The Concept of Legitimacy - Essay Example

Essay: Legitimacy theory Introduction According to Suchman “legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574). Mathews sheds light on the strategically important aspects of legitimacy by focusing attention on the “congruence between social values and norms of acceptable behaviour” (Mathews, 1993, p.350). Therefore any divergence between the two value systems would imply a doubt about the legitimacy of the organization. Conflation of these concepts can be a very difficult proposition though such organizational contingencies existing within its operational environment could act as a compulsion to achieve such fusion so that legitimacy becomes an institutionalized organizational goal. Financial reporting mechanisms and the connected objectivity perspectives have been questioned by researchers and analysts on the ground that organizations present such annual financial reports with a view to legitimizing their activities in the eyes of the society. This social obligation arguably reinvigorates the existing debate on the dichotomy between the legitimacy theory and reliable financial reporting as an organizational requirement. While theoretical underpinnings of accounting and financial reporting are concerned with professional impartiality and numerical accuracy as explicitly required under IAS, legitimacy of organizational behaviour in the food sector is determined by a series of endogenous and exogenous variables ranging from industry-centric environmental factors to national and supranational regulatory compulsions. Food industry-centric environment has been subject to a revolutionary paradigm shift in quality and safety. This evolving scenario of extreme choices has invariably predicated upon the stricter legitimacy-prone standards that are being witnessed in it today. Analysis A variety of theoretical approaches have been developed over the years to build a comprehensive framework of analysis to study an otherwise complex concept in organizational beahviour. Legitimacy theory is just one such theoretical postulate that has evolved into what’s now known as the yardstick of organizational behaviour concerning that particular aspect of its ethical responsibility to the very society in which it operates as a corporate entity. Thus the very logic of organizational behaviour hinges on the fundamental premise that organizations are bound by a universal requirement to justify and legitimize their behaviour and existence to the society (Alexander, Jorissen and Britton, 2007, p. 208). However a majority of these theoretical postulates seek to unravel the complexities associated with environmental disclosures of the organization in general rather than the implications of financial reporting in particular (Richardson, 2002, p.214). . Food sector is no exception to this unconsciously adopted rule either. Theoretical perceptions developed under political economic theory have gone a long way in organizational behaviour in that “attributes of neutrality and representational faithfulness” assume a greater relevance in financial reporting (Deegan and Unerman, 2006, p.301). Advocates of political economy and related literature on organizational theory have added little more emphasis to the social responsibility clause of the organization. Their presumption that the organization is a logically disposed entity to fulfill consequential obligations towards the society and therefore its operational independence is limited in nature is not always valid though. The authors deny a place of inclusive importance to accounting and ethical responsibility. They attach a primary importance to financial reporting. Food sector in Europe is subject to a comprehensive system of EU-wide regulations. This regulatory framework imposes additional pressures on financial reporting obligations of the organization whose existing obligations under accounting and social responsibility clauses are adequate to ensure proper ethical behaviour on the part of the organization though (Eastham Sharples and Ball, Editors, 2001, p.67). International Financial Reporting Standards obligate organizations to carry out and implement all that’s required of them under Revenue (IAS 18), Measurement (IAS 32, 39) and Provisions (IAS 37). For instance IAS 18 on Revenue as amended by IAS 39 Financial Instruments: Recognition and Measurement (January 2000) requires the organization that “revenue be measured at the fair value of the consideration receivable (IAS 18.9)”. While transactions that involve the exchange of similar goods or/and services are not considered revenue generating activities, when exchanges of dissimilar items are involved such transactions are considered to be revenue generating efforts (IAS 18.12). Assuming that there is deferment of the cash or cash equivalent inflow, the subsequent fair value of the purported consideration receivable is less than the nominal sum of money or/and money equivalent to be received. Thus discounts are essential. This is more obvious under circumstances in which interest-free trade credit is made available to the buyer by the seller. Or it can be the seller has charged interest below the market rate (IAS 18.11). These Standards make reference to the sale of goods, rendering of services and related aspects of interest payments, royalties and dividends. Financial reporting under such circumstances as these where revenue has to be recognized in keeping with benefits accrued to the seller, involves reliable measurement of revenue, costs, benefits, interests, royalties and dividends. Though these measurements have an exclusively accounting-related set of parameters they extend beyond these limits in applications and encompass a whole range of financial reporting obligations such as reliability in measurement, conformance and