1、Financial Accounting TheoryCraig Deegan,Chapter 8 Unregulated financial reporting decisions: Considerations of systems oriented theories Slides written by Michaela Rankin,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.2,Learning Objectives,In this chapter y

2、ou will be introduced to how community or stakeholders perceptions can influence the disclosure policies of an organisation how Legitimacy Theory and Stakeholder Theory can be applied to help explain why an entity might elect to make particular voluntary disclosures,Copyright 2000 McGraw-Hill Book C

3、o. Aust. PPT t/a Financial Accounting Theory by Deegan,8.3,Learning Objectives,organisational legitimacy and how corporate disclosures within such places as annual reports can be used as a strategy to maintain or restore the legitimacy of an organisation how the respective power and information dema

4、nds of particular stakeholder groups can influence corporate disclosure policies the view that a successful organisation is one that is able to balance or manage the demands, including information demands, of different stakeholder groups,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Ac

5、counting Theory by Deegan,8.4,Systems-oriented theories,Legitimacy and Stakeholder theories are both systems-based theories focus on the role of information and disclosure in the relationships between organisations, the State, individuals and groups the entity is influenced by, and influences the so

6、ciety in which it operates,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.5,Political Economy Theory,Legitimacy Theory and Stakeholder Theory derived from Political Economy theory political economy is the social, political and economic framework within whic

7、h human life takes place economic issues cannot be investigated in the absence of considering the political, social and institutional framework within which economic activity takes place,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.6,Political Economy The

8、ory continued,Corporate reports not considered neutral and unbiased, but are a product of the interchange between the corporation and its environment Two streams of Political Economy theory: classical bourgeois,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8

9、.7,Classical Political Economy Theory,Related to the works of Marx considers class interests, structural conflict, inequity and the role of the state accounting reports and disclosures are a means of maintaining the favoured position of those who control scarce resources focuses on the structural co

10、nflicts within society,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.8,Bourgeois Political Economy Theory,Does not explicitly consider structural conflicts and class struggles concerned with interactions between groups in an essentially pluralistic world L

11、egitimacy Theory and Stakeholder Theory derive from this branch does not question or study the various class structures within society,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.9,Legitimacy Theory,Organisations seek to ensure they operate within the bo

12、unds and norms of their respective societies activities are perceived to be legitimate bounds and norms not static so require organisation to be responsive relies upon the notion of a social contract,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.10,Legitim

13、acy versus legitimation,Legitimacy is the status or condition which exists when an entitys value system is congruent with that of society legitimation is the process which leads to an organisation being viewed as legitimate,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theor

14、y by Deegan,8.11,Social contract,Represents the implicit and explicit expectations that society has about how the organisation should conduct its operations traditionally the optimal measure of performance was profit maximisation public expectations have changed so organisations are now required to

15、address human, environmental and other social issues,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.12,Implications of not meeting social contract,Society allows the organisation to continue operations to the extent that it meets their expectations the orga

16、nisation may find it difficult to obtain the necessary support and resources to continue operations may lead to sanctions such as legal restrictions on operations, limited resources provided, or reduced demand for products,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory

17、 by Deegan,8.13,Actions to legitimate activities,Adapt output, goals and methods of operation to conform to definitions of legitimacy attempt, through communication, to alter the definition of social legitimacy so it conforms with the organisations present practices, output and values attempt, throu

18、gh communication, to become identified with symbols or values which imply legitimacy,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.14,Communication to maintain legitimacy,Seek to educate and inform the community about changes in performance and activities

19、seek to change perceptions but not behaviour seek to manipulate perception by deflecting attention from the issue to other related issues seek to change external expectations,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.15,Role of public disclosure,Public

20、 disclosure in such places as annual reports can be used to implement each of the previous strategies perspective adopted by many researchers of social responsibility reporting highlights the strategic nature of financial statements and other related disclosures,Copyright 2000 McGraw-Hill Book Co. A

21、ust. PPT t/a Financial Accounting Theory by Deegan,8.16,Empirical tests of Legitimacy Theory,Used by numerous researchers examining social and environmental reporting practices used to attempt to explain disclosures disclosures form part of the portfolio of strategies undertaken to bring legitimacy

22、to or maintain legitimacy of the organisation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.17,Examples of empirical studies,Patten (1992) examined the change in the extent of environmental disclosures of US oil firms around the Exxon Valdez oil spill in A

23、laska legitimacy theory suggested that they would increase disclosure in the annual report after the spill found the increase in disclosure occurred across the industry,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.18,Examples of empirical studiescontinued

