites, magazines, newspapers etc.

Article 2 is about a tobacco producing firm which is trying to legitimize its existence. Due to the very nature of product it offers, it faces a complex task of appealing to conflicting groups in the society. As per the article “ Moerman and van der Laan (2005, p. 385) analyzed the 2001/2002 Social Report of British American Tobacco (BAT) and concluded that BAT used social reporting as a “management strategy to forestall the introduction of more onerous regulation and to obfuscate or deflect poor social performance”. Their results therefore supported a legitimacy motive for the disclosures due to a threat to their legitimacy. Hence perceptions and applicability of legitimacy theory can differ from one entity to another. As per the article “The qualitative analysis suggests that the voluntary social disclosures made in the annual reports of Rothmans may have been provided with a view to counteracting the potentially negative consequences to the firm’s legitimacy of the smoking and health debate, supporting the traditional view that firms engage in legitimizing strategies, including increased disclosure, when faced with a threat.”

The first article states that “Legitimacy theory also recognizes heterogeneous, competing groups of stakeholders, but it operates at a conceptual level. At this conceptual or abstract level, legitimacy theory deals with “perceptions and the processes involved in redefining or sustaining those perceptions and can accommodate notions of power relationships and discourses at a global level”

Legitimacy Theory:

As per the theory of Legitimacy, entities seek to legitimize their actions by showing conformance or consideration to the values, norms, beliefs, definitions and restrictions of societies of which they consider themselves as a part.

Legitimacy theory is a political theory and has implications on several business activities including accounting. Social values can be linked with economic actions with the help of accounting.

As given in the assignment, it is stated that organizations sometimes voluntarily provide information in their annual reports which is not mandatory. It is proposed by the propounders of Legitimacy theory that entitities do so in order to enhance their image and acceptability with a wider audience and the information is placed strategically so as to include and exclude certain audiences.

Key Features of Legitimacy Theory

Applicable to a wider audience: the legitimacy theory is applicable to a macro audience. Stakeholders in the macro audience includes environmentalists, social workers etc.

• Varies: The applicability of the theory is not constant for all situations but varies with respect to group characteristics.

• Conceptual: legitimacy theory deals with creating a favorable image in the society and pertains to managing the various perceptions of different stakeholders in the society.

• Strategic Implications: the legitimacy theory can be applied strategically to improve an entity’s position which can be either to restore, maintain or enhance its image. It can attempt to change its offer mix, promotion and communication mix or even societies’ expectation in order to improve its legitimate status in society.

• Results based on Legitimacy theory applications are many times difficult to quantify and be expressed in economic terms and rely on indirect aspects. Accounting for such activities seeks to account by presence or enhancement of certain symptoms or signs related to performance of certain activities undertaken to enhance legitimacy of an entity. This type of accounting includes social and environmental audits. Examples can be increase in literacy rate, increase in awareness, increase in usage, no. of trees planted, decrease in carbon points etc.

Managerial Stakeholder Theory:

The managerial stakeholder theory pertains to the micro environment of an entity and includes present customers, contractors, lenders, shareholders. Financial Information requirements of such stakeholders met by a study of the four sources of financial information namely, balance sheet, profit and loss, changes in equity and changes in cash flow statement. Besides these reports an entity may provide several other information. Such activities of the entity can easily be quantified and measured in economic terms. Entities and managerial stakeholders share a responsibility and accountability relationship. The stakeholder theory with respect to accounting, like the legitimacy theory is not applied uniformly across all interest groups but groups are prioritized and their information requirements are differentiated.

Key Features of Stakeholder Theory

• Concrete
• Quantifiable
• Applicable to micro audience
• Varied Application

Section (ii)

Ans.

The firm considered is BHP Billiton Ltd. Annual Report 2011

Analysis of Different Types of Voluntary Social and Environmental Disclosures

(Appendix enclosed)

Section (iii)        

Ans.

Explanation of Disclosures (Theoretical basis)

From the   BHP Billiton Ltd. Annual Report 2011, it can be seen that the company discloses much voluntary information which can be explained with the help of the two interrelated political economic theories that are namely the Legitimacy Theory and The Managerial Stakeholder Theory. By providing such information the company seeks to satisfy the information requirements of its various stakeholders and also create a favorable image for it self in the society.

The various disclosures as per the two theories has been categorized in the table below:

From the above table it is evident that the stakeholder theory is applicable to the immediate stakeholders of the company whereas legitimizing theory is applicable to a broader social audience. Information pertaining to History and Development, Customer Groups, Resources and Business Optimization, Supporting workforce diversity, information on employees and directors are in accordance with the Managerial stakeholder theory.

Information on Government regulations, reducing climate change impacts, engaging in policy development, educing energy and GHG emissions, managing water resource, enhancing biodiversity and land management, managing land rehabilitation and mine closures, Engaging with NGOs, managing human rights impact, socio economic contribution, transparent and ethical behavior, are information provided to depict the social responsibility of business and  in accordance with the Legitimacy theory. Such information aims to reach a larger social audience such as environmentally conscious people, governments, socially aware audience etc.

Conclusion

Certain entities by their sheer size and magnitude or mode of operations influence the society at large. Examples of such entities include the mining and exploration firms and various other manufacturing firms. Such entities cannot work separately from the society but need to function along with it.

Reference

Matthew V. Tilling, Carol A. Tilt, 2009. The edge of legitimacy Voluntary social and environmental reporting in Rothmans’ 1956-1999 annual reports. Accounting, Auditing & Accountability [e-journal] 23 (1), 55-81. Available through Emerald Insight database [Accessed 4 March 2012].

Sandra van der Laan, 2009. The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs ‘Solicited’Disclosures. The Australasian Accounting Business & Finance Journal [e-journal] 3(4). Available through Business Source Complete database [Accessed 4 March 2012].

BHP Billiton Ltd.. 2011. Annual Report 2010-2011.[Online] Available at: http://www.connect4.com.au.ezproxy.cqu.edu.au/products/ar/index.html [Accessed 4 April 2012].

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