Contemporary Issues in Accounting - Essay Example

Contemporary Issues in Accounting (Name) (Institution Affiliation) (Date) Introduction Today, it is typical of any firm to include voluntary disclosure in its annual report as it helps in managing the stakeholders’ perception of the firm’s financial position as well as its operations. As such, this paper delineates the concept of Voluntary Disclosure by looking at three main theories: legitimacy theory, accountability theory and stakeholder theory. The paper also analyses Cochlear’s annual report highlighting its voluntary disclosures as well as relating them to the relevant theories. Voluntary Disclosure Every nation has laws that require firms to disclose their financial information as well as any other relevant additional information material in their quarterly, half-yearly, and annual financial reports. According Ho and Wong (2003), how a company’s information, regarding its performance, is shared among the stakeholders as well as the public deeply affects the functioning of capital markets. Accordingly, voluntary disclosure represents the freewill on the part of a company to give the public the crucial information used to weigh a company’s financial performance (Ho & Wong, 2003). This information is often disclosed in order to satisfy the stakeholders’ needs, as they would want to know the company’s direction. More often than not, investors require correct and timely information regarding firms’ performances in order to reach effective investment decisions. Though this information can be collected in many ways, the corporation’s annual report is often used. The annual reports play a vital role in providing useful, relevant as well as reliable financial information to shareholders, investor as well as other interested individuals. Apart from the voluntary disclosure, the annual reports also provide for compulsory disclosure, which is a basic market demand for information often required by various laws and regulation. Legitimacy Theory According to Deegan (2002), firms are tirelessly working towards success ensuring that their operations are within the bounds as well as the norms of their respective societies. Accordingly, the legitimacy theory posits that the operations and actions of an organization should be desirable, appropriate and desirable within the constructed or set systems of beliefs and definitions, norms and values. In effect, organizations are expected to establish congruence between the societal acceptable norm and the social values, which are associated with their operations and activities (Suchman, 1995). Equally, Richardson (1987) maintains that accounting is legitimating the organization and involves linking the social values with the economic actions. Richardson (1987) also posits that organizational legitimacy is not always in a steady state, but variable. Moreover, the variability is not often temporary, but spatial across board. As such, an organization may employ ‘legitimation’ strategies depending on the firm’s perception of its level of legitimacy. Lindblom (1993) argues that organizational legitimacy is constructed through using symbols in communicating a public image. This image is often in line with the firm’s main goals as well as methods of operation. Legitimacy is based on the public’s perception and as such, the management are left with no option but disclose information related to the company’s financial position and performance. Due the society’s perception, the organization often seeks to change the opinion of external users regarding the firm through disclosure (Cormier &Gordon, 2001). The society considers the organization’s annual report as a significant material and organization consider it a tool of ‘legitimation.’ However, Legitimisation can also occur through compulsory disclosure, as the regulations often require companies to disclose their financial statement in their annual reports (Cormier &Gordon, 2001). Stakeholder Theory The stakeholder theory incorporates two theories: a managerial-based theory and an ethic-based theory. Accordingly, the ethic-based theory primarily delineates how firms should handle their stakeholders: the theory emphasizes on the firm’s responsibilities (Gray et al, 1996). On the other hand, the managerial-based theory emphasizes on the importance of managing particular stakeholder groups, more so the powerful ones. It is important for the organization to pay attention on the powerful stakeholder groups as they control significant resources needed by the company’s operations (Gray et al, 1996). These groups include consumers, regulators, lenders and supplier. This theory depicts that information disclosure to the shareholders is very vital as it can be used to manage or manipulate the stakeholders in order to get their approval and support. Conversely, voluntary disclosure can help to distract the shareholders’ disapproval or opposition (Gray et al, 1996). The stakeholder theory seeks to articulate a significant question: “which groups of stakeholders need special attention and which ones do not.” Additionally, the theory acknowledges the complex as well as he dynamic relationships between firms and their stakeholders and that these relationships involve accountability and responsibility. Accountability Theory The accountability theory posits that the management of a company should depict goodwill and transparency as the public expects a firm’s behavior to be exemplary and that it should be in line with the stakeholders’ interests. In effect, through accountability the company’s management can be evaluated, monitored and controlled in order to serve the interests of shareholder and other stakeholders effectively. The accountability theory has two perspectives. The first one emphasizes on the relationship between the organization and the shareholders. This relationship is the driving force behind the inclusion of financial information in the annual report. The other approach involves the relationship between the organization and the stakeholders, which translates into voluntary disclosure within the annual report. Consequently, information transmission between the organization and user often depend on the level of relation between them as described above. Positive and Negative Voluntary disclosures Firms are not expected to make negative voluntary disclosures as the voluntary disclosures are meant to capture the attention of the stakeholders in a positive way. The voluntary disclosures are used to ‘market’ the company (Ebner &Baumgartner, 2006). More often than not, much of the negative information will only appear in the annual report if it required by law under the compulsory disclosure. Firms exclude negative voluntary disclosures in their annual report in order to avoid bad publicity and losing the users’ confidence. Voluntary Disclosure Page Number Identified theory/theories Positive or Negative Business Data This section provides information about the company’s financial growth, new products as well as the high level operating data. 2-3 -Stakeholders theory Positive Letter to shareholders The letter informs the shareholders about the company’s operations throughout the year. It also provides information on the firm’s financial results, future plans as well as its market position. 