Assignment 1 Essay Example

Theoretical Perspective on Sustainability Accounting

Theoretical Perspective on Sustainability Accounting

Introduction

Sustainability has become an important business concept in the modern day business environment. O‟Donovan (2002, p. 344) defines sustainability as the adoption of business practices that promotes social, economic and environmental sustainability. Sustainability accounting, however, refers to the tools that businesses use to become sustainable. The most common sustainability accounting tools in practice are the triple bottom line and corporate sustainability reporting. Because of the growing importance of sustainability as a business concept, a number of theories have emerged that attempts to explain sustainability accounting, which include Positive Accounting Theory, Legitimate Theory, Stakeholder Theory and Institutional Theory. This paper describes how these theories explain sustainability accounting.

Legitimacy Theory

Legitimacy theory is one of the social theories that seek to explain why companies try to promote sustainability. The theory suggests that companies have a social contract between themselves and the society in which they operate (Patten 1995, p. 273). As such, legitimacy theory explains sustainability accounting by indicating that businesses tend to legitimize their activities by undertaking corporate social responsibility (CSR) reporting in a bid to get their actions approved by the society, thereby ensuring their long term existence. The social contracts here indicate the many expectations that the society has about a company in terms of how a company should conduct its business. O’Donovan (2002, p. 345) argues that legitimacy theory emanates from the notion that in order for businesses to continue existing, they must operate within the boundaries and norms that the society consider socially responsible. An example of corporation action that explains legitimacy theory is actions taken by British Petroleum (BP) after the 2010 Deep Horizon oil spill at the Mexican Gulf in which the UK Company began engaging in CSR that included undertaking oil cleanup exercise and compensating the victims affected by the oil spill as a way of legitimizing its actions.

Stakeholder Theory

Stakeholder theory is a widely used theory of sustainability that maintains that a business has an obligation to play a role in the society, where it operates. According to this theory, every business has an obligation to ensure that their actions to not impact negatively upon all the stakeholders with stakes or interest in the company (Omran, and El-Galfy, 2014, p. 268). This implies that a corporation has a duty to not only protect the interest of investors, but all the other stakeholders with an interest or affected by business practices, such as employees, customers, suppliers, government and the community. For instance, because the employees invest their intellectual capital and time, customers buying company products and the community providing the necessary infrastructure and human capital that a company utilizes, their interests, just as those of the shareholders must be protected.

Institutional Theory

Institutional theory explains sustainability accounting in the sense that the theory focuses on corporations better safeguard their positions and legitimacy by abiding by the rules of the land, which includes laws, regulatory structures, courts, societal and cultural practices, as well as the institutional environment. According to this theory, the strategies and decisions made by a company are influenced by political, social and economic factors as they seek to legitimize their practices in other stakeholders’ view (O‟Donovan 2002, p. 348). For instance, the theory suggests that corporations engage in sustainable initiatives such as making green changes because of the government regulations. Institutional theory, therefore, suggests that corporation do not engage in sustainability accounting because they feel like doing so, but because of the external pressures, such as government regulations.

Positive Accounting Theory

Positive accounting theory (PAT) is a sustainability accounting theory that maintains that actions taken by people or corporations are driven by self-interest (Omran, and El-Galfy, 2014, p. 259). Therefore, regarding sustainability accounting, PAT suggests that certain social and environmental sustainability that corporations engage in and their disclosures only occur when a company when the management believes that such initiatives will result in positive wealth creation (O‟Donovan 2002, p. 353). This implies that, when the management of a company does not believe that social and environmental sustainability initiatives would not yield positive wealth implications, the management would not invest in sustainability programmes.

Conclusion

Sustainability has certainly become an important concept in the modern day business environment. Today, companies are under pressure to invest in sustainable initiatives in order to ensure continued operations in the long run. However, as indicated in the report, there are a variety of theories that helps in explaining why corporations engage in sustainability initiatives. The theories include Positive Accounting Theory, Legitimate Theory, Stakeholder Theory and Institutional Theory. Although the theories have different perspectives about sustainability accounting, all agree that promoting sustainability is importance for the present and future businesses.

References

O‟Donovan, G 2002, “Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory,” Accounting, Auditing and
Accountability Journal, vol. 15, no. 3, pp. 344–371.

Omran, M.A., & El-Galfy, A. M 2014, “Theoretical perspectives on corporate disclosure: a critical evaluation and literature survey,” Asian Review of Accounting, vol. 22, no. 3, pp. 257–286.

Patten, D. M 1995, “Variability in social disclosure: A legitimacy-based analysis‟, Advances
in Public Interest Accounting, vol. 6, pp. 273-85.