The Effect of legitimacy theory in achieving profitability and sustainability in a corporation - Essay Example

College: The Effect of legitimacy theory in achieving profitability and sustainability in a corporation Introduction The accounting profession has regarded itself as ethical sine the founding of the first modern professional body at the end of the 19th century. Ethical consideration within this profession have been improved because the ethics no longer rotate around the relationship between professional and client ,professionals and professional but also professional and society as a whole (Matwes,1995). Social and environment accounting involves communicating the social and environmental effects of the company’s economic actions related to a particular interest group in a society or to the society at large. But what role does the social environment accounting play in determining the performance of a company both in the short and long run. The theory behind the inception of contemporary issues in the accounting field will also be reviewed with focus given to the legitimacy theory (Suchman, 1995). Theories are a scheme or systems of ideas which account for a group of facts or ideas, accounting theories provide a systematic framework for understanding, investigating and developing various accounting practices. Theories are used for evaluating applicability of the current accounting practices. Legitimacy theory assumes that an entity is affected by and influenced the society in which it operates, among other system oriented theories, the institutional and stakeholders theory, an entity has the primary role of ensuring that it discloses information in the relationship among, groups, organisation, the state and individuals for the coon good of the public. According to Drever and McGowan, (2007), the systematic oriented theories were derived from the political Economy theory. “Political economy is the social, political and economic framework within which human life takes place” (Gray, Owen & Adams, 1996 p.47). It is obvious that entities exist within a society and economic issues affecting such an entity can not be excluded from the political, institutional and social framework within the society. Legitimacy theory ensures that organisations and entities carry out their activities within the legal bounds and norms of their respective societies. Any given society would not condone an entity within it to carry out illegitimate activities because of the repercussion that such activities may bring upon the society. However, bounds and norms are not static as they keep changing with time, thus it is also necessary that an organisation responses to the changing culture and norms within the society in order to continue operating in it smoothly (O’Donovan, 2002). Latest Research ACCA UK Awards for Sustainability Reporting in 2008 recommended that companies should start accounting for their sustainability impacts from both a financial and non financial perspective. The article point out that accounting for social and environment sustainability is a challenge because most of the components of the social environment aspect are abstract in nature. The Centre for Urban and Regional Studies, in New Castle Australia have designed practical guide fro small community organisations and enterprises due to the growing interest in social accounting . The three main steps that authors relate to social accounting are planning, accounting and reporting and auditing. Milne has recently carried out a critical look at positive accounting theory, political costs and social disclosure analysis. The aim of the research was to illustrate empirical evidence in support of the challenges that meet positive accounting theory of social disclosures. Literature Review Mathews (1995), made an inquiry whether social environment accounting is a practical demonstration of ethical concern. He points out that the accounting profession was among the first professions to uphold integrity in its practices. Recently there have been attempts by educational programmes to move the accounting profession from professional ethics to that of ethics and professionalism. Previously, the code of ethics that existed revolved around professional and professional, however there have been concerns that the accounting regulation and practice should enlarged to encompass the view of ethical behavior. This is one of the reasons that have led to the ever growing field of stakeholders, legitimacy and corporate responsibility theories. According to, legitimacy theory is the one that is widely addressed and covered within the social and environment accounting fields. However an umber of researchers have discovered that legitimacy as a soil accounting theory does not lead corporations to voluntary disclose their financial statements. Tilling (1995) research paper outlines some of the recent development that has been carried out in the ethical literature on legitimacy and corporation contribution to the table. In addition the paper accounts for some of the developments that have previously been discovered but are yet to be brought into the wider picture of social and environmental accounting (Tiller, 1995). Tiller (1995) ,raises an issue that is often uncovered, he point out that there are two classes of legitimacy theory, the macro theory of legitimating often referred to as the institutional legitimacy and the strategic legitimacy theory . According to him, the institutional legitimacy deals with the organizational structures such as a whole such as the government, religion, society and capitalism that have widely been accepted in the society. To achieve the norms of the mentioned established institutions the company has to continuously ensure that it establishes, maintains, extends and defends its social values and corporate mission. According to Suchman,1995 legitimacy can be compared to money, for any business to operate ,it needs it as a basic resource, in addition ,there are events that would reduce or increase the level of legitimacy in a company (Hearit, 1995, p. 