CSR Reporting: Theories of Financial Accounting 1

CSR Reporting: Theories of Financial Accounting

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Corporate Social Responsibility Strategy (CRS) is crucial and upon proper development, a firm benefits more. A chosen CRS strategy integrates social, economic and environmental aspects. In this assignment, I critically explore the theories of accounting and how they explain sustainability accounting.

Positive accounting theory (PAT)

PAT theory predicts choices including accounting policies by firms and the manner in which firms responds to the suggested accounting criterions. This approach is also relevant in disclosing voluntary information and specifying the reasons for publishing the CSR report. PAT mainly focuses on improving the relationship between the stakeholders and the firm. According to Lawler & Foster (2009, p. 140) collection of contracts helps to describe an intense in PAT. PAT allows managers to either use the bonus plan hypothesis or the debt theory. Under the bonus plan interpretation, managers with additional benefit strategies are more likely to use book-keeping approaches that will improve the existing revenue (Lawle & Foster, 2009, p. 144). Regarding CSR, bonus plan has a positive relationship with social and environmental exposé. In reality, when a discloses the social and environmental undertakings, it is more likely to increase its returns.

According to debt/equity hypothesis, managers of a firm with a higher debt/equity ratio are more apt to use book-keeping methods that upsurge income. By increasing the level of voluntary disclosure, a company which relies on massive debts is likely to solve the problems between stakeholders and creditors. In the perspective of social and environment, (Lawle & Foster, 2009, p. 146) argue that managers opt to avoid any obstacles of the debt agreements by increasing the current earnings. For example, the administrator may choose to reduce flexible social and environmental programs. Another manager may opt to avoid any program that would cut down the reported earnings. Cecchetti et. al., (2011) finds that a company which heavily relies on debts would increase its contribution to social activities and disclose more of its environmental issues to the public in a bid to meet the creditors’ expectations.

Legitimacy Theory

Through legitimacy theory, firm management resolves to take action for the society. The guiding factors in the Legitimacy theory are the community where the business operates and the performance of the enterprise, which helps to judge the company. Therefore, it depends upon the perception that a social agreement exists concerning the business and the public that is a host of implicit and explicit expectations of the community on the company (Mousa & Hassan, 2015, p. 48). This description shows that public expectations of a firm’s operations mainly motivate the legitimacy theory. Therefore, when a company undertakes its activities in harmony with the general public, it will achieve legitimacy. (Mousa & Hassan, 2015) stated that companies use ethical language to pass info to their stakeholders. In case they are giving bad news, positive info accompanies bad news hence stakeholders make more positive expectations about the firm.

Environmental discoveries also serve as tools for legitimacy. Good and poor environmental performers, therefore, have the responsibility to provide environmental disclosures to obtain legitimacy (Guthrie, Suresh, & Ward, 2006, pp. 4-5). However, bad environmental performers must provide more information related to the environment compared to their counterparts. Therefore, voluntary disclosure helps any firm to describe its legitimacy operations and hence gets legitimacy from the public.

Stakeholders Theory

The stakeholder’s theory has two primary distinctions namely the managerial branch and the ethical branch. From the moral perspective, all stakeholders have equal rights, and they must receive information about the impact of the company on their personal trepidations. Therefore, there should be no distinction between stakeholders regarding power. The managerial perspective of the stakeholder’s theory distinguishes between powerful and less powerful interested parties and requires that they receive different management. The needs of influential stakeholders are more important and sensitive. Therefore, the dominant shareholders have the competence to influence the resources required by the firm.

Environmental exposé in a firm relies on the internal and external stakeholders. Ackermann & Eden (2011, p. 183) noted that internal stakeholders provide pressure towards environmental disclosure, while external stakeholders have the widespread influence of the environmental exposure. For example, a big business whose operations fail to conserve the environment may receive excessive pressure from the government to disclose their environmental information, which makes them more accountable for the production processes. As a result, they will conserve the environment and help to achieve sustainability.

Institutional theory

According to this theory, appreciating the context of an institution is the first step towards understanding the decision-making process within an organization. It is the context of the organisation that will enable it to either act in a socially and environmentally responsible ways. Economic conditions will determine the decisions that managers will make if social and environmental factors will affect their revenues Bruton, Davidson, & Han-Lin (2010, p. 427). For example, a firm may opt to act in a socially irresponsible way when it’s financial performance is relatively weak. In an event where the economic environment is somewhat unhealthy, a firm may opt to act irresponsibly concerning social and environmental policies to try and maximize its near-term profitability. Other institutional factors that would determine whether a company operates in a more socially or environmental acceptable manner includes institutional conditions, the nature of the state regulations, and mobilisation from the external investors.

References

Ackermann, F., & Eden, C. (2011). Strategic Management of Stakeholders: Theory and Practice. Long Range Planning, Elsevier, 179-196.

Bruton, D. G., Davidson, A., & Han-Lin, L. (2010). Institutional Theory and Entrepreneurship: Where are we now and where do we need tp move in the future? Texas: Baylor University.

Cecchetti, G. S., Mohanty, M., & Zampolli, F. (2011). The Real Effects of Debt. BIS Working Paper (pp. 1-34). New York: BIS.

Guthrie, J., Suresh, C., & Ward, L. (2006). Legitimacy Theory: A Story of Reporting Social and Environmental Matters Within the Australian Food and Beverage Industry. Sydney: University of Sydney.

Lawle, P., & Foster, J. (2009). Making Performance-Based Contracting Work for Kids and Families. Community Development Investment Review, 139-145.

Mousa, A. G., & Hassan, T. N. (2015). Legitimacy Theory and Environmental Practices Short Notes. International Journal of Business and Statistical Analysis, 42-53.