Application of Social Contract to Legitimacy Theory in Accounting

Question: Discuss about the Relevance and Application of Social Contract to Legitimacy Theory in Accounting. Answer: Introduction In the social and environmental accounting area, legitimacy theory is one of the most quoted theories. In the year of 1995, Suchman examined several definitions of the legitimacy theory. Through the application of the social contract, the people can get away from the un-natural state of the country. An individual can be free from the various political and social issues. The development of the global market and the communication can increase the financial scope for the society. With the help of legitimacy theory, several social studies demonstrate the Internet Financial Reporting (IFR) which provides the information about financial and non-financial reporting. Social theory is based on the modern movements of government. So it is essential to know about the fundamental nature of government their legitimacy. The concept of application of the social contract and the application of legitimacy theory is critical and relevance in present time (Belk, Sherry, 2007). Hopwood had done so many researches on the social and environmental contract by using the legitimacy theory in accounting for the better annual financial result. He was the first to identify the relationship between the social and environmental contract and legitimacy theory in accounting. The organizational legitimacy is implicated in the examination of the social and environmental contract. Organizational legitimacy provides the tool and contents for the analysis of social contract in accounting. Legitimacy theory explains the motivation for a social and environmental report of any accounting company. When the accounting companies become faced the environmental pressures from the shareholders, then they adopt the legitimacy theory to explain the shareholders their present social and environmental report. Since the year of 1980 legitimacy theory is one of the theories which provide the explanation for the incensement of the environmental degradation. Legitimacy theory governs the behavior of the social co ntract report, and it divides the report into the voluntary and mandatory report (Bhimani, 2006). The relevance and application of social contract to legitimacy theory in accounting involve the explanation of legitimacy theory, the analysis report of social and environmental issues related to legitimacy. The hypothesis of legitimacy theory and the legitimacy theories of governments, the internet financial reporting and the result showing the growth of the account are also included in the application of social contract of legitimacy theory in accounting. Legitimacy can also be called a process of conveniently studying various organizations and their relationship between the society as well as the surrounding environment. The Legitimacy Theory The concept of social contract basically says that the governments derive their control or power from the public. On handing over the power to the government, the public surrenders many of its freedoms and accepts the rule of the government or the monarch, as is the case. In return, the government or monarch offers them the due protection and governance. Thus a kind of contract is established between government and the subjects. This theory of social contract was proposed by Thomas Hobbes in the seventeenth century (Bhimani, Dai, 2008). Hobbes as the pioneer of this concept was in the belief that people could be worse off sometimes, but the contract would definitely serve well for the well-being of the society. The theory of legitimacy can be called as originating from this social contract. It acts as a mechanism for supporting organizations to implement and develop certain disclosures in social and environmental purview. The mechanism helps to fulfill the social contract, resulting in the realization of objectives and efficient survival in a turbulent state of affairs. Suchman describes legitimacy as general insight or an supposition that any entity's events are desired and appropriate. The appropriateness and desirability are expressed on the basis of the conformity to a system of values, definitions, norms and beliefs. The two classes of legitimacy An important fact relating to the theory of legitimacy is that it has two major subdivisions into two classes. While one is the macro theory, also known as the institutional legitimacy theory, the other is known as the organizational legitimacy. The first concept practically equalizes the institutionalization with legitimacy. Both these phenomena stress on the empowerment of organizations through making them meaningful and natural in the eyes of the society (Bragg, 2013). When the principles and purposes of accounting are considered, holding the time frame and the generally considered questions as given, the business environment, the democratic government, and the capitalist structure are taken as static. The research is situated within these concepts. Legitimacy has an abstract nature, such that finding the mechanism of motivation of organizations to disclose information related to society and environment. Often, the symbolic representation of a professional institution is associate d with its cultural beliefs. So the institution or organization considers that improvement of the culture and its promotion of the outer environment is essential to attaining legitimacy. The legitimacy theory thus very closely associated with the cultural aspect of an organization's surroundings. Breaking Down the concept of legitimacy The theory of legitimacy is based on the enriched teachings of many theories such as stakeholder's theory, management theory, and institutional theory. The reason that this concept of legitimacy has had a sustained applicability to contemporary situations is that traditional norms have been combined modern value and ethical considerations. Firstly, it seeks to answer the circumstances under which a firm can be called legitimate. Secondly, it lays down the list of persons or entities who could affect the legitimacy of an organization (Burritt, Schaltegger, Bennett, Pohjola, Csutora, 2011). Lastly, it clarifies whether the legitimacy concept should be regarded as an objective or a finishing for the organization. Legitimacy can be very simply explained using the organizational approach, as being any operational resource that is extracted from an organization's cultural