2). Barkemeyer (2007) , point out that legitimacy is a key driver and determinant of corporate social responsibility in developing countries. A multinational company that operates in a remote location would seek to gain legitimacy from its main shareholders who are based in hits home country, for such a company gaining short term goals would be an achievement compared to long term goals. Furthermore, the legitimacy issues may differ between the host country and the home country of such a company, thus, to achieving balance legitimacy model may lead to the achievement of CSR of a company and also contribute towards achieving ecological sustainability (Barkemeyer, 2007). In another study carried out by Patten (2002) on the legitimacy issue surrounding the Alaskan oil spill, social disclosures are largely viewed as a method responding to the ever changing perception of the company by the general public. Disclosing financial statement that adequately cover the issue at hand is a legitimate way of ensuring that the company continues to benefit positively from the society in which it operate and that the company does not unwarranted issues in the society .However failure to do so may lead to filing of endless suits and tainting of the company’s reputation. From the literature review conducted it is evident that legitimacy theory is an important aspect in the success of any given company, however to what extend it is viable and does it affect the business. To find out more about this, I have chosen to conduct a research analysis on the topic on the effect of legitimacy theory in achieving profitability and sustainability in Australian corporations. Research methodology The research method that would be most appropriate for this study will be both the qualitative and quantitative research methods. Using the two methods will result to holistic results that are both valid and reliable. On one hand, qualitative research method is very reliable when it comes to time consumption, financial resources , the feasibility study and ethics related to the to research topic (Wolcott, 1995). A qualitative approach will be achieved through conducting literature review on the research topic, through the literature review, various aspects of legitimacy theory and its relation to social and environmental accounting will be analyzed and evaluated. A number of case studies will also be conducted to a sample of companies that have had social issues that they dealt with through social accounting. Apart from the two in-depth interviews will be given to leaders in managerial positions of the selected case studies. In order to measure the extend to which social and environmental accounting affect the performance of a business, a quantitative research methodology will be used. The advantage of using this method of research it that it clearly tests the hypothesis in the research. Through the use of scientific methods, measures of central tendency, the use of financial statements of selected companies, I will be in a position to strongly defend my thesis (Creswell, 2003). Discussion and Conclusion Conducting this research will heavily contribute to the theory and practice of social and environment accounting with focus on legitimacy in contemporary corporations. Research that was conducted by Mathew (2004) illustrated that most researchers have not yet comprehended the issue of legitimacy in relation to social accounting. Through this research, the gaps in the definition of the term will be addressed. A comprehensive analysis thorough literature review process and case study analysis will bring out the various position of legitimacy as viewed by different players and develop an all inclusive definition of legitimacy. In addition the research would enable players in the accounting field develop further understanding of legitimacy and its relevance and contribution to social and environment accounting principles. When there is a better understanding of all the terminologies involved in this area, there is likely to be an improvement in the manner in which corporation should report on social issues affecting their company and the society in which they operate (Watts & Zimmerman, 1986). This research would help to develop an understanding of moral principles, ethical standards, corporate code of business ethics and the role of corporate governance in the free enterprise system and capital markets .It will highlight the importance of ensuring that a company attains legitimacy theory within and throughout its business operations .It will also help in business sustainability performance and accountability reporting in all areas of economic, governance, social, ethical, and environmental activities thus enabling stakeholders to fully recognise their role and right in relation to the company. It is evident that legitimacy covers a substantial pert of social and environment accounting. Legitimacy in an organisation can be compared to the financial resources which form a vital component of growth and development of the company. Although, it is in an abstract form, legitimacy is the key driver that determined whether a firm or business will be sustainable in the future. It is important for accounting profession to take this theory into consideration and give it more emphasize than the current situation. Companies, government and individual groups should invest more in developing policies that lead to the strengthening of legitimate mechanism because this would realize sustainability and profitability objectives of the business and society at large (Ashford& Gibbs 1990). References and further reading may be available for this article. To view references and further reading you must purchase this article. References ACCA Social Accounting in times of economic downturn Retrieved from http://www.iaaer.org/research/files/ACCA_Social_Accounting.pdf on 5th April 2011. Ashford, B. E. and B. W. Gibbs (1990) “The Double-Edge of Organizational Legitimation”, Organization Science, Vol. 1, No. 2, pp. 177 - 194. 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