recognition (Stolowy and Lebas, 2006, p.169). It’s these parameters of financial reporting that need an extensive analysis here with reference to the food sector. In the process of this analysis a series of hypotheses have to be established in order to delineate the relevant literature and the normative propositions of the subject. Hence the concept of legitimacy acquires a dynamic and formidable correlation with financial reporting environment and instruments thereof in the food sector on a nation-wide and region-wide basis. Socially desirable outcomes related to financial reporting aspects of legitimacy have been conceptualized by analysts and researchers before on the seminal ground that what has evolved through times would have a significant impact on future developments of the subject. Financial accounting and reporting plays a dominant role in recognition and measurement of items in the company balance sheet, the profit and loss account and all other financial statements irrespective of their relative importance to the accountant (Elliot and Elliott, 2007, page.153). Under IAS 39 Financial Instruments: Recognition and Measurement, the organization is required to recognize and measure all assets, liabilities, costs, benefits and so on that are created in the process of sales, contracts and transactions. Under IAS 39 a financial instrument is defined as a contractual agreement that creates a financial asset for one organization or individual and a financial liability for another. Therefore cash, a dividend bearing asset like a share, a financial derivative or a non-derivative and so on could be characterized as an example of a financial instrument. A derivative’s value might change over time, e.g. interest rate or the share price. Financial reporting practices as established under legitimacy theory acknowledge the inevitable correlations between definitional variances and principle-centric prudence (Mirza, Orrell and Holt, 2008, p. 10). While these instruments have been defined in a manner to minimize all costs associated with the risk element in misconception, there is very little corresponding obligatory compulsion imposed on the accountant to act in accordance with rules and regulations. As a corollary there are none too well defined principles on organizational behaviour with particular emphasis on predetermined expectations on legitimacy. Legitimacy is an abstract concept with or without primacy and immediacy of contingency planning attached to the organizational behaviour (Bremer, McKibben and McCarthy, 2006, p.363). Thus justification of legitimacy in financial reporting environments does not engender a pre-conceptualized paradigm for either the management as an exclusive obligation or the organization as an inclusive privilege. The positivity associated with food sector is of considerable importance here given the EU-wide health regulations though. Though the entire EU food industry has come under ever increasing scrutiny by legislators, Green Groups and the citizenry it’s the Genetically Modified (GM) food industry that has brought the financial reporting task of the organization under the spotlight. For instance GM food requires to be labeled as biotechnology if the defined threshold of 0.9 per cent is surpassed by a particular food item. Recent upsurge in GM food imports into Europe and the rest of the world cannot be denied. Though labeling requirements at the customs might not be so strict in some other destinations, the EU has its policy set on strict supervision and detection procedures. There has been a huge disagreement between environment groups and the biotech industry over the level of tolerance. The average organization feels that their ‘legitimate concerns for the consumer’ have been underestimated by environment groups and national governments (Cooper, 2008, p.48). In the absence of such a value or definition for these abstract legitimacy claims, regulatory regimes and standards authorities have very little else to put into practice by way of supervision but to impose blanket capping limits. Financial reporting does not necessarily have a clause to set aside a certain amount of money on the health related concerns of customers. Be it negative or positive, the accountant does not make a provision for perceived behavioural tendencies on the part of the customer. However accounting practices might include references to profits and losses related to GM food. Sector-wise imbalances apart there is a clear positive correlation between legitimacy and responsible organizational behaviour. Under Provisions (IAS 39) organizations are required to recognize a financial asset or a liability only when the organization is a party to the provisions of a contract that involves financial instruments. These provisions go a long way in Recognition and Measurement criteria of IAS 39. Since financial instruments are not always included in all contracts, there can be some definitional bottlenecks that demand a degree of precaution in identifying the nature of a contract. For example there are contracts in which some financial instruments might be included such as the contract to buy a good in the futures market in which case there is a derivative that’s connected with the price of the good. This is because of the fact that any inward or outward cash flow associated with this derivative is identical to any other behavioural pattern of an independent derivative. Again it reiterates the fair value proposition. IAS 37 (Provisions) aims at creating essential criteria for recognition and measurement that in turn are applied in respect of contingent liabilities and assets. One of the most crucial clauses of this requirement is the obligation cast on the organization to disclose appropriate and adequate information on these liabilities and assets in the