environment. Ultimately this resource may be used for pursuing its goals. Thus legitimacy is as significant a resource as is money. Certain actions by any stakeholders within the company may increase the legitimacy and others may reduce it, so it is essential to evaluate the consequences of any step carefully before implementing it (Clawson, Waltenburg, 2009). But legitimacy besides being viewed as a part of resources derived from the environment of an institution can be taken as having both contexts for the purpose of exchange and being a by-product of such an exchange. Social and environmental report research and legitimacy The linkage between the legitimacy of any organization and reporting of social and environmental aspects can be determined from Suchmans definition of legitimacy mentioned in the previous part. Legitimacy is a generalized process according to this definition, and hence rather a long term process than a short-term one. The legitimacy of an organization is also never a fixed phenomenon but an ongoing one where there is the constant evolution of the legitimacy that has been perceived. The concept of legitimacy is also being reconstituted by means of social enactment (Drever et al., 2007). The processes which facilitate the legitimacy of an organization actually act as necessary elements for enhancing the behavior and communications of a corporate organization. The key methods helpful for communication of an organization with its stakeholders are both that of social as well as environmental reporting. Thus ultimately such reporting proves to be useful for maintaining the legitimacy of an organization. Till now, many researchers in the field of accounting from social as well as environmental point of view have embraced the legitimacy theory. Many such researchers claim to have tested legitimacy and found support for much of the concepts related to legitimacy. Within the literature for accounting, legitimacy has primarily dealt with the highly reactive nature that disclosures regarding organizations possess. This has been the case with most of the research studies on legitimacy. Added to that there is a distinguishingly high proportion of the research that has focused on those industries that have suffered from any disasters or occurrences of any other type (Elisabetta, 2006). Thus these studies are concentrated on an attempt by corporate to repair or reconstruct legitimacy and conduct its investigation as a short term but a reactive phenomenon. Thus the view that legitimacy can be controlled by the organization has thus been the dominant approach throughout the research on social and environmental aspects. The analysis of content is mostly made use in studies about reporting on social as well as environmental aspects. The analysis is associated with legitimacy theory and examines the number of disclosure depending on the size, media press ure, membership of industries and other factors (Horngren, 2011). While there is much valuable information obtained from this approach, regarding reporting on information related to society and environment, it does not succeed in adding insight into the way of communicating effectively. Legitimacy is such a concept that is directly correlated to the context and the audience composition. Legitimacy, on one side, is the result of those legitimation procedures performed by the apex organization, and on another side, actions that affect norms and moral values that are taken into consideration by the remaining professional institutions. This concept can be called an assumption or even a perception as it is a representation of how observers react when they form an idea of the organization. The increasing amount of research endeavors in studying corporate reporting on the social and environmental aspects is an evidence of the growing interest and curiosity in analytic studies. Research publications which are resource based and engage in studying organizations along with their relation to society and the environment have a brief history (Horngren, 2013). They do not concentrate specifically towards reports on social and environmental aspects of corporate organizations but c onduct the analysis and evaluation of the prevailing situations in this regard. Thus ultimately the legitimacy of an organization along with the social and environmental reporting and research are complementary to sustaining the overall performance of an organization at a high level. These two concepts are hence interrelated and are both irreplaceable for ensuring the standard performance of any organization. Hypothesis The various types of industry the IFR revelation has been analyzed by more than a few authors, but not all of them found a positive association between them (Weil, 2017). To the unpaid traditional annual account disclosures, the group of oil, chemical, and mining provides more profit than the others groups. The separation in the diverse sectors depends on data used; therefore this contrast becomes trickier. Moderately environmental disclosures, Dierkes and Preston think that the modified environmental companies are more likely to environmental exposure than the other industries. U.K. companies completed that two sectors have environmental disclosures, petrochemicals and chemicals, and intermediates (Horngren, 2013). These studies reveal that there is the more ecological discovery to the polluter companies, in some cases, defensible to the legitimacy hypothesis, in this research will be tested if that type of businesses has additional disclosure in the IFR. Whereas companies with envi ronmental impacts provide more financial in sequence on the internet for its stakeholders, we analyze the industries that are measured to have a high environmental impact. The big business has more incentives to a revelation on the web. They have more visibility, and so they draw the better attention from the general community, governments, stakeholders, other stakeholders or even the opposition. The great firms have additional resources to have in order plan more efficient and have other disclosures on the internet. There is an active connection between company size and disclosure of IFR. Companies with high levels of productivity improved pressure in shareholder decision and had more attractive stakeholders, so there is the greater tendency to IFR disclosure (Kew, Watson, 2012). There is a optimistic link between productivity and disclosure of IFR. Leverage is the amount of money owing used to finance