4 -Stakeholders Theory Positive Environment, social and Governance This section in the report informs the users about the company’s commitment in improving its environmental awareness, social support and governance is concerned. 6 -Stakeholders Theory -Legitimacy Theory Positive Information about intangible assets This section reports ongoing steps put to improve the employees welfare and equality. This sections also highlights the company’s progress in development and research 8-9 -Stakeholders Theory -Accountability Theory Positive Information about management and shareholders This section provides information regarding the current board of directors as well as the senior management. 11-12 -Stakeholder Theory Positive Corporate Governance Report This part reports on the firm’s structured framework of principles and practices through which the management and directors ensure accountability, transparency and fairness in the firm’s relationship with its stakeholders. 13-21 -Stakeholder Theory -Accountability Theory Positive Relationship between the Disclosures and theories Apparently, all the disclosures identified in the report best befits the Stakeholder Theory as all of them touch on either the shareholder or other stakeholders such as customers, potential investors and creditors. For instance, the Business data disclosure affects important stakeholders such as the shareholders and the creditors are the disclosure of financial position as well as the company’s performance will influence their decision to continue supporting the firm. The Legitimacy Theory best explains the Environment, Social and Governance disclosure as the society expects the firm to be involved in activities, which are aligned to the societal norms. For example, the society expects the firm to take part in corporate social responsibilities activities such as environmental awareness and the users expect the firm to reflect such achievements in the annual report. The users expect the firm to report their operations through voluntary disclosures in annual report, as they believe that the firm is charged with promoting best practice business principles (Ebner &Baumgartner, 2006). On the other hand, the accountability theory best explains corporate governance disclosure since the users expect the company to be involved in behaviors, which advocate for the interest of the stakeholders. As such, the company has to share information regarding its practice of business principles, which are in line with the firm’s objectives and values for the shareholders to monitor assess and evaluate the company’s management. For example, the firm must disclose its auditing reports as well as the process for evaluating the senior executives’ performance. Conclusion It is evident that all firms’ annual reports will never reflect negative voluntary disclosures unless such information is perceived mandatory and falls under the compulsory voluntary section. Most companies will never disclose information that would otherwise reflect a negative impact to the users (Gray et al., 1996). Accordingly, Cochlear’s annual report available for the general public avoids disclosing information about the year’s product recalls cost, excludes patent dispute provision, constant currency and free cash currency. However, the report notes that the excluded information can be found in its extensive report, which is only available for the shareholders and the firm’s staff. The report only focuses on positive voluntary disclosures, which affects the reliability of voluntary disclosures. Notably, the analysis of Cochlear’s voluntary disclosures matches the paper’s expectation about the relative proportions of positive and negative disclosure. The analysis has confirmed that indeed firms are not expected to make negative voluntary disclosure. By excluding information such the product recall cost, a potential investor may not have a clear concept about the company’s performance as well as its operations. Moreover, the exclusion of negative voluntary disclosure can have dire consequences to the firm as users may regret associating with firm after their relationship with the firm fall short of their expectations. Accordingly, the firm’s reputation may be compromised thus affecting its success in the future. References Cormier, D., & Gordon, I. (2001). An examination of social and environmental reporting strategies, Accounting, Auditing and Accountability Journal, 14(5), pp. 587–616. http://dx.doi.org/10.1108/EUM0000000006264 Deegan, C. (2002). Introduction: the legitimising effect of social and environmental disclosures a theoretical foundation. Accounting, Auditing & Accountability Journal, 15(3), 282-311. Ebner, E. and Baumgartner, R.J. (2006), The relationship between Sustainable Development and Corporate Social Responsibility, paper presented at Corporate Responsibility Research Conference, 4th-5th September, Dublin. Gray, R., Owen D. and Adams, C. (1996), Accounting and Accountability, Prentice Hall Europe, Great Britain. Ho, S.S.M., Wong, K.S. 2003. Preparers’ perceptions of corporate reporting and disclosure. International Journal of Disclosure and Governance 1:1, 71-81. Lindblom, C. K. (1993), “The implications of organizational legitimacy for corporate social performance and disclosure”, Conference Proceedings, Critical Perspectives on Accounting Conference, New York. Richardson, A.J. (1987) “Accounting as a legitimating institution”, Accounting, Organizations and Society, Vol. 12, No. 4, pp. 341-355. Suchman, M. (1995) “Managing Legitimacy: Strategic Approaches and Institutional Approaches”, Academy of Management Review, Jul, 20, 3, pp. 571 – 610. Read More