24、,Deegan and Rankin (1996) used Legitimacy Theory to explain changes in annual report environmental disclosure policies around proven environmental prosecutions prosecuted firms disclosed significantly more environmental information in the year of prosecution than any other year prosecuted firms disc

25、losed more information than non-prosecuted firms,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.19,Examples of empirical studiescontinued,Deegan and Gordon (1996) investigated the objectivity of environmental disclosure practices and trends over time, as we

26、ll as whether environmental disclosures related to environmental group concerns found increased disclosure over time associated with increased environmental group membership disclosures mostly positive positive relation between environmental sensitivity of industry and disclosure,Copyright 2000 McGr

27、aw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.20,Examples of empirical studiescontinued,Gray, Kouhy and Lavers (1995) performed longitudinal study of UK social and environmental disclosures from 1979-1991 related trends to Legitimacy Theory, with specific reference to Lindbl

28、oms strategies,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.21,Examples of empirical studiescontinued,Deegan, Rankin and Voght (2000) used Legitimacy Theory to explain how social disclosures in annual reports changed around the time of major social incide

29、nts or disasters Carpenter and Feroz (1992) a US study on the choice of an accounting framework related to a desire to increase the legitimacy of an organisation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.22,How management determines societys expectatio

30、ns,Legitimacy Theory proposes a relationship between corporate disclosure and community expectations management has been found to rely on the media, with the media being observed to shape community expectations (ODonovan 1999),Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Th

31、eory by Deegan,8.23,Legitimacy Theory versus Positive Accounting Theory,Legitimacy Theory has been compared to the Political Cost Hypothesis of PAT Legitimacy Theory relies on the notion of a social contract it does not rely on the economics-based assumption that all action is driven by self-interes

32、t and wealth maximisation or make assumptions about the efficiency of markets,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.24,Stakeholder Theory,Two branches of Stakeholder Theory: ethical (moral) or normative branch positive (managerial) branch many simi

33、larities between Legitimacy Theory and Stakeholder Theory should not be treated as two separate theories but two (overlapping) perspectives of the issue set within a political economy framework,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.25,Ethical branc

34、h of Stakeholder Theory,All stakeholders have the right to be treated fairly by an organisation issues of stakeholder power are not directly relevant management should manage the organisation for the benefit of all stakeholders,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting T

35、heory by Deegan,8.26,Ethical branch of Stakeholder Theorycontinued,firm is a vehicle for coordinating stakeholder interests management have a fiduciary relationship to all stakeholders where interests conflict, business managed to attain optimal balance among them each group merits consideration in

36、its own right also have a right to be provided with information, even if not used,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.27,Definition of stakeholders,Any identifiable group or individual who can affect the achievement of an organisations objectives

37、, or is affected by the achievement of an organisations objectives (Freeman and Reed 1983),Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.28,Primary versus secondary stakeholders,Primary stakeholders: one without whose continuing participation the corporati

38、on cannot survive as a going concern Secondary stakeholders: those who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival ethical branch does not differentiate between primary an

39、d secondary stakeholders,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.29,Right to information accountability,In considering rights to information accountability is considered: the duty to provide an account or reckoning of those actions for which one is h

40、eld responsible accountability involves two responsibilities: to undertake certain actions to provide an account of those actions reporting is assumed to be a responsibility rather than demand driven,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.30,Testing

41、 of ethical branch of theory,As involves normative perspectives about how the organisation should act ,they cannot be validated by empirical observation normative theory attempts to interpret the function of, or provide guidance about, the corporation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/

42、a Financial Accounting Theory by Deegan,8.31,Managerial branch of Stakeholder Theory,Attempts to explain when corporate management will be likely to attend to the expectations of particular (powerful) stakeholders more organisation-centred stakeholders identified by the organisation extent to which

43、organisation believes relationship needs to be managed in interests of the organisation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.32,Managerial branchcontinued,Theories can be tested with empirical observation unlike normative ethical branch specifical

44、ly considers the different stakeholder groups within society, and how they should best be managed not society as a whole like Legitimacy Theory expectations of stakeholders considered to impact on operating and disclosure policies,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accountin

45、g Theory by Deegan,8.33,Stakeholder power,Organisation will not respond to all stakeholders equally, but to the most powerful stakeholder power is a function of the stakeholders degree of control over resources required by the organisation eg. labour, finance, influential media, ability to legislate, ability to influence consumption of the organisations goods and services,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,8.34,Stakeholder powercontinued,Major role of management is to assess the importance of m