notes to financial statements. Here it’s pertinent to question the credibility of IAS 37 in establishing a regime of obligations for the organization in the food industry to comply with EU regulations to achieve its organizational outcomes related to legitimacy. Since this Standard is explicitly clear on the need for genuine obligations only, there is no room for the recognition and measurement of future planned expenses. Theoretical perceptions of legitimacy and organizational behaviour presume a degree of convergence between organizational goals and profits. At the same time there is a corresponding divergence between organizational goals and legitimacy-centric behaviour in highly competitive corporate environments (Day and Reibstein, Editors, 1997, p.22). Financial disclosures tend to be under a cloud under such circumstances. Legitimacy becomes a casualty in some niche markets including food. For instance fast food industry has also been regulated on the same lines as suggested above. EU-wide regulatory regimes have been initiated to impose limits on this particular industry. However, organizations within the industry have a tendency indulge in niche market creation practices. Such efforts undermine both the adoption of legitimacy-related practices at the financial reporting level and the evolution of precise procedural perspectives on matters incumbent on the legitimate behaviour of the organization (Sumariwalla and Levis, 2000, p.9). While the imposition of regulations by national and supra-national bodies like parliaments alone does not produce positive results, compliant behaviour on the part of the organization is not a foregone conclusion either. Thus positive financial reporting practices that organizations adopt in compliance with legislation or/and regulations tend to vary according to the industry (Leidner, 1993, 48). According to the author aims of financial reporting practices and organizational environments tend to produce conflicts that rekindle the socially occasioned issue of organizational responsibility to the community in which it operates. While emphasizing the sentiment, it’s also necessary to note the fact that organizational responsibility does not positively pinpoint the existence of a sole set of obligations on the part of the organization. Neither does it preclude the management from adopting socially irresponsible measures to achieve organizational goals. What’s so important is the regulatory framework within which the organization operates irrespective of other exogenous factors that might effectively impose limits on its behaviour. Conclusion IAS 18 (Recognition), IAS 39, 32 (Measurement) and IAS 37 (Provisions) have specifically defined the parameters of behaviour for the organization that operates in otherwise already regulated corporate environment. Financial reporting though not regulated has been characterized by an ambitious tendency on the part of the legitimacy-prone organization to adopt financial management practices that are identical to self-imposed regulatory regimes. This is just in justification of what the corporate behaviour ‘ought to be and not is’ (Deegan and Unerman, 2006, pp. 281-284). There is also an equally important aspect of organizational obligation associated with industry specific behaviour in financial reporting. Food industry comes to occupy a very important place in this respect. Food industry, as is already subject to some highly imperative regulatory regimes, is a dynamic entity with some positive and some negative implications arising from the need to be legitimate in financial reporting in particular and corporate behaviour in general (Camfferman and Zeff, 2007, p.9). This dichotomous existence of the organization in the food industry invariably invites the attention of analysts on the objective correlations between the concept of legitimacy and organizational goals which can be as pressing as any other objectives. Finally legitimacy is an abstract concept with connotations and denotations that defy the imagination of the most seasoned analyst because its definitional variations could even encompass a number of related theoretical postulates including the political economic theories that have evolved with a paradigm shift in the intricate functional environment of the organization, particularly in the food industry. Food industry has thus developed a symbiotic relationship with this theoretical but unregulated corporate environment within the four walls of the organization. Whether it’s mutually beneficial or not has not been known yet. REFERENCES 1. Alexander, D., Jorissen, A., Britton, 2007, A. International Financial Reporting and Analysis, Thomson Learning, London. 2. Bremer, M., McKibben, B., and McCarty, T. 2006, Six Sigma Financial Tracking and Reporting (Six SIGMA Operational Methods), McGraw-Hill, New York. 3. Camfferman, K. and Zeff, S.A. 2007, Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000, Oxford University Press, Oxford. 4. Cooper, M. 2008, Life as Surplus: Biotechnology and Capitalism in the Neoliberal Era, University of Washington Press, Washington. 5. Day, G.S. and Reibstein, D.J. (Eds.), 1997, Wharton on Dynamic Competitive Strategy, John Wiley & Sons, Inc, New Jersey. 6. Deegan, C. and Unerman, J. 2006), Financial Accounting Theory: European edition, McGraw Hill, Maidenhead. 7. Eastham, J., Sharples, L., and Ball, S. (Eds.), 2001, Food Supply Chain Management: Issues for the Hospitality and Retail Sectors, Butterworth-Heinemann, Oxford. 8. 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C. 1995, Managing Legitimacy: Strategic and Institutional Approaches, Academy of Management Journal, Vol. 20, No. 3, pp. 571 - 610. 15. Suumariwalla, R.D. and Levis, W. C. 2000, Unified Financial Reporting for Not-for- profit Organizations, Jossy-Bass, California Read More