Accounting Theory and Practice

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1. Introduction

Recent years have saw that listed firms, especially the large organisations, voluntarily disclose their Social and Environmental issues in their annual reports. As a result, a question was come up with by researchers: why managers would choose to undertake the voluntary activities?

Although there is no consensus being reached about what perspective theories should be used to explain the Social and Environmental Accounting, and moreover critique voices are from the works of Marx or by the deep-green or feminist literatures (Deegan, 2002), to some extent, systems-oriented theory and Positive Accounting Theory can list some hints.

This essay will seek to explain the reasons why firms voluntary disclosure information by referring to Legitimacy theory, Stakeholder theory, institutional theory, and lastly Political Costs hypothesis respectively.

2. Legitimacy theory

As asserted by legitimacy theory, organisations are pursuing for activities that are within “the norms and bounds of their respective societies” (Deegan & Unerman, 2006, P. 217). However, these norms and bounds are changing all the time and this requires firms keep pace with the moral environment in which they operate. Some researches indicated that the public disclosure of social and environmental information, such as through annual reports, is for legitimising purpose.

2.1 Legitimacy, Public Expectation and the Social Contract

Legitimacy theory relies on the notion that there is a “social contract” between organisation and the society in which it operates. (Deegan & Unerman, 2006, P. 217) The social contract is not easy to define but it implies some expectations that the public has on the organisations. Traditionally, profit maximising is considered to be the optimal measure of corporation performance, however, in recent decades, the public expectation has gone through significant changes. Heard and Bolce (1981) note the expansion of the advocacy movement in the United States during the 1960s and 1970s, and the significant increase in legislation related to social issues, including the environment and employee’s health and safety, which are enacted in the United States within the same period.

Consistent with Heard and Bolce, another argument states that the public increasingly expect the business to “… make outlays to repair or prevent damage to the physical environment, to ensure the health and safety of consumers, employees, and those who reside in the communities where products are manufactured and wastes are dumped…”( Tinker and Neimark, 1987, P. 84)

Legitimacy theory highlights that organisation must pay attention to the rights of the public at large, not only of those of the investors. And the organisation can continue operation only if it meets the generally accepted social expectations. “Failure to comply with societal expectation may lead to sanctions being imposed by society.”(Deegan & Unerman, 2006, P. 272) for example, legal restriction on organisation’s operation, difficult to obtain necessary resources (financial capital and labour), and/or decreasing in demand for products (for example, consumer boycotts).

2.2 Legitimacy and changing social expectations

As community expectations change, organisations should also voluntarily disclosure information about what is changing (or explain why their operations have no changes). According to Lindblom (1994, P. 3) with respect of changing expectations: “Legitimacy is dynamic in that the relevant publics continuously evaluate corporate output, methods, and goals against an ever evolving expectation.”

While Dowling and Pfeffer came up with strategy of ‘communication” to legitimate organisations’ activities, Lindblom (1994) identified four actions that organisations can use to obtain or maintain their legitimacy. All these methods need firms to disclosure information that the public...
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