a firms assets. Companies with high levels of influence of leverage and disclos ure of IFR have more financial expenses than the other companies. There is the negative connection between leverage and disclosure of IFR. In this study, the possession attentiveness could be representing or for a percent of supply held by major shareholder or percent of manager interests. The companies have more ownership concentration; have less likely stakeholders, and then the IFR disclosure will be to a less user. There is a negative between possession attentiveness and disclosure of IFR. The auditors solid cooperates and supervises the process financial coverage, leading to increased disclosure clearness and good status to the Financial Report (Kumar, Kumar, 2010). The companies are auditing by a Big 4, will be influenced by a strict standards financial accounting revelation. There is the definite connection between the companies checking by "Big4" and expos of IFR. The issues of legitimacy of government Hobbes and the legitimacy of government during a public contract are philosophy of freedom. The symbol gives huge significance to the explanation of the explanation for the words. Hobbes maintain that there is a link between freedom and determination of persons because a free person can do whatever that has determination to do, lacking any boundaries, barriers or constraint (Stice, Stice, 2014). In this case, humans are bound by social laws, by which persons have put themselves under the system of the sovereign. Hobbes's thought is that biased legality and ethical compulsion are accepted by will of persons. So, according to Hobbes, the determination is more choice to develop compulsions willingly. This is why, for Hobbes, the determination is the spirit of contracts (Nijman, 2004). Social agreement, as per to Hobbes, is defined as an agreement by all persons to dispose of all their controls and allow the first sovereign to use his authority without obstruction by its subject fully. It is comprehensible that between the parties no equal opportunities are seen in Hobbes's public contract, the monarch is absolute. Hobbes claims that it was the free determination of the citizens to generate such a government, and to be ruled by a selected representative, the monarch. Hobbes explains in the case that people communicate their independent determination to be governed by the conqueror because they have a horror of death. At the point of time while they have countenanced the death from the defeaters, they continuously expressed their independent determination to be governed by them and give up their powers and civil rights to the new monarch. Hobbes reacts that it is sufficient for a person to have the human freedom and not to be reserved into chains. This lifted for him the responsibility to obey to his sovereign in everything (Rosenfield, 2009). Hobbes states that there is not much disparity between governments formed through political agreement and those created thr ough invasion. As per Hobbes, the contracts can also be set up with silence or implied consent and acceptance. By the help of this theory, Hobbes explains some essential words such as depiction (Spiceland, 2010). The implicit permission as a method to create a suitable agreement, notions which are significant for additional expansion of the contract theories can be made. Locke and legality of the government claim that an individual cannot unchain to someone in addition by independent determination, nor place himself beneath a random authority of another. Locke explained the idea of judgment as connected to persons decision, and not a conclusion including the external force (Schroeder, Clark, Cathey, 2011). Locke also shows that when the people depart state of scenery to unite a public contract for shaping a political civilization. The power must be given up by the people, to attain the range for which they bond to the society. This is to provide a monarch to authority for forcing men to assist because in this condition of scenery when there is no power to manage them, they establish a combat, which almost certainly would by no means finishes. Though both Locke and Hobbes thinks that people should give up all human rights and authority and pass them to the ruler, the dissimilarity between the two is in the description of the concept of will Locke, un like Hobbes does not support the agreement made upon terror and pressure. According to him, supporting compulsion can obtain only by a contract which is freely accepted and usual by persons, by which they submit themselves to someone elses determination (Smith, 2011). Like Hobbes, also Locke approves the implicit permission as a way of declaring the will for being the branch of the social agreement. But the dissimilarity is that when talking about the right confined by the government through public contract, he mentions the notion of possessions. In fact, Locke goes further by stating that the federal contract is inhered from the property-owner to his successor. The successor of the land will be compelled to follow the rules of the contract which was accepted by his ancestor, because mutually with the land he will take over also the obligations to the government. In his agreement people consent to give their human rights to someone they believe. In order to put into natural effect l aw and to defend them, the ethical obligations would be useless if there were nobody that would perform them (Tracy, 2013). Locke does not attach future generations with the agreement consented by their intimates. Locke defines that it is usual that the body moves in the way in which there is a greater power applied. Locke also claims that it is complicated to obtain common consent, at least for the motive that it may happen that not all the populace can contribute to the voting (Wheatley, 2010). Internet financial reporting The usage of technology and internet in accounting they can change the way of information and the utilization of economic data. Legitimacy theory provides the theoretical framework for the Internet financial reporting. As per the paper of 1997, Wildstorm described the importance of the web in the financial communication (Scott, 2015). By legitimacy theory, the internet financial report (IFR) differs the traditional financial reporting. IFR can include the voluntary, mandatory or the incremental information which may help the stakeholders for decision making. IFR plays a significant role in the regulation of the report and the preparation of the environmental report. It can differentiate between the printed audit reporting and the financial report based on the electronic review (Appannaiah, Reddy, Putty, 2010). The Internet can establish the relationship between the stakeholders and helps in the interactive communication for the development of the financial state of the particular co mpany. In the year of 1999 Lyman et al. through the support of International Accounting Standards Committee (IASC) analyzed the internet accounting reporting by legitimacy theory. In the year of 2002 Liao et al. and the year of 2003 Debreceny, describe the financial report can support the professional auditing, accounting and the regulation of the internet financial report. In 2003 Poon and Tak Yu said that the Internet financial reporting could include the annual report, quarterly report, analysis report, press collection report, share price information and the management discussions also (Britton, Waterston, 2013). Through the research in 2005 by Garcia-Borbolla et al. the relationship between small and medium enterprises with the website, the size of the companies, education, training, the management of the company, and the usage of the technologies can be known. As per the recommendation of the Khan in 2007 to develop the qualitative characters companies can improve their onlin e financial reporting which is suggested by International Accounting Standard Board (IASB). The positive point of the internet financial reporting is through this process the accounting department of any company can represent their reports as portable document format (PDF), so there will be no possibilities to misplacement of the reports. In the year of 2010, Aly et al. found out the profitability in the utilization of internet in the social contract of accounting. He includes the size of the firm, auditor size, liquidity, leverage and the website of the company (Dauber, 2005). There are various analyses which determinate the financial reporting through the internet. The main hypothesis of internet financial reporting is justified based on the legitimacy theory. The analysis of the social and environmental contract in accounting can briefly describe the role of legitimacy theory and internet in financial reporting. The voluntary internet financial reporting maintains the relationshi p between the auditors and the investors (Horngren, 2013). The adoption of the voluntary internet financial reporting can affect the qualitative and quantitative factors of the company. The mandatory internet financial reporting is a concern with the press release and conference. It is helpful to the accounting standard for communicating to the hard annual report and the information which regulates the balance sheet and the income statements. Result and discussion The quantitative analysis of the annual financial report of different types of industries can be the result of the application of the social contract at legitimacy theory in accounting. The result of the study of legitimacy theory shows the modification of the policies of the companies which is related to the social events. The result shows the tactical nature of the social contract which includes the management and the annual report under the unfavorable condition. The study of the corporate social contract supports the legitimacy theory (Horngren, 2014). The result of the analysis of the subject indicates the achievement of the higher level of media attention which can support the annual financial report. The result of the study facilitates the decision making process and the help in the preparation of the annual financial report. According to the result of the study, the legitimacy theory can explain the nature of the political economy and the responsibility of the government towa rds the accounting. The result of the study supports the view that how the companies are utilizing their annual financial reports to justify their existence. The result of the study shows the differences between two types of industries, k-based industry is one of them. The results of the analysis demonstrate the utilization of the Internet financial reporting which applied to the big business (Powers, Needles, 2012). The results of the analysis between independent variables are related to the total asset, income and the size of the enterprise. As per the product of the study of the profitability, it can assist the making of internet financial report. Since last 20 years, the legitimacy theories are uses in the bank sectors also. The examination of the presented IC information in each annual report can disclose the social contract. The result of the study suggests the globally well-known sustainability of the legitimacy theory. The result of the survey provides the political, social , environmental supports to the respective company. The result indicates the firms to legitimize themselves in the global market. The result with the legitimacy theory voluntary takes part in the enhancement of the reputation of the company (Krivogorsky, 2012). The result didnt find any relationship between SDI and board independence. It indicates the corporate governance system of the company. Conclusion The social and environmental contracts are known to be the most innovative theory for application in accounting. Legitimacy theory takes a huge part in the in the analysis of the behavior of the company. It governs the social and environmental factors of the company's financial report. Through the positive thinking and the political movement can secure the property and the life of a human. The social contract also influences the political aspects (McMillan, 2010). Legitimacy theory indicates the explanations which motivate the environmental, financial reporting which is based on the application of social and environmental contract. The social and environmental report can be considered as the major way of communication. Legitimacy theory provides the framework to the social contract in the accounting business. To enhance the capability and the competence of any company the government tries to improve the knowledge, Appling information technology of the companies. To prepare the financ ial report internet plays a significant role (Oppermann, 2009). To know the mechanism of the legitimacy theory, it should be known that the opportunities regarding the legitimacy theory and the amount of cost provided by the